The memories of a Black Tuesday, when terrorism violated the sanctity of America even as a stunned world watched helplessly, still linger on. As New York valiantly struggles to pick the pieces of a shattered city, and American patriotism is at its peak, the dark shadows of uncertainty linger ominously – its tentacles reaching across the nation. Everywhere you turn you see fear, indecision, pessimism, clouding the faces of humanity. The question, “How could it happen to this great nation?” reverberates again and again. As we end a year marred by an already slow economy tumbling even further after the September 11 disaster, Kavita Chhibber catches up with owners of several businesses as well as experts for their perspective.
Dual Whammy: The Dot.com Bust -The Downturn
The late nineties saw a locust of dot.com companies devour Venture Capital (VC) money and leave destruction in its wake. It ate into the innards of IT. The mighty lay vanquished and fledglings didn’t stand a chance.
Take the case of Chandan Seernani, who cut his professional teeth on IT consulting and honed his skills in the field for twenty years, working for companies like Compaq and IBM. Then, the entrepreneurial bug bit him and he decided to start his own company last year. Chandan focused on wireless application technology and “Hot Palm” was conceived in February of 2000. The company was declared one of the most promising startups in the southeast by Red Herring magazine. It was among the 35 selected out of 550 companies to present their business plan at an exclusive VC conference. The company caught the attention of four VCs and Chandan raised the first round of funding, both in USA and Europe by April of 2000. It was in July-August of 2000 when they went to Wall Street to generate a second round of funds, that Chandan noticed a feeling of uncertainty in a nervous market. “We were caught in the downturn, and since we could only make money when the product was built and sold, we had to close shop. Suddenly, the VCs had decided to sit on their cash as the dot.coms crashed.”
The herd mentality took its toll, yet again. Just as the VCs had earlier jumped on the roller coaster, pouring money into anything that spelt internet or dot.com, they now pulled the money out of the market in unison too, ringing the death knoll of startups like Hot Palm, that had something of value to offer.
In the tech arena, the placement companies fared no better. Several of them had to terminate the services of their H1-B consultants from India. Some of the contractors went back to India, leaving behind expensive cars at the airports, as they were unable to pay the loans on them. Others ate into their savings while trying to work odd jobs, as they struggled to find work. Many IT companies have failed in the recent months, according to CPA Dinesh Mehta; others are scrambling to stay afloat.
“We have been doing very aggressive marketing and have cut out profit margins,” says Mani Jayraman of Synergy America. Mani has had to let go of some contractors because their salary demands were too high, but he simply did not want to lay off his internal staff of many years and has preferred to take a hit instead. Neeraj Bassandra and Satish Anand of Primus Software, Maha Mahadevan of Boss solutions and Sanjiv Tirath of Pyramid Consulting all admit to having been caught by surprise at how badly the market was hit. Primus and Boss Solutions turned to product development, taking a hit in the placement department of their company. Their products however have received a very strong response from top companies and that has rejuvenated them, even though they haven’t yet received any orders. Sanjiv Tirath says things have been steady for them since May, but they were involved in business deals with a lot of dot.com companies that went under, resulting in loss of revenue for them. They had to let go about 25 % of their contractors.
Chand Akinneni of Softpros Inc. recently built a 90,000 square feet facility in India for projects outsourced to them. “Layoffs have caught up in India too. “The days of 600 % salary increase that we saw in the past five years is over,” says Chand. He has also joined hands with 30 other Indian software company CEOs to pool their resources to cut costs. “We are helping each other to place consultants and share costs such as office networking facilities, health and general insurance,” adds Chand.
The telecommunication industry too has taken a big hit. Anil Khatod worked as the Chief Marketing and Strategy officer for fiber optics giant Nortel Networks, before he left to pursue new challenges in VC investing. Anil says that he does not see the telecommunications industry or the economy getting back on track for the next twelve to eighteen months. There is still a lot of capacity that needs to be used up in telecom. Anil also says the demand for bandwidth will rise, but only at a rate of about 60 % as compared to 200 % in the past five years. Anil points out that in the last two years a lot of money was going into sales and marketing instead of product development. “Even companies like Lucent and Nortel who have done away with a lot of internal products to cut costs, are going to be looking for these products in the near future. So entrepreneurs who can develop them will reap the benefits 24 months from now,” says Anil.
So what is the future of IT? We consulted with the top brass in the field to get some answers. Jay Chaudhry, one of Georgia’s leading IT entrepreneurs, Deepak Raghvan, Co-founder and Chief Strategy officer of a e-supply chain, Manhattan Associates, and Anil Khatod put things in perspective.
“We all know nothing in life that comes too fast, is stable,” says Jay Chaudhry, “VCs should certainly get involved with startups, but to go crazy over companies that had no basic business models, was foolhardy. Mergers and consolidations accelerate a down economy, but unfortunately there are no buyers. Big players like Cisco, Nortel and Lucent are all in trouble. When the times are tough, any company that has a strong sales and marketing focus, and can combine demand-generation with demand-fulfillment, in an unparalleled and cost effective way, is the only one that is going to survive.”
“1999 was a blip, an aberration,” says Deepak Raghvan, “We were flying high in irrational times, where irrational companies managed to corner large market shares because they didn’t have to worry about staying profitable or having a viable business model. Now financial analysts are ignoring promises or revenues and focusing on discounted cash flow. Today the VCs are back to valuing businesses that are solid and have staying power.”
“As an investor I’m not giving up,” says Jay. “There is a lot of VC funding sitting there which needs to be put to work, but it will be used for meaningful companies with sound business models.” Anil Khatod agrees. “I spent a week in California recently with my VC friends and we looked at a lot of business proposals. The VCs have funded a lot of companies in the past 24-36 months which they have had to write off as losses; but they are now spending a lot of time with start-ups with potential, helping them raise a second round of funding, and to operate in a cost effective way, in what is going to be a tough environment.” Chandan Seernani puts it very aptly when he says, “Gone are the days when you could slap a PowerPoint presentation and get 40-50 million dollars worth of business. The buzz words these days are ‘Path to profitability’ and the business that provides it will get the money.”
Travel and Hospitality – We Love To Fly And It Shows—Well, Not Anymore
Indeed the Delta slogan seems like it was made for another era! The Travel and Hospitality Industry have both come crashing to the ground in recent months.
Ashish Dharamrup, who owns Everest Travels, is a twenty year veteran in the business. According to Ashish, in the past couple of years, the airlines started competing directly with the travel agencies for business. “That is where we started losing market shares. They tried to cut the commission margins for us and going directly to the customer with those special fares, and weekend travel, even before they started doing it over the Internet. We were surviving because they were offering those special fares once a month or every other month, but now the Internet has opened big venues for them and they have been offering fares to clients that we simply cannot afford to match. On top of it, they have cut down drastically on our commissions too. A lot of agencies were doing corporate travel and they had to close business. We are surviving because we are consolidators and we do wholesale for international travel.”
Ashish says that after the attacks they saw sales slide down by more than 60 %. Since then it has picked up only 10 %. With the holiday season on, they are hoping to see a surge, “I hope we can cash in on those bookings. Booking and actually closing the deal are two different things.” The Southeast Asian community is not traveling much according to Ashish because of the situation in Afghanistan. Ashish feels that the airlines should not have any black-out dates this year for the holiday season, but rather, should offer low fares in advance. The last minute tactics with limited seats is not going to work this time, because people will have already made alternate plans by then. Ashish doesn’t see any change in the slump but is hoping that things will start picking up in February-March.
The hospitality industry too has suffered after the terrorist attack. Though it was already seeing a slump early on in the year due to the downturn in the economy. Prior to the attack the industry was already in mild recession, the drop in revenue ranging from 8 % to 20 % depending on the grade and location of the property. The September attack had revenues and occupancy plummeting to as low as 50 percent over the weekend, all over the nation.
“In the 25 years that I have been in this business, this is the first time I am handing out more refunds than the money I am taking in,” says Harish Pattni, President of the Pattni Lodge group, which owns several properties in the Southeast. Pattni said that their properties in Florida have been the worst hit with revenues down to 40 %. The city of Atlanta and the state of Georgia has been affected a little more this time because of rapid growth in recent years as well as a surplus of supply in the pipeline. Pattni added, “We have had heavy cancellations where conferences and conventions are concerned. When you cancel conventions, its not just one person canceling. We are also seeing that the ones that are being held, the attendance has been cut to half. He however thinks that with the holiday season upon us, and people wanting to travel more by road, business should pick up for interstate and limited supply hotels and motels. But the upscale and full service hotels are in for a tough quarter. Hopefully, refinancing next year with the low interest rates may help small businesses save up to 30 %, helping their survival chances.
R. C. Patel of Diplomat Hotels, a company that also owns and manages several properties in the Southeast, says, “New construction has stopped totally, banks have frozen any deals that were in the pipeline. Since there is no new supply, hopefully the demand will catch up. So we will see some normal activity in full swing sometime in the third quarter of next year.” Patel feels that wherever people have over-leveraged their deals there are going to be many more bankruptcies. On the flip side, however, he adds, the interest rates are down so people with variable interest rates will fare pretty well.
Real Estate – Slow Development
“When the economy is slow, investors buy, and they sell when it pick ups, so there is no freezing point in commercial real estate,” says Narender Reddy, a veteran commercial real estate broker. “And yet, freezing is precisely what I saw after September 11. I lost 9 million dollars worth of contracts in fifteen days, as people panicked. Some of my clients lost deposits worth $50,000 to a $100,00, but they couldn’t care less.” Narender sees a lull in commercial real estate where office space is concerned, and says that apartment complexes are going to take a hit as well.
“We have consistently been raising apartment rents by 4 % to 5 % in the past five years,” says Shiv Aggarwal who owns several commercial properties in Georgia and adjoining states, “and now people are leaving to buy houses, because the interest rates are so low.” Aggarwal is also in the midst of creating a one-stop South Asian indoor mall, which will have all the amenities of Indian origin under one roof. Despite the downturn, he is optimistic about his mall due to its unique concept whose time, he feels, has come. Moreover, what also encourages him is the rapidly growing South Asian population in Georgia. According to the year 2000 Census, Georgia experienced one of the largest growth in our community compared to the rest of the nation.
Surinder Bahl who has been in the real estate business for over 25 years both in England and Atlanta, says he saw a lull in business for about two weeks after September 11. The phones had stopped ringing; but now he has his hands full, especially with overseas clients buying commercial property – who also end up buying homes from him. Surinder also noticed a change in the mainstream community’s attitude towards Muslims. “I have a Pakistani client who was looking for a dry cleaning drop store and the landlord was very reluctant to sign the lease in his name. After the attack most Americans have become very familiar with Muslim names.”
Rehan Khan The President of Pakistani American Society of Atlanta (PASA) recalls how one of his colleagues, a Southeast Asian had to write “American Management” on his convenience store, and how an American lady refused to buy groceries from a Muslim grocery store, fearing contamination, after the anthrax scare!
Gokul Kunath who owns a brokerage company, City Group, says the construction industry has been the first to be impacted and he doesn’t expect to see any new developments in the next couple of years. There is also less absorption of space as companies move to smaller offices. “People who have leased out offices to high-tech companies are going to have a tough time clearing their debt.”
Residential real estate often peaks in August and starts slowing down by early September, according to residential real estate agent Alka Bharadwaj. But after the attacks, it took a further hit. Low interest rates have helped, but sellers have had to reduce their prices. Single-family homes are doing much better than highrise upscale buildings. “People will get good deals from February to July 2002, but if the economy does not show signs of recovery, then July onwards it will tough. Real Estate usually lags behind the general economy by about ten months.”
The Restaurant Beat: To Eat or not to Eat
While grocery stores saw a lull in the first week, with customers staying away, things picked up soon after. “Our video rentals went up,” say Harish Barwalia and Bhavesh Patel of New Delhi Imports. “People preferred to stay home and watch TV, rather than risk going to public places like malls. Now things are getting back to normal.”
The restaurants, especially the ones with banquet facilities had a different tale to tell. J.T Ahluwalia of Maharaja Restaurant & Banquet Hall lost over half-a-dozen wedding parties in September because a lot of the guests were traveling from India and Pakistan and didn’t get their visas. “They have not rebooked,” says Ahluwalia. “Business has dropped about 25 %. People are still wary of going out and being identified as Southeast Asian, or mistaken for someone from Afghanistan or the Middle-east, since we all look the same.” Ahluwalia is grateful that his American clientele, which is about 80 % of the total, has been very supportive, and things are slowly picking up both in the banquet and restaurant sections. He feels that people are saving for gifts for their families and are still not interested in big parties so things may remain sluggish for the next couple of months.
Manju Kothary of Palace Restaurant & Banquet Hall says she lost on big convention parties the week of the attack as everything got postponed; and yet, on the same day, she had over 80 people for lunch. Business is back to normal. “We are booked for parties each Saturday for the next three months.”
Arvinder Ghai, the Sikh owner of Bombay Grill saw a big drop in customers after the attacks. He even noticed a few turning away because of his turban. “CNN was full of turban tales, and unless you really know the difference, it’s hard to tell who is Arab and who is a Sikh,” says Mr. Ghai. “I own a gas station and a convenience store in Kennesaw, where I had a similar experience. A few days after the attack, I was at the station when a customer who was coming in, saw my turban, turned around and went over to the store across the street. We had to put up a big sign saying we are Indian American Sikhs. Even my bank manager who has come so often into my restaurant and been treated to free lunches, had the cheek to ask me, ‘What is your nationality?’ At the airport, one of the security men asked the woman checking me to ask me to take my turban off. Fortunately, she said no, saying that she knew it to be a religious custom. Thankfully she was aware of the difference. Now business has picked up again and the American customers who used to pack this place as soon as our doors opened at 5.30 pm, are contrite and have come back. I don’t blame them. They need to be educated. We were the same way in India. Every white guy on the street was an American for us, when he could have been German, Russian or British.”
Diamonds Are Forever – Not This Year, Dear!
Indeed as jewelers scramble to slash prices, people are still refraining from jewelry and clothing purchases. The economic downturn had already made a dent in the jewelry business by about 20 % according to Malik and Karim Charaniya of Shirin Jewelers, who operate 60 jewelry stores in and outside Georgia and have been in the business for 19 years. The September 11 tragedy further brought down the business by 10 %. Business did pick up in November but the profit margins have disappeared. “People who would normally spend a $1000, now want to make do with $300 instead. Where once, our markup was 100 %, it has now been slashed down to barely 25 %” says Malik. The brothers have seen a rise in bankruptcies and have put plans for expansion on hold as they wait and watch.
Raj Soni of Karaan Jewelers saw his sales tumbling by 40 % in the first couple of weeks after the attack. According to Raj, who also travels all over the nation doing jewelry shows, the months of September through December are normally the most lucrative. This year, these choice months for their business are taking a big hit, with sales down by over 50% from last year. He agrees with the Charaniya brothers that people are buying only a fraction of what they did earlier.
The clothing business also has taken a hit. Seema, who works at the Khazana clothing boutique, says they hadn’t seen a single customer for a week after the attack. They have cut down on their new shipments and are slashing down prices drastically on the inventory they have. Farial, of Mirage Saree House which focuses on volume sales and has clothes in every price range, saw the same lull after the attack. “People were afraid to come out, especially to Decatur, and there were several announcements at the mosques not to wear Indian clothes. Fortunately, we don’t abandon our culture, and with all the festivals October onwards, things have picked up. We are also offering attractive prices and big discounts. Budgets are conservative but people are still buying.”
Sona Narang who caters to high-end boutiques saw business slowing down at the beginning of the year itself due to the economic turn down, and after the September tragedy, business is down 25-30 percent. “The high-end customer has definitely become a bargain shopper, even the stores are much more price sensitive and we have had to cut down our profit margins.” Being a turbaned Sikh, Sona says initially there was a feeling that he may be mistaken for an Arab but his American clients have been very supportive.
R.D. Sharma who caters to mom and pop stores in evening wear, and also owns gas stations and convenience stores, said the garment business had seen a slump earlier on and after the September 11 attack, his clients have been bouncing checks more frequently. An American came to his gas station couple days after the attack and asked if he had been harassed, and that he should have an American flag outside his store. “I said I couldn’t find a flag, as they were sold out. The guy showed up the next day with one and gave it to me. I haven’t seen him since,” says R.D.
What the Stocks Foretell: The Analysts Looks into His Crystal Ball
As the economy limps along, and people wait and watch, it seems what is holding back everyone is the uncertainty of times. To get a better sense of what to expect, Khabar caught up with Dr. Jagdish Sheth, the eminent economist and Professor at Emory’s Gouizeta Business School.
Professor Sheth says Atlanta will be impacted because we are a big convention city. The only positive thing he has seen is that owner managed IT companies, with four or five employees are beginning to thrive again, with big companies using them to run their day-to-day business. “The economy will turn around sooner than what we forecast because the government is putting in big monetary as well as fiscal incentives,” says Professor Sheth. “The government has decided that they need to become buyers themselves, and government buying will not be limited to defense and securities but will go across everywhere. The advantage is that the Indian companies are declared as minorities and should aggressively chase government contracts and government suppliers who have been mandated to increase the minority business.”
Professor Sheth says he has been pleasantly surprised by how well the Bush administration has handled the economy in a crisis. “To get through Congress and the Federal Reserve, unite the people, and get a global coalition going, has all boiled down to amazing leadership. No one is willing to question George Bush at this point, even those who may not be in agreement with him.”
Dr. Sheth feels that this is the time for investors to lower their expectations about how the stock market will do. “The amount of exuberance we have had about the economy was not sustainable in the long run.” He feels that people are going to shift from expensive to less expensive goods but will keep on buying, and concludes with, “The government, by the interest rate deductions, is creating an enormous amount of affordability for cars and houses, which will provide a boost to the economy. The consumers will then be able to spend their own money on non-durable services and the combination will bring the economy back again within the next six to nine months.”