Profit E-Magazine Issue 46

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10 Weekly Roundup 14 How the private sector killed off the MQM 16 Will Coke Studio help Coca Cola slay the Pepsi dragon?

23 23 Rooting for the uprooted Faraz Khalid 24 What does China want from CPEC?

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31 Open banking’s next wave: Perspectives from three fintech CEOs 37 In the dying world of Pakistani magazine, are fashion magazines the only survivors?

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Executive Editor: Babar Nizami l Managing Editor: Farooq Tirmizi l Joint Editor: Yousaf Nizami l Business Editor: Agha Akbar Reporters: Arshad Hussain l Muhammad Faran Bukhari l Syeda Masooma l Ghulam Abbass l Ahmad Ahmadani Shehzad Paracha l Director Marketing: Zahid Ali l Regional Heads of Marketing: Muddasir Alam (Khi) l Zulfiqar Butt (Lhr) Mudassir Iqbal (Isl) l Layout: Rizwan Ahmad l Illustrator: ZEB l Photographers: Zubair Mehfooz & Imran Gillani l Publishing Editor: Arif Nizami l Business, Economic & Financial news by 'Pakistan Today' Contact: profit@pakistantoday.com.pk

CONTENTS

welcome

THE ADULT IN THE ROOM? If campaigns are conducted in poetry, and governing in prose, it appears that the Imran Khan Administration – at least insofar as Finance Minister Asad Umar is concerned – are aiming to govern in prose with a poetic bent to it. The finance minister was quick to tweet out that the cabinet in its first meeting had decided to aggressively prosecute Pakistanis who may have illicitly stashed wealth abroad, but then, in an appearance before the press shortly after taking his oath of office, the minister appeared to suggest that such an effort would not be a focus of the government’s economic policy.

If we are interpreting the minister’s statements correctly, it appears that he is aiming to not entirely abandon the populist rhetoric that won the PTI the 2018 election in the first place, but also balance it out with a pragmatic approach to economic management that may just get the country out of its financial quagmire.

The problem, however, is that he has yet to lay out how he intends to do that.

The only thing we know for sure from the minister so far is that the new administration intends to revisit the budget bill for fiscal year 2019, which was to be expected, given the fact that it was crafted in the waning days of the Nawaz Administration.

But what happens next?

The markets – and Pakistan’s broader economy – are calm so far because they expect that the government is planning to negotiate with the International Monetary Fund, but

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the government has yet to make any significant announcements about how and when that will happen. The longer they wait, the more the markets are likely to begin panicking. At that point, one is likely to see the resumption of the sell-off in the rupee, a return of higher inflation, and a worsening of the very macroeconomic problems that the government of Pakistan is trying to solve by going to the IMF in the first place.

It may be tempting for the government to try to reinvent the wheel, but now is not the time for such measures. The government would be much better off taking the bitter pill of the IMF bailout now, and seeking to negotiate room for structural reforms during the bailout program. It is better to have those negotiations with the breathing room of a bailout than to be caught scrambling for piein-the-sky solutions with an asphyxiating economy.

Farooq Tirmizi Managing Editor

FROM THE MANAGING EDITOR

Government Holdings (Private) Limited MD Mobin Saulat

QUOTE

Imported gas and Tapi pipeline should give some breather to the government as it can focus on domestic reserves”

“China and Pakistan have made remarkable achievements in the Belt and Road cooperation, and in building CPEC” Chinese Premier Li Keqiang

$124.412m

were spent on the import of agriculture machinery during FY18. It witnessed about 4.77 per cent growth as the country spent $124.412 million of the mechanisation of agriculture sector of the country as against the corresponding period of last year. During the period from July-June, 2017-18, agriculture machinery worth $124.412 million were imported as against the import of $118.743 million of the same period of last year, according to the data of Pakistan Bureau of Statistics (PBS). During the period under review, other machinery worth $3.666 billion were imported, which posted about 9.28 percent growth when it was compared to the import of $3.354 billion of the same period last year. Meanwhile, in last fiscal year, telecom machinery valuing $1.534 billion imported as compared the imports of $1.351 billion of the same period of last year, whereas mobile phones worth $847.654 million imported as against the US$ 709.690 million of the same period last year. By the end of last fiscal year, the country imported transport group goods valuing $4.383 billion as compared the imports of $3.327 billion of the same period of last year, which grew by 31.74 percent, the data revealed.

Rs30b

of non-payments to two RLNG power plants Haveli Bahadur Shah and Baloki may force them to shutdown operations. The indifferent attitude of the interim energy ministry in the last few weeks has contributed to a minimum or no payments to power producers, greatly impacting power generation and resulted in increasing daily outages across Pakistan.

As the incoming PTI government takes hold of reins, the incompetence of the outgoing caretaker energy ministry in handling the affairs of the energy sector will take some working. Presently, consumers are suffering four to ten hours of power outages in urban and rural areas. There are concerns two major power plants producing 10 percent of overall peak summer generation would shut down in a week’s time if their outstanding dues of Rs30 billion aren’t cleared. It has come to the fore, the management of National Power Parks Management has apprised the appropriate quarters about their failure to operate two regasified liquefied natural gas (RLNG) based power plants, having a generation capacity of 2,453 megawatts due to cash flow issues.

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$4b

loan is poised to be provided by the Islamic Development Bank (IDB) for reviving Pakistan’s flailing economy.

Two officials have told the Financial Times that the Islamic Development Bank based in Jeddah, Saudi Arabia has agreed to make a formal offer to lend Islamabad the money when Imran Khan takes over as prime minister.

They also added that they expect Asad Umar, the finance minister to be, to accept the offer. “The paperwork is all in place,” said one senior adviser in Islamabad. “The IDB is waiting for the elected government to take charge before giving their approval.” The person added that the loan would not cover Pakistan’s expected financing gap of at least $25bn during this financial year but was “an important contribution”.

Imran Khan, Pakistan’s former cricket captain, is expected to take over as prime minister in the coming days after his Pakistan Tehreek-e-Insaf party won the most seats in last month’s election — though it fell short of an outright majority. One of his first jobs will be to repair the country’s balance of payments problem, with high imports and stagnant exports having bled the country of much of its foreign exchange reserves.

“I am confident that the journey towards improvement in economic conditions will continue” State Bank of Pakistan Governor Tariq Bajwa

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$26.073m

worth of tobacco was exported by Pakistan in FY18. The exports of tobacco were recorded at 3,802 metric tons worth $14.813 million in the financial year 201617, the data revealed. Meanwhile, about 1,469,802 metric tons of sugar worth $508.333 million exported as compared the exports of 307,348 metric tons valuing $161.039 million, showing over 200 percent increase. Besides, the country exported 1.189 million metric tons of wheat worth $236.339 million during 12 months of last fiscal year as compared the exports of 3,937 metric tons valuing $1.038 million of the corresponding period last year.

$300m

in new security funding has been pledged by the United States for Southeast Asia, as China forges ahead with plans to bolster its engagement in the region. U.S Secretary of State Mike Pompeo Pompeo unveiled the figure to reporters on the sidelines of a meeting of foreign ministers from the 10-member Association of Southeast Asian Nations (ASEAN) and other officials from around the world in Singapore. The new security assistance will strengthen maritime security, develop humanitarian assistance, peacekeeping capabilities and counter “transnational threats”, he added. The United States said earlier this week it would invest $113 million in technology, energy and infrastructure initiatives in emerging Asia which he called “a down payment on a new era of U.S. economic commitment to the region”. The United States’ developing vision for a “free and open Indo-Pacific” comes at the same time as China ramps up its influence as part of is Belt and Road plan to bolster trade ties with nations in Southeast Asia and beyond.

$1.5b

savings could be stitched up by businesses, individuals, and government from the megapolis of Karachi alone if consumers adapt digital payment systems, according to a study commissioned by VISA. The study titled, ‘Cashless Cities: Realizing the Benefits of Digital Payments’ in research encompassing ‘payment patterns of 100 cities from 80 countries’ divulged that by 2032, cashless payments could increase Karachi’s employment by 4.7 percent and accentuate GDP growth rate with 14.3 basis points. Describing the benefits of digital payments, said he, businesses and governments have to pay the cost of cash management. The various benefits of going digital could save up to $12 trillion for a clutch of 100 cities – if they decide to go cashless.

Rs972.6b

have been disbursed by banks for agri-credit purposes during FY18. FY18’s disbursement is 38.1 per cent higher than the last year’s disbursements of Rs704.5 billion. Further, the agri outstanding portfolio increased to Rs469.4 billion on end June 2018 registering a growth of 15.7 percent compared with the last year’s position of Rs405.8 billion. Similarly, the agricultural credit outreach has increased to 3.72 million farmers at end June 2018 from 3.27 million farmers last year recording growth of 13.8 per cent. The achievement of agri credit disbursement was a challenging task in the backdrop of various real side challenges like; water shortage, low production of maize and wheat, price volatility of agri produce and a high cost of production. However, the State Bank of Pakistan (SBP) made concerted efforts for achieving the agri credit disbursement target and implementing various budgetary initiatives set by the government.

Rs24.2t

was the figure of the federal government’s debt at the end of financial year 2017-18. A net addition of Rs9.8 trillion in the last five years, at an annual growth rate of 13.5 percent, reported the State Bank of Pakistan (SBP). Five years ago, total debt of the central government stood at Rs16.4 trillion, which has grown rapidly during the PML-N government’s tenure. The debt is exclusive of all obligations that are not the direct responsibility of the finance ministry. The pace of debt accumulation during the past five years has squeezed fiscal space.

The cost of debt servicing alone in the first month of this fiscal year was over one-third of the total spending in July, owing to the increase in interest rates by the central bank.

BRIEFING

“We are not going to change the governor of the State Bank of Pakistan” Finance Minister Asad Umar

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Rs5m

fine has been imposed by National Electric Power Regulatory Authority (Nepra) on Central Power Generation Company Limited GENCO-II, a government-owned power generation company. The fine has been imposed on account of negligence in the maintenance of 220 kV switchyard of TPS Guddu old and non-operation of 220 kV circuit breaker which resulted in a power breakdown on January 21, 2016, in the northern network of the country i.e. Punjab and Khyber Pakhtunkhwa. The Authority (NEPRA) took a serious note of the power break down and initiated legal proceedings against GENCO-II and directed NTDC to investigate the matter and submit a report.

Rs896b

is the figure of receivables in Pakistan’s power sector. The previous Pakistan Muslim LeagueNawaz (PML-N) government left office at May-end with heavy receivables from power-sector defaulters that amounted to Rs851 billion. The receivables then went up to Rs896 billion by the end of the fiscal year 2017-18 on June 30, posing a serious threat to the power sector. A year ago, in June 2017, the receivables had stood at Rs729.8 billion, according to the audited figures compiled. The private sector, consumers in the Federally Administered Tribal Areas (Fata) and owners of agricultural tube wells in Balochistan were major defaulters of the power distribution companies. They had to pay Rs670.70 billion by the end of FY18 compared to Rs554.79 billion in June 2017. Tubewell owners owed Rs232 billion at the end of June this year compared to Rs185.3 billion in June 2017 whereas Fata consumers were to pay Rs26.85 billion as opposed to Rs22.18 billion in June 2017. The federal government and its entities owed Rs4.88 billion in June 2017, but the receivables reached Rs7.20 billion in June 2018.

Rs10b

have been released under Public Sector Development Programme (PSDP) 2017-18 for for various ongoing and new schemes against the total allocations of Rs 1,030 billion. The released funds include Rs5.2 billion for federal ministries and Rs4.7 billion for special areas, according to the latest data released

by Ministry of Planning, Development, and Reform. Out of these allocations, the government has released Rs4.628 billion for Pakistan Atomic Energy Commission for which Rs30.4 billion was allocated for the year 2017-18, whereas for Maritime Affairs Division, an amount of Rs334 million has been released out of a total allocation of Rs10.1 billion. Similarly, Rs 200 million have been released for Cabinet Division for which the government has earmarked Rs1.1 billion under PSDP 2017-18.

The government has also released Rs4.7 billion for AJK (block and other projects) out of its allocations of Rs 29.8 billion for the FY2018.

$3.858m

worth of furniture was exported in FY18 as compared to the exports of $4.5 million of the corresponding period last year (201617), showing a decrease of about 14.27 percent. The data of Pakistan Bureau of Statistics (PBS) revealed that during the period from July-June, 2017-18, about 184,000 units of different furniture products worth $3.858 million were imported as compared the imports of 229,000 units of $4.5 million of the same period last year. Meanwhile, during the period under review, jewellery valuing $5.903 million were exported as compared to the $5.827 million of the same period last year (2016-17) and it was increased by 1.30 percent.

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Rs18.7b

worth of transactions were carried out on locally registered e-commerce merchants during FY18, according to figures released by State Bank of Pakistan (SBP). There were 1,094 locally registered e-Commerce Merchants having their merchant accounts in 8 banks as of end of June, 2018 showing limited boarding of e-Commerce merchants in the country. These transactions showed a significant YoY growth of 183.3 per cent and 98.9 percent compared to previous year. In addition to the above, domestically issued Debit, Credit and Prepaid cards processed 6.8 million transactions of Rs. 39.7 billion on local and International e-Commerce merchants. In these e-Commerce transactions Credit Cards has the highest share both in volume and value of transactions.

Saudi Arabia can invest in different sectors of Pakistan to boost trade and economic ties” Senate Chairman Muhammad Sadiq Sanjrani

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48pc

stake is being acquired by JS Group in Habib Coastal Power Company (HCPC), an independent power producer based in Balochistan. A senior government official said JS Group would also be a beneficiary of Rs6 billion damages owed to HCPC by Sui Southern Gas Company (SSGC) on account of an international arbitration case won by the former. Officials said Pakistan will have to pay damages in millions of dollars and previously the government has lost key cases like Reko Diq and Karkey in the International Court of Arbitration. Officials disclosed negotiations had been ongoing for the past three years and a deal was finalized just before the conclusion of the previous PML-N government’s’ tenure on May 31st, 2018.

$200m

benefits will be gained by Pakistan after signing of a free trade agreement (FTA) with Thailand.

Pakistan and Thailand would present their final list of FTA incoming round of negotiation scheduled for September that is aimed at increasing trade liberalisation between both the countries. Both sides had exchanged the final offer lists of items for free trade, including automobile and textile sectors in order to remove the reservations of both sectors. Pakistan wants concession on 110 products on textiles, agro-products, plastic and Pharmaceuticals as the same was granted by Thailand to other FTA partners in these products, a top official of the commerce ministry told APP. He said that Pakistan had relative advantages over Thailand in some 684 commodities including cotton yarn and woven textiles, readymade garments, leather products, surgical instruments and sports goods. He said that Pakistan had relative advantages over Thailand in some 684 commodities including cotton yarn and woven textiles, ready-made garments, leather products, surgical instruments and sports goods.

17pc

growth is projected in fixed investment during the ongoing financial year 2018-19. “The investment target is achievable given the improvement in ease of doing business, affordable energy supply, and prospects of higher profits and enhanced capacity utilization rate,” official sources said. The spillover effect from public investment under China Pakistan Economic Corridor (CPEC) is expected to catalyze private sector and foster public-private partnership. The expected technology and innovation spillover from the interaction of Chinese and Pakistani business would improve productivity in all sectors. Further, the lagged impact of current investments, including CPEC investments by government, private local and foreign investors coupled with prudent monetary and fiscal policy is expected to bolster the economy. During the last fiscal year (2017-18), total investment was recorded at 16.4 percent of GDP compared to 16.1 percent in 2016-17.

Rs1.9t

of liabilities and receivables would need to be restructured by the incoming PTI government, according to a senior government official. The new government, according to a senior government official would require making adjustments and administer write-offs besides employment various kinds of borrowing to clean the slate in terms of debt and liabilities of loss-making entities. The official shared a bulk of liabilities built up over time because of a widening gap between payables and receivables in loss-making entities, which reflects inter-corporate circular debt. With the increasing debt, a fresh liquidity injection of Rs600-700 billion would be needed. The incoming finance minister Asad Umar would be allowed the leeway to estimate a higher fiscal deficit at the start of PTI’s term compared to 4.9 percent of GDP recorded by the previous PML-N government.

$5b

risky sovereign wealth fund establishment mulled by the previous government using foreign loans to invest in real estate and capital markets, but a timely intervention by authorities saved the exchequer from huge potential losses. The plan had been floated by Ali Jehangir Siddiqui, then special assistant to the prime minister, according to officials of the Ministry of Finance and relevant documents. The move was at the advanced stage and the government wanted to promulgate a presidential ordinance to make the wealth fund operational, they added. However, the Ministry of Finance and State Bank of Pakistan (SBP) refused to give their consent for a highly risky and politically controversial proposal, said the officials.

BRIEFING

HOW THE PRIVATE SECTOR KILLED OFF THE MQM The political party died when its reason for existence – securing access to middle class government jobs – was made redundant by a rising private sector

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By Farooq Tirmizi

f there is one thing that became abundantly clear in the 2018 elections, it is that the Muttahida Qaumi Movement (MQM) is well and truly dead. Why is a business magazine talking about the death of a political party, you might ask? Because the death was caused primarily by economic factors.

While it is true that many elements of the Establishment certainly seemed gleeful at the prospect of the MQM’s death and appeared to do everything within their power to hasten the demise of the party that claims to represent the interests of Muhajirs in Pakistan, they were by no means its primary undertakers.

To put it simply, the MQM is dying because it has no reason to live anymore. And while some of its supporters still cling on to its slogans as comfortable relics of the past, the MQM cannot escape reality: Muha-

jirs are not a threatened ethnic group in Pakistan and a party that sustains itself on stoking a sense of fear within that ethnic group will strangle itself to death.

To understand why the MQM is dying, you do not need to watch Altaf Hussain’s speeches, nor do you need to learn about the Army operation in Karachi, and most certainly don’t listen to the know-nothing talking heads on television. You do not even need to talk to Muhajirs about their political views. All you need to do is stand on the sidewalk on I.I. Chundrigar Road in Karachi at 9 am on a weekday morning. Stand in front of any building and ask the young men and women going into those buildings just two questions: how much money do you make, and how much money do your parents make?

While you will meet many sons and daughters of comfortably middle class families, you will also meet the 24-year-old commercial banker at Bank Alfalah, making Rs40,000 a month, whose father is a rickshaw driver scraping by on Rs15,000 a month. You will meet a young accountant at PricewaterhouseCoopers whose parents own a fruit cart and barely make it above the poverty line.

And you will meet the young lawyer whose father owns a small paan shop on a street corner in one of the many working class neighbourhoods of the city.

These young men and women have one thing in common: they have managed to secure a ticket out of their working class background into Pakistan’s rising and increasingly affluent middle class, and they did not need a government job to do so.

Some, maybe even most, did not even need a government-subsidised education to get there either.

Why is this relevant to the MQM’s imminent death? Because the fundamental premise that justified MQM’s existence in the first place was the notion that Muhajirs were being prevented from gaining access to economic opportunities by virtue of their ethnicity.

Muhajir resentment emerged in the early 1970s when, after two decades of dominating the Civil Service of Pakistan, they were finally forced to make room for people from other ethnic groups in the country through the introduction of geographic quotas

FOR THE FIRST TIME IN PAKISTAN’S HISTORY, ITS FINANCIAL CAPITAL WILL BE REPRESENTED

BY A POLITICAL PARTY THAT IS ALSO IN POWER AT THE FEDERAL LEVEL, WHICH MAY BODE WELL FOR BOTH ECONOMIC POLICYMAKING AND ETHNIC HARMONY IN THE NATION’S LARGEST AND WEALTHIEST CITY for government jobs. Of course, Muhajirs did not see it as an injustice being corrected: they had been raised to view other ethnic groups as unworthy cretins and saw this policy measure as the death of meritocracy.

Built on half-truths and lies though it was, that culture of resentment at least held some credence when the government was the dominant economic actor and the only paths to upward economic mobility relied on access to political patronage and a government job for yourself or for one of your family members.

But as the economy liberalized in the early 1990s onwards, there is now no longer just one path to the Pakistani upper middle class: there are many, and many of them are controlled by Muhajirs themselves.

In other words, the economic anxieties of the 1970s that animated the rise of the MQM no longer exist.

The fastest path to the upper middle class life in Pakistan is no longer through the government but through Corporate Pakistan. The smartest students no longer want to attend the PMA at Kakul on their way to becoming colonels and generals, nor Government College Lahore on their way to becoming DMG officers. They now want to attend LUMS and IBA on their way to becoming brand managers at Procter & Gamble and Unilever.

The government no longer controls access to economic opportunity through patronage, and so the democratic order no longer threatens Muhajir economic interests. It did when they relied on the disproportionate power in the civilian bureaucracy that was only possible through undemocratic control. The geographic quotas remain, but Altaf Hussain’s successors at the University of Karachi either no longer care, or are no longer threatened by them. Even if you want a government job as a Muhajir, there are now so few people applying from

Urban Sindh that the quotas perversely begin to work in your favour.

In short, Muhajirs no longer need the MQM to guard their narrow ethnic economic interests in the federal government because those interests no longer hinge around government jobs.

Now they have a much wider set of economic interests and need a party that is interested in governing the country’s largest city and providing it with a functioning infrastructure.

Under the Musharraf Administration, it had briefly felt possible that the MQM could make the pivot from being the insurgents to being the responsible governing party. Then came the politically brilliant PPP ploy in 2011 of using Zulfiqar Mirza to make the MQM go back on the ethnic defensive, and all of a sudden the MQM’s evolution stood aborted. The party reverted to being the well-organised gang of thugs it always was.

Some observers, such as Zarrar Khuhro in the Herald, argue that the MQM needs to find a post-Altaf Hussain strategy to survive. While Khuhro’s analysis of the break-down of the MQM is very well laid out, I argue that no viable recovery strategy exists.

The 2018 elections showed that Muhajirs have reverted to their pre1988 voting patterns of voting for national parties and in the Pakistan Tehrik-e-Insaf (PTI), many of them have found one they can accept. Indeed, the leadership of the PTI on economic matters appears to be largely from Karachi, and includes the first generation of professionals who made solid middle class careers in Corporate Pakistan, and not through government.

Meanwhile, for the first time in Pakistan’s history, its financial capital will be represented by a political party that is also in power at the federal level, which may bode well for both economic policymaking and ethnic harmony in the nation’s largest and wealthiest city.

POLITICAL ECONOMY

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Coca Cola may be the global giant, but it remains the underdog in Pakistan; Coke Studio, however, is helping the company catch up in market share with its rival

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Muhammad Faran Bukhari

t is not often that a giant multinational corporation can be seen as an underdog, but the South Asian market for consumer goods is a peculiar space. In tobacco, the global number one is Philip Morris International, but in Pakistan and India, its smaller competitor – British American Tobacco – is dominant.

And in beverages, Coca Cola may be the global colossus, but

BATTLE OF THE BEVERAGES

in this part of the world, it plays second fiddle to its rival PepsiCo. The team at Coca Cola Pakistan, however, appears hell bent on changing that dynamic, and are willing to invest whatever it takes to gain market share in Pakistan’s large and rapidly growing market for beverages, particularly at a time when global food and beverage companies are struggling to grow market share in more developed, high-income markets.

“In developed markets, you can barely get single-digit growth,” said Fahad Qadir, the spokesperson for Coca Cola in Pakistan and Afghanistan, during an interview with Profit at the company’s main offices in the country in Lahore. “Pakistan is one of those countries which has double digit growth – sometimes even healthy double-digit growth – as far as the industry is concerned.”

Qadir may be underselling just how rapidly the market has grown.

Based on estimates compiled from industry sources, Profit estimates that the total retail value of beverages (carbonated, non-carbonated juices, and bottled water) sold in Pakistan hit Rs297 billion ($2.8 billion) in 2017 and has been growing at a rate of 15.9% per year for the past five years.

Of course, given the perennial challenges of electricity outages and infrastructure constraints, the actual amount earned by companies competing in this space is considerably lower. Again relying on those industry sources, Profit estimates that the total revenue of the industry as a whole was around Rs166 billion ($1.6 billion) in 2017. The difference between those two numbers is accounted for by the retailers’ margins, which are necessitated by the high cost of running power generators owing to daily power outages throughout most of the country.

‘IN DEVELOPED MARKETS, YOU CAN BARELY GET SINGLE-DIGIT GROWTH… PAKISTAN IS ONE OF THOSE COUNTRIES WHICH HAS DOUBLE DIGIT GROWTH – SOMETIMES EVEN HEALTHY DOUBLE-DIGIT GROWTH…’ Fahad Qadir, the Coca Cola spokesperson in Pakistan and Afghanistan

The growth in the industry, incidentally, is driven almost entirely by growth in volume: the average Pakistani now consumes 26 litres a year of the beverages that Coca Cola sells, which includes not just its signature carbonated beverages, but also fruit juices (the Minute Maid brand) and bottled water (sold under the Dasani brand). That number has been growing at an average of 11.6% per year for the past five years.

Why Coca Cola is behind Pepsi

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he carbonated beverage business was invented by the founders of what would eventually become the Coca Cola Company.

Coca Cola was invented in 1886 by pharmacist John Stith Pemberton in Atlanta, Georgia, in the United States.

The Coca-Cola formula and brand were bought in 1889 by Asa Griggs Candler,

‘BASED ON ESTIMATES COMPILED FROM INDUSTRY SOURCES, PROFIT ESTIMATES THAT THE TOTAL RETAIL VALUE OF BEVERAGES (CARBONATED, NON-CARBONATED JUICES, AND BOTTLED WATER) SOLD IN PAKISTAN HIT RS297 BILLION ($2.8 BILLION) IN 2017 AND HAS BEEN GROWING AT A RATE OF 15.9% PER YEAR FOR THE PAST FIVE YEARS’ 18

who incorporated The Coca-Cola Company in 1892.

Since then, the company has grown to become one of the largest in the world, and now owns over 350 brands and operates in 200 countries and territories around the world. Coca Cola operates in more countries than there are members of the United Nations.

PepsiCo, the market leader in Pakistan, has a slightly younger history, and operates in fewer countries than Coca Cola, and is smaller in revenue, despite having many more business lines than Coca Cola.

So how does PepsiCo dominate in Pakistan, and in South Asia more broadly?

Well, it helps to start first. PepsiCo entered the Pakistani market in 1979, when it entered into a partnership with Pakistan Bottlers, which was then a local bottling company that manufactured its own brand of beverages under the name Pakola.

PepsiCo then built out partnerships with seven other local bottlers throughout Pakistan and gained a commanding share of the Pakistani beverage market, easily beating out the British and Australian competitors who had existed in the country back then. It also made the strategically important decision to start sponsoring the Pakistan men’s national cricket team and frequently featured Pakistan’s favourite cricketer – Imran Khan – in its ads.

By the time Coca Cola even realized there was a market in Pakistan and began operations in the country in 1996, it was too late. PepsiCo had already been in the country for 17 years by that point, and had been the lead sponsor for the team that won the World Cup in Pakistan’s favourite sport.

Indeed, Pepsi’s ads almost invariably featured cricketers in Pakistan, starting with Imran Khan, but then moving on to Javed Miandad, and other great legends of Pakistani cricket, including and up to several members of the current international side.

Coca Cola initially tried to replicate the strategy that they believed had made PepsiCo successful: having eight, well-connected local bottlers handle the manufacturing and distribution of its products. But the formula proved too chaotic. Coca Cola was able to take some market share, but lagged far behind PepsiCo, which remained the dominant market leader in the country.

The Coca Cola structure and the 2008 shakeup

B

efore understanding how Coca Cola was able to put into effect its turnaround strategy, it is first necessary to understand the uniquely American structure of the company.

The Coca Cola Company owns the formula and the brand names of every Coca Cola product. In addition, it

also owns the bottling company for its operations inside the United States. In most other countries in the world, however, the company retains ownership of only the brand the formula through a company called the Coca Cola Export Company.

In Pakistan, there is a local branch of the Coca Cola Export Company, not incorporated as a Pakistani company, but rather as the branch of a foreign company. That branch conducts all marketing and brand building activities and manufactures the concentrate for the company’s signature beverages from a plant it owns and operates in Raiwind.

When it first started operations, that concentrate used to be sold to eight separate bottlers who each had

their own factories located throughout Pakistan. Within a few years of arriving in the country, however, it was clear that the business model of having several bottlers in one country was not working, so the company spent a decade buying out every single one of its bottling partners, and by 2008, had consolidated them into one single company called Coca Cola Beverages Pakistan.

For some time, Coca Cola Beverages Pakistan was a wholly-owned subsidiary of The Coca Cola Company in the United States, but in 2008, the US-based parent sold a 49% share to Coca Cola Içiçek, a Turkey-based partner of the group. Coca Cola Beverages Pakistan operates six bottling factories in Pakistan, located in Karachi, Gujran-

BATTLE OF THE BEVERAGES

wala, Multan, Lahore, Rahimyar Khan, and Faisalabad.

It was then that Coca Cola began its most ambitious project of building up its brand to compete against the powerful brand identity that PepsiCo had built up in the country. Only after consolidating its operations, and overcoming the logistical and operational challenges it had previously faced, was it able to focus on the strategic task of building up its brand identity in a country that had long ago been conceded to its main rival in the global market.

Coke Studio and the takeoff

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he mistake that Coca Cola made was in assuming that giving out bottling licences to politically well-connected families – which is what PepsiCo had done – was the reason for PepsiCo’s success in Pakistan and the only formula for success in the Pakistani market.

In hindsight, of course, this was not true. Aside from having a head start in the Pakistani market, PepsiCo invested in building an association with the one thing that the overwhelming majority of Pakistanis felt an emotional attachment to: the men’s national cricket team.

By associating itself with the stars that young Pakistanis looked up to – Imran Khan, Javed Miandad, Wasim Akram, Shahid Afridi, etc – PepsiCo made itself into an almost local brand.

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‘SINCE THEN, THE COMPANY HAS GROWN TO BECOME ONE OF THE LARGEST IN THE WORLD, AND NOW OWNS OVER 350 BRANDS AND OPERATES IN 200 COUNTRIES AND TERRITORIES AROUND THE WORLD. COCA COLA OPERATES IN MORE COUNTRIES THAN THERE ARE MEMBERS OF THE UNITED NATIONS’ Many foreign brands are often the subject of conspiracy theories, and PepsiCo certainly had its fair share of such theories about its brands, but by being seen as the supporters of a nationally unifying institution – Pakistan cricket – PepsiCo were able to overcome what may otherwise have been a significant challenge and build a commanding lead in market share.

If Coca Cola was going to succeed in the Pakistani market, it was going to have to take on that branding advantage.

Enter Rohail Hayat.

Rohail Hayat was formerly a member of something that had been a Pakistani institution itself: the pop music band Vital Signs. In 2008, he was given charge by Coca Cola to create something for the Pakistani audience that had already been tried by the company in the Brazilian market: a platform for musical performances, aired on a studio to a television audience commercial-free. The goal would be create the

sound of Pakistan, blending folk music with modern, established stars with young up and comers, Urdu singers and local language stars.

Coca Cola may not have realized it at the time, but this was exactly what they were looking for.

If Pepsi had cornered the market for inspiration by linking itself with the Pakistani cricket team, Coca Cola could respond by taking up the task of sponsoring soulful, uplifting music.

The show started in 2008 and was almost immediately a success. “The popularity of Coke Studio is far greater.

We get hits from almost 180 countries in the world on our official pages. A number of our songs have crossed 10 million, 20 million and even 100 million hits on YouTube,” said Qadir.

So big a success was Coke Studio Pakistan that Coca Cola began replicating the formula in other countries. In 2011, Coca Cola introduce Coke Studio India, produced in partnership with MTV. The idea was then also adapted

for Arab audiences with the 2012 launch of Coke Studio.

It was success like no other multinational corporation’s ad campaign had ever gotten in Pakistan. Coke Studio may have originated in Brazil, but it died out there very quickly. It was in Pakistan that it found success, and it was the Pakistani model that Coca Cola successfully exported to other parts of the world, a fact that Pakistanis have begun to take pride in, which certainly helps the company build its brand in the country. “Coke Studio produces the recognition, the recall, the brand, the preference, the choice and the consumption and everything goes up,” said Qadir. “The standing and the equity of the brand has increased considerably in all these years. Coke Studio has been the cornerstone of our success story in the last 10 to 12 years. It has not just become the identity of Pakistan, it is the identity of every Pakistani and what Coca Cola stands for locally and internationally.”

The numbers certainly bear out Qadir’s claim. In 2008, the year Coke Studio started, Coca Cola’s share in the Pakistani beverage market was around 26.3%, a number that has since jumped sharply to 37% at the end of 2017.

In an extension of the connection between the Coca Cola brand and Pakistani music, the company launched Coke Fest in 2017, a series of outdoor festivals across major Pakistani cities with several food stall and live music performances.

“It gives a different dimension to what the brand is doing,” said Qadir.

“There are not many opportunities people have of getting to enjoy outdoor music. So we came up with Coke Fest.

We have 30,000 to 40,000 people attending every event in every city that we go to. I think this provides an opportunity for people to go out with their families and enjoy. Yes it is an off shot of the music activities we do, but it is becoming a strong pillar of the marketing activities we do every year.

Eventually everything has to result into more sales and more beverages selling for the company.”

Investing in operational capacity

B

rand building, however, is not enough, a lesson far too many brand managers have a tendency to forget. Coca Cola has been

investing heavily in building out its capacity to manufacture and distribute its products to the market.

In 2011, Coca Cola invested $172 million into Pakistan to manufacture aluminum cans for Coke. The product had previously been imported from the Middle East, which rendered its price too high to be competitive in the Pakistani market.

In 2013 and 2014, it invested a further $248 million into the Pakistani market in order to build two new bottling plants in Karachi and Multan, in addition to the plants that had already existed in both of those cities, as well as investing in more coolers, which the company distributed amongst retailers to help boost the company’s retail sales.

Given the infrastructure challenges and daily power outages in Pakistan, it is common not just for large multinational food and beverage companies, but also many other types of companies, to distribute coolers, refrigerators,

freezers, and even diesel generators to retailers to help keep their products at the optimal temperature for the consumption of the end-consumer.

And the company is now planning to invest another $250 million over the next two years to continue that expansion spree.

“We are putting in a new greenfield plants,” said Qadir. “We just inaugurated our Faisalabad greenfield.

A couple of years ago, we inaugurated Multan, so we are putting up new greenfields every two to three years, which will help our distribution and of course our production capacity. We are investing $250 million in the coming few years and we invested the same amount in the last two to three years.”

That continued investment in production and distribution capacity is a necessary outgrowth of the company’s aggressive marketing campaigns.

After all, what good is a marketing campaign that persuades more people to buy your product if you are not able

BATTLE OF THE BEVERAGES

to produce enough of that product to get to the people who are now willing to spend money on it?

Part of the increase in capacity has been the introduction of new brands, such as Dasani water, the company’s flagship bottled water brand, which has supplanted Kinley as its main bottled water offering in the Pakistani market. “Kinley was the first water brand we launched in Pakistan.

When you look at the business plans every year, you do look for new innovations. So from that perspective we thought that we will switch to Dassani, in order to revitalise the portfolio. We have redesigned everything. Right from the shape of the bottle to the labelling.

Switching over has been good and the feedback has been great,” said Qadir.

The taxation problem

T

he one consistent complaint Coca Cola has had in Pakistan is the taxation regime it faces, both in terms of the actual rates it is legally required to pay – which the company claims are too high – and the enforcement mechanism, which the company feels is too lax and thus discriminates against companies that actually pay their taxes versus less scrupulous players who avoid taxes and thus have more cash available to reinvest in their business.

“The entire beverage industry is being very disproportionately taxed,” said Qadir. “We pay excise duty on top of the sales tax. No other segment within food and beverages pays excise duty, so beverage industry is the only one doing that. It increases our cost to do business. Excise duty in Pakistan is the second highest in the region including China, India and Indonesia which means that we don’t have much space to grow, despite the fact that we are bringing in a lot of investment which runs into hundreds of millions of dollars.”

And then there is the fact that the company believes that many of its

competitors, particularly local bottlers, including some of those that are partnered with PepsiCo, are evading taxes, which creates an imbalanced playing field.

“We feel pride in saying that we pay our fair share of taxes,” said Qadir.

“But sometimes tax payments of other players is questionable. We don’t want anyone getting an unfair advantage from one side and using that money to fuel growth for themselves.”

What comes next?

Y

et despite the supposed disadvantages to investing in Pakistan, Coca Cola continues to pour money into the economy.

Part of it has to do with the fact that Coca Cola Içiçek, the publicly listed Turkish company that owns half of, and operates, Coca Cola Beverages Pakistan has reached a market saturation point in its home market of Turkey.

Coca Cola Içiçek operates in several markets across the world, including Azerbaijan, Iraq, Kazakhstan, Kyrgyz-

‘FOR SOME TIME, COCA COLA BEVERAGES PAKISTAN WAS A WHOLLY-OWNED SUBSIDIARY OF THE COCA COLA COMPANY IN THE UNITED STATES, BUT IN 2008, THE US-BASED PARENT SOLD A 49% SHARE TO COCA COLA IÇIÇEK, A TURKEY-BASED PARTNER OF THE GROUP’ 22

stan, Pakistan, Syria, Tajikistan, Turkmenistan, and Jordan. None of those markets, however, have either the size or the rapid growth that the company has been able to achieve in the Pakistani market.

As a result, the management of Coca Cola Içiçek continues to speak glowingly of Pakistan and its prospects for growth and will likely continue to invest aggressively in the country for the foreseeable future.

“In Pakistan, we have primarily focused on achieving profitable volume growth through pricing and effective discount management, which resulted in a significant improvement in operational profitability. Brand Coca-Cola, with the highest brand love score globally, outperformed the sparkling category and was more than double the nearest competitor in Pakistan. That means greater production of existing brands, as well as the constant introduction of new brands into Pakistan, including some of Coca Cola’s biggest global brands,” said Burak Basarır, CEO of Coca Cola Içiçek, in his 2017 annual letter to shareholders.

“We have expanded our portfolio.

We are into juices now. We didn’t use to be in that before. And we launched energy drinks like Monster,” said Qadir.

“We just make sure that we produce the best beverages and we deliver them wherever possible. It is still a long way to go but I think we are happy with the performance that we have so far.

BATTLE OF THE BEVERAGES

OPINION

Faraz Khalid

farm animals, and will become a farming tycoon. Then I will venture into the dairy and fishery business. Integration into food distribution will follow suit, leading to industrialized farm products. I will control the supply for big factories that I will own. The story goes on and on, and Sheikh Chilli carries on dreaming bigger and bigger things, while all that he owns at the moment is an egg.

An egg, which could have been used to make a tasty During a casual but intriguing conversation with friends, someone used omelette for breakfast. The moral of the story: Sheikh Chilli the term “Sheikh Chilli” in a rather sarcastic manner. This reminded me of was a futile dreamer, living in a world of illusions, and hence my unrelenting admiration of the fabled persona of Sheikh Chilli, which I a profound loser. Like Willy Loman in Arthur Miller’s classic, immediately pointed out. While the South Asian popular culture and Death of a Salesman, an icon of futility and nothingness. folklore looks down upon the mythical character named, calling him a We are told that if you happen to come across an egg, just profound loser; I, on the other hand, consider him an inspiration. A miseat it. Anything outlandishly bigger than an omelette is understood hero who deserves to be rooted for and appreciated. frowned upon. In fact, a person in the real world who thinks So let me reiterate what I may have written earlier as well. The story bigger than what he owns is given the label of being of Sheikh Chilli as it should have been.

Sheikh Chilli.

Sheikh Chilli is the main character of a popular folk tale. And as all I am usually annoyed with such stories. I believe that folk tales go, this tale too has a moral, a moral which seems almost such Eastern folk tales and their morals are forthrightly forced and contrived. We are told to perceive the protagonist of the dangerous. To me, Sheikh Chilli should have been perstory, Sheikh Chilli as a loser, a character living in a world of his self-creceived as an inspiration. Here was a man who dared to ated illusions. A person who dreams of becoming rich and famous, while think big and out of the box. all that he possesses is an egg.

I believe we need to retell the story of Sheikh Chilli. It Here is the synopsis of this story. Sheikh chilli once found an egg can be the same story, but in a different tone and with a somewhere on the street. Instead of just making an omelette out of it, he more pertinent moral. After all, it’s almost human nature, conceives an idea of using the egg to become rich. He thinks, if I can get and a necessity to have Chilli’s soul among us. We need to the egg hatched through a poultry farm, it will turn into a chicken. The conceive new ideas, regardless of how little we have. If we chicken will grow up soon, and will lay more eggs. Soon I will have lots of look at today's tech driven world, there are thousands of eggs, dozens of them, which will hatch into dozens of chickens. These very successful Sheikh Chillis around us. People who had chickens will lay more eggs, and hence more chickens. And in no time I an idea, and simply, probably fearlessly, went down to imwill have so many chickens, that I will own my own poultry farm. plement it into something big. From a garage based setup By careful planning, I will turn the farm into a huge business. One to Apple Inc, from a hostel room with a computer to Facefarm will lead to two, then four and soon dozens of farms. I will buy more book, from a fisheries business to Samsung Electronics. from a newspaper hawking job to Virgin Megastore, Virgin Air and Virgin Galactic. It’s the spirit of Sheikh Chilli that drives big ideas . Sadly, in our part of the Faraz Khalid world, we are used to, and content with, a set formula to success. Get into a good school, become a The writer is Country Credit doctor, lawyer, banker or engineer. Think small and steady. Don’t venture out of the box. Don’t run Head, Retail Banking, UAE, too fast… There’s another folk take of a rabbit and a turtle which is equally dangerous but that’s for at Standard Chartered Bank another day. We are told that Sheikh Chilli never really achieved what he dreamt of.

What we are not told is that Sheikh Chilli, in reality, did become successful. In fact, a vast number of successful personalities in every field, whether business, science, or sports, started off as bare handed, wide eyed, fearless, Sheikh Chillis. All that they did was to act after they idealized, with honest hard work. We can learn a thing or two from Chilli’s story. If nothing much, just the bit of not being afraid of coming up with big ideas and trying to implement what an enterprising brain dreams up every now and then. Sheikh Chilli can be a catalyst of innovation and introspection… an inspiration.

So here’s to all those out there, who are, or ever were, or will be, Sheikh Chilli. Never stop dreaming!

Rooting for the uprooted

ENTREPRENEURSHIP

23

WHAT DOES CHINA WANT FROM CPEC? The history of China and the United States and how it explains what Beijing is doing pouring so much money into Pakistan

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D

By Farooq Tirmizi

rive around any major Pakistani city these days and you can see the subtle signs. There is the logo of the Industrial and Commercial Bank of China (ICBC) on top of the tallest building in Karachi.

There are the Chinese engineers having lunch at restaurants in Lahore. There is the proliferation of new Chinese small businesses in Islamabad. And, of course, there are the massive Chinese machines and armies of Chinese managers and workers that you can see across worksites throughout Pakistan, if you happen to get close enough to any one of the dozens of Chinese-funded projects that dot the entire country’s landscape.

Whether we like it or not, Pakistan’s economic fate has now been tied to that of China, though how firmly – and for how long – may still be up for debate. What that means, however, is anybody’s guess as of right now.

There is now at least somewhat of a debate as to whether the China-Pakistan Economic Corridor (CPEC) is good for Pakistan, at least among Pakistan’s small community of intellectuals who analyse such matters. If one looks hard enough in Pakistani publications, one might find an article or two assessing such questions as the extent to which borrowing from China may impact Pakistan’s macroeconomic health, whether investing in coal at a time of grave climate change and falling solar prices is a good idea (hint: it’s not), and whether any of the Chinese-financed infrastructure programs will improve Pakistan’s economic competitiveness.

But a much more fundamental question has been avoided altogether: what does China actually want to get out of pouring this much money into CPEC? We know what Islamabad wants, and what it thinks it will get out of CPEC, but what does Beijing want? Does anyone in Islamabad know? Do they care to find out? We suspect the answer to the latter two questions is no.

The government of China itself has, unsurprisingly, been less than forthcoming about why it is making such large investments in the Belt and Road Initiative (BRI) and why CPEC, which is not technically a part of BRI but still related, is the single largest component of the Chinese government’s investments in overseas infrastructure.

Oh, sure, ask any Chinese diplomat, or comb through Chinese official statements and one finds the usual language about promoting peace and harmony and commerce

CPEC

and all that nice stuff. But really, what do they want? And what are we giving them in exchange for the money (besides the obviously high interest rates and high prices on Chinese equipment)?

Pakistan’s place in the world

I

t may be an uncomfortable realization for most Pakistanis that the world’s major powers see us as merely a pawn (and not even a lesser power), but the sooner we understand how we are perceived in the capitals of the world’s most powerful countries, the sooner we can understand their intentions towards us.

Neither Washington nor Beijing has ever thought of Pakistan as a particularly important ally, and while both have occasionally made gestures to placate Islamabad’s desires in order to persuade the government of Pakistan to do what they want, neither sees Pakistan as the kind of indispensable ally that is worth taking on a few additional

troubles for.

This does not, of course, mean that this is how Pakistanis should see ourselves and our own nation’s place in the world. It does, however, mean that we will have to understand that the respect accorded to rising powers like India, Brazil, Indonesia, and South Africa will not naturally be extended to Pakistan as well, at least not until the government of Pakistan fights for it. It is in this framework that it is important to understand how great power machinations can affect both Pakistan’s political alignments and economic wellbeing, and how the country must craft its response.

To understand the answer to the question of what does Beijing want, one must, therefore, understand the history of not just China, but also the United States, the place of each of these countries in the global economic and political order from the 20th century onwards, and how the changes in the relative power of countries can result in massive changes in global political allegiances and, more often

than not, war.

But first, a lesson in the history of Ancient Greece, and specifically the warnings of an Athenian historian who wrote about how the world can change when rising powers challenges reigning ones.

The Thucydides trap

I

n September 2015, The Atlantic magazine in the United States published an article by Harvard political scientist and former US Assistant Secretary of Defense Graham T. Allison, who warned that the United States and China are in danger of falling into the Thucydides trap, the near-inevitable cycle of mistrust that can lead to war between great powers as one rises and the other sees its power challenged.

The theory was first put forward by the Greek historian Thucydides, who wrote the definitive book The History of the Peloponnesian Wars between Athens and Sparta for supremacy in the Eastern Mediterranean region

ONE BELT PROJECT

26

in the fifth century BC. Allison wrote: “The defining question about global order for this generation is whether China and the United States can escape Thucydides’s Trap. The Greek historian’s metaphor reminds us of the attendant dangers when a rising power rivals a ruling power—as Athens challenged Sparta in ancient Greece, or as Germany did Britain a century ago. Most such contests have ended badly, often for both nations, a team of mine at the Harvard Belfer Center for Science and International Affairs has concluded after analyzing the historical record. In 12 of 16 cases over the past 500 years, the result was war. When the parties avoided war, it required huge, painful adjustments in attitudes and actions on the part not just of the challenger but also the challenged.”

How is any of this relevant for Pakistan and its relationship with China?

Because CPEC is not the result of the supposed friendship between Islamabad and Beijing, but rather the global chess match that China is playing against the United States.

In this game, if the chess metaphor can be extended, Pakistan is at best a knight: maybe not quite a

THE ESSENTIAL WARNING DELIVERED BY THUCYDIDES IS THAT WHEN TWO POWERS FIND THEMSELVES STUMBLING SUBCONSCIOUSLY TOWARDS CONFRONTATION, THE FIRST TO SUFFER ARE USUALLY THEIR ALLIES, NONE MORE SO THAN THE ALLIES WHO END UP SWITCHING ALLEGIANCES AND FIND THEMSELVES ON THE WRONG END OF THE BARGAIN. IN THIS, THE WARNING FOR PAKISTAN COMES IN THE FORM OF THAT MOST FAMOUS OF QUOTES FROM THUCYDIDES: “THE STRONG DO WHAT THEY CAN AND THE WEAK SUFFER WHAT THEY MUST” pawn, but an odd piece that moves even more oddly, and while it can occasionally deliver a good blow here and there, is usually only slightly less expendable than a pawn.

This position of Pakistan in US-China relations is made ironic by the fact that it was Pakistan that facilitated the shuttle diplomacy that former US Secretary of State Henry Kissinger engaged in when he sought to open up diplomatic relations

between Washington and Beijing.

(Kissinger used to land at Chaklala Airport, Rawalpindi, pretending to be on a trip to Pakistan, whereas his real destination was Beijing, where he laid the groundwork for former US President Richard Nixon’s eventual trip to China that normalized relations between the two countries.)

In other words, if we want to understand what China wants out of CPEC, we need to understand the

GLOBAL SHIPPING LANES MAP

CPEC

relationship between China and the United States in particular, and the relationship between rising powers and reigning powers more broadly.

Because the essential warning delivered by Thucydides is that when two powers find themselves stumbling subconsciously towards confrontation, the first to suffer are usually their allies, none more so than the allies who end up switching allegiances and find themselves on the wrong end of the bargain. In this, the warning for Pakistan comes in the form of that most famous of quotes from Thucydides: “The strong do what they can and the weak suffer what they must.”

What America built, and what China wants

T

he United States has been indisputably the most powerful country in the world for a full century now, and in that time, it has built a global order that has come to define the world as we know it today. While American power is multifaceted and pervasive, there are three key ingredients upon which this power rests: a dynamic domestic economy that is more innovative than any other on the planet and can serve as the anchor of the global economy, a voluntary set of US-dominated global institutions that seek to export the US ideological model of liberal democratic capitalism throughout the world, and a military force that is deployed across the entire planet in services of keeping the sea lanes open for global trade and for keeping a lid on major power conflict.

As China rises, it believes it has come close to achieving the first of those three prongs of US hegemony. Long derided as simply a hub for cheap manufacturing, China is now an economy that has grown to become the second largest in the world not just because it serves as a factory for the world, but

A statue of Thucydides, an ancient Greek historian, in VIenna, Austria. Thucydides first wrote of the virtual inevitability of conflict between a rising power and a waning one. also an increasingly important center for innovation and technological leaps forward.

From Pakistan’s perspective, whether China has actually achieved this goal is almost irrelevant: the fact is that Beijing believes it has, or is close to, achieving this status, and has begun to act accordingly: namely, building out the other two elements of global power.

Beijing has already begun to build up what is being billed as the Chinese answer to the Washington-based, US-dominated World Bank: the Asian Infrastructure Investment Bank, one of the entities that was originally meant to be the financiers of many of the CPEC projects before the Chinese government realized they were nowhere near ready to build the kind of specialized institution that could finance infrastructure around the world and instead got regular Chinese state-owned banks to do more of the financing instead.

INSTEAD OF CHALLENGING THE UNITED STATES FOR CONTROL OF THE CHOKE POINTS OF GLOBAL TRADE, CHINA IS SEEKING TO REMOVE THOSE CHOKE POINTS ALTOGETHER, BY CREATING A COMBINATION OF LAND AND SEA ROUTES THAT ELIMINATE THE NEED TO TRAVEL THROUGH THOSE NARROW BODIES OF WATER 28

CPEC, however, is not meant to be a showcase for China’s equivalent of the World Bank. Instead, it is meant to challenge the most overt form of American power: its military might, which serves as the guardian of its economic power.

Protecting the seas

L

ook closely at the map of global trade flows and one sees that there are a handful of points that can be viewed as choke points in the global trade system: the Panama Canal, the Suez Canal, the Straits of Gibraltar, the Straights of Hormuz, the Straights of Malacca, and the Gulf of Aden, in addition to other points on the map, are narrow bodies of water through which large volumes of the ships that carry global commerce flow.

At, or near, each of these choke points is a US naval base, or the base of a military with whom the United States is very closely allied.

In Washington’s eyes, the United States Navy stands as the guardian of the safety of global sea lanes, and is the hard power that makes all of global commerce – including China’s explosive export-led economic growth – possible.

While it is partly the act of a magnanimous global power, it is also fundamentally a self-interested act: if the United States is the country that makes the global economic system of

trade possible, then the United States also gets to have a say in writing the rules of that system.

It is that matter of the global trade rules – which the United States made, and which China is widely seen as being less than amenable to when they do not suit its interests – that is likely to be the trigger for conflict between these two global powers.

China does not want to follow the rules of the US-led World Trade Organisation, in large part because

they require a greater degree of openness and foreign competition than China is willing to allow for its domestic market. But China is now also the second-largest economy, which puts it in an awkward position: too big to continue flouting the rules without anyone noticing, but not big enough yet to change the rules to suit its interests.

That is where the One Belt, One Road (OBOR) initiative and CPEC come in.

CHINA’S INTEREST IN CPEC, AND GWADAR, IS A SIMILAR MOVE: CREATING AN OPENING TO CHINA FROM THE ARABIAN SEA, WHICH WOULD HAVE THE ADDED BONUS OF ALLOWING GOODS TO FLOW BETWEEN CHINA AND THE MIDDLE EAST AND EUROPE WITHOUT HAVING TO PASS THROUGH, OR CLOSE TO, INDIAN WATERS. LOOK AT THE MAP OF CPEC AND OBOR INVESTMENTS, AND IT IMMEDIATELY BECOMES CLEAR THAN CHINA DOES NOT WANT TO CONTEST THE UNITED STATES FOR THE CURRENT MAP, BUT COMPLETELY RESHAPE THE MAP OF THE WORLD

The beginnings of Pax Sinica?

T

he matter of China’s place in the global trading system had already begun to become a problem by the second term of President George W Bush, and continued to simmer along throughout the presidency of Barack Obama. It is now threatening to boil over under the leadership of President Donald Trump, who has made hostility to China on global trade a signature policy issue.

But the leadership of China has been smart enough to see the problem coming, and appear to have designed a solution that would serve two purposes: reduce the United States’ power to make the global economic system’s rules, and increase the centrality of China in global trade.

In order to reduce the power of the United States, the most obvious path would also be the one that would most directly lead to conflict: rather than letting the US Navy be the sole guarantor of security for all of global trade, China could start sharing that burden by creating naval bases close to those choke points for global trade as well.

CPEC

The problem, of course, is that two major global powers building large military installations in close proximity to each other is a recipe for disaster. Beijing may as well be issuing an overt declaration of war. So instead, China decided to adopt the strategy used by Persian Emperor Xerxes in his invasion of Greece: change the landscape altogether.

Instead of challenging the United States for control of the choke points of global trade, China is seeking to remove those choke points altogether, by creating a combination of land and sea routes that eliminate the need to travel through those narrow bodies of water.

So, for instance, instead of being so reliant on US-provided security in the Straits of Malacca (close to Malaysia), China is building a massive port in Myanmar, a $7.3bn deepwater port at Kyaukphyu on the Bay of Bengal.

The Economist reports: “Subsidiaries of CITIC, a state-owned Chinese conglomerate, are taking a 70% stake, and will run the port for half a century. If Kyaukphyu grows large enough to handle 4.9m containers a year, as CITIC hopes, it will match Felixstowe, Britain’s largest container port—a startling transformation.”

That port would be connected by strong road and rail links to China and would create a backup to China’s current route for ships to and from Europe, which must pass through the Straits of Malacca. Instead, China

30

would be able to redirect at least a portion of its trade to pass over land through southern China and Myanmar to reach the Bay of Bengal directly, bypassing the Straits of Malacca completely.

China’s interest in CPEC, and Gwadar, is a similar move: creating an opening to China from the Arabian Sea, which would have the added bonus of allowing goods to flow between China and the Middle East and Europe without having to pass through, or close to, Indian waters.

Look at the map of CPEC and OBOR investments, and it immediately becomes clear than China does not want to contest the United States for the current map, but completely reshape the map of the world.

What Pax Sinica might look like for Pakistan

S

o what, you might be tempted to ask. It looks like China is avoiding war on its way to becoming a dominant global power, and it is developing Pakistan’s infrastructure along the way. What is wrong with that?

Well, for one thing, it may be instructive to remember that this infrastructure is being built first and foremost for the needs of China. Any benefit that accrues to the Pakistani economy is purely incidental and not at all the goal of the projects. And secondly, and perhaps most importantly,

it is highly relevant to remember the differences between how the United States and China have historically seen trade.

The defining ideology of the United States is liberal democratic capitalism, which results in Washington believing, among other things, that creating mutually beneficial global trade relationships is the key to establishing a peaceful world order. Trade, in the American view, is meant to benefit all parties involved as a means of keeping the peace amongst them.

By contrast, China’s view of trade has largely been one of a system that it has no problem gaming to its own benefit, and discarding when its rules become inconvenient.

For another, it is also increasingly becoming clear that China wishes to own the infrastructure it is building in other countries, the most famous example of which is the fact that it has formally taken ownership of the port of Hambantota in Sri Lanka after the Sri Lankan government was unable to pay its debts. In that respect, this new relationship with China is more akin to colonialism than any other form of economic partnership.

China’s vision for Gwadar, in other words, is likely to involve a lot more direct Chinese control than is currently being discussed. It is certainly not a promising sign that the government of Pakistan has thus far refused to disclose the precise nature of the terms under which all of the infrastructure projects are being financed.

If the current administration truly believes in Pakistan learning to become an economically independent nation – as their rhetoric seems to suggest they do – then they may be inclined to try to move Pakistan out of CPEC and onto a more self-reliant path of economic development.

After all, the first rule of economics is that there is no such thing as a free lunch. China is not acting out of the magnanimity of its heart in building this infrastructure. It is doing so for its own economic and national security needs, and the future of the people of Pakistan should not be ransomed to the needs of a country that is about to engage in a massive competition with another major power in its quest for global hegemony.

We have worked too long, and too hard, for independence to voluntarily give it up now.

CPEC

OPEN BANKING’S NEXT WAVE:

PERSPECTIVES FROM THREE FINTECH CEOS

By Laura Brodsky, Chris Ip, and Tobias Lundberg

T

he CEOs of Ping Identity, Plaid, and Tink share their views on the prospects for open banking and the pressing need for players to develop a data and customer

strategy.

The notion of open banking has been central to financial services dialogue for many months, fueled in part by the buildup to the EU’s revised

FINTECH

Payment Services Directive (PSD2).

We define “open banking” as a model in which banking data is shared between two or more unaffiliated parties to deliver enhanced capabilities to the marketplace. For more on recent movements related to PSD2, see sidebar, “PSD2 and open banking.”

Progress toward data sharing has differed by region depending on market structures, regulatory environments, and consumer attitudes toward privacy and security. Varied interpretations of the word open from

both industry firms and consumers are also shaping approaches to this new model. Use cases range from new interfaces for financial data, alternative underwriting and lending, facilitating new payments streams, and the opening of ecosystems. (See “Remaking the bank for an ecosystem world,” October 2017.)

McKinsey reached out to the CEOs of three innovative fintechs— Ping Identity, Plaid, and Tink—for their perspectives on global prospects for open banking. (See “PSD2: Taking

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advantage of open-banking disruption,” January 2018.) While these firms address varying perceived pain points in financial services and pursue different business models, common themes emerged across the three interviews.

The implications for banks and other traditional financial services firms are far reaching, and warrant thorough strategic analysis.

Although the notion of customer focus is hardly revolutionary, it is notable that two of these companies were launched with the intent of building consumer-facing products. Both pivoted when they discovered pain points in the value chain that consumed a disproportionate amount of their energy. The CEOs reasoned that addressing these bottlenecks would in turn spur greater value creation for their own companies as well as the market overall.

We found consensus among the three CEOs that while regulation can help provide structure to data sharing, a mindset that prioritizes facilitation over control and restriction will be necessary for all parties to realize its full benefit. Developing business models that foster such cooperation will be critical. Education and a focus on the benefits—along with the risks—will be important to change attitudes and build trust with providers and consumers alike.

Segmentation will likewise be essential. While there will certainly be demand for “autopilot” type solutions performing tasks in the background without consumer intervention, this model should not be imposed across the board. Some consumers will demand greater control and transparency over the process. The most important metric for success remains customer trust.

Open banking and data sharing are commonly associated with open application programming interfaces (APIs). While our interviewees see APIs as a powerful enabler, they are not the sole means through which to share data. Further, as Plaid’s Zach Perret points out, the notion of an “open API” is a misnomer in a financial services context. Given the legitimate security and privacy concerns surrounding financial data, such APIs will continue to be monitored and permissioned.

There was also consensus that the trend toward data sharing will contin-

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ue with or without regulatory mandate, and that there is ample opportunity for both incumbent banks and nonbank tech-driven market entrants to thrive. Ping Identity’s Andre Durand goes a step further, seeing open banking as the “tip of the spear” leading a broader data-driven trend toward open health and open government. As Tink’s Daniel Kjellen cautions, however, many banks have been slow to enact strategies addressing this market momentum.

Open banking remains in its nascent stages across all markets—including those that have taken considered regulatory action. While it is too early to predict winners and losers, some points are becoming clear. Data sharing does not lend itself to “zero sum” outcomes; as such, achieving a win need not require inflicting an offsetting loss. As these CEOs point out, the unbundling and rebundling of financial services will likely continue for some time, and different customer segments will gravitate toward solutions with different levels of data sharing and autonomy. One sure path to a disadvantaged position, however, is to neglect to develop a data and customer strategy that reflects the ongoing evolution in open banking.

Interview with Zach Perret, CEO of Plaid

Plaid’s mission is to “transform financial services by lowering the barriers to entry for developers, spurring technical interest in the sector and democratizing access to critical services.” The

San Francisco-based firm serves as a “trusted intermediary for the fintech ecosystem by securely connecting consumers, their banks, and financial applications,” reporting that more than 10,000 developers are building on the Plaid platform “to enable core functionalities that benefit many millions of people.” Plaid was founded in 2012 and has attracted funding from investors including Goldman Sachs, NEA, Citi Ventures, American Express, and Google Ventures.

McKinsey: How do you expect “open banking” to evolve? Has your own business pivoted due to its evolution?

Zach Perret: Before we dive in, it’s worth noting that “open banking” is actually a bit of a misnomer: there are no truly open APIs in financial services.

Due to security, regulatory, and privacy concerns, it’s essential to properly vet each developer and use case.

Definitions aside, the concept of banks allowing increased access to developers is incredibly exciting. When we started Plaid, there was no concept of “fintech.” The infrastructure available to startups was sparse, and those who did try to build new products in financial services often struggled to get off the ground. My co-founder and I launched Plaid based on our previous experience trying to build a consumer financial application. In working on this project, we found that connecting with consumer bank accounts was incredibly difficult and—importantly—that there were thousands of developers like us who were struggling to launch financial products. We started Plaid to build the product that we had needed ourselves—by developers for developers—to help them build the next generation of financial services applications.

I’m really excited about the pace and number of innovators thinking about building great products in financial services. Seeing large financial institutions embrace fintech and build products to enable the market is incredibly exciting. The move towards open banking is a testament to the way that banks are increasingly embracing technology that allows their consumers to better control and take agency over their financial lives.

At Plaid, our mission is to empower innovators by delivering access to the financial system. We believe that consumers’ lives will be better because they’ll have more access to the tools and services they really need. It’s

great to see the banks embracing this innovation and building technology to enable it.

McKinsey: How does Plaid interact differently with small versus large banks?

Zach Perret: It’s undeniable that big banks generally have more resources and larger teams to dedicate towards technology, but we’ve been encouraged at the commitment to tech that many smaller banks and credit unions have shown recently. At Plaid, we’re focused on delivering access to financial tools and services to everyone, regardless of where they bank.

On a personal note, I grew up in North Carolina, and my family banked with the State Employees Credit Union.

I loved the bank, but when I entered the working world, I had to switch to a big bank because I found that my account at SECU didn’t work in the places I needed it. When building Plaid, we made a big push to ensure that small banks and credit union customers don’t have to make that same tradeoff, and can still access the financial products they need no matter where they choose to bank.

McKinsey: What role will regulation play in driving the shape of US data sharing?

Zach Perret: It’s impossible to guess where regulation might end up in a few years, but the impact of data-sharing regulations on the way we interact with our money can’t be overstated. Consumers’ right to access and use their financial data is clear, but regulation has yet to define how exactly it will be enforced. It’s encouraging that we continue to see consumers themselves speaking up and reinforcing their desire to access and use their data to live a better financial life.

McKinsey: What about PSD2? Will that come to the US? Zach Perret: Attempting to force-fit PSD2 to the US market would be very difficult. With nearly 10,000 financial institutions in the US, applying a broadbased standard to enforce APIs and data sharing would be very difficult, both technically and logistically. I’m also not sure how necessary it is to preserve fintech. I think banks and fintechs will find ways to work together well with or without regulation to enforce it.

McKinsey: What benefits of banking APIs will prove most impactful to consumers?

Zach Perret: Though we don’t always

think of it as such, the checking account is the hub of our financial lives.

Everything flows through it. From receiving your income to making an investment, paying a credit bill, doing your taxes, and managing your expenses—everything in our financial lives starts and ends with our checking accounts. As things progress, the interconnectivity of our checking accounts is increasing, and we’re relying on apps and services to enable this. Banking APIs are at the core of this evolution, and are essential to allowing consumers to live digitally enabled financial lives.

McKinsey: What will the landscape look like in five years?

Zach Perret: Who knows? Maybe we’ll all be paying each other with Dogecoin.1As better technology continues to enable better and simpler consumer experiences, I expect our financial lives to become increasingly digital, automated, and data driven. My hope is that banks, innovators, and regulators will all work together to deliver the best possible financial services products to consumers. While I can’t predict how we will save money, budget, or invest in five years, I am hopeful that our financial lives will become significantly easier by embracing digital financial technology.

Interview with Andre Durand, CEO of Ping Identity

Andre Durand founded Ping Identity in 2002 with a vision of securing the

internet through identity, simplifying enterprises’ pathway to providing a secure and seamless digital experience. The Denver-based firm counts over half of the Fortune 100 among its customer base, and has partnerships with Microsoft, Google, and Amazon. Durand’s prior startup, the open source instant messaging platform Jabber, was acquired by Cisco in 2008.

McKinsey: Can you tell us about Ping Identity’s origin?

Andre Durand: In 2002, I was sailing off the coast of Venezuela and blogging for the first time from the high seas. With only ocean around me, I had time to explore topics focused on emerging business ideas—one of them was the concept of creating a global “lost and found” and the other being the equivalent of “find my iPhone.” After a few days gestating on the ideas, I realized that something profound and fundamental was missing. There was no way to connect people with things without identifying them and/or the device to the internet. In that moment, the idea for Ping Identity was born.

McKinsey: Does Ping Identity serve end users or corporates?

Andre Durand: We sell exclusively to the global 5,000. Having grown up in the cloud and mobile era, we built a modern identity platform that simplifies identity security, while helping enterprises secure and connect users and applications across their hybrid infrastructures for all identity types— workforce, partners, and customers.

While we sell nothing directly to consumers, billions of consumers use our technology on a daily basis.

Our value is realized when enterprises achieve secure access to data and applications regardless of device, where the user resides, or where the application is hosted, in the data center, private, or public cloud. Ping Identity focuses on the intersection of frictionless user experiences and security and many customers leverage our technology to enable their digital transformation initiatives.

While the largest enterprises in the world across every vertical use Ping Identity solutions, financial services and banks in particular have emerged as our number one vertical.

This trend is accelerating as regulation around open banking is driving an awareness of the significance of identity at a truly transformational level.

FINTECH

We believe that open banking is only the beginning in a trend towards open business, where open data and APIs will drive transformational change in healthcare, government, energy, retail, supply chain, et cetera.

McKinsey: How was Ping Identity chosen as the identity enabler for the UK open banking initiative?

Andre Durand: Two of the largest banks in the UK are Ping Identity customers and the task force determining how to deal with the PSD2 edict didn’t want something purely bespoke. Our team was instrumental in educating the task force on the maturity of existing identity standards to meet the desired security goals of the open banking initiative. Once this initial work was completed, we had earned the trust of the group to move forward and also provide a solution.

McKinsey: What can we learn from the UK’s open banking journey?

Andre Durand: There are movements around the world right now to accelerate innovation through open APIs and data sharing. Similar initiatives are being pursued in the US and Australia, and they all share a vision of not reinventing the wheel when it comes to security and identity. One of the reasons the UK has made the first move is due to the fact that, at the start of the discussion, they delegated API security to industry best practices.

While PSD2 requires that organizations meet certain requirements, it doesn’t specify how. The beauty of open banking is that it has taken much of the ambiguity out and the resulting interoperability will be massive.

McKinsey: How do you see the landscape evolving?

Andre Durand: There are a set of market forces around who owns your personal data and what rights and controls individuals have for its use.

Today we find ourselves at the intersection of personal and business identity colliding. These emerging regulations are trying to strike a new balance between companies wishing to market to end users, and end users wishing to take an active role in their privacy. Until recently, businesses have had all the leverage. They share data according to their own needs, with little regard for the end user, or their desires for privacy. With PSD2, that begins to change, and user consent and the right to be forgotten is creating a better market

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balance.

With regards to open banking, I expect we’ll see a whole host of new third parties emerge, and existing third parties being cut out as banks and merchants transact directly.

McKinsey: Can you envision a similar model taking hold in the US? Andre Durand: I do believe we’ll see a similar trend in the US as banks and merchants seek to reduce costs and create more direct and efficient transactions.

McKinsey: What is the role of regulators in making this happen? Do you expect banks to get on board?

Andre Durand: Regulation is forcing institutions to become more transparent and include end users in the use and sharing of personal data. Regulation aside, there is a lot of money surrounding the entire transaction fee ecosystem that is ripe for disruption.

As a result, with or without regulation, there’s a multibillion-dollar motive to make new and more efficient models work. We simply need to “follow the money,” however regulation is required to protect the individual as these new models emerge.

McKinsey: Are you surprised we haven’t seen more activity from the traditional players?

Andre Durand: Equifax and other credit companies have as much of an opportunity as anyone to disrupt in this space. So far the focus has been on the providers of account info— ASPSPs, in PSD2 parlance. We’ve heard very little from the firms consuming that data and that’s where it’s going to explode. These could be fintechs, banks consuming other banks’ data and/or payment aggregation platforms. These conversations are taking place, we just haven’t seen them bubble up to the press release stage yet.

While Google, Microsoft, Amazon, and Facebook have all laid early claim to consumer identity services, banks, mobile operators, and governments all have a role. Having a common standard for identity enables interoperability between each of them, leveling the playing field and providing choice to consumers.

McKinsey: Is the term open banking a misnomer?

Andre Durand: There is rarely a term that everyone agrees on, but I believe this one will stick because it’s disrup-

tive and denotes a desired state of change. Many will be threatened by terms like open banking, open health, or open government, but usually it’s the incumbents that have something to protect—including business models that have been well fortified over many decades.

Interview with Daniel Kjellen, CEO of Tink

Daniel Kjellen co-founded Tink in Stockholm in 2012 along with CTO Fredrik Hedberg. Their stated mission is to “bring people financial happiness,” helping individuals to better understand their money and empowering them to make smarter choices. Tink’s direct-to-consumer app was launched in Sweden in October 2013 and has over 500,000 users. More recently the firm has begun partnering with European banks, including ABN AMRO, whose Grip app is built on Tink’s platform, and SEB. McKinsey: Tell us a bit about Tink’s background and business model.

Daniel Kjellen: We started in 2012. As former entrepreneurs turned bankers, we felt there were missing pieces in the retail banking equation, unfulfilled needs from a consumer perspective.

We saw a mismatch between the products people consumed and a true market analysis of the best possible product. We took a bet that the industry was about to change, to become data driven.

Along the way we transformed into a technology provider, creating building blocks for the future of

banking. It starts with a unified API to access accounts, aggregate data, make payments, add a product recommendation engine on top of transactions.

By mid 2018 we’ll be live in eight plus EU markets.

McKinsey: Tink provides tools to developers and banks as well as serving consumers directly. Which do you see as your customers going forward?

Daniel Kjellen: We started out as a consumer business and our hearts are with the consumers. But we want to be the best friend of the developers. I think Tink is successful because we do care about the consumers.

I think it’s important for us to be a product company with very close ties to the consumer. I think these two sides work together beautifully today.

It’s hard to tell—I believe there will be opportunities in both these units, but we’re one product with two go-tomarket strategies.

McKinsey: How aligned are you with the banks, who are currently the main delivery vehicle, in your customer-back approach?

Daniel Kjellen: I think sometimes we’re totally aligned and at other times our near-term goals are contradictory, but everyone agrees that if it weren’t Tink someone else would be doing this. If the customer wants something, you can’t disregard it in a functional market. Data aggregation brings transparency, competition, and potentially margin pressure. But good banks have an opportunity to benefit from that transparency, especially as first movers.

McKinsey: How progressive do you think the banks are in accepting this reality?

Daniel Kjellen: I think it’s changed dramatically in the six years since we founded Tink. In the first two years there were plenty of barriers—a lack of legislation, less well-formed customer behavior. Now everyone sees where the future is headed, it’s a matter of how fast we get there. I’d say at this point we’ve seen 10 to 15 percent of banks having placed their bets. Sixty percent realize something is going to happen; they may not yet want to push it but want to stay close, take a multibet strategy. And probably 20 percent don’t have a clue yet and don’t believe they have to change that much.

McKinsey: How do you think the ecosystem and partner landscape will play out?

Daniel Kjellen: We’ve seen a complete debundling of services over the past few years, and we’re now starting to see signs of how they’ll be rebundled again. I don’t think we’ll see the banks providing everything start-to-finish, but because the market will be so much more competitive you’ll need to bring your “A” game to every small product to win your niche.

McKinsey: Will there still be room for a few best-practice full suite players?

Daniel Kjellen: Today every bank is doing everything for everyone in the market from age 18 to 80. There will still be room for such players—they’ll have the advantage of not having to integrate all these component parts.

Will this be 5 or 50 percent of the market? I don’t know.

McKinsey: Is regulation or customer need the fundamental driver for this change?

Daniel Kjellen: From our perspective, consumer need is the driving force but regulatory problems have gotten in the way of customer will. I think we have to accept that many of these entities are very big and extremely regulated; they don’t dare take short-term bets on small innovative parts of their business. They needed PSD2 to pave the way, to remove an obstacle to a five-year roadmap.

As I see it, PSD2 is the backseat enabler, not the driving force. Also, PSD2 covers only payments. Tink aggregates many other types of accounts as well. If you plan your business only around payments aggregation, you’re going to be left behind in a few years.

McKinsey: How do you envision the future customer experience?

Daniel Kjellen: Today, if you want to use a bank service you sign up with that bank, and they can only provide services for the accounts you have with that bank. Based on these new aggregation APIs, you can take your bank with you, based on other accounts. That’s a big mindset change.

The advisory part is where I think most providers want to be. I think this service will eventually go to autopilot.

Why should I have to decide to refinance my mortgage? Let the autopilot do it for me. There’s a market niche, the 20 percent of people who want to turn on that autopilot and are willing to pay for it. As a bank you need to decide which niche you’ll want to serve.

McKinsey: One of the concerns about open banking is it could actually push more services. Absent a perfect autopilot, how do you push back on those forces?

Daniel Kjellen: It’s a very good question. It’s easy to sit here and say that will never create a problem, but we’ve seen over and over again incentive schemes that trigger the wrong behavior. It’s important for us to stick to our mission—it’s something you constantly have to remind yourself.

Tink has decided that we don’t want a commission, because we don’t want the incentive to move people around, which may not be in customers’ best interests. Even if PSD2 starts with user consent, we all know how complicated that can be—what am I consenting to?

McKinsey: What challenges do you see in the market’s evolution?

Daniel Kjellen: I think we’re going to repeat the journey of the past six years. It’s going to be complicated and bumpy sometimes. In the aggregation of mortgage accounts, for example, I think we and a lot of other firms are going to be wedged into one regulated and one unregulated business.

McKinsey: How will the value chain differ in five years?

Daniel Kjellen: Obviously the big shift will be from “bad banks” to “good banks”—low competition and high barriers to switching have limited incentives for banks to produce the best products. For the first time I think bankers who produce fantastic products at low cost will have tons more customers. Other than that it’s hard to say. It’s not necessarily that the fintechs will win this. It could definitely be the banks. They have a lot of assets that will be extremely useful going forward.

McKinsey: Where do you want Tink to be in five years?

Daniel Kjellen: We want to be the unified financial API that lets everyone connect to their bank accounts and aggregate data—a service that I think most European citizens will use across multiple financial institutions and services. On top of that I want to be in data services to help end users achieve financial happiness. For me personally that would be an autopilot; for others it will be completely different, but I want to provide the building blocks for others to create those products.

Courtesy mckinsey.com

FINTECH

IN THE DYING WORLD OF

PAKISTANI MAGAZINE, ARE FASHION MAGAZINES THE ONLY SURVIVORS? While print as a whole continues to chug along, fashion magazines are a rare bright spot in what was otherwise seen as a stagnating industry

I

Syeda Masooma

t is a paradox that does not, at least initially, make much sense. Over the past decade, the total number of magazines published in Pakistan has fallen off a cliff, but the total amount of advertising revenue flowing towards Pakistan’s magazines has skyrocketed, outpacing overall print revenue. How does that work? The answer appears to be a shift in focus, and a specialization on the part of magazines towards the kind of content that works best in that format, which in the Pakistani industry’s case, happens to be fashion.

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The industry as a whole is in dire straits. The total number of magazines has fallen from 1,383 magazines published in 2007 down to just 232 by 2015, the latest year for which complete figures are available from the Pakistan Bureau of Statistics. Meanwhile, advertising revenue for the industry appears to have grown substantially. While credible numbers are hard to come by, estimates compiled by Aurora, the advertising-focused magazine owned

by Dawn, and Gallup Pakistan suggest that the industry grew its total print advertising revenue from Rs381 million in 2010 to Rs1,980 million in 2016, which comes to an average increase of 31.6% per year, much faster than the 11.7% per year that the print industry as a whole grew during that same period.

Industry dynamics

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n Pakistan’s print media industry there are two main categories of magazines – standalones and those that go with a regularly published newspaper. Newsline would be an example of the first category and Sunday magazine would be an example of being accompanied with a daily newspaper – in this case Daily Times. Similar categories exist in Urdu language publications. However, the general trend of the industry shows that standalone magazines do not fare as well as the ones circulated along with a daily or regularly published newspaper. The

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success of these magazines is not only derived from the number of their readers but also from the advertisers’ confidence in a particular newspaper. Before delving into the details of the possible reasons behind this, let’s consider the general benefits and shortcomings of both these formats.

For starters, while newspapers allow for a much wider audience for advertisers, magazines allow for a specific audience to be targeted directly.

The readership of magazines is usually more interested and loyal because of there are specific topics that each magazine focuses on, such as Profit, which focuses on business stories, and Mobile World, which confines itself to automobiles. That allows for targeted advertisements, especially if the advertised products are related to the topics being covered by the magazine.

Magazines usually have a glossier finish and generally attract a higher quality of writers than regular newspapers. There is also a greater desire among both people and companies to be the subject of magazine articles rather than those in daily newspapers.

Companies, for instance, are more likely to display in their offices a magazine with their company or CEO featured on the cover, instead of a newspaper copy with a story about their organization.

And, in general, readers are also more likely to hold on to a magazine copy longer than a newspaper, which allows

“MOST POLITICAL NEWS AND CURRENT EVENTS IN OUR COUNTRY LEAD TO A LOT OF ANXIETY AND DEPRESSION. I BELIEVE LOOKING AT PAGES OF BEAUTIFULLY DRESSED FASHION MODELS OR SOCIALITES AT PARTIES GIVES PEOPLE A RESPITE FROM ALL THE TERRIBLE THINGS GOING ON”

Injila Baqir Zeeshan, editor-in-chief of Brides & You magazine

for longer exposure to the content and advertisements as well.

There are also some disadvantages for the magazines when it comes to advertisers, the biggest of which is the higher cost. In general, magazine ads tend to cost higher than print newspaper ads. Also, because of the primary strength of a magazine as to targeting a particular audience, magazines often also limit the reach for general

advertisements. Most publications also require a time lag before an ad can be published so magazines are also not the best option for advertisers looking for urgent advertisements.

On the other hand, newspapers offer lower rates and can appear in print much faster than magazines, by virtue of the frequency of the publishing of the two formats – newspapers are mostly published daily while magazines are usually weekly, fortnightly or monthly. From a publisher’s perspective, the choice is clear: the pros and cons of each of these formats appear to favour magazines.

However, there is another side to the story: the differences between standalone magazines and those that are published with a newspaper. While the latter category also comes with all drawbacks of any particular magazine, traditionally in Pakistan the ones accompanied with a newspaper have been doing better in terms of circulation and revenue. Then there is also the difference between broadsheet and stapled magazine, amongst which the latter is also known to do better.

The rise of Sunday magazine

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nstep magazine by The News newspaper (owned by the Jang Group) used to be the magazine for entertainment and lifestyle news. “Instep

was the go-to magazine especially for barber shops, where the customers chose their hairstyles and looks based on the models featured in the magazine,” said a former employee of the group. However, with the advent of Sunday magazine, which is published with Daily Times newspaper (owned

by Media Times Ltd.) all other fashion and lifestyle magazines moved down the pecking order. The 150 to 200-page magazine has taken over the lifestyle magazines industry in Pakistan.

Instep was just one of the many magazines who apparently lost their luster, but for Instep to stay content with its eroding importance is cause for surprise because the Jang Group is known to be an aggressive competitor in both print and electronic media.

One of the potential reasons for Instep to have lost its appeal – particularly in the world of entertainment industry – might be its broadsheet format. However, the company disagrees that its readership has declined, though it might have changed in its composition.

Jang Media Group Managing Director Sarmad Ali said, “It is not that we have lost our audience or advertisers.

The difference maybe in the number of advertisements but the truth is that our few ads bring us as much money as many ads in other publications like Sunday, because our clients are bigger companies. A regular ad in fashion

“THERE IS ALREADY A MODEL IN PLACE WHERE BRANDS CAN PAY FOR THEIR ADS TO APPEAR ACROSS INSTAGRAM WITHOUT NEEDING OTHER ACCOUNTS TO POST THEIR CONTENT. THIS WILL NEGATIVELY IMPACT ANY INSTAGRAM ACCOUNTS THAT EARN THROUGH PAID POSTS” Jahanzaib Haque, Chief Digital Strategist & Editor, Dawn.com magazines costs around Rs 50,000 while we get around Rs 150,000 to Rs 160,000 per advertisement.”

His comment is verified by Sunday magazine’s advertisement rates that range from Rs 20,000 in the last pages to Rs 30,000 in the starting pages, and Rs 75,000 for the stick-on page on the cover, as shared by a former marketing employee of the magazine. For Paper-

MEDIA BUSINESS

azzi magazine, the advertising rates start from Rs 40,000 for an ordinary page and go up till Rs350,000 for the cover. As opposed to this, Profit – a non-lifestyle, business focused magazine – offers advertisement rates varying from Rs 50,000 for a double spread advertisement to Rs 200,000 for a gatefold ad.

The popularity of fashion magazines

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li, however, admitted that Instep lost focus, or never tried to focus, on the lifestyle category in particular. “Our magazine features stories on political, social and lifestyle news. I don’t know why we haven’t tried capturing this big industry of fashion magazines.” He added that while lifestyle magazines focus primarily on images and photoshoots, Instep’s strength remains but with our current publication we have dedicated resources to different beats and we are doing pretty well.”

A possible answer for Jang’s indifference to fashion industry might come from Dawn.com’s Chief Digital Strategist & Editor Jahanzaib Haque.

Speaking to Profit he said, “There is surprisingly little traction for articles related to fashion online – it is one of our weak categories on Images.dawn.com, especially when compared to food or TV/film.” Images is the broadsheet magazine that accompanies Dawn newspaper on a weekly basis.

Injila Baqir Zeeshan, editor-in-chief of Brides & You magazine, is of the opinion that fashion and lifestyle magazines are more popular in Pakistan.

“They are a lifestyle and a social pages diary. They give the people everything they want to know about so many

things. Also, they are beautiful, exciting, fun and highly entertaining.”

She also had an elaborate answer to how the fashion magazines have been able to gain lots of advertisers in a short span of time, most of which also advertise products related to the fashion or lifestyle industry. She said, “With the rise and progress we have seen in the fashion industry and the mushrooming of fashion designers, one factor is that fashion magazines be-

come their platform to reach out to the world. Through the magazines’ pages they show their work to potential clients and boost their business.”

Injila also disagrees with the notion that standalone magazines fare less well than the newspaper-joined magazines. “A common perception is that the magazines distributed with the newspaper have a much larger print run, which may or may not be true.

But the life of a standalone monthly or quarterly magazine is much longer than a newspaper magazine which attracts lots of advertisers as it becomes cost effective for them.”

MAGAZINES, IRRESPECTIVE OF THE BEAT OR CATEGORY, RUN ON ADVERTISEMENT REVENUE. THE ADVERTISEMENTS ALSO COME BASED ON THE Tired of politics?

READERSHIP AND CIRCULATION. HOWEVER, bout fashion and lifestyle’s popularity over other types of PARTICULARLY WITH REGARDS TO THE FASHION content, she said, “Most politiINDUSTRY, SOCIAL MEDIA, ESPECIALLY INSTAGRAM, cal news and current events in our country lead to a lot of anxiety and HAS BECOME THE DE FACTO PLATFORM FOR depression. I believe looking at pages POSTING PICTURES, SINCE FASHION AND LIFESTYLE of beautifully dressed fashion models socialites at parties gives people a MAGAZINES USUALLY DO NOT PUBLISH MUCH or respite from all the terrible things going WRITTEN CONTENT AND ARE FOCUSED ON IMAGES on.” She is not the only one with these

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opinions.

A regular reader of such lifestyle magazines, Ayesha Shakeel, said: “There are all types of magazines on my office table, but whenever I get free time I pick up a fashion magazine. For one, I don’t have to use my mind while looking at pictures instead of trying to read a political or technical article.

And second because they are always aesthetically pleasing.”

However, her colleague sitting right beside her, Maryam Shahzad, interrupted and said that she would pick a technology magazine, over a fashion magazine and also over any newspaper because the content in magazines is always more in depth and in detail instead of smaller stories or purely news items in a newspaper.”

None of the six people present said they would go for a political newspaper. While this is not a sample size of the readers in general, it does hint at the rising dislike towards politics and inclination towards entertainment – which is captured by the dozens of magazines hitting the Pakistan’s market. However, there is one more challenge slowly creeping up this industry: social media.

The social media challenge

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agazines, irrespective of the beat or category, run on advertisement revenue. The advertisements also come based on the readership and circulation. However, particularly with regards to the fashion industry, social media, especially Instagram, has become the

de facto platform for posting pictures, since fashion and lifestyle magazines usually do not publish much written content and are focused on images.

The online free of cost option for fashion and lifestyle platforms had already become a challenge for hard copy-published magazines. Another reason is that until very recently, while Facebook and Twitter etc. require advertisers to pay the platforms to publish or sponsor their advertisements, Instagram allowed people to run several different accounts, including some that are run primarily for advertisement purposes where the account owners were making money directly from advertisers instead of through the app.

Now, the Instagram app has applied a condition on its users to disclose if a post is the result of a marketing move. Haque spoke on the matter and said, “There is already a model in place where brands can pay for their ads to appear across Instagram without needing other accounts to post their content. This will negatively impact any Instagram accounts that earn through paid posts.”

Regarding the difference in advertisers that go towards print magazines or Instagram advertising, Injila was of the opinion: “Serious advertisers including the corporate sector with large campaigns primarily focus on print and Instagram and other digital mediums are used as an extension of the campaigns. For Instagram, a lot of the advertisers are small businesses or home businesses and their focus is on having a digital/social media reach and presence. The trend is changing fast though and some of our major cor-

SUNDAY MAGAZINE’S ADVERTISEMENT RATES RANGE FROM RS 20,000 IN THE LAST PAGES TO RS 30,000 IN THE STARTING PAGES, AND RS 75,000 FOR THE STICK-ON PAGE ON THE COVER, AS SHARED BY A FORMER MARKETING EMPLOYEE OF THE MAGAZINE. FOR PAPERAZZI, THE ADVERTISING RATES START FROM RS 40,000 FOR AN ORDINARY PAGE AND GO UP TILL RS 350,000 FOR THE COVER. PROFIT – A NON-LIFESTYLE, BUSINESS FOCUSED MAGAZINE – OFFERS ADVERTISEMENT RATES VARYING FROM RS 50,000 FOR A DOUBLE SPREAD ADVERTISEMENT TO RS 200,000 FOR A GATEFOLD AD

porate clients have moved on to fully digital campaigns recently.”

While it may be true for advertisers’ preferences, the question still remains as to how enforceable it is by the app to control the posts that are paid for. Haque said: “There are a number of ways in which Instagram will deal with the problem. Proactively, they already have a fast-growing, lucrative, targeted and measurable way to advertise directly on their platform.

Passively, audiences – and more critically, competitors – have the option to report posts that may be paid, causing a fair amount of trouble for the account.”

The endgame

A

fter all is said and done, it appears that while fashion and lifestyle magazine category is here to stay for publications and magazines, the specific beat magazines have also carved a name and place for themselves. While it may seem that thick and heavy fashion magazines are getting all the advertisements from the industry, the fact remains that competition and the respective size of advertisers for such magazines mean that fashion and lifestyle magazines run on a large number of small advertisers, while category magazines run on a small number of big advertisers.

Social media has also proven to be an aide to these magazines so far since designers, jewelers, makeup artists and everyone related to the fashion industry is now on the lookout for the opportunity to be featured on some fashion magazine’s social media accounts.

Similarly, companies who want their organizations mentioned in business magazines, automobile dealers and showrooms are looking towards technological magazines and so on.

From the perspective of advertisers, the choice is then not in terms of money but rather in terms of the target audience. While many newspapers are not nearly as captivating as magazines, they are useful for reaching a broad geographic market. They also have a short exposure span as most readers throw them away after one read.

Magazines offer glossier and attractive platforms and allow for a longer time of exposure of advertisements, along with offering any particular product to a specific category of readers, hence customers.

MEDIA BUSINESS