Decades in planning, if not centuries!

Letter # 30,  19 February 2021

While we try to get our heads around Sun Tzu, they already know enough to quote Chanakya. A few days back, India’s defence minister announced that India and China have agreed to disengage on the Pangong lake and both sides will cease forward deployment of troops in a ‘phased, coordinated and verifiable manner.’ (1) Videos released by the Indian Army later show the disengagement in action, after 10 months of tense standoff and nine Corps Commander-level talks.

There are multiple theories that explain the sudden breakthrough: one, India gained the upper hand when its troops undertook an operation in the Chushul sector (the night of 29th Aug) and occupied multiple heights along the LAC which overlook Chinese fixtures at Spanggur Gap and Spanggur Tso (2). Another school of thought suggests that the upcoming 100th anniversary of the Communist Party of China in July 2021 could have forced China into a faster disengagement (3).

Whereas that might explain why the standoff diffused, I am yet to come across something that explains why China chose to engage in a protracted standoff over a mountainous land with no vegetation or mineral resources in the first place. It only becomes clear when one: (a) reads how deeply and coherently China is aware of India’s military doctrine; and (b) knows how well China reads India’s defence budget, and its priority of allocation. On 8th Feb 2021, China Aerospace Studies Institute released the English translation of its 2013 Science of Military strategy that lends tremendous insight. (4)

The document breaks India’s military strategy over four time periods: (a) 1947 to 1960: Focus on building the economy while building defence just on the western frontier (Pakistan). (b) 1960 to 1972: Focus on building and modernizing armed forces after reeling from the loss in 1962 China war, which culminates into a win in the 1971 Pakistan war (attack West, defend North). (c) Post 1970s to end of century: Maintain land control and expand in the seas (this is where it gets tricky; we shall come to that later). and lastly (4) By 21st century: With the economy booming, establish passive deterrence for China while pursuing aggressive and punitive deterrence for other countries.

The PLA thinks that India takes a “Indo-centric” view of South East Asia, rooted in the belief that ‘India is at the heart of the region and that Pakistan and China are its main obstacles.’ Here is where they quote “the historically famous strategist – Chanakya” ‘who treated neighbors as enemies and that dealt with those who were far away and attacked those who were near’ (to imply that India “deals” with erstwhile USSR and USA, while conflicting with Pak and China).

It sheds some light as to why the PLA thinks that India might want a conflict with China; but if they believed that India’s military doctrine towards China has always been one of ‘persuasive (and not punitive) deterrence’, why would China engage into a protracted standoff rather than diffuse the situation faster? This is where it gets interesting.

A one-line answer is: because protracted stand-off in norther frontier leads to higher military spending and the relatively fixed defence budget leaves little allocation for Naval spending. For, you see, with enough funding, India can theoretically block 80% of all China’s hydrocarbon imports! Yes, you read that right.

It started with India setting up a Theatre Command (all assets of Army, Navy and the Air Force vests under the operational command of a three-star General) for the Andaman and Nicobar Islands (ANI) in 2001. That started the militarization of the ANI which has now turned into refitting of the airfields and docking facilities to accommodate larger vehicles. The plan, off late, has been to station additional aircrafts, warships, missiles and soldiers in the vicinity. India claims this is to protect trade (90% by value passes through this route) and for security.

ANI is a group of 572 islands, with the northern-most tip just 300km away from Myanmar and the southern-most tip a little over 200km away from Indonesia. End to end, ANI spans across over 800km and even though it accounts for just 0.2% of India’s land mass, it accounts for over 33% of its exclusive economic zone in the sea.

This means that every merchant vessel going through the Malacca strait MUST navigate through either side of the ANI. With right militarization, India could gain the ability to block the western entry point to the Malacca strait.

This could be ground-breaking and can potentially change the world order. The Malacca strait is the busiest maritime route in the world. Of the 120,000 ships that sail through the Indian ocean every year, about 70,000 vessels pass through this strait. And, for China, 80% of its hydrocarbon imports go via this route. The vital strategic value of the ANI is certainly not lost on New Delhi.

But India has limited financial resources and ability to spend on defence. Its 15-year navy modernization plan will require funding support of USD123bn or an annualized spend of USD8.5b (5). Over the years, India has not been able to allocate even half the annualized budgeted spends, which has left the navy grossly under-funded, years in counting.

An additional knock on the door from the northern neighbours cut into the already strained Indian fiscal resources. For China, it is a game of depleting the adversary while hardly breaking a sweat itself. Here is a country that plans for decades, if not centuries.

Moving on from countries that plan for decades to companies that do the same. A lot has already been written about Amazon and Google, and how they are years and decades ahead of the curve, in terms of their thought process as well as actions.

In India, however, one company that has thought and executed “long term” is Max Life (we have investments in its listed parent- Max Financial, or MAXF). At the start of the millennium, the life insurance industry had just been opened-up to the private sector and a mad rush to expand fast by adding branches and recruiting agents ensued.

Founded in 2001 in partnership with New York Life, MAXF was one of the (if not the) weakest brands to enter the life insurance business. Other insurers incorporated during the same period (2001-05) either had large banks backing them (HDFC, ICICI, SBI and Kotak) or large industrial houses (Bajaj, Reliance, Birla). Relative to competition, Max Life approached the space differently—build the business slowly with a razor-sharp focus on training the agents. Their pareto was going to be granular as well, meaning, lesser dependence on a few “superstar agents”.

The idea was to build the right talent, and if MAXF got that part right, the business would eventually follow. It ran an ad campaign which drew attention to insurance mis-selling (pervasive at the time). When the regulator eventually clamped down on this, MAXF came out on top. Relative to peers, its agents serviced far fewer customers on average, but it ensured that clients were satisfied. The idea was to build a durable business—a long, slow and expensive journey, but one that was built to last.

The net result? When the regulator clamped down with introduction of ULIP guidelines, MAXF’s market share jumped from 5.5% to 7.5% (in 2010-11). Another round of tightening came around 2013-14 when highest NAV guaranteed products were banned and MAXF’s share increased from 8.5% to 10.3% in 2013. Its VNB margin (akin to EBITDA margin) at 25% and its ROEV (akin to ROE) over 20% are now best in class in the industry. The proof of the pudding lay in the fact that the HDFC group, during its discussion to acquire MAXF (which did not eventually go through), was for the first time in the group’s history willing to pay a non-compete fee to the promoter.

In the end, countries that plan for decades generally end up coming out on top. Companies that are willing to do so and take the pain in the short term, end up becoming stronger to withstand the test of time. Often, they make for an extremely rewarding investment.

 

Notes:
(1) India and China to pull back troops in a phased, coordinated manner: Rajnath Singh in Lok Sabha | India News – Times of India (indiatimes.com)
(2) Explained: In India-China border standoff in Ladakh, why Chushul sector is critical | Explained News,The Indian Express
(3) Has India spoilt the party for China ahead of CCP’s 100th anniversary? What Xi won’t say (theprint.in)
(4) 2021-02-08 Chinese Military Thoughts- In their own words Science of Military Strategy 2013.pdf (af.edu)
(5) Indian Navy’s modernization plans in jeopardy (defensenews.com)

Disclaimers:
Information in this letter is not intended to be, nor should it be construed as investment, tax or legal advice, or an offer to sell, or a solicitation of any offer to make investments with Buoyant Capital. Prospective investors should rely solely on Disclosure Document filed with SEBI. Any description involving investment examples, statistical analysis or investment strategies are provided for illustration purposes only – and will not apply in all situations and may be changed at the discretion of principal officer. Certain information has been provided and/or based on third-party sources and although believed to be reliable, has not been independently verified; the investment managers make no express warranty as to its completeness or accuracy, nor can it accept responsibility for errors appearing herein.

Leave a Reply

Your email address will not be published. Required fields are marked *

*

*