Tuesday, July 10, 2007

Amway... No Way!

Lo: "Bakwaas.. have you decided to be an IBO?"

Bakwaas: "I don't know yaar"

Bewars: "I think I'll be an Independent Business Owner. I don't think I will use a lot of their products, but I can recruit others. My path to financial independence. Come on guys, be enthusiastic, haven't you seen all the millionaires at the meeting?"

Lo, Bewars and Bakwaas just arrived in US. Plenty of dreams. And lots of loans. When they landed, at the airport, the promised Indian Student Association pickup did not arrive. They were afraid. Tears welled up in Bewars' eyes. They waited. All of 20 mins. None of them jotted down the seniors numbers. It was written down, somewhere, but miraculously disappeared, just like the slight rattling sound in your vehicle which disappears when taken to a mechanic. Looking around, they spot a brown man, middle-aged, perhaps of Indian origin, talking on his cell phone.

Bakwaas: "Lets talk to that uncle. He might help us."
Lo: "But.. but.. how can we approach strangers? My parents told me not to talk to strangers."

Bewars was about to start wailing, any moment now. The brown man smiled at them. Bewars beams. Brown man approaches the group. With a disarming smile. Made them feel at home. Finds about about the pick-up issue. Offers to take them home. Tells them that he has a wife and a kid. That he loves to interact with young people from India. That he has been out of India for so long and wants to catch up on things back home. He was charming. Persuasive. Helpful. Takes them home, hosts them for the night. Entertains. Next day, drops them off at the presorting facility for arriving desi students.

Bakwaas Singh is assigned to Mohan Singh, a PhD candidate in Economics. Bewars is going to stay temporarily with a gang of Telugu chaps and Lo with a gang of Telugu girls. All of them in the same apartment complex.

For a few days, Lo, Bewars and Bakwaas were busy. Getting their ID cards done and such. One evening, they catch up at Bewars'. That is where Idler overhears the conversation.

Idler: "What is this IBO thing that you guys are talking about?"

Bewars was in two minds, whether to tell or evade the topic until he becomes an IBO and recruit Idler. Lo was not that thoughtful. She blurts out. Rewinds the reel and visualizes their arrival fiasco. In HDTV format.

Lo: "This kind gentleman made a compelling presentation.. on financial independence. Yesterday, we attended a meeting. We saw opulence all around. People are becoming rich. Quickly."

Bakwaas: "The assistantship and on-campus scenario isn't rosy. We are considering becoming IBOs. Who knows, we may be rich so quick that we might have to drop college. Like Bill. Steve. Larry. Zuckerman."

Bewars: "I want to retire in Hawaii. In 2 years time. I will be on MTV Grind."

Idler: "I'm interested. Tell me more about this."

Bewars: "On one condition. If we become IBOs, you have to join one of us."

Idler: "Sure."

35 mins break. The gory details of 'business'.

Idler: "Hmm."

Bakwaas: You don't sound convinced.

Idler: Well.... erm.

Idler: I am not so sure of the efficiency of this business.

Bewars: Matlab?

Idler: A business is supposed to solve a problem more efficiently than existing businesses. I don't think this one fits under my definition of business.

Idler: How is this business more efficient than other retailing chains, which deliver products to consumers? Such as Walmart, etc.

Lo: Well.. its a different delivery mechanism. Walmart makes a lot of money on products they sell. When we become IBOs, we make money. Instead of making Walmart richer, we make everyone rich.


There are fundamental differences between these two delivery mechanisms. Before Walmart, the distribution system was similar to what we have in India. There were a few layers between producer and consumer. The price of products increases 3x by the time it reaches consumer. Sam Walton thought that this is inefficient (which is quite obvious), and decided to be the one link between producer and consumer. The layers just sit there. Taking advantage of information asymmetry to do 'business'.

Lets do some arithmetic.

For 2006, On a revenue of $315bn, Walmart's profits are $11bn. About 3.5%.

Quixtar, over a period of 8 years, generated a revenue of $6.8bn. This generated bonuses of $2.2bn for the IBOs. An overhead of 30%. Since this is privately held, we don't know what profit margins they have on 'products'. Most of their products are about 4x similar ones. My wild guess is that their markup (product, bonuses, etc) is between 60 - 80%. About 20 - 25 times as much as Walmart. Clearly, it is not efficient. Almost as bad as the Govt of India, where 15 paisa is delivered for every Rs. 1/- spent.

Bakwaas: They sell products of a much better quality.

Idler: By whose standards? Anything to substantiate their claims?

Besides, if their products are of a much better quality, why don't they sell in open market? Most of these chemicals have simple formulae. Anyone can manufacture them. Betterness can't be measured. Reminds me of religion. My God is better than yours. My God is the True God, rest all are False gods.

Bewars: They don't want others to control their products.

Companies focus on what they can do best. If they can build better products, they should concentrate on that. Instead of worrying about who is going to sell their products. If the products are good, the market forces ensure their success.

Of course, this does not hold true for those who build super efficient systems. Walmart has an efficient distribution system. It can distribute most products in a cost efficient manner. Once that system is mastered, it can get into products. Lets take Salt. Sugar. Or Washing Powder. Things of this sort, don't need tremendous intelligence, they have fixed molecular signature/properties and when done in large scale, are economic. Walmart has its own brand, Great Value.

Lets take a look at Google. They have a built a cost efficient distributed OS. They can distribute data efficiently. First, they concentrated on the data and made it easier for people to find information. A few years back, we all had to spend an hour every day deleting mails. The email limit was 6MB. Along comes Google with an innovative GMail. And 1 GB space. How did they do that? They have mastered how to store and distribute data. Right now, Microsoft Exchange is on Google's crosshairs. Google can deliver a wide range of services using this distribution mechanism. But I digress.

Bewars: But my cousin does this back home. He has a PhD.

Idler: Is this his area of expertise? Look up appeal to authority under logical fallacies.

There are always X number of people with Y qualifications doing Z number of things. This doesn't make Z valid.

Lets take a PhD who smokes. Does that mean that we should all smoke?

Amrith Khanna, has a PhD and he cheats on his wife. Does the PhD lend legitimacy?

Note that I'm not saying smoking and cheating on wife are bad. I'm bringing in analogies to point out invalid arguments.

Bakwaas: I always wanted to be an businessman. This is my chance to become an enterpreneur. My path to financial freedom.

Idler: A business solves a problem. Takes up a complex process and makes life easier for people. A business solves others problem. If you are thinking about your problems, your business will not sustain. You would be better off in a job.

The class of problems that Walmart or Google are trying to solve: Distributional Inefficiency. Which class of problems are you trying to solve?

Bewars: He is a nice guy. Has wife and kids.

Politicians wives and kids. But it is universally agreed that politicians are vile and decadent creatures.

Idler: Here is a summary

Amway, Quixtar - are insidious.

Inefficient: May not be as insidious as Govt's, but can be classified as scams. They add an infinite number of layers between producer and consumer. Efficiency is inversely proportional to the number of layers. Of course, there are exceptions. But, those don't apply here.

Loss of Relationships.. and respect: You will be risking most of your relationships, relationships that you've carefully built over a period of few decades. Which you will need later on. You friends will shun you. You will not be kindly spoken of.

Monetary Loss: An average IBO makes $115/month. Since the hierarchy is a pyramid and not an equitable distribution, people at the top make money and people at the bottom LOSE money. That averages out to $115/month. The majority make money by selling sales materials and in the name of seminars. You would have to shell a lot of money for that.

Elimination from Gene Pool: In the past, in match-making, people used to look at the hierarchies of families on both sides, traversing up to seven levels (parents, grand parents, great ...). This is to find out to if there are any mental deficiencies in the family and if so, avoid the match. However, most of these are addressed by the tremendous advances in medicine. But, there is no excuse for numerical illiteracy. Especially, when people keep flaunting their degrees. These deficiencies in education are noted. In the not so distant future, we will be able to track amway people, matchmakers would lookup (just like credit checks), leading to the gradual and eventual elimination of quixtarians.

Lo: He is a nice guy. He loves India and all Indians.

Idler: Ever heard politicians speak? Those words.. mean nothing. Its just a play on emotions. Vulnerable people are affected.

It does not matter one bit whether someone loves (or claims to) or not. Efficiency is the key. Politicians have been claiming that they love India for more than half a century.

If he loves India, ask him to pay back the cost of his education first. India spent about $100,000 for his 'education'.

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