Biting The Bullet

Most of the debate on the Indian economic reforms has centred on what the government needs to do. Little attention has been paid to what Indian industry and business need to do to respond successfully to the reforms. I shall attempt a beginning here to fill this gap. Clearly, the future of the Indian economy after the reforms will increasingly depend on the success of Indian industry and business. The key questions: Can Indian business overcome its historical weaknesses? Can it withstand heightened domestic and external competition? Can it become globally competitive and follow in the footsteps of the Far Eastern exporters? Can it, in a sense, return the compliment that the nation has paid it with liberalisation?

 

The historical performance of Indian business is weak. Certainly, it has not succeeded in bringing about an industrial revolution in the country. Prior to 1947, it could blame the British Raj; after 1947 it could blame the over-regulated license raj. Now, after the 1991 economic reforms, it has no one but itself to blame. The companies of East Asia have demonstrated that new entrants can adopt winning strategies which can reward them with global market share in a relatively short period. Can Indian companies do the same?

Indian markets can becoming increasingly competitive after the economic reforms. They are a good laboratory to examine the response of Indian companies. The purpose of this article is not yet to offer a verdict on whether Indian companies will survive in these markets. It is rather to examine the strategies of well-run companies who are demonstrating capability to become competitive both in the Indian and the global markets. When a large enough base of competitive companies is created, we will be in a position to answer the bigger questions posed in the first paragraph. At present, Indian enterprise is in a state of transition which is saying a lot for the process of change has begun.

Indian companies continue to face a much tougher environment at home than their competitors abroad. They cannot easily close unprofitable plants; they cannot retrench surplus labour; they face high costs because of import and excise duties which are still high by world standards; they are at the mercy of government-owned monopolies in infrastructure which play havoc with their delivery schedules; they are the victims of corrupt functionaries in excise, customs, and numerous state-level departments. On the positive side, Indian companies are beneficiaries of incomplete reforms because they are still sheltered in their home market. There are still barriers to entry e.g., the import of consumer goods is still banned. From the long-term perspective of the winning companies, entry barriers are not beneficial because only vigorous competition in the domestic market will make them stronger.

The strengths and weaknesses of Indian competition

Forty years of socialism was not able to destroy India's legendary entrepreneurship even though it distorted its behaviour. Indian companies still have a number of strengths. The primary one is that they have been founded largely by the trading castes which have demonstrated great financial acumen, an austere life style, a propensity to take calculated risks, and an ability to accumulate and manage capital. For the past 50 years, Birla companies have monitored performance of their numerous enterprises across the globe on a daily basis. The Ambanis have single-handedly created "the equity cult" among the Indian middle class by building a 1.5 million shareholder base, one of the largest for any company in the world. Because many Indian industries were under severe price controls in the past 40 years, companies were forced to become low-cost producers in order to survive. These constitute significant strengths, and provide a basis for competitive advantage as India joins the global economy.

However, Indian companies also have clear and numerous weaknesses. The most important ones are: the inability to separate the family's interest of the business; a lack of focus and business strategy; a short-term approach to business, leading to an absence of investment in employees and in product development; and insensitivity to the customer, largely because of uncompetitive markets, but resulting in weak marketing skills. Some of these weaknesses were reinforced during the 1950-1990 period by the closed economy which discouraged competition.

Family capitalism, not managerial capitalism

Indian firms by and large continue to be family-run. There are nervous today because they are afraid that a family-run business will not be able to cope with the competitive demands of the post-reform scenario. As a result of competitive pressures and the rapid rate of innovation and change, there is a scramble to find talented people and to retain them what they are found. Almost every industrialist I talked to said that his biggest challenge is to find men and women of ability to manage crucial positions in his company. This is the most profound challenge we are witnessing in the business world after the reforms.

The inability of Indian business to create large-scale non-family organisations may not necessarily constitute a constraint on the rate of aggregate economic growth, at least in the early phases of industrialisation. What small companies give up in terms of financial clout, technological resources, and staying power, they gain in flexibility, lack of bureaucracy, speed of decision-making. Familial capitalism is not necessarily a disadvantage or a weakness in the global economy. The inability to professionalise to bring in and retain outside talent, to institutionalise, to separate the family's interest from the firm's interest this is clearly a weakness. In the successful exporting nations family firms have overcome this weakness. In India they are still grappling with this issue.

Big business in India lacks focus and strategy

The biggest failing of Indian companies is that they want to do everything. Whether it is the Tatas, the Birlas, the Singhanias, Modis or Thapars the vast majority of big business in India lacks focus. The average business house is engaged in 18 different businesses. Reliance, in refreshing contrast, makes only a few products (all from petrochemicals) and it does it well. Ranbaxy only makes pharmaceuticals; Bajaj Auto only makes two-and three wheelers.

Whereas overseas companies have been shedding activities that are not related to their core competence. Indian companies seem to be going the other way. Among the 50 leading Indian companies studied by Dr Freddie Mehta in 1994-95 there was a specific mention of starting up a finance company in the majority of the chairman's statements for 1993-94. The 1994-95 chairmen's speeches proclaimed their interest in the power sector. The 1995-96 reports showed a desire among many companies to enter into telecommunications.

It takes decades to master the fundamentals of an industry through painstaking attention to detail in building suppliers, in creating distribution networks, in understanding customer needs. Yet Indian business treats the serious decision of entering a new and unrelated industry as though it were a "flavour of the year". It is difficult to have sympathy with the Bombay Club when some of its members behave in this amateurish, drawing-room manner.

It is odd that BM Khaitan, the world's largest producer of green tea, does not reinvest in the tea business, but fritters away his tea earnings buying unrelated businesses. He recently spent $95 million to buy out the Indian Everready battery business of Union Carbide. Or even the outstanding Aditya Birla group, the world's largest producer of viscose staple fibre and palm oil, does not invest in product development in order to strengthen its leadership position or to neutralise the environmental threat to the business.

Having said that, there are many responsible young businessman in India who are questioning their basic strategy, and have asked themselves, "What is our core competence?" One example is the Turner Morrison group, which is divesting out of apparel, sugar, edible fats and alcohol in order to focus on construction materials. Even an old diversified house like the Thapars wants to divest all businesses other than chemicals and paper from its flagship company, Ballarpur Industries. The RPG group has divested its tyre cord and razor blade businesses. The disease of diversification goes back to the origins of Indian business, to the managing agency system that prevailed during the British days, when a single management oversaw tea, jute, textiles, cement, shipping and so on. After Independence, the licensing system and inefficient capital markets reinforced the situation. A few groups with good Delhi contacts captured most of the license and closed the doors to newcomers. Even though licensing was unique to India,

diversification is not. The Japanese zaibatsus were similarly diversified in the beginning. But the Japanese have realised that the success of Toyota, Honda, Sony, Panasonic, and Cannon. Toshiba has come from focus. Even after the reforms, Indian firms have not learned this lesson. Soon after 1991 they went on a spree forming joint ventures. Each industrial house sought as many joint ventures as it could. And these joint ventures had no relationship with one another, ranging as they did from automotive components to fast foods and fashion garments.

The successful companies have found it best to do a few things; make sure that these are the right things; and do them brilliantly. Successful managers find that success and happiness lie in absorption and mastery over a small area of life.

Ironically, the recent family splits in India have helped to create focus When dividing assets the wiser families placed business interest above family interest and split their assets strategically. Thus they have ended up creating focused businesses, and they will gain major rewards from this virtuous decision. The majority, though, divided their assets by placing family interests first; they split their assets in an illogical way with no synergy between the divided companies.

A short term approach with little investment in people or innovation

A second major failing of Indian business is its short term focus. Hence, it does not invest in its people, nor in its R&D. Its lack of attention to human capital is evident right at the start, in how it recruits new employees. I recall that when Procter & Gamble used to recruit its trainees at the campuses of the Indian Institute of Management, we competed mainly against the foreign companies (Citibank, Levers, Nestle) for the best graduates. There were few Indian companies Asian Paints was one of them, and they impressed us. Exactly the opposite situation prevails in Japan, where foreign firms find it difficult to get the best graduates from the top institutions, such as the University of Tokyo, because of fierce competition from Japanese companies and the prestige and rewards attached to working for a Japanese firm.

If the success of a firm is crucially based on the quality of its managers, why do Indian companies not recruit from the best and the brightest at the IIMs and IITs? The answer Indian industrialists give is that IIM and IIT graduates are not culturally suited for their businesses. If they are culturally unsuitable, the industrialists could have systematic recruitment programs for bringing in talent from lesser colleges and institutes. Mukesh Ambani has expressed his allergy against the "tie-wallah, golf-playing executive," but that does not absolved him of the responsibility of setting up an intake programme which attracts the top graduates of other colleges. The Indian business world is still largely feudal where the owner centralises decisions. Some owners treat their employees no better than servants. In fact, one industrialist, I recall, literally referred to his finance manager as a servant within the earshot of a foreign collaborator.

The weakness in recruiting is compounded by the lack of attention to training. A young person is hired and thrown into a department to learn what he can. International companies, on the other hand, prepare detailed training plans for their young managers and closely guide them for the first two years. They reward senior managers not only for the results they produce, but also for the on-job training that they impart to their subordinates and for the quality of their organisations.

Amiya Kumar Bagchi, director of Centre for Studies in Social Science, Calcutta, attributes this failing of lack of attention to human capital to the unequal and feudal social structure in our country. "As a result, the owners are arrogant and the managers are servile," he says. "In East Asia, the owner will happily sit down with an employee for a meal. It is this attitude which has helped them succeed, create universal education, and wipe out poverty. India, in contrast, is like the Philippines, which is the only failure in East Asia because it shares our feudal social structure."

It is fair to say that one of the biggest side-effects of the competition which the reforms have engendered is the mad scramble for talent in the past 5 years. Because of the need to raise productivity and quality in a competitive economy, successful Indian companies like Reliance, HCL and Infosys have created outstanding recruiting and training programmes. Infosys has gone further and created a stock option programme among a broad section of its employees. Asian Paints has been amply rewarded for its farsighted decision to recruit at IIMs since the 1970s with leadership of the paints market.

Eleven ways in which one business has been transformed by the reforms

There are still a number of sceptics, both in the private sector and the government, who believe that the reforms have only had a superficial impact. One businessman, Abhijit Sen of National Insulated Cable Co. (NICCO), catalogued eleven ways that his telephone cable business and his way of working have been transformed by the economic reforms.

"Without the reforms, our business would not have existed. Till 1986, the government did not permit the manufacture of telephone cable by the private sector. Even after that there still existed severe licensing obstacles, which meant that a bureaucrat had to approve what we produced, how much, where, and with what technology. These licensing restrictions went away in 1991, and we have increased our capacity five times already.

Second, we had to split our assets in any one unit to exceed Rs 100 crore, which would have made us a "monopoly" or MRTP company, and denied us the ability to expand. We merged the companies companies after 1991 with enormous savings in taxes.

Third, we used to have four full-time people in Delhi to do government liaison; now we have one part-time person because all our raw materials have been decontrolled. Before 1991, we had one person to kow-tow to the steel controller; a second to kow-tow to the aluminium controller, a third to kow-tow to the copper canalising agency, a fourth for the STC.

Fourth, we no longer need to get capital expansion approval from CCI. The merchant bankers get it done in less than half the time through SEBI. Fifth, I don't need JCIE approval for the import of raw materials. Sixth, nor do I need DBOD approval for loans above Rs 5 crore. Seventh, I don't need RBI permission to travel abroad; earlier it took a month to get foreign exchange. Eight, Modvat has been extended to our products, which has provided significant tax savings. Ninth, West Bengal has abolished octroi and that speeds up movement of our goods. Tenth, I can travel to most cities in India based on a last minute business decision without having to kow-tow Indian Airlines. Eleventh, my productivity is up to 35 per cent because of changed work attitudes. My 2,000 workers produce three times more cable than they did in 1991."

This is merely one example, but it illustrates the profound impact of the economic reforms on the way Indian managers run their businesses. All Indian companies acknowledge that they have been positively affected by both industrial and trade liberalisation. Industrial liberalisation has allowed them to expand existing businesses or start new businesses without the need for government approval.

As a consequence they have invested heavily in new capacity, in some cases in world-scale plants (because there was no bureaucrat to pre-judge if their scale was appropriate). In other cases they have used this opportunity to leapfrog in technology in order to enhance their competitiveness without the Directorate General of Technical Development telling them which technology was appropriate. Trade reform has made it possible to import raw materials and key components without a licence or without a bureaucrat pre-judging what they should import. Tariff reductions have reduced their costs and helped them to become more cost-competitive.

The freedom to choose between an Indian or foreign supplier has forced Indian suppliers either to improve their products to the standards of the imported one or to lower their costs in order to compete against cheaper imports. Some of the weaker suppliers, however, have lost significant market shares to import.n

(Next week: Case studies on successful Indian companies)