India: No Gains without Growing PainsPublished: January 22, 2004 in Knowledge@Wharton
But as India rockets ahead in the information age, what are the implications for those whom technology has yet to touch? What techniques can the country’s businesses use to sustain their phenomenal growth? The eighth annual Wharton India Economic Forum explored these and other topics during a daylong conference. With “India: Investment for the Future” as its theme, participants lauded the achievements of the nation to date and offered advice to the next generation of business leaders.
Access for Everyone
Sam Pitroda, chairman of WorldTel and often called "the father of Indian telecom," opened the day’s sessions with a thought-provoking keynote speech describing his experiences with the opening up of an often bureaucratic country. “India, as I see it, is a land of contrasts,” Pitroda said. “It’s a place where people have learned to live and be very comfortable in chaos.”
Pitroda described his upbringing in a Gujarati family in the Indian state of Orissa, his subsequent education at Chicago’s Illinois Institute of Technology, and his entrance into the then-nascent world of digital communications. At the age of 31, Pitroda left his job to found a business with two friends. After growing it to a $100 million company and selling it to Rockwell International, he went to India during the 1980s and decided to try his hand at fixing the country’s telecommunications infrastructure. “My idea was to connect the country using Indian talent,” he recalled, “developing it from ground zero. I was convinced it would bring about democratization and social transformation, that telecom could change the culture and work habits.”
Working with Indira Gandhi - who was then India's prime minister - and later her son Rajiv Gandhi, who became prime minister after her assassination in 1984, Pitroda set up and chaired India’s telecom commission. “I saw technology as an entry point, to get people to work together to address national issues,” he said. “We focused on accessibility as opposed to telephone density. We established 700,000 PCOs (public call offices) using rural exchanges that worked without air conditioning. After all, they had to work in spite of lizards, water buffaloes, etc. We learned a lot about development, deregulation, and privatization.”
The story of Indian corporate growth is still being written, Pitroda noted. “There are great business success stories, especially in telecom, pharmaceuticals, and business process outsourcing. Indian business will transform the country in many ways. But there are challenges ahead.”
Pitroda exhorted the audience to think bigger: “In the 1980s, I saw information technology as a great social leveler. Today, the world over, Indian IT talent is recognized and accepted, even expected. But until we create a global, national agenda that’s in tune with a free market economy, it’s difficult to build a modern nation. We need massive administrative reforms. We have the politics of the 1940s still, in India. It sometimes takes 15 years to get a court case settled. Processes are obsolete. Everything the British Raj left is intact. We have perfected it, and now we’re trying to computerize it.”
The division of power between the central government and the states also has to be resolved, he noted. “The whole equation is complex; we still have a hierarchical, feudal mindset. Very little happens in terms of development on the district level, but the district has to be the focal point for development for revenue collection, spending, and management.”
Pitroda also cautioned the audience not to throw the baby away with the bathwater: “Don’t overestimate the role of privatization and business in building society; government intervention is still important in all societies,” he said.
Making It … and How
Not all strategies apply to all companies. In a panel titled “Indian Corporate Success Strategies,” leaders from various companies shared their advice for doing better-than-well. Ajay Piramal, chairman of the industrial group Nicholas Piramal India, described how he made the decision to change fields at an opportune time. “Our family business was textiles,” explained Piramal. “Then textiles suffered a major setback, with striking workers, and my father and brother passed away. So the first change we made was to enter the pharmaceutical industries, by acquiring Nicholas Laboratories from Sara Lee in 1998. There was no strategic reason to do it; there were no similarities between textiles and pharma. In spite of that, there was a fit. I felt that this was a sunrise industry because of the way the MNCs ran their companies in India. It was undermanaged and underperforming.”
Piramal saw a chance to turn it around and create value. “At the time, Nicholas was lagging behind in the industry. In such an environment, where you have neither the brands nor technology to compete, what do you do? You invest and grow. So we invested in new capacity and new products. We acquired more MNCs that were underperforming in India and therefore were insignificant for their home base.”
Nicholas Piramal’s joint ventures and alliances included world leaders such as Boots, Hoffmann-La Roche and Aventis. “We had to do something different to catch up with the leaders. Each subsequent acquisition had a strategic reason – to get access to new products, for instance, or get entry into a fast-growing market. In 15 years, we have had compounded annual growth of 31% in sales, year over year. When we started we were 48th in the field; now we’re number 4, and we are number 2 in branded formulations.”
Piramal says the focus on value has paid off. “We’ve built trust with each stakeholder – partners, prospective sellers, employees. We’ve kept looking out for opportunities to make our own destiny.”
Kalpathi Suresh, CEO of SSI, a global provider of consulting and software services, told a similar tale of growth by acquisition. “We started in Chennai with one IT training center,” he said. With significant foreign equity investment, the firm grew its revenues and expanded market share. We kept our balance as the industry soared in the 1990s and crashed in 2000. The software services business was relatively unfettered by government bureaucracy, so we could formulate strategy in response to market needs.”
M&A (mergers and acquisitions) was the strategy of choice, he noted. “We started in 1991 as an IT training company with a focus on emerging technology. Ten years later, we were the third largest IT training firm in India. We were late entrants to the software development business. Since we had 10 years of positive cash flow from the education business, and had appreciation from U.S. companies, we looked for inorganic ways to grow.”
Starting with Indigo, a Delaware-based company, and then Albion Orion, SSI made forays into several new verticals and gained access to government clients in the U.S. “M&A has been instrumental in growing both our training and software services businesses. Each of our acquisitions was seen as a true-blue local,” said Suresh. “Numbers don’t begin to capture the wealth of our learning in the past few years as we journeyed from start-up to global services provider.”
One company that didn’t go the merger route is MRF, India’s largest tire manufacturer. In fact, K.M. Mammen, its chairman and CEO, focused on competing on cost, quality, and even brand. “My father had a toy balloon factory. We also made other products, like industrial gloves and contraceptives. We then went into the tread rubber business, taking on the likes of Firestone and Dunlop.”
When MRF began making tires during the 1960s, said Mammen, Dunlop dominated the industry with more than 50% market share. After a tremendous struggle, MRF emerged in 1987 as the leader and has held that position to date. “From the beginning my father ensured that capital investments were made at the lowest possible cost. This meant that we worked with ingenious engineers to create ways to fabricate machinery cheaply without affecting the product. That’s what allowed us to compete effectively.”
That principle still holds today, said Mammen. “We have in-house machinery manufacturers, so we can produce at half the cost of U.S. manufacturers.”
While interest rates today are more favorable, borrowing money wasn’t much of an option for MRF earlier, said Mammen. “MRF’s policy is to fund growth through internal accruals. Debt was expensive in India; borrowing is okay if you’re assured of a steady cash flow, but many large business groups faltered because they borrowed heavily at high rates. MRF is virtually a debt-free company today.”
Mammen also noted that staying independent has other advantages. “Big players won’t share their hard-earned knowledge and technology with you unless they have a major stake in your company,” he said. “So we have an intensive in-house R&D program, and use consultants whenever possible. We’re the only Indian company supplying to Ford, General Motors, and Honda in India. Some 30% percent of our production is exported to more than 60 countries. Our emphasis on exports exposed us to international tire trends and allowed us to benchmark with global players. It made us quality-conscious and market-savvy.”
MRF now uses sports as a branding tool, he noted. “We brought branding to an unglamorous industry, holding the MRF world series in cricket. We also sponsor motor sports. We feel that such events act as brand ambassadors.”
Beyond the Back Office
Perhaps the most storied success in India these days is in IT-enabled services, where India has emerged as a leader. No longer just a source of cheap code, the country’s service providers are rapidly moving into more complex operations at a fast clip.
Akshaya Bhargava, managing director and CEO of Progeon, took a broad look at the future of the industry. “We have taken a view of the future in our company which drives our investments and helps us say yes or no to certain customers. The future lies in the knowledge-intensive processes. When you go to a customer, the biggest challenge is dealing with the perception of risk. It’s not price, technology, or attrition of people – it’s whether the customer feels comfortable. So you have to come through with deep credibility.”
Bhargava noted that captive centers -- in which companies set up their own outsourcing operations in other countries -- have two flaws compared to third-party providers. The first is that a company outsourcing work to a captive center has little incentive to keep costs low as long as they are lower than the costs of doing similar work in the West. In contrast, a third-party BPO services provider, which must offer services at competitive prices relative to other BPO providers, is more likely to be disciplined about keeping costs low. As such, Bhargava claimed that captive centers cannot lower costs as much as third-party providers can, despite the fact that the third-party provider's prices include a profit margin.
The second flaw, according to Bhargava, is that companies that set up captive centers will continue to view them as back-office units. "It reports to the regional or global back office," he said. "For a third-party provider, however, such work is front-office. It has a different mindset. You don’t manage them the same way.”
One concern in the U.S. has been the moving of what some see as too many jobs overseas. But Sulaksh Dixit, marketing manager for AP-FIRST, an agency set up by the Indian state government of Andhra Pradesh, noted that a recent study had shown that for every dollar outsourced to India, the U.S. actually gained more than a dollar in value.
How will all these issues play out, especially given the recent news that Dell Computer has chosen to move some of its call center operations from India back to the U.S., citing customer dissatisfaction? Is it a harbinger of things to come, or will it merely accelerate the move toward outsourcing of higher-value, non-customer-facing operations offshore? Next year’s conference might have some early answers.