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The Nutgraf : A fine line

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Traffic fines get out of hand. Xiaomi sells phones and loses share value. WeWork has second thoughts about an IPO.

Are you also looking skywards?
 
If you have no idea what I am talking about, India’s moon mission, Chandrayaan suffered a setback late last night after contact was lost with the lander module 2 km above the surface of the moon.
 
My Dad used to work at the Indian Space Research Organisation (ISRO). He’s seen a lot of missions, successful and unsuccessful. Mostly unsuccessful. He says science is like that. Two steps forward. One step back. No matter.
 
No jokes from me today. Very proud. We all should be.
 
However, things on earth last week were a bit… unusual.

Seven signs you may have passed a dumb law
While India was working hard to put a vehicle on the moon with all its ingenuity, it did the exact opposite to vehicles back on earth. Last week, amendments to the Motor Vehicle Act came into effect. This was passed by the Indian Parliament a few weeks back.
 
So what’s new?
 
Lots of things. But specifically, enhanced penalties for driving violations. If drivers are caught breaking the law now, things are going to get pretty wild.
 
Like what?
 
Driving without a license. Drunken driving. Over-speeding. And several more.
 
But isn’t that a good thing, PGK?
 
No. It’s not. I’ll show you why.
 
Take any bad law in India : FDI in e-commerce. Death penalty for rape. Section 66 (A) of the IT Act. Take any of them, and you’ll see a pattern. Specifically, seven things.
 
1. You take things to the extreme. Just to show you are tough.
 
If you’re trying to solve the problem of road accidents in India – a real problem, by the way – I mean, genuinely solve it, what do you do? Look at causes? Examine causes? Vehicle regulation? Public infrastructure investments?
 
Haha. No. Too difficult. Let’s just increase penalties by a ridiculous amount. Because that should scare ’em.
 
Fines are up now for a range of offences. The smallest increase is 400%. In some cases, the fines are ten times what they used to be previously. Here are some examples:
 
  • Over-speeding. Before: Rs 400 (~$5). Now : Rs 2,000-4,000 ($25-$75)
  • Driving without a license. Before: Rs 500 (~$7). Now: Rs 5,000 ($85)
  • Driving despite disqualification. Before: Rs 500 (~$7). Now: Rs 10,000 (~$140)
 
This may sound like a great thing on paper. Or on a WhatsApp forward. But this is what happens next.
 
2. You discover an obvious flaw once you enthusiastically start implementation.
 
The law kicked in on 1 September. On that day, nearly 39,000 drivers were fined for various offences. One of them was Haribandhu Kahanr, a middle-aged auto-rickshaw driver in Odisha, who was caught for breaking a number of traffic rules. These are the details of his offences and fines:
 
  • Rs 500 for general offence
  • Rs 5,000 for allowing an unauthorised person to drive the vehicle
  • Rs 5,000 for driving without a valid licence
  • Rs 10,000 for drunken driving
  • Rs 10,000 for violating air and noise pollution norms
  • Rs 5,000 for using a vehicle without registration and fitness certificate
  • Rs 10,000 for using a vehicle without a permit
  • Rs 2,000 for plying without insurance.
 
The total fine? Rs 47,500 (~$600)
 
According to the report, this is what he said,
 
“I bought this second-hand auto-rickshaw for Rs 25,000 about a week ago. I graduated long ago, but couldn’t find any sort of employment. I bought the auto to earn a living. I have all the necessary documents of this vehicle”
 
He’s not alone. There are several others.
 
  1. A tractor driver in Gurugram was fined Rs 59,000, about a third of the cost of the vehicle.
     
  2. Dinesh Madan, a resident in Delhi, was fined Rs 23,000 for flouting several rules. In response, Madan left his scooter with the police and hasn’t paid the fine as yet. He says the price of his second-hand scooter is Rs 15,000 (~$200)
 
And in an extreme case…
 
     3. In Delhi, another motorcyclist, after being fined Rs 11,000, calmly proceeded to set his bike on fire.
 
Because if there isn’t a vehicle, how can there be a vehicle violation? Genius.
 
3. You create all kinds of strange incentives
 
Here’s a hypothetical scenario. Let’s say you are driving a bike and you are caught and fined an astronomical amount for some infraction. What happens? The police impound your vehicle, and ask you to come to court the next day, pay the fine, and take it back home.
 
But what happens if it isn’t your vehicle? Let’s say you rented it from  Bounce or Vogo – one of those aggregators. Technically, nothing stops you from surrendering the vehicle to the police and walking away, leaving Bounce to foot the bill.
 
How large can that bill be?
 
Unsurprisingly, the law isn’t so clear.
 
But it has a provision where aggregators found guilty of license violations will attract a fine of Rs 1 lakh (~$1400)
 
So the lesson of the story is, if you have had a few too many drinks, just rent a scooter and drive home.
 
4. Sections of the media conduct some deep analysis…
 
Rahul Kanwal is one of India’s most decorated journalists and the News Director of one of the country’s largest media organisations – India Today Group.
 
In a tweet, thanks to data compiled by the Data Intelligence Unit of India Today, he explained why we were all overreacting.
 

Rahul Kanwal has 5 million followers on Twitter.
5…and people remember why they stay away from mainstream Indian media
 
Saad Momin, according to his Twitter bio, is an expert in Textile Reinforced Composites & Weaving. He also understands a concept called PPP (Purchasing Power Parity). 

Saad Momin has 25 followers on Twitter.
 
Rahul Kanwal’s tweet has since been deleted. No explanation provided.
6. You explain that this is important because it acts as a deterrent
 
Nitin Gadkari, the Union Minister and the architect of the new motor vehicle law, defended the law thus:
 
“There are 5 lakh accidents and 1.5 lakh deaths on our roads. 65 percent of them are between the age of 18 and 35. Should we not save these lives? If there is no respect for the law of the land and there is no fear as well, then it is not a good thing”
 
It needs to be draconian. People need to be scared. Else there won’t be any compliance.
 
7. But you ignore every single study which claims otherwise
 
This is a good time to introduce a gentleman named Dr. Rune Elvik, a road safety researcher at the Institute of Transport Economics, Oslo, Norway. Dr. Elvik is the real deal. I found his profile on Research Gate. He’s published a staggering 102 papers. And has been cited 3,000 times. All on road safety. From the esoteric to the popular. Just look at some of them:
 
  1. How can cyclist injuries be included in health impact economic assessments?
  2. A new method for assessing the risk of accident associated with darkness
  3. Road safety effects of roundabouts: A meta-analysis
  4. Car drivers’ valuation of landslide risk reductions
 
In 2016, he published a paper titled, ‘Association between increase in fixed penalties and road safety outcomes: A meta-analysis’, where he looked at every single study done around the correlation between road safety and traffic fines, going all the way back to 1986. Across the world.

He does a lot of complicated stuff. Most of which I don’t understand. But at the end of it, he gets this nice graph, which I have to reproduce below.
 

This is what he says in his abstract:
 
Increasing traffic fines was found to be associated with small changes in the rate of violations. The changes were non-linear. For increases up to about 100%, violations were reduced.
 
For larger increases, no reduction in violations was found.

 

Xiaomi wants to be Apple. The problem is it also wants to be Apple
So the smartphone giant Xiaomi hit a milestone. On Friday, the company announced that it had shipped 100 million phones in India over the last five years.
 
Normally, this would be a wonderful thing. So how’s the company doing? Take a look at the stock price, since the time of listing in June 2018.

Here’s what you need to know
 
  1. Since the time of IPO, Xiaomi’s stock has been down by nearly 48%.
  2. Then last week, it declared its quarterly earnings, and announced that it has achieved a “consensus-beating performance,” since adjusted net profit exceeded estimates for the first half and second quarter of 2019.
  3. The market heard Xiaomi out politely, laughed loudly, and Xiaomi’s stock price fell by 6%.
  4. The next day, the company announced a $1.5 billion buyback of its shares in a bid to bring its stock price up.
 
But what is going on?
 
  1. Very simple. Xiaomi is selling a lot of smartphones. It’s even making money off it. Monthly active users climbed 34.7% to 278.7 million in the last year.
  2. The problem is that’s what the company doesn’t want. It wants to be able to sell phones at a low margin, and make money off services.
  3. Right now, that’s not happening. In the last quarter, Xiaomi’s advertising revenue actually fell despite selling more phones.
  4. Xiaomi’s services revenue – which includes ads and games – increased by 15.7%, which isn’t much if you look at the number of users it added.
 
I’ll let Tim Culpan, columnist at Bloomberg explain it best:
 
Xiaomi doesn’t need to talk down to its customers by saying it will sacrifice handset profits to ensure they get a good price. Xiaomi can also stop talking down to investors by insisting that smartphone profits don’t matter. The second-quarter results show that making money on handsets isn’t incompatible with an increasing user base and happy fans.
 
The sooner Xiaomi management admits it was wrong and embraces hardware profits, the sooner the shares are likely to recover.”
 

India and USA are officially on the opposite ends of the spectrum in payments
US Presidential candidate Elizabeth Warren is climbing in the polls.
 
In case you aren’t aware, Warren believes that the government must break up monopolies. Specifically, she has a plan that seeks to break up companies like Amazon, Google, Apple and Facebook.
 
Then last week, she tweeted another proposal

Real-time payments. Imagine. How futuristic. And cute.
 
In India, things have gone a little further down the road. Because real-time payments have been working so well that the National Payments Corporation of India (NPCI) is considering enforcing restrictions so that nobody gets a monopoly.
 
 As the Economic Times reported:
 
This issue was discussed in a meeting of the UPI steering committee led by the NPCI last week, three people present at the meeting told ET. “There was a proposal on limiting each company’s market share to not more than 33% of all UPI transactions so that no one enjoys a monopoly over payments in the country,” said a top banker, who was present at the steering committee meeting.

IPO or MPO? You decide. We Work
First, I am going to quote the Asian Nikkei review here about SoftBank:
 
For early investors and founders looking to cash out, the Vision Fund has emerged as an alternative venue to stock exchanges, a process that has become known as a “Masa Public Offering,” or MPO—a reference to SoftBank Chairman Masayoshi Son’s nickname.
 
“An MPO is our IPO,” said Vijay Shekhar Sharma*, founder of Indian fintech unicorn Paytm.
 
Sure, but what happens when you get an MPO, then plan to go IPO, but now want to go back to an MPO.
 
That’s exactly what WeWork is facing. The company was supposed to IPO soon, but now it looks like it’s having second thoughts after facing withering criticism about its founder, business model and financials. As the Wall Street Journal reported, a few things happened last week :
 
  • WeWork is weighing slashing its valuation to around $20 billion. This is half of its last private valuation.
  • Adam Neumann, WeWork’s co-founder and CEO, flew to Tokyo last week to meet Son. They “discussed the possibility of an additional infusion of capital”.
 
Basically, SoftBank has two choices :
 
  • Launch the IPO. SoftBank acts as an anchor investor. To do this, it needs to invest a big chunk of the $3-4 billion WeWork intends to raise.
  • SoftBank invests money into WeWork right now and delays the IPO until next year.
 
I’d love to say more, but this section from the WSJ seems too good not to quote:
 
“I’ve heard no bullish views at all,” said Rett Wallace, chief executive of Triton Research, which analyzes pre-IPO companies for investors. “There were Uber bulls, there were Lyft bulls, there were Snap bulls.” He added that “WeWork is exhausting people’s cynicism.”
 
Exhausting people’s cynicism. Brilliant.
 
* Paytm’s founder and CEO, Vijay Shekhar Sharma, is one of the investors in The Ken

What We Are…Watching
 
Where : A Comedy Central special called “Control Room”
 
In his first episode, comedian Miki Leeper explains how he created a fraudulent company that claimed to sell used tissues “that get you sick now so you don’t get sick later.”
 
And to do this, he took a week off, sat in a room with just an internet connection, and tried to emulate brands like Goop.
 
What happened next will amaze you. It’s 25 minutes long. It’s brilliant. It’s funny.
 
And it’s so revealing.
 
You should check it out.

That’s it for this week. Be safe. Drive safely.
 
And if things go wrong, do not set your vehicle on fire. It’s not worth it.
 
Okay, financially, maybe. But still, it’s not worth it.

 
 
Regards,
Praveen Gopal Krishnan
[email protected]