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What Diet Coke Paradox tells you about Indian Economy? — Transcript

by Think School · 2,545 words · 388 segments · language en · Watch on YouTube

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0:02[music]
0:09[music]
0:11>> Even in the last few weeks, Diet Coke
0:13has been disappearing from India, and
0:15the Indian Gen Z had gone crazy.
0:20Now in India, finding a can of Diet Coke
0:22is turning into a bit of a treasure
0:24hunt, specially the Gen Z is treating it
0:27like a full-blown crisis.
0:30Sad reels of empty fridges and dramatic
0:33[music] posts like my emotional support
0:35drink has abandoned me.
0:37I can handle LPG crisis, but Diet Coke
0:40shortage, not okay.
0:44And when I asked why, the answer I got
0:46was aluminum shortage.
0:50Global tensions rise, supply chains
0:53start taking a hit, and one of the
0:55biggest things affected right now is
0:57aluminum.
1:00Aluminum cans run short, Diet Coke
1:02disappears. Aluminum can shortage which
1:05has [music] happened, and India doesn't
1:07have enough manufacturing units for
1:08cans, so we are heavily import dependent
1:11on aluminum cans.
1:14But do you realize it is absolutely
1:15ridiculous because India is literally
1:17the second largest aluminum producer on
1:19earth. In fact, India has enough bauxite
1:22to last 350 years, and it is also one of
1:25the best bauxite quality in the world.
1:28On top of that, we also have one of the
1:30cheapest labor [music] rates in the
1:31world.
1:40Aluminum is the metal of the future.
1:42Bauxite deposits have come as a
1:44blessing. India's aluminum production
1:46hit 4 million metric tons, making it the
1:49second largest aluminum producer in the
1:51world. It is the most versatile and
1:54widely used [music] metal in the world.
1:58So, on paper, India should be the Saudi
2:01Arabia of aluminum, right? In fact, you
2:03will see this pattern occur again and
2:04again across industries in India. We are
2:07called the pharmacy of the world, but we
2:09still import 70% of our active
2:11pharmaceutical ingredients from China.
2:13We are one of the largest producer of
2:15iron ore, and yet we import specialty
2:18steel for our own bullet trains. We have
2:20the third largest reserve of rare earth,
2:23but we still don't have a single
2:24commercial scale rare earth magnet
2:26factory. And this paradox reveals
2:29something absolutely shocking about
2:31India's growth story, and you are not
2:33going to like it. So, the question is,
2:35what does this Diet Coke paradox tell us
2:37about the weakness of India? Why the
2:39hell are we importing aluminum cans from
2:41Sri Lanka when we have 350 years of
2:43aluminum? And how is the Modi government
2:45supposed to solve this problem? Before
2:47we move on, I would like to thank
2:48Neurogum for supporting our content.
2:50People today, because of reels,
2:51short-form content, [music] and constant
2:52notifications, the average person's
2:54attention span has significantly
2:56dropped. Some studies suggest that it is
2:58now around 47 seconds. And we see the
3:00effects of this in real life. Blanking
3:02out during an important meeting, or
3:03reading the same paragraph again and
3:05again, and yet not registering anything.
3:08This phenomenon is commonly called brain
3:10fog. And data suggests that one in every
3:12three people worldwide is dealing with
3:14this issue. Unfortunately, most of us
3:16have started normalizing it. So, to deal
3:18with it, most people rely on coffee or
3:21energy drinks throughout the day. But
3:23the problem is, while these drinks may
3:24give you a temporary energy spike, they
3:26actually don't improve focus. Instead,
3:28[music] they often lead to jitters,
3:30anxiety, and crashes. And when our team
3:32researched a proven solution, we found
3:34something very interesting.
3:36Scientifically, when caffeine is
3:37combined with a natural amino acid
3:39called L-theanine, it delivers [music]
3:40calm and stable focus without anxiety or
3:42crashes. This exact science was used by
3:45Kent and Ryan, who launched it in the US
3:4710 years ago in the form of gum and
3:49mints. That innovation is Neurogum. Each
3:52piece contains 40 mg of natural caffeine
3:54and and 60 mg of L-theanine, which is
3:56the optimal combination. Caffeine helps
3:59activate your brain while L-theanine
4:00promotes calm, focused energy. An
4:03independent MIT study even showed that
4:05people using Neuro Gum reached a high
4:06focus state 21% faster. And after
4:09massive success in the US, it's finally
4:11available in India. So, if you're
4:13looking for a scientifically backed
4:14solution for brain fog, you should
4:16definitely give it a try. The link is in
4:18the description.
4:22>> [music]
4:28>> Before we go further, one thing has to
4:29be very clear. When we say aluminum
4:31industry, we're not talking about one
4:33business, we're talking about a
4:35five-stage pipeline. And each stage
4:37makes dramatically different money. If
4:40you look at this funnel carefully, the
4:41red rock at the bottom sells for $40 a
4:44ton. The finished can sheet at the top
4:46sells for $3,560
4:49a ton. So, do you realize that is a 90x
4:52jump from the bottom of the funnel to
4:54the top of the funnel? And if you look
4:55at the funnel, the money in aluminum is
4:58not actually in the mine, it is actually
5:00in rolling mills. And here's one stat
5:03that I want you to remember for the rest
5:04of this video. Hindalco in Q2 of FY23
5:07earnings report says that raw aluminum
5:10on London Metal Exchange was $2,367
5:14a ton. The same aluminum as can sheet
5:17sold for $4,877
5:20a ton. So, do you see the premium for
5:23rolling is $2,510
5:26a ton. Long story short, the premium for
5:28rolling aluminum into a can sheet is
5:30larger than the price of the aluminum
5:33itself. So, every ton that Hindalco
5:35rolls into a can sheet, they make more
5:37money on the rolling than on aluminum.
5:40Now, remember this number, $2,510,
5:43and we'll come back to it. Now, let's
5:44look at India's report card across these
5:46five stages. The five stages of aluminum
5:48production are bauxite, alumina, primary
5:51aluminum, which then gets rolled into
5:52sheets, and then these sheets are used
5:54to make finished cans. Now, stage one,
5:56two, three are low-margin stages, and
5:58here we are absolutely world-class.
6:00Here, we barely make margins of 10 to
6:0325%.
6:04But in stage four, the margins range
6:07between 20 to 30%. But for this stage,
6:10we built the factories, but we're
6:12running them at less than 1/3 capacity.
6:14Why? I will tell you very soon. Now, if
6:17you look at stage five, it is the
6:18highest margin stage of all, where we
6:21could generate 20 to 40% depending on
6:24which finished goods we manufacture for
6:26which industry. And for this highest
6:28margin stage, we actually import from
6:30United Arab Emirates. So, the top of the
6:33funnel looks absolutely amazing, but the
6:35bottom of the funnel is where the money
6:36is, and the bottom for us is almost
6:38empty. And you know what is shocking?
6:40The UAE has zero bauxite, not a single
6:43gram. They import every bit of raw
6:45material from countries like India. But
6:47the United Arab Emirates built one of
6:49the world's most energy-efficient
6:51aluminum hubs. Why? Because they gave
6:53their industry two things India doesn't:
6:55cheap and stable electricity, and zero
6:57political friction. Now, let's put some
6:59numbers to this so that you understand
7:01the gravity of the situation.
7:03We started with 100 rupees of bauxite in
7:05Odisha. India refines it to 200 rupees
7:07of alumina, and melts it to 660 rupees
7:10of raw material. So, in three stages,
7:13560 rupees of value was added. Then,
7:16India shipped that metal to the United
7:18Arab Emirates, and in one rolling step,
7:20the UAE turns it into a 1,350 rupee
7:24sheet, adding another 690 rupees of
7:26value before sending it back to us as a
7:29finished can at 1,500 rupees. So, India
7:33did three stages of heavy work, and UAE
7:35only did one step, and yet UAE made more
7:38money than India did across the entire
7:40pipeline. This is how we are giving away
7:42high margins to other countries after
7:45doing all the dirty low margin work here
7:47in India. And in spite of having one of
7:50the cheapest and the best bauxite
7:51reserves in the world, we are still
7:53losing out on the margins. So, now the
7:55question is why does it happen? Why
7:56can't India simply master the high
7:58margin stages
7:59>> [music]
7:59>> like rolling, extrusion, and finished
8:01goods?
8:02Well, the answer is a vicious cycle that
8:05I call the aluminum trap. And this trap
8:07is quietly suffocating 3,500 MSMEs that
8:10make cans, foils, car parts, and window
8:13frames. This is one of the most
8:15underrated crises in Indian
8:16manufacturing, and almost nobody is
8:18talking about it. Let me break the trap
8:20into three parts. Part one of the trap
8:23is the fact that Indian aluminum is
8:25cheap globally, [music] but it is
8:26somehow very expensive for Indians. Do
8:29you realize that is again ridiculous?
8:31Like I said, India makes the cheapest
8:33aluminum on the planet, but an Indian
8:35small business still has to pay the same
8:37cost as the international buyer. That
8:40makes no sense, right? Oil is expensive
8:42because we don't have it, but why is
8:44aluminum expensive for our own business
8:47owners?
8:48Well, this is where the government's own
8:49policy becomes a problem. The government
8:51of India levies a 7.5% basic customs
8:54duty on imported primary aluminum plus
8:57social welfare surcharge. This was done
8:58with the intent to protect Indian
9:00producers from aluminum dumping. So, if
9:03the foreign trader tries to sell in
9:04India, their product with 7.5% tax would
9:08become costlier as compared to domestic
9:10aluminum producers. So, the assumption
9:12was that factories in India will get
9:14cheap aluminum from domestic aluminum
9:16producers. Good idea on paper, right?
9:19But here's what actually happens. Since
9:21foreign aluminum is expensive, the
9:23Indian producers realized that Indian
9:25companies cannot buy from foreign
9:26traders anyways. So, they increase their
9:28price to be on par with the
9:30international prices. So, if the foreign
9:32trader sold it at $3,500 a ton, even
9:36when the Indian prices could be $3,000 a
9:38ton, they would still sell at $3,495
9:42a ton. This is called import parity
9:44pricing. Now, the Indian primary
9:47aluminum market is controlled by four
9:48large companies: Hindalco, Vedanta,
9:51Nalco, and Balco. And nobody is forcing
9:54the prices down. Now, a lot of people
9:55would argue that the government should
9:57force their prices down. But, if you
9:58think about it from these companies'
10:00perspective, they also have a point. If
10:02Vedanta can sell their aluminum for
10:04$3,500 a ton on the international
10:06market, why would they sell it for less
10:08in the domestic market? This is the
10:10reason why India exports 50 to 70% of
10:13aluminum it produces to US, Europe, and
10:16Asia. And there, stage four and stage
10:18five process is carried out, and then it
10:19is sold back to Indian companies. So,
10:21eventually, our own can makers pay
10:24higher premiums for aluminum that we
10:26ourselves sent abroad. This is part one
10:29of the trap, where domestic aluminum is
10:31artificially expensive.
10:33Part two of the trap is that aluminum is
10:3580% of an MSME's cost. Now, imagine you
10:38run a small factory in Pune making
10:39aluminum cans. Your single biggest cost,
10:4280% of it, is the aluminum itself. And
10:44that aluminum is priced like it came
10:46from abroad. So, your margins are
10:48already wafer thin, and your factory is
10:50already running at 65% capacity because
10:52demand keeps swinging. And this is where
10:54trap three comes in.
10:56While the government of India levies a
10:577.5% duty on raw materials, it levies 0%
11:02on finished products. Now, we did some
11:04market research to figure out what would
11:05be the approximate cost difference
11:07between a can produced in India versus a
11:09can produced in Korea due to these duty
11:11gaps. And we took the 330 ml Diet Coke
11:14can. Now, here's what the numbers say.
11:16Let's say an MSME in Pune wants to make
11:18the Diet Coke can. Now, the aluminum
11:20sheet is their biggest cost, which
11:21requires 15 g per can. Now, because of
11:24India's import duty parity pricing, they
11:26pay 6.1 rupees per can just for the
11:29metal. Add manufacturing, energy, labor,
11:32stamping, that's another 2.6 rupees. Add
11:34compliance and working capital cost of
11:361.2 rupees. Add another 0.5 rupee margin
11:39and the can leaves the factory at 10.4
11:41rupees. Now, a Korean factory makes the
11:43same can, but they buy aluminum at the
11:46world's market without the 7.5% duty
11:49premium. So, their metal cost 5.67
11:51rupees, their manufacturing cost is 2.1
11:53rupees, shipping to Mumbai cost 0.8
11:56rupees and they give themselves a
11:57healthy 1.2 rupee margin. And even then,
12:00the cost of the can is only 9.77 rupees.
12:04And when the Korean can crosses Mumbai,
12:06the import duty is zero. Yes, it is
12:10zero. So, do you realize the MSMEs of
12:13India are being taxed for their raw
12:14material, but at the same time their
12:16competition is not being taxed when
12:18their finished goods come to India. And
12:21why are we not charging them import
12:23duty? Because India signed a trade
12:25agreement with Korea. So, as Coca-Cola
12:27India, if you're given a choice between
12:29buying an Indian can at 10.4 rupees or a
12:31Korean can at 9.77 rupees, obviously you
12:34would choose the Korean can over an
12:35Indian can, right? So, Coca-Cola India,
12:38in spite of being in India, would still
12:40choose to buy a Korean can as compared
12:42to an Indian can. And if you scale that
12:440.63 rupee gap across 10 billion cans,
12:47then Coca-Cola is looking at a mammoth
12:49difference in bill of 630 crores. So,
12:51now the question we heard is, why do we
12:53levy a 0% tax on finished goods? And by
12:55the way, if you compare global duties to
12:57India on primary aluminum, India levies
12:597.5%, Europe levies 3 to 6%, South Korea
13:03only charges 1 to 3%, and even the US
13:06charges less than 2.6%. This is the
13:08reason why South Korea is very easily
13:10able to import aluminum with less duty
13:13and export cans to India at zero duty.
13:15This is the story of India's aluminum
13:17dependency. So, do you realize aluminum
13:20is one of the rare commodities that we
13:21have in excess. We don't have lithium,
13:23we don't have oil, we We have cobalt.
13:26So, it is justified that we have to pay
13:27a higher price for these commodities.
13:29But, why do we have to pay a premium and
13:31send our money abroad even for the
13:33commodities that we are blessed with?
13:35This is the question that the diet coke
13:37paradox is asking from India's growth
13:39story. We are rich in raw materials, we
13:41are rich in primary processing, but we
13:43keep giving away the most valuable part
13:45of the value chain to our foreign
13:46partners. And here's where we, the
13:48citizens of India, have to understand
13:50that Atmanirbhar Bharat is not about raw
13:53materials. It's about owning the most
13:55profitable part of the value chain. And
13:56until we acquire the most valuable parts
13:58of our value chains, we cannot become an
14:01economic superpower. This is the story
14:04that the diet coke paradox tells us. And
14:06I just hope you learned something
14:07valuable from this case study. That's
14:09all from my side for today, guys. If you
14:10learned something valuable, please make
14:11sure to hit the like button and help me
14:12make YouTube algorithm happy. And for
14:14more such insightful business and
14:15political case studies, please subscribe
14:17to our channel. Thank you so much for
14:18watching. I will see you in the next
14:20one. Bye-bye.
14:24>> [music]
14:29[music]

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