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Asia’s final frontier in investment: Bhutan
By Sourajit Aiyer
Frontier markets have gotten remarkable attention in recent months. As an analyst is said to have summarised it
during an investor roadshow in Nairobi: everyone and their dog seems to know something about frontier
markets.
Improving governance, positive demographics and reforms initiation at one side, the large population is a major
rationale to look at economies like Vietnam, Argentina, Kenya, Colombia, Nigeria, Bangladesh, Romania,
Pakistan or even Myanmar. But judging strictly on the population criterion, there would hardly seem a validation
to think of countries like Bhutan. After all, it has a population of only around 750,000 and does not figure on the
list of typical frontier markets (hence I have used the term ‘final frontier’).
However, every economy is still an economy. Specific opportunities can exist for those enterprising enough to
invest some time to sift through its threads, identify sector-specific micro stories (‘islands of proficiency’) and
place emphasis on the profitability potential of opportunities rather than just the growth potential. One needs to
look at such an economy with a granular/micro/sector-specific mindset rather than the broader/macro/‘country-
story’ mindset with which most look at the large emerging/frontier markets.
In January this year, I made a short trip to Bhutan (a country in the eastern Himalayas between India and China),
and took that chance to make some observations on ‘Ground-Zero’. There are three basic reasons why I think
there might be some rationale to look at this final frontier market.
First, Bhutan is a country which has undergone political and economic transition. More importantly, it is phasing it
in a gradual, step-by-step manner. That might seem an intelligent and mature way of managing transitions, given
the numerous cases where countries have simply rushed head-first and often fallen nose-first in the process.
Second, the attitudes and aspirations are changing with uptick in local income and media proliferation, fuelling
demand in specific sectors. The strength of the ‘demographic attitude’ in this case offers the chance to help
businesses benefit from ‘islands of proficiency’, especially as the competitive scenario is still nascent and there is
scope to capture the first-mover advantage. Third, the debate between chasing profitability (or return on equity)
or chasing growth has bitten the post-2008 business world, especially when it comes to a new market. The
importance of maintaining profitability to avoid capital erosion and accumulated losses cannot be
overemphasized. After all, not every venture by global businesses in the large emerging/frontier markets has
shown rapid profitability.
BHUTAN’S VISIBLE CHANGES
Recent changes in the country are visible and perceptible. The monarchy paved the way for a parliamentary
democracy in 2008 to institutionalize the governance system. Given its systematic planning, the economy itself
has grown at rates of 7%, 12%, 9% and 5% in real terms, in the last four fiscal years. Secondary and tertiary
sectors led the growth in the recent years, some large projects were initiated and public services expanded. The
resultant growth in income is apparent, and the capital Thimphu has expanded with the urbanization flow.

2. New buildings, both residential and commercial, are coming up along the Babesa highway just before the city
starts. This stretch of around 5 kilometres on the southern side of Thimphu looks a major construction site. The
real estate activity is more in this part of town because this is a stretch of flat land, whereas uphill mountains at
the other end (north-west) of the city limit the scope of real estate expansion.
Two senior professionals from the Bhutanese financial sector whom I met informally said some homeowners are
trying out new interior designs inside their houses, a sign of changing times. While the building supply would be
backed by demand, not everyone would have the capacity to buy new houses.
It is easy to see cases of families living in strained/worn-out houses if one walks along the bylanes of the city,
though their number seemed lower than other Asian developing countries. Nevertheless, how many of them are
actual homeowners, how many are tenants on lease and how many can afford a home loan is something only
the Census statisticians can say.
While education enrolments have picked up, the job market has not kept up. Employment capacity of the public
sector seems to be reaching saturation and the private sector is yet to expand in that respect. There were at
least two taxi rides where I was surprised to find that the drivers (a man and a lady of the younger Gen-X/older
Gen-Y age group) were actually qualified students working in a government office on-contract for part of the
week, and were driving taxis in the remaining time to supplement their income. Both said they were lucky they
were able to afford car loans, as not everyone is able to do so. So there did seem to be a sense of despair at the
general lack of full-time job opportunities. Regarding low-income labour, either the Bhutanese have not built their
skills or they seem not to like getting their hands dirty – a situation a bit similar to that in the Middle East, where
there are a lot of migrant workers.
Most of the labourers working on road and construction projects seemed to come from India, a fact made clear
on hearing the music playing on their radios when one halts beside their work sites.
WILLING TO SPEND
Most of the boys of the older Gen-Z/younger Gen-Y are increasingly sporting the ‘punk’ look and most girls are
sporting generous doses of chic-fashion/accessories. An expat working with an international organization in
Thimphu told me that the young Bhutanese have become big fans of Korean television programmes.
People are high on aspirations and desires, reflected in changes in attitude. Those who are earning well are
willing to spend on new consumption, be it clothing accessories, cars, hang-out zones or department stores.
Cars are larger and in more variety, whereas they used to be smaller and fewer till the 1990s. New coffee shops
and restaurants are sprouting up in the city centre, and affluent local/expat crowds are thronging at all hours.
Average prices in these establishments seem on the higher side as compared to levels in Thailand, India, etc.
But then Bhutan has very few such outlets, hence, some element of monopolistic-type pricing by the first-
entrants might be existing.
While department stores used to store mostly ‘Made in India’ products earlier, nowadays one can see goods
made in Thailand and elsewhere, also jostling for shelf space in most stores.
In a future article, I will outline a dozen opportunities that these changes are bringing to investors.
The author works with a leading capital markets company in India. Views are entirely personal.
This entry was posted in In Depth, Views and tagged Asia, Bhutan, emerging markets, frontier markets, India,
investing, investment on February 27, 2014 by Antonia..
Market Moving News and Views
A dozen direct investment opportunities in Bhutan
By Sourajit Aiyer
What sector-specific micro opportunities for direct investment do the recent changes in Bhutan’s economy spell?
Following are a dozen that came to my mind based on the observations made during my recent trip there.

3. I emphasize these are not just products for global businesses to export to Bhutan. Most can also be produced
locally in Bhutan over time. That can create production-oriented jobs for locals, instead of just trade/sales-related
jobs. But for that, it depends on the country itself, whether it has the capabilities or desire to expand into
ventures, albeit with foreign investment/foreign technical partnership.
Some of these ideas use intellectual capital, some use physical capital, and some use a combination of the two.
In most of them, I have tried to draw parallels to India using similar Indian companies as examples. Similarly,
such examples of successful companies would exist globally in other countries as well.
1) ELECTRIC CARS
Bhutan has been looking at the electric cars sector for some time, and has recently cut a deal with Nissan for its
Leaf. Despite being a hydro-electricity producer, most of its internal energy consumption is fuelled by imported
fuels as most of the hydro power is exported. Apart from environmental concerns, there are other justifications
for electric cars.
Thimphu is only as big as an average neighbourhood/borough of a city like Mumbai, Delhi or Bangalore. Hence,
intra-city driving within a small city means drivers are never really too far from their homes, ie their charging
points.
The Bhutanese financial professionals remarked informally that young Bhutanese increasingly preferred to drive,
rather than walk short distances. While it does not mean the population is becoming lazy, it does show a shift in
people’s attitude. The vertical expansion in the city is yet to occur. Most buildings have few storeys which makes
wire-charging practical if batteries are difficult to detach and carry.
Mahindra & Mahindra also announced plans to launch its E-20 (formerly Reva). Entry strategies by electric car
makers should be more aggressive if the price differential between the various models justifies it. Mahindra E-20
costs the equivalent of about 0.6 million Indian rupees in India.
Through informal chats with local cabbies, I learnt that the average car imported from India costs about 20-25%
more than its price in India. By that estimate, one can add 20-25% over the mark-up of the Mahindra E-20 for its
cost on Thimphu’s roads. Public transport of choice in Thimphu is also the taxi. Most taxis are Maruti Suzuki
WagonR/Alto or Hyundai Santro made in Indian factories, which cost 0.35-0.5 million rupees in India. The price
point of electric cars keen to enter Bhutan has to be comparably affordable; otherwise the loans might be out of
reach for most buyers unless they are subsidized.
2) PROCESSED FOOD PRODUCTS
There seems to be demand for processed foods like meat products etc, as evidenced by the stocks in
department stores. The population is able to pay and willing to pay. Hygiene in packaged foods might be one
reason, as compared to the raw meat at the traditional shops. Another is the longevity of the processed/packed
version.
Daily cooking is not practical with a working population comprising both men and women due to lack of time and
lack of hands, a feature also common in India. Bhutan itself has set-up a company in the agro-processing space,
and there might be a rationale to invest into similar processing facilities given it has adequate supply of the raw
materials.
3) MOBILE V.A.S.
In a country where TV programming was banned till the 1990s, media proliferation has now grown in leaps and
bounds. The latest phones are visible everywhere, and young faces are visibly busy peering into their various
gimmicks.
This suggests potential for Mobile VAS providers to tie up with local networks. Mobile VAS includes mobile
gaming, tones, infotainment, live streaming, m-commerce, etc. A number of mobile VAS players in India like
OnMobile, InMobi, CanvasM, Mahindra Comviva etc have made this segment a success story in the Indian
telecom space.

4. 4) SOLAR RENEWABLE ENERGY
The sunlight is intense and clear for people in Bhutan, which is easy to understand given its altitude and low
pollution. It was enough to tan a person within 3-4 days if most of the time is spent outdoors. Conversely, the
sunlight hitting flat and polluted cities is more diffuse and mild. So is there a scope for solar renewable energy?
Bhutan’s government does seem to have upheld environmental causes. Solar power would further reduce its
dependence on oil imports.
Being a mountainous terrain, the country has tracts of land which are not easy for real estate or agriculture
development. This is visible in the eastern parts of the city across the river, on the western part near the TV
Tower, and on the southern part around the Buddha view-point. These tracts can be useful areas to set up solar
photo-voltaic panels to absorb sunlight and channelize the electricity into the national grid.
Today, solar panels are easily set on roofs of buildings and large-scale solar panel farms are also being set up.
Logic suggests that sunlight absorption would be higher where it is more intense and bright. Nevertheless, a
limitation is that the movement of shadows owing to the position of nearby mountains versus the sun can restrict
the amount of time sunlight hits a specific surface.
5) LOANS, I-BANKS, ONLINE TRADERS
Bhutan’s government pays for the healthcare and higher education for its people in most cases – two key
reasons why people globally save. The Bhutanese seem to be consumers by nature, rather than savers. Low
interest rates historically have also not been much of a motivation.
This can constrain the ability of the Bhutanese banks to lend to investible projects, if the supply of funds does not
match the demand. Depending on the due diligence of local projects and regulatory requirements, there might be
an opportunity for global commercial banks to look at lending to genuine, high-asset quality projects in Bhutan.
To draw a parallel to India, commercial banks there have funds owing to the average Indian’s propensity to save.
But the ability to lend is constrained due to asset quality concerns in the wake of the economic slowdown.
The scope of capital markets also draws interesting observations. The local professionals told me the country’s
stock market has only about 20 listed companies, but the appetite for those initial public offerings had been
huge. One can argue the appetite is high due to the fledgling stage of the markets and novelty of the IPO
product. But one can look at it from another angle – that cracking the first sale is often the toughest, and
subsequent sales get accepted more easily, more so if the money in people’s wallets is only set to grow.
Potential appetite of future listings might warrant the attention of boutique investment banks for sector-specific
advisory service. Online trading in shares has also picked up, and might offer scope for technology service
providers to partner with the four local brokerages to enhance their online offering to clients.
6) E-COMMERCE RETAIL PLATFORMS
Indian e-commerce firms like Flipkart, MakeMyTrip, Rediff, Jabong, Myntra etc have garnered market share in
India, and are employing large numbers of people. Bhutan has good internet connectivity and most young people
are literate and computer-savvy. If investing in physical outlets poses viability concerns, then expanding the e-
commerce offering might have potential, provided security of online payment gateways is maintained.
There is hunger for products – evidenced by the variety of casual apparel, shoes, fashion accessories, electronic
and entertainment gizmos, etc. used by the people on the streets. Formal clothes might have a limited market,
since most locals wear traditional attires at work. I do not know the penetration/safety of online banking services
in Bhutan, but there are also strategies to navigate that if it poses a constraint. For example: India’s Flipkart
allowed cash-on-delivery option for clients in India who were unable to make payments online.
7) PREFABRICATED FURNITURE
Given the real estate activity, there might be a rationale for pre-fabricated furniture. These are made from
compressed ply, sawmill products, etc, and are easy to set-up/dismantle, easy to move and light-weight. They
are increasingly favoured in India for its practical advantages, if the foot-fall seen in stores like Home Town or
Reliance Living is an indicator.
Bhutan, although rich in timber resources, restricted the export of timber to India a few years back to maintain its
ecological balance and prevent excessive deforestation. In this context, the demand for furniture fuelled by the

5. building boom might mean demand for more timber, something which the nation might want to avoid in order to
maintain its ecology. Hence, usage of pre-fabricated furniture might actually serve a broader national interest.
8) COOL HANGOUTS
Growing consumption and changing lifestyles mean changes in the way people spend their leisure time, be it in
shopping plazas or socializing in ‘chic’ public spaces like coffee shops and restaurants.
These are the current hang-out zones for the affluent locals, and the 1990s western music playing in some of
them seems to target the younger Gen-X/older Gen-Y age group. There might be more appetite for such outlets
if the number of high-income earners grows further, coupled with the fact that the number of such chic outlets is
still limited in the city.
9) PROFESSIONAL COURSES
Construction of the Knowledge Park on the Paro-Thimphu highway and the IT Park in Thimphu serves as
evidence that the government is taking the objective of higher education and creating further jobs very seriously.
But apart from universities/colleges, higher education also includes professional and vocational courses focused
on specific streams which help build expertise in that specific area and make the students job-ready. It helps
create ‘employability’ of the students.
Successful examples in India are software/IT institutes, hotel management colleges, graphics designing, media
and mass communication colleges, industrial training institutes etc. After all, there is a limit to the number of
engineers, doctors and lawyers a country can employ.
Any country needs professionals in other work areas as well, otherwise it needs to import that talent. Investing
into education is also akin to investing into the country’s future, since the skills of its people are its biggest asset
against competing nations in the global arena. India’s leadership in the global ITES and software sectors is a
classic example.
10) ONLINE NEWSPAPERS
Local newspapers were not really impressive, with dimensions of an afternoon tabloid paper and just a dozen
pages. The small population size poses a constraint to set up a fully-fledged newspaper since the readership
base is limited.
So it might be worth looking at a digital/online newspaper with both news and infotainment content, which makes
its revenue from either the advertising or subscription.
There might be such products already existing in the country, unfortunately I did not spend much time in
‘Bhutanese cyberspace’.
11) ONLINE TRAVEL BOOKINGS
Tourism is a major draw. But what is really missing is a good online booking platform if one is not travelling as
part of large, package groups. Using my own experience, it was difficult to book Druk Air’s tickets online, and it
has a limited number of travel agents.
It was also tough to book hotels via phone/email. Of the dozen hotels in the Ngultrum 1,200-2,000 (1,200-2,000
Indian rupees, $19.3-$32.2) range that I contacted by phone/email, only two acknowledged. It was not the most
straightforward booking experience. Hence, there might be scope for online booking platforms which make it
convenient for individual budget travelers, like MakeMyTrip or Yatra in India.
However, the number of tourist arrivals may not grow exponentially – the small tarmac bay of Paro airport can
only fit a limited number of aircraft, road travel is time-consuming, Gelephu airport development is delayed, and
the government itself is keen to limit the tourist inflows to maintain the country’s ecological balance. Hence,
service providers need to manage costs within limited tourist volumes.
Budget hotel chains might take a look at Bhutan. But why not 5-star chains? Most foreign visitors apparently pay
a per-day fee which limits the number of days spent, most of the time in Bhutan is spent outdoors on day-trips,
there is limited time to spend in the hotel to use its luxury services and the existing 5-star TAJ property might just
be sufficient for the small number of high-end tourists.

6. Therefore, the numbers might warrant only the attention of budget chains like Ibis, Ginger Hotels or Lemon Tree.
12) FITNESS CENTRES
From the above observations, it is apparent that the Bhutanese society might be on the eventual path where
people are walking less, not always eating healthy foods, too busy at work to take time off, etc.
Such examples of societal transformations abound globally, where an increasing proportion of people fall prey to
lifestyle issues like obesity, ‘bulging-waists’, etc. This might just interest fitness chains like Fitness First, etc.
The third, and last article in this series will take a look at whether the profits justify the risks of investing in
Bhutan.
Pages: 1 2 3 4
The author works with a leading capital markets company in India.
Views and ideas expressed are entirely personal.
This entry was posted in In Depth, Views and tagged Asia, Bhutan, emerging markets, frontier markets, India,
investing, investment on March 3, 2014 by Antonia.
Market Moving News and Views
Is it worth investing in a small, frontier country?
By Sourajit Aiyer
Is it justified to look at the investment opportunities listed in the second article of this series, given that Bhutan is
such a small market? Here I would like to draw attention on the profitability vs. growth debate highlighted in the
initial paragraph of the first article.
The market of this frontier country might be small, but one needs to look at it from the perspective of a
correspondingly lower capital outlay and the profit potential. For example, I might need 100 dollars of capital to
set up 10 outlets in a large market where I might earn 20 dollars profit.
A small market like Bhutan might warrant only 1-2 outlets, ie a limited outlay of 10-20 dollars. But as long as the
project earns a profit of 2-4 dollars, the ROE is maintained. It has some ‘margin of safety’ since the absolute
amount of capital is committed to an unknown market is lower.
Even expansion into small areas within a large country requires breaking up of the larger business plan to
examine the viability per location. Hence, one can compare a small market like Bhutan to a sub-portion of a
larger economy. But it assumes the 2-4 dollars profit factors in the additional compliance/regulatory cost, given it
is a separate country.
The potential to earn that profit fast seems to exist because:
(a) Competition is still limited and the first-mover advantage exists, to some extent. In comparison, competition is
already high in large emerging/frontier markets. Bhutan might not be a demographic story, but it seems to hold
potential to realize profitability faster vis-a-vis larger markets, which hold higher growth potential but are
challenged due to sheer number of players competing, leading to capital erosion, delayed break-even and
unrealistic price wars.
(b) The government will also have to think about increasing economic opportunities for its jobless youth,
otherwise restlessness and impatience will eventually rise as the supply of qualified youth increases each year.
The monarchy seems pro-people, and its popularity among the local/foreign residents is clearly visible. The
commitment of the establishment to create opportunities for its people seems to be concrete. The government
has to delve how it can manage the economic needs of its youth within its much admired Gross National
Happiness objective.

7. THE CHALLENGES OF A FRONTIER COUNTRY
Does this mean there are no challenges? The government has faced criticism in the international media for its
handling of the situation of the Bhutanese people of Nepali origin who could not prove their residency as per the
1958 law, rendering them homeless in camps in Bhutan and Nepal. There have been some incidents of violence
and situations of unrest associated with this issue.
Any situation causing heterogeneity/ghettoisation of population segments is best avoided, especially in a small
country like Bhutan where any demand leakage should be a concern. Also, when people and lifestyles mix, it is
good for business as it enhances scope for products that one might not otherwise have demanded.
Another challenge is the vacancy rate in the newly constructed buildings. If the demand continuously falls short
of supply and prices do not reconcile, then vacancy rates will move northwards and remain sticky. This can
eventually lead to a bubble and loss in invested capital.
The supply of educated youngsters is only going to increase each year. Controlling the impatience and
frustration of its educated yet jobless youth is a socio-economic challenge, especially to avoid those ill feelings
getting targeted towards the government.
Lastly, while some steps of the government might seem restrictive (like restricting car imports, etc), they were
good from ensuring the nation’s long-term sustainability. But such uncertainties worry those who have committed
capital.
In conclusion, there might be some opportunity to extract profitability even in the ‘final frontier’ markets, despite
the population size not being significantly large. One needs to look into the viable sector-specific micro ‘islands of
proficiency’, study the strength of the ‘demographic attitude’ rather than just the ‘demographic quantum’, the
existent competitors and scope of the first-mover advantage.
In the end, profitable growth makes a valuable and sustainable business. In this case, the absolute value of
potential profitability is low owing to the lower capital outlay in a small market.
But the chances of achieving the potential profitability faster seem bright, especially when one recalls that a
proportion of new businesses in large emerging/frontier markets are still struggling to achieve profitability due to
the old adage – too many cooks spoiling the broth.
The author works with a leading capital markets company in India.
Views and ideas expressed are entirely personal.
This entry was posted in In Depth, Views on March 18, 2014 by Antonia Oprita.