Just reading this excellent brief by John Kay on how a UK bank failed that struck me as relevant to the Indian solar market. (link)
One lesson from the bank’s failure was the “winner’s curse” – the cost of winning business was so high that it bankrupted the business itself. In history, this was known as a “Pyrrhic victory” – a victory that is devastating to the victor.
Here are John Key’s observations:
“When similar individuals or businesses are contenders for an object whose true value is uncertain, the winner will usually be the bidder who offers to pay too much. First observed in auctions of offshore oil blocks, the winner’s curse explains why mobile phone license auctions raised so much more than governments expected.
HBOS’s rival, Royal Bank of Scotland, experienced the curse when it outbid Barclays for ABN Amro, a contest whose outcome was likely to bankrupt whichever bank “won”. What the corporate banking division of HBOS described as “innovative lending” was lending on more aggressive terms than any other bank. The same principle underpinned expansion in Western Australia, a far away country of which Edinburgh knew nothing, and in Ireland, a market already crowded with foolish lenders.”