Visions Of Grandeur

Sometime back, in the early nineties, it had a grand vision. A vision to become a global trading giant, a multi-billion dollar corporation with operations spanning the globe. To become another Sumitomo or Itochu, the gigantic, hundred billion dollar Japanese sogo-soshas.

MMTC, earlier known as Mineral and Metals Trading Corporation, the Indian PSU trading giant, had conjured many big ideas. It would build steel plants and ports, create distribution networks in rural India to sell fertilisers and atta, provide value-added services to its customers...

It was a daring plan. The target a $3 billion turnover by 2000 AD.

The report card so far: After losing nearly 80 per cent of its business in the first two years, the trading company surged back, posting a turnover of Rs 5076 crore in 1995-96. And this year, turnover will again shrink by Rs 1146 crore. (Provisional figures made available by MMTC to

 

The Strategist. The profit graph is even wilder.

Roller-coaster rides couldn't have been more dizzying. And two conclusions emerge from it. One, quite obviously, there is every manner of experimentation afoot at MMTC to seek more businesses. Two, the company has faltered in trying to change too quickly, trying to do far too many things at the same time.

And if one was to identify an over-riding factor that has proved to be MMTC's undoing so far, it is the trading giant's inability to put adequate systems and resources in place before expanding the scope of its operations.

Initial attempts to get an interview with the company failed. But just as the story was going to print (after we spoke to a number of MMTC officials and ex-employees), we got a call from the company. The following morning, the chairman & managing director, S N Malik, along with another director, spent over two hours answering our queries about MMTC's operations.

Subsequently, The Strategist has attempted to put together this story a story of the ambitions and travails of a quasi-government company trying to break into the hurly-burly world of global trading operations.

Seeds of trouble

To understand MMTC's present, let's delve a bit into its past.

Uptil 1990, MMTC was the official canalising agency of the country. This meant that almost every single import and export of minerals, metals and fertilisers was done by this corporation.

It was a business worth several thousand crores of rupees. And it was easy business. The government would tell MMTC what to buy and when to buy. MMTC would raise the tenders, draw up a contract with the chosen party, and collect its service charge.

A simple, uncomplicated operation where business volumes and profit margins were assured. But then things started to change.

1991:Government decanalised steel. This meant other companies could also trade in that commodity. Potential loss of business for MMTC: Rs 500 crore approx.

Early 1992: DAP and MOP was also decanalised. Potential loss of business: Rs 1200 crore approx.

Mid 1992: Non-ferrous metals taken off the list too. Potential loss to MMTC: Rs 800 crore approx.

The net impact: MMTC's turnover plummeted by more than 150 per cent in just three years, to Rs 3217.3 crore in 1993-94. Says an ex-MMTC employee who is now with a private trading company, "Those were the shock years. We did not know what to do, where to go. Suddenly we were left to fend for ourselves."

And in that period of turmoil, evolved a plan to "go for broke", as another trader put it. At MMTC, nobody fails to point out the enormity of the task. "We lost 80 per cent of our turnover overnight. We had to rethink our business completely," is how people at the corporate headquarters reassure each other.

The corporate transformation

The plan sought to change, fundamentally, the nature of its business operations. To transform MMTC into something more than a contracting agency. From now on, it would make money by doing value-addition activities.

There are two kinds of trading activities. One is the simple buying and selling operation which has razor-thin margins. To make money in this game, the volume of business should be very large. On a global scale, MMTC's did not have that quantum of business. More so after decanalisation.

And as a senior official who was part of strategy-creation sessions explains, the organisation lacked the skills. "In a buying-selling operation, the trader has to know every little thing about the market to be able to take profitable decisions of when and how much to buy. At that stage, we did not have that capability."

The other kind of trading activity is about improving margins per transaction. So the trading company works closely with its buyers and suppliers, participates in the intermediate stages of the transaction shipping, handling, distribution, and at times, in value-addition processes. Adding up the half per cents, the trader can tote up a substantial figure. So while a simple buying-selling operation would net around 1-1.5 per cent, value-added trading could push up margins to as much as 5-7 per cent.

MMTC plumped for this business model. It formed joint ventures in acquaculture and aqua marine products, soya meal, leather, and steel. It ramped up volumes in the lucrative jewellery business, started offering services like shipping and warehousing in its traditional bulk imports/exports business.

The strategy made sense but it came undone at the implementation stage for the reasons outlined below.

"Jumped the gun": In the last five years, everything for MMTC has happened a bit too quickly. It lost business at an amazingly fast rate, and then tried to get back into the game at an even quicker rate.

Domestic trade, third country trade, barter trade, joint ventures in aquaculture, horticulture, processed food, textiles, steel, leather MMTC wanted everything on its plate. Shouldn't the company have chosen a few of them first, consolidated, then moved on? S N Malik does not agree. "Sure, someone could say that. But when your turnover is shrinking at a rapid rate, you have to experiment. What will you export otherwise?", he counters.

And once speed became paramount, choosing new businesses could not be an elaborate exercise. Often, fundamentals were ignored. One of the initiatives was setting up a joint venture to export premium clothing. The plan: complete vertical integration to maintain product quality. So, even knitting factories were envisaged even though this sector was facing a surplus capacity. The enthusiasm was short-lived when financial institutions refused to back the project.

But this was not so with the leather exports project, which the company abandoned after a year, when it was clear that it lacked the expertise to run that business profitably. MMTC had jumped into it because the government had identified leather a thrust sector for exports.

And as the PSU went into an overdrive, things began to go terribly wrong.

"Skill-requirement mismatch": With a rapidly expanding business portfolio, a very significant shift was taking place in the working of the company. Simpler, fewer transactions were replaced by complex, multiple business transactions. In the canalisation days at MMTC, the number of business deals were few. Now, with more businesses on the plate, transaction throughput shot up.

"What should be the costs? What amount of credit should be given? How should the accounting be done? Now, our people had to handle a lot of small transactions, and all this was new to them," explains S N Malik.

Initially, the lack of systems wreaked havoc on the company's finances. It took a year and a half to work out the profits of the company. Gradually, monitoring systems were set up. The entire business was divided into different profit centres, managers were appointed to file, daily, reports on inventory, cargo movement, field visits etc.

But one critical problem remained. While the new business paradigm required new skills, the kind of pay packages the PSU could offer, no one was willing to touch the company with a barge pole. Price Waterhouse was asked to find profit centre heads for new businesses. But prospective general managers demanded pay packets upwards of rupees three lakhs.

Trying to make do with existing skills has ensured that success eluded new initiatives. In the soya business the company made losses in the first year of operation. Business suffered because MMTC could exercise little quality control at private factories where soya was processed. Now MMTC has taken a factory on wet lease and posted eight of its officers to oversee operations.

But did they have the requisite expertise? A middle-level official who was working in the urea division points out ruefully, "One fine morning, I was transferred to Ahmedabad to handle work at the Kandla port. But I had absolutely no idea how to handle this new job. Overseeing loading and unloading operations requires a proper inspection team, and understanding the whole process can take almost two months."

Conflicting pulls: "The message from the top management seemed to be `Burn your fingers and learn'," says an official in the gold division. In the early 90s, credit limits to jewellers was increased substantially to pump up trading volumes in gold. But then, some jewellers started defaulting on payments or failed to export processed gold. "We never understood the implications of the changed policy," adds the same official.

Not only did the company stand to lose a substantial amount of money lent to these jewellers, failure to re-export gold attracted heavy penalty from customs authority. Naturally, such laisse-faire operations affected profitability of operations. In 1995-96, trading profits crashed by Rs 22 crore. The cost graph has continued to move north. For instance, administrative and establishment expenses have risen from 0.86 per cent of the turnover in 1985-86 to 1.47 per cent in 1995-96.

These cost pressures led to measures to improve the "quality of transactions, stricter measures to recover loans from defaulting parties, vigilance enquiries against erring officials. Though the figures are improving, trading profit is up by nearly 33 per cent, sundry debtors figures improved, the working environment at MMTC has become vitiated.

One ominous pointer the rapid rise of "scoops" damaging news stories about MMTC's operations attributed to 'senior MMTC officials.' In a startling admission, the chairman and managing director of the organisation says, "There is a disgruntled section of officials who have resisted changes, and leaked selective information to the press."

As a result, petty quarrels have broken out. One manager petitioned that he should be chosen for a foreign posting over his colleague because as an engineer he was better qualified. Another, who was denied a promotion, alleged that he was being victimised by one of the directors.

So will MMTC be able to cast aside its troubled and turbulent past. S K Nayyar, business development manager at a Fortune 500 trading company has an unsettling observation to make: "For a trading organisation, its only asset is its people. If you have a problem there, you have big trouble." Especially, since the more fundamental problem of human management re-skilling remaining unaddressed.

And with new business initiatives popping up at a steady rate, the turbulence in the system is increasing.