Hello folks, the reception for this column has been amazing and have been hearing that the posts are contributing to your interview prospects. Kindly tag your friends if you feel it would be useful for them. Thanks in advance. Here we are with the fifth column of the kind: as always Mr.Balaji Vishwanathan, a Top Writer in Quora, is the contributor. Read on, Cheers!
Q: Why are net profit margins for large US companies twice what they were 30 years ago?
A: Factor 1: Consolidation - to produce bigger & bigger companies
One of the reason is that there has been a rapid consolidation in many industries. We now have a monopoly/oligopoly in many industries including banking, airlines, software, telecommunications etc. These monopolies are likely rent-seeking - making more profits merely because there are not enough alternatives.
For instance, in the Airline industry there has been a massive consolidation in a decade that there are now 4 mega carriers - America, United, Delta and Southwest, compared to dozens of carriers even a decade ago. That has lead to massive profits for the first ever time, while cutting routes. These Cities Have Lost The Most Flights
Think of the viable alternatives you have for Google search & Maps, Facebook, Microsoft Office, Uber/Lyft for ridesharing or Apple/Samsung in smartphones. There are not as many as the industries they replaced used to have. In online retail, Amazon has far bigger marketshare than they used to a decade ago.
Does that mean there were no large companies in the 1970s and 80s. No, there was the IBM and AT&T. But, they didn't control as much part of the economy as some of the modern companies do. They didn't control how you bought things, hired people, moved across the cities and so on. As technology eats away other sectors, it is time we really understood the rent-seeking behavior that top tech companies have compared to the inefficient companies they replaced.
Sanders in his campaign trail talked a lot about big banks, while hardly mentioning how big companies have become in every industry. Sure, JP Morgan is too big to fail. But, how about Google? If god forbid there is a simultaneous collapse of Google & Microsoft, could there be a bailout given how systemically important these are to global information management on which every industry now relies upon? Can you imagine what your life would become if some big meteor hits San Francisco Bay Area wiping out most companies there?
Factor 2: Globalization - US workers have much less monopoly.
30 years ago, the workers of the US had little competition. Japan was a competition but it was a far smaller country. Same for Germany. They both were not just small, but had to be in the US security umbrella, often making concessions like what Japan made in the Plaza accord of 1980s.
The mid-20th century was a time when even barely trained American workers without a college degree or some strong specialization could have a lifestyle that was available only for a royals of the early 20th century. There were economic ruins everywhere and despite all the challenge Soviets posed in military, there was hardly any economic challenge from anywhere. It was a time too good to be true, but could not be sustained for long.
In 1989 the whole world changed. Billions of people were added to the global economy that was barely more than half-billion. Chinese, Russians, Indians and others started flooding the market and with the improved global logistics and information technology, could compete. Europe was consolidated and Germany became far more assertive in this changed game of EU. The new star of Asia - China - doesn't bow as much to the US as Japan did. It is a far more diverse game now than it was 40 years ago.
Factor 3: Labor productivity is not keeping up with innovation
The corporations are growing far smarter than the common workers. The pace at which innovation happens at the top is likely not matched up with what is happening at the bottom. Universities are unable to keep up with the demands that new innovation needs, while there is hardly much training available for new workers.
40 years ago, a worker would go into a trade school or university to study the trade and do that for a big chunk of his career. It is far more harder to follow that predictable path and thus the workers are left behind by innovation train.
What is the solution? Justice Department has to look much more closely into the formation of monopolies in a number of sub-sectors. Pay close attention to find out if there is anti-competitive behavior. Regulations have to be thought out. For instance, as Facebook/Twitter/Quora become your source of news & editorialize content in an indirect way [through algorithms] should they be regulated in the same way press media is?
More importantly, they have to rethink how education and worker training is happening. Universities are not going to help train the modern workers in rapidly changing environment. They are far more expensive & due to their heavy price tag [and the loans needed to pay] workers get much more risk aversive & have much less flexibility in their career choices. We have to move beyond the University system of the industrial era. For all their lofty talks of "fostering thinking" & "bringing scholarship" - they are hyperexpensive factories & their ancestors of 16th century didn't make their students go broke with their price tags.
Q: What exactly are NPAs of banks? Why banks fail to recover their money from big defaulters despite so much of precautions while lending money?
A: Non-Performing Assets are loans given out by banks that the banks no longer expect to get repaid. Let's say your company got a big loan for a factory and you can no longer repay, that loan is called an NPA.
There is a scam in Indian banking industry one that most banking employees know and one that common public doesn't realize. Often, bank officers are forced to give loans by politicians and higher officials, knowing fully well that the loans would not be repaid.
My grandfather was an assistant general manager in State Bank's inspection department. He was so quickly promoted that he was in the MD track by his early 40s. He was investigating a big NPA scam in Gujarat one that involved an Union Minister and many powerful folks. That proved to be one of the last assignments for my grandfather. His career was cut short and pushed outside the bank. It was all hushed up and the secret died with him.
My father [who worked as a bank manager in Indian bank] would constantly get phone calls from higher ups and politicians to give loans to those he rejected. No wonder, Indian Bank was near bankruptcy in the 1990s - with high number of NPAs. Sometimes projects rejected by even the Finance Minister would be overruled by the Prime Minister's office [Narasimha Rao]. Everyone inside knew. If you talk, you get silenced [as in the case of my grandfather]. There was even a CBI investigation and that silently closed things. Indian Bank loan scandal threatens to become a political millstone for United Front govt : Investigation
The courts would often push CBI in these cases: Spell out action taken in NPA scam: Bombay high court to CBI - but nothing gets resolved.
Money is power. Power is money.
In some cases, it just happens that a good company you funded end up in bad times. The officer exercised best judgement and circumstances play the devil. However, in most of Indian NPAs, it is deliberately given knowing fully well that the receiver would not repay. Politicians and top bank executives work well in siphoning off public money.
Things have improved a bit since those corrupted times, but the scam still exists. Tens of thousands of crores of public money gets out of the banks to corrupt hands and then "written off". You will hear it in news items like this: Officials under scanner in Rs. 2,000 crore NPA case, Syndicate Bank scam: CBI tracks mastermind's nexus with corporates and CBI begins probe into bank fraud involving loans over Rs 3000 crores.
Each of these cases involve thousands of crores. It happens all the time. It happens all over the nation. It happens in almost every public bank. And still, the ignorant public refuse to learn and act. The public refuses to learn any bit of finance to understand this. You have no idea of how big the racket is.
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