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Demand creates its own supply

Updated: Jun 5, 2023

Greetings from Team Carnelian!!

We try to cover in our letters topic from the questions, comments, or concerns in the mind of our investors and share our perspective on them.

Few heard in the recent past are:


  • India stands no chance vis a vis China.

  • India neither has scale / eco system.

  • Minimal ease of doing business, red tape, bureaucracy too strong etc.

  • India does not invest into R&D, technology.

  • We are only assembling, not manufacturing.

IT services

  • India is only a low-end IT servicing business.

  • We have no innovation of our own.

  • India does not have a Silicon Valley kind of ecosystem.

  • AI - we have no chance. It will disrupt the industry.

Indian corporate governance is poor.

  • Most promoters are thieves/crooks.

We have a very different perspective on all of them.

A fundamental thinking error which one makes while making the above statements is:

  • Comparing two different stages/time frame of countries and arriving at a conclusion, and

  • Forgetting to notice the rate of change and its possibilities.

In wealth creation, what matters is the rate of change. Value creation is the delta from where you stood yesterday to where you are today. Value creation is not the delta between where you stood today and where you ideally should be or where others are.

One who misses to understand this fundamental point, misses the wealth creation opportunity.

In our perspective, Demand creates its own supply and when strong demand is met with an enabling environment, it creates value.

It is this change in the demand environment we must keep assessing. The Demand environment may have changed due to some structural reforms, geopolitical reasons, cost pressures or any other reason. When there is strong sustainable demand environment, Indian entrepreneurs have risen to occasion and delivered the best in class.

Let us understand this better with some actual evidence we have seen on ground.

We visited a large metro coach factory in India. This company has been making wagons for decades and hasn’t found success. Demand was patchy and sporadic. As any entrepreneur does everything to grow, and since opportunities in India were limited, this company acquired plants in Europe but continued to struggle. Now comes the change, GOI undertakes huge investments in the railways sector. A massive program on metro rail and Vande Bharat trains gets unleashed. This change in demand has changed the mindset of the company. It has built its first indigenous metro coach which is competing with MNCs. What’s most enthralling is this company has hired people from MNCs (of course Indians) and is doing a lot of innovation. When we met some of the personnel at the plant, we could see pride while conversing with them. One said we want to build for India and export coaches to the world. We saw coaches getting built in India which earlier were only imported. Think about it a company with a tiny balance sheet, which was almost written off, is aspiring to compete at a global level!!

What changed – massive demand of coaches!!! Demand is creating supply. Of course, it will not be smooth and there will be difficulties in the initial phase. But what makes us believe that China didn’t face these issues in their early days? Once a capability is built, it only gets better.

Few other examples we have seen are:

  • A similar mindset in another company in aerospace, which is a tier one supplier competing with global giants. Visiting their factory was a sheer delight.

  • We know a titanium precision castings company, which compete with again USD 35 bn+ giant, ready for 20x growth. One would be surprised to see such huge capability in a small city of the country away from the hustle of metros.

  • We met a cable company recently which was in distress and was restructuring its debt 2 years ago; now exporting 80% of their cables to the US. They claim their quality is well recognised in the market and are very upbeat about their future growth. They believe they will grow at ~25-30% in the foreseeable future and leapfrog.

  • Garmenting where China, Bangladesh well lead India, we see companies learning form the Chinese model of creating huge labour campuses (critical for garment manufacturing), building a large-scale company and have created massive wealth already and likely to continue in the future too. One of our portfolio company has beautifully implemented this model and we believe they will grow several times bigger than what they are, as the demand environment is strong and as the company ramps up and delivers great experience to its customers, there is no reason why it shouldn’t grow.

  • We also have a portfolio company from Surat who is gunning for ~20%+ growth for the next decade. They have hired their R&D team from global companies. They have innovative products for EV batteries and are beaming with confidence. When asked about demand, he replied that it is not a problem. What does this say?

All these capabilities were there somewhere inert but the change in the Demand environment is getting them unleashed. Demand creates supply.

All the time we come across entrepreneurs who are gearing to tap this surge in the demand environment across the board. Their energy, hunger and desire to build and go to be the best organisation is the CHANGE we want to highlight. This rate of change will create wealth.

We also find people who are non-believers saying India is doing only assembling of components and this is not real manufacturing. Large part of raw material still gets imported. True. There is no denying it, be it electronics, chemicals or other sectors, India still imports most of the raw material. But one must not forget it always begins like that.

Maruti and Hero Honda started as joint ventures with Japanese companies where 90% plus parts were imported and assembled. Over the years, India has built the best auto component industry / eco-system which competes with the best in the world and now supplies to the world.

This capability got built only because first there was assembling done in India and the demand got created over the years through incentives and business needs, to manufacture locally. Demand got created once assembly started not before that. If one waited to start Maruti only after building eco system for components, it would have never taken off!

Electronics is one sector where India is deeply dependent on imports. India is incentivising businesses through PLIs to put capacity and capability. Initially, it will all start with assembling, but over a period, just like in the past, component eco system will get built. India exported USD 5 bn worth of Apple iPhone and is targeting to take it to USD 25 bn. Would Apple not explore local sourcing of components, and will Indian entrepreneurs not explore just like auto components to manufacture them here? They will. Demand will create supply.

India has done this in the past with Pharma sector as well when the opportunity arose. Changes in Intellectual Property rights and policy reforms carried out allowing imports of bulk drug created huge opportunity for India entrepreneurs. Many products patents were expiring, and Indian businesses created significant wealth making best of this change. Supply of talent (research capability), best in class manufacturing all were made possible. Because there was demand. Demand creates supply. For supply you need an enabling environment.

For Indian manufacturing we believe, the demand for import substitution and demand from international markets (export) have led Indian entrepreneurs to heavily invest in capability and capacity building across several sectors such as Chemical & speciality chemicals, Auto & Auto components, Garments, Electronics, Defense, Capital Goods, Toys, Footwear and many more. Indian businesses are thinking best in class to meet global standards and are even delivering innovative products at cheaper cost. We think this a massive change thanks to change in Demand Environment.

Now coming to IT services:

India has built, best in class IT services industry which has evolved across several technological changes and transformation. Indian IT services came of scale in late 90s mainly due to Y2K. Many wrote off the industry post 2000 as Y2k was over. However, we have seen the industry has evolved from Y2K to ERP to Automation to Digitisation to Transformation. While companies like Microsoft/Google/Apple are great stories from US, it doesn’t mean that we must play that game only. India is building based on her strengths and demand available. Of course, the start-up eco system in India has picked up significantly in the recent past. We saw 68 unicorns born which was unthinkable one decade ago. This is a positive change.

These are all positive developments in the right direction. Do we have to be like the US? maybe not! But India is surely taking a leap in Technology. Industry 4.0 is integrating Technology from an early stage in manufacturing which is a step in the right direction. Since there is demand of automation, use of technology, Indian companies are adapting and creating supply too. In IT services, the fastest growth of ER&D segment is an indication of the same.

Let us look at another related but different topic.

In the 90s, India was criticised for decades for having poor corporate governance. As the economy started becoming large & the institutional investor base started to grow from the mid-2000s, India Inc and SEBI have continuously worked to improve on corporate governance. Today India has one of the best corporate governances, despite many naysayers. This is not only because of the Law & SEBI, but also as Indian entrepreneurs are rewarded with better valuation for better governance. There is a clear gap in valuation for well governed companies’ vs poor governed companies. This increases the demand for better governed companies which has led to supply, meaning more and more companies pursuing better governance.

To conclude, when we assess India, companies or sector or any other investment opportunities, we see the journey differently and believe as long as there is demand and it is sustainable, it will create its supply. The Rate of change is important. We see manufacturing & IT sector thriving for the next decade. We see India manufacturing leapfrogging over next decade. People who believe in this rate of change, rather than ideal destination, will be able to participate in this wealth creation journey.

As always, welcome your thoughts and suggestions.

Happy investing and wealth creation!

2,104 views2 comments


Chandra Kumar Rathi
Chandra Kumar Rathi
Jul 08, 2023

Your assessment is very professional & with correct basic understanding of wealth creation! You have taken pains to meet such Entrepreneurs & companies & have offered suitable financial assistance too. Great going! Wishing very best.


sunil kumar S
sunil kumar S
Jun 06, 2023

Super... very well written. What a way to start the morning . Keep writing and educating. Thanks a ton!!!!


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