Archive for the ‘Consumer Behaviour’ Category

Analysis of the mobile phone’s impact on cash flows and transactions in the informal sector

As we saw, Mrs Chimphamba needs to juggle time and money as part of her household financial management in order to ensure that expenses can be met by income. We also saw that the mobile phone was made viable and feasible by the availability of the prepaid business model that gave her full control over timing and the amount required to maintain it — how much airtime to purchase? when? how often? — all of these decisions were in her hands, within the limits of the operator’s business model. Now, we’ll take a closer look at the impact of the mobile on her domestic economy.

Readily available real time communication has helped Mrs C by speeding up the time taken for a decision on a purchase or a sale. That is, the transaction cycle has been shortened. As the speed of information exchange increases, it increases the speed of transactions — it shortens the duration of time taken to execute them from inception to completion. This, in turn, implies that more transactions can now take place in the same amount of time thereby increasing the frequency and the periodicity. When mobile money is present, one can see that as both quantity and frequency of transactions speed up, so does the cash flow. We’ll come back to this factor.

To explain using a real life example, Mrs Chimphamba does not need to sit at her homestead wondering if today someone will pass by to purchase a bottle of wine. Similarly, Mrs C’s customers do not need to go out of their way to pass by her homestead to see if the wine is distilled and ready for sale, or whether it will still take another day or two for the next batch to be ready. Further, the uncertainty of whether they’ll have cash on hand on that future day, or if they’ll return as promised are all elements that real time communication have minimized.

Now, Mrs C is able to let her regular customers know that she’s making a new batch for sale and do they want to reserve a bottle for purchase? It allows her customers to put aside cash for this purchase. She is even able to accept and execute larger orders for some future date, and even accept some cash advances if her operating environment includes the presence of a mobile money transfer system such as those more prevalent in East Africa. This in turn changes her purchasing patterns and decision making as the pattern of cash flows — timing and amount — changes. She isn’t making do anymore on an unknown and predictable sale based on sitting and waiting for someone to show up to buy her wine.

Real time communication has improved the decision making cycle for both buyer and seller in a transaction as it counteracts uncertainty and information asymmetry even while speeding up the time take for a decision.

As the quantity and frequency of transactions increase— first, in cash conducted face to face, and then later, remotely by mobile money, regardless of the size of each transaction — the change in cash flow patterns begins to smooth out the volatility (the uncertainty factor has changed completely) between incoming and outgoing, as well as the decisionmaking involved. That is, the gap between income and expense starts becoming less in terms of both timing and amount — there is the possibility of a steady stream in the pipeline. Calculus offers hints of how the curve can begin to smoothen out as frequency and periodicity of transactions begins to accelerate.

Size of transactions thus begin to matter less in that the incoming amount now does not need to be so large as to cover expenses for an unknown duration of time before the next incoming payment; nor do expenses have to be tightly controlled constantly due to the uncertainty of the duration of time before the next payment, and the types of expenses incurred during this unknown period of time.

So the boost in decision making — how long it takes to complete a transaction, how often can transactions be completed — enabled by the real time communication facilitated by the mobile phone; plus the attendant immediacy of receiving payment via the same platform is the root of the improvement in the hyperlocal economy and consumption patterns among the informal sector actors. This is why large established traders (with sufficient financial cushion) were heard to observe that both purchasing power and consumption patterns had changed in their market town (Busia, Kenya Jan 2016) in the past 10 years since first the mobile phone, and later, mPesa, were introduced into their operating environment.

Uncertainty and information asymmetry that have long characterized the fragile and volatile nature of the informal sector operating in inadequately provided environments with unreliable systems and scarce data. In the next chapter we’ll step back and take a broader look at communication, connectivity, and commerce in the informal economy starting with the description of the operating environment’s characteristics regardless of continent.

This is part of a newly launched Medium where I will write in detail on economic behaviour and its drivers in the informal economy. Much of it draws upon the original research in the field from 2008-2009 which was shared on the prepaid economy blog. I found that time had passed and increased my understanding and I wanted to explore those discoveries in writing. Much of this is the foundation for recent works on ‘Mama Biashara‘.

Professionals stand above the competition: Branding lessons from street vendors of Africa

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Zimbabwe

Farai Mushayademo’s distinctive dress sense, with a different shiny suit every day, makes him a darling of customers and helps him beat the “rising competition,” he said.

This article on the increasing competition for the burgeoning informal economy of Harare, the capital of Zimbabwe, came less than a month after we saw this smartly turned out fruit vendor plying his trade in the streets of Accra, Ghana.

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Ghana

For communicating brand quality, the Ghanaian gentleman surely deserves an award. His read to eat fruit was as smartly packaged and labelled as any consumer brand in a supermarket.

cth8lhbxyaqv0lyI’ve written before on the topic of ‘Branding the Unbranded’ – whether its the humble avocado being sold by the side of the road in upcountry Kenya, or a designer BBQ meant for the emerging middle class – but these distinctively dressed gentlemen on two opposite ends of the vast African continent come under an entirely new category of product and service innovation happening in the informal sector.

How do you set yourself apart in the unbranded informal economy in response to rising competition is a challenge. Ghanaian market women’s customer development and retention strategies in a commodity market (potatoes) were documented a decade ago, and found to rely on social skills, including non verbal ones such as eye contact and encouraging smiles. Yet, her advantage is that her potential customers are slowly walking through the market, looking for the best potatoes to purchase. She has the time to call out and attract their attention.

For these men on the streets, walking through traffic, that advantage is fleeting or nonexistent. They must grab attention *and* communicate their messaging in an instant (can they have been reading Gladwell’s blink?) – and the fruit vendor, with his spotless white gloves, and packaged fruit, clearly rises above the rest with his strategy.

The police are also, one hopes, less likely to chase a man in a three piece suit off the street. This is one pan African trend worth keeping an eye on.

Mobile Money in South Africa: The nature of the beast by Flo Mosoane

pexels-photo-3The 2015 State Of The Industry Report (SOTIR) for Mobile Money published by GSMA, reveals a picture of a service that continues to change the landscape of financial inclusion in developing and poor countries across the globe. In December of 2015, the industry processed transactions in excess of a billion, most of which were in Sub Sahara Africa.

It seems however, that the continued success of Mobile Money eludes South Africa. What with the untimely death of Vodacom Mpesa after millions of Rands of reinvestment. Only 4 months after which MTN South Africa also announced that they are ceasing new registrations, marking the end of (Mobile Network Operator) MNO-lead Mobile Money deployments here.

Despite the large bang that MTN Mobile Money launched with, managing to sign over 2 million subscribers; at the end, Vodacom Mpesa only had just over 75 000 users, and MTN Mobile Money only about 140 000 or so users. A performance that neither of these well-established, successful, multinational MNO’s can be proud of.

We lament the apparent failure of Mobile Money in South Africa. It is well established that it has made a significant contribution to financial inclusion for underserved populations, and still presents significant opportunity to serve unbanked and underbanked communities.

This is a very special contribution by Flo Mosoane, writing from first hand experience on the ground on this subject. Do read the whole article.

Read On…

How to Spot Signals of Local Purchasing Patterns in the Market

np-md-mohamed-kanuThis photograph is taken from a regular news item from a Liberian newspaper announcing the opening of a new petrol station in the town of Ganta. What caught my attention is the size of the LPG cylinders being promoted. On the left is the 6kg and on the right is an even smaller size that I’ve yet to see elsewhere – the 6kg one has been spotted in the lower income side of Jakarta, and in the markets of Abidjan, and Nairobi.

What it tells me is that purchasing power in the local market is not only a little less than a major capital city, this is probably a tier 2 city, but also that its a cash intensive market where incomes are more likely to be the volatile cash flows from commercial activities in the informal sector.

The lumpsums available for LPG aren’t going to be as large as to afford the standard 13kg size, but it doesn’t preclude people from purchasing these smaller sizes more frequently. That is, we cannot assume total consumption volumes to be less than larger cities where larger sizes are more popular. On the other hand, the micro size on the right seems to hint at the possibility of LPG being more popular than traditional fuels such as kerosene, charcoal, or firewood.

These small sizes also signal a fragmented, informal market where small pack sizes and sachets are popular.

Dignity drives purchasing decisions for South African low income consumers

graph-1There is so much I was going to say when I came across this snippet in the news about South African consumer habits among the lower income folk for yesterday’s post. I am not convinced by the framing of the interpretation of the qualitative data but that’s an embedded SA problem with qualitative research in townships. So for now, I’ll just stop with the following quote:

Melzer says spending on clothing in South Africa is phenomenal. Talking to people about their spending patterns, the word “dignity” comes up again and again, she says.

Moreover, customers aren’t necessary buying what businesses think they are selling. A clothing retailer might think it is selling clothes, when in actual fact it is selling dignity or status.

Africa’s Middle Class: Development economics and marketing demographics conflating the holy grail

The most developed nation on the African continent, south of the Sahara desert, is considered to be South Africa with its financial and transportation infrastructure and systems, a legacy from history. In the first decade of the 21st century, the black middle class – known as Black Diamonds in marketer jargon – came into prominence on the back of numerous economic initiatives after the fall of apartheid.

img-south-africa-consumer-goods-02The rise of the Black Diamonds was meant to be the signal of a changing rainbow nation, one whose peoples would finally be included in the social and economic advancements long enjoyed by a privileged minority. This emerging middle class was also among the first to be noticed as African consumers in their own right, and their discovery pioneered the subsequent search for the now mythical African middle class. Even then, their total number was under scrutiny for its aspirational inclusivity versus actual households fitting the conventional definition of a middle class. From The Economist writing in 2007:

The University of Cape Town’s Unilever Institute of Strategic Marketing says there are now 2.6m “black diamonds”, as it calls the black middle class, a 30% increase in less than two years. Included in the definition are working professionals; those who own things such as cars, homes or microwave ovens; university students; and those who merely have the potential to enter these categories. The survey estimates that these black diamonds represent 12% of South Africa’s black adults, and make 180 billion rand a year ($26.2 billion), or 28% of the country’s (and more than half of all black South African) buying power.

For some, such as Lawrence Schlemmer, a sociologist in Cape Town, this definition is far too broad to be meaningful. He agrees that numbers are rising fast but argues that they are still tiny. Last year, he says, only 322,000 black South Africans (less than 1% of the black population of 38m) could be deemed “core” middle class, a far cry from 2.6m black diamonds.

Still, whatever their size, the buppies are affecting the economy and the political landscape.

This week, a comprehensive new survey by the South African government shows the on the ground reality in 2016. The National Income Dynamics Study (NIDS)‚ launched by the Department of Planning‚ Monitoring and Evaluation (DPME) in Pretoria surveyed 28‚000 people who were tracked every two years from 2008 to 2015. Very similar in fact to the recent household panel survey completed in India. Even their conclusions resemble each other:

According to the study‚ those in the middle class have a tendency to drop in and out of poverty.

And the size has not actually changed much since 1993 – the year before the fall of apartheid and the election of Nelson Mandela.

The study also shows that the South African middle class is much smaller than estimated‚ sitting at around 14.5% of the total population in 2014. Women are more affected by poverty, and even those who manage to climb the ladder may slip down again.

“…It has not grown much since 1993 — growing its share by only two percentage points in the past 23 years…”

20151024_mac237And, perhaps, the real challenge we face with the ongoing search for Africa’s middle classes is the conflation that took place back then between a consumer marketing segmentation and a socio-political demographic.  By allowing the aspirational reach of the consumer marketing driven research to inflate the size of the segment classified as middle class, it has given rise to an ongoing and complex muddle across teh entire continent. As the AfDB’s former president Donald Kaberuka said last year:

“I think we are wasting too much time on the definition of the middle class and the cut off point, it is a sterile debate.

“A dynamic middle class that rises with the sea increases domestic demand, the diversity of the economy, [its] resilience, and they also stabilise the politics of a country as well, since they have a stake in the system.”

He has a point. But perhaps not the one he intended to make. Instead, if we consider disentangling consumption and demand for consumer products from the increase in political voice and “stake in the system”, we may in fact discover that there is indeed a sizeable bourgeoisie emerging even though they may not possess all the qualifying criteria traditionally attributed to a middle class per se. (Previous posts on this topic have been tagged informal bourgeoisie)

There’s the demographic segment which is the middle, and then, there’s the conceptual body of solid citizens invested in the democratic stability and economic growth and development of their countries. As Jacques Enaudeau wrote in 2013:

But fixated on wealth, the discussion on middle classes in Africa misses out on the other two pillars of social stratification: social status and political power.

As soon as those two are factored in, discussing the “African middle class” as a homogenous entity seems absurd, and so it should. Thinking that what separates the senior civil servant from the street hawker or the country head of a multinational from the shop owner is a matter of daily expenditure amounts to looking at their reality through the wrong end of the telescope: the bigger picture is that they live in different worlds.

In the developing world, the formal sector with its white collar jobs populated by university graduates may jostle cheek by jowl with the informal economy’s life lived on the street but that proximity might be on the only thing they have in common.

For here lies the rub: the material culture that the notion of “middle class” posits as shared consciousness is articulated to a strong sense of individualism, which is borderline contradictory with the idea of class. All the more reasons for the analysis to consider the representations which members have of themselves as a group and the historical context in which such groups are being shaped.

This, however, is not the post to unpack those complexities of self image and collective consciousness. It’s one which pauses to ponder the newest set of findings on the dynamic nature of poverty and wealth in the more uncertain and volatile operating environments of the still developing world. And considers the South African example introduced today:

There has, however, been considerable demographic transformation within that band of the middle class, with Africans now outnumbering whites by about two to one, the report said.  Factors driving the surge include greater access to credit, improved education levels, BEE and improved economic growth until recently.

Transformation of societies is underway, just as the Indian researchers concluded in their analysis. This might be a much larger global trend underway, whose weak signals we’re just beginning to pick up now. I’ll be following up with these musings on the blog. The people with the real problem on their hands are the consumer companies looking to justify entering the African markets, and perhaps that’s a topic to take up in the next article.

What will it take for African-made clothing to become available for mass market?

When we talk about fabric in West Africa, there is no doubt that wax (also called ankara) is one of the first thing that comes to mind. Vlisco, the Dutch fashion textile brand, has been for long THE fabric par excellence bringing prestige and elegance to those who wear it. As 2016 marks the 170th anniversary of the brand, a celebratory campaign has been launched in several West African countries to share the history of the brand, re-print classic fabrics with a modern touch and weigh on the stakes for the future.

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Vlisco’s campaign with 8 brand ambassadors

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Cocktail for the launch of the celebratory events around Vlisco’s anniversary in Cotonou

Speaking of stakes, competition from China has been the most damaging to Vlisco’s sales and image. Cheaper Chinese fabrics that happen to be look-alikes of Vlisco patterns have created two shifts in society:

  1. wax has become widely available to working class who can now frequently purchase fabric; and
  2. a rise of fashion labels creatively using wax for accessories, clothing, and shoe apparel.

Fashion labels using wax have flourished, at low scales, remaining more custom made than ready-to-wear. Yet whether they are designed with Vlisco or cheaper wax fabric, prices remain high. Let’s have a closer look:

Case 1: Woodin, part of the Vlisco group, boasts to be the “first African brand offering a contemporary and wholly African fashion range”. Vlisco owns two textile factories in Ghana and Côte d’Ivoire yet ready-to-wear designs remain expensive, according to consumers. Prices range between $50 and $120. Interestingly enough, Woodin aspires to produce ready-to-wear collections accessible to all.

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Case 2: newly launched clothing lines that produce small scale collections with (cheaper) wax prints. Designers work with tailors and seamstresses to produce their clothing/accessories items. Volumes produced depend on demand from customers, personal funds (access to funding) or requirements for expo/private sale designers are attending. Prices are also deemed expensive and closely mirror those of Woodin.

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Left: Nanawax from Benin who aspires to be the Zara of Africa; Right: Dakrol creation from Togo

Admittedly, despite the current trend in wearing wax, African consumers still have a hard time purchasing ready-to-wear wax prints because of alternative options such as buying fabric and sewing preferred design directly with a tailor or seamstress or second hand clothes. However, mindsets are changing and demand is rising, especially from the middle class.

So, despite the democratization of fabric, both cases highlight important points:

  • Cheaper fabric, even when produced locally, does not significantly reduce cost of clothing
  • Labor costs remain expensive
  • Economies of scale could be reached if demand rose significantly so mass market clothing in wax (or other locally made fabric) could be readily available

This begs the question: will manufacturing enable reducing the cost of ready to wear Ankara clothes and accessories in Africa?

Seasonality as an element of contextual planning for emerging consumer markets

livestock flows eac fewsnetGrowing up as a Hindu expat in multicultural ‘West Malaysia’ of the 1970s and 80s, it was a matter of course that every festival would be a big occasion. We had Christmas in December, and Chinese New Year soon after, to be followed by Hari Raya (Eid) and Deepawali – each of them deserving of TV specials and decorations on the streets.

Seasonality of cash flows and income streams in the informal and rural economy translated in the urban areas as festivals triggered a boom in consumer sales. India’s formal economy still keeps watch on the onset of the annual monsoons, as those rains will have documented impact on their 3rd quarter sales in the peak festival season of October and November, leading into the wedding season.

In Eastern Africa, this seasonality is seen, among other things, in the lives of pastoralists and livestock farmers. As Eid Al Adhar approaches in a few days, livestock sales for the annual sacrifice are reaching their peak. Trade in meat is one of the staple income sources in the arid lands and the Port of Mombasa is one of the keys to the distribution networks.

The livestock trade to the Middle East accounts for 60 percent of Somaliland’s gross domestic product and 70 percent of its jobs.

This, however, is changing, as the Port of Berbera will soon receive millions of dollars of investment in improved infrastructure. The element of seasonal cycles over the course of the natural year, however, will not change. And this is worth noting for those considering the emerging consumer markets in the developing world.

Beyond word of mouth, however, it is hard to get a proper idea about the economic impact of Ramadan. Perhaps because of sensitivities around dealing with a religious institution, international organisations such as the World Bank, International Monetary Fund and United Nations Development Programme have not conducted research on the precise economic impact of the custom.

FMCG majors already feeling the pinch of shrinking domestic markets are finally taking note of this entire opportunity space. In Indonesia, Unilever, Beiersdorf and L’Oreal are making halal face creams and shampoos to court Muslims as sales in Western markets taper off.

There are patterns of trade around major holidays in each region, be it Chinese New Year or Dussehra, and the informal sector prepares for, and relies upon, these expected bumper ‘harvests’ in their cash flow. It will be interesting to watch what happens in the context of the African consumer market as the Asian giants begin to eye it seriously as the last frontier for significant growth.

Research Question: Why is the informal retail sector so persistent and resilient?

retail2Retailing in India is currently estimated to be a USD 200 billion industry, of which organised retailing makes up 3% or USD 6.4 billion. By 2010, organized retail is projected to reach USD 23 billion and in terms of market share it is expected to rise by 20 to 25%. (Sinha et all, 2007)

These claims of projected growth were made based on a 2005 KPMG report on the Indian Consumer market, while the chart itself with it’s aspirational forecast is from the IBEF website. I have been watching and waiting for more than ten years for India’s retail revolution to take place.

The consistent message from the beginning of the retail boom has been that since the organized retail sector (what we would call the formal) has only been ~2% of the total retail trade in India (the balance is informal retail) there was ample opportunity for growth in modern retail.

Yet if you look at the data from 2015, you’ll see that the forecasts were far too ambitious (or, perhaps, aspirational, in the push for modernization driving India’s recently opened markets) – formal retail has only reached 8% penetration in the past 10 years. Nowhere close to the 25% expected by 2010. Mind you, these were all the management consultancy reports bandying the numbers around.

I bring this up because I’m seeing the same kinds of projections happening right now for the African consumer market by the very same firms. And with very few exceptions, the majority of the SSA markets tend towards the same kind of proportions of organized vs unorganized retail  (formal vs informal, modern vs traditional et al are all variations on this theme with minor differences in definition).

And, even as the retail real estate development investments are booming, we are already seeing the very first signs of the same challenge that India faced – over capacity, low footfalls, and empty malls. Just yesterday, the news from Ghana – a firm favourite of the investment forecasters –  has this to say:

Ghana’s economic woes have translated into a variety of challenges for formal retailers who are competing for sales alongsidethe dominant and deep-rooted informal shopping sector. According to a recent report by African commercial property services group Broll – titled Ghana, Retail Barometer Q2, 2016 – overall sales in most modern shopping malls are well below historic averages, despite garnering sufficient foot traffic.
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“International players are also looking at the market and re-adjusting their product/pricing mix to cater for the real middle class, whereby we are talking more in terms of value products rather than high-end products.”

And, retail developers are turning their attention to secondary cities such as Kumasi and Takoradi, as Accra reaches saturation point. The exact same pattern as we have been seeing in India. You would think people might pause a moment to take a look at similar markets and operating environments to assess patterns of market creation development.

This pattern is what gave rise to the research question I would like to frame – why has the informal retail sector been so persistent and resilient? What does this mean for modern trade? And, what are the implications for urban development and planning?

The trajectories of the Indian and the Ghanaian economies have taken different turns, thus, while one might point to these factors as the reasons for the challenges facing the mall owners and the retail brands, the big picture over the past twenty years points to something more fundamental in these operating environments common to the developing world.

That is what I would like to find out.

Japan’s Indian Strategy for the African Consumer Market

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One of the most high-profile events Kenya has hosted since independence begins this week when heads of state from across Africa and the Prime Minister of Japan Mr Shinzo Abe jet in for the Tokyo International Conference on Africa Development (TICAD). It will be the first time that Ticad has been held outside Japan and it is an honour to Kenya to have been picked to host this event. ~ Daily Nation editorial

The Nikkei Asian Review has been preparing for days with longform articles on the African consumer market, and other opportunities for Asian businesses. While Indian B2C investments have been closely analysed (and embraced), it is clear that the East Asians are eyeing each other as their closest competitors.

Africa was once dominated by Western investors, due to ties forged in colonial times. But Chinese companies have muscled their way in, and Indian, Japanese and South Korean players are arriving and thriving. This intense competition is no longer just about extracting minerals and materials. It is about tapping the next big consumer market.

Their articles are well researched and provide ample insights for businesses contemplating these new markets. Here are some highlights that caught my eye:

Vivek Karve has a clear picture of the ideal African market. The chief financial officer of India’s Marico, a maker of hair and body care products and other fast-moving consumer goods, said his company targets countries with “per capita GDP under $5,000, many mom-and-pop shops, low penetration of multinationals and political stability.”

There’s little handwringing over lack of data or missing middle class metrics. Inadequate infrastructure and informal retail in Africa is no different for your average Indian FMCG brand than their domestic market, thus the concept of the ideal market being one full of little mom and pop shops.

Marico’s strategy for achieving that includes promoting local brands familiar to African consumers, rather than pushing products that are popular in India. It uses multiple distributors to cushion itself against credit risks.

The Japanese, having already faced off with the Koreans in India’s large, diverse, and fragmented markets, are ready to take a leaf from the Indian playbook for their foray into the African market.

The gap between Asian and Western rivals is expected to narrow over time, with China making up much of the ground. About 3,000 companies from China — Africa’s largest trade partner since 2009 — are doing business in sectors such as infrastructure, resource development and telecommunications.

And even this focus on infrastructure development and large scale investments is changing. The Chinese idea is to boost purchasing power across Africa and turn the continent into a massive consumer market.

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Nissin Foods launched locally sourced sorghum noodles in Nyama Choma flavour in Kenya

The Japanese are preparing the ground to apply their own strengths in Africa. Japanese companies see Africa as a lucrative but daunting challenge — one they would rather tackle with a partner or subsidiary that is familiar with emerging markets.

This, again, is where India comes in. Toyota Motor, Honda Motor, Nissin Foods Holdings and Hitachi all export from their factories in India to Africa. The Japanese government is actively working to help companies make inroads in India as a springboard to Africa.

A couple of years ago, the Ministry of Economy, Trade and Industry compiled a list of potential Indian partner companies with strong African operations in 16 fields, including beverages, consumer goods, retail, electronic parts and auto components. Godrej Group and Marico were among them.

The lessons of the last quarter century are driving a new collaborative strategy. My rupees and yen are on Asia.