As the Auto Industry Shifts Gears, KPIT Cummins Finds Room for GrowthPublished: October 08, 2009 in India Knowledge@Wharton
Global auto markets are shifting gears towards smaller, more fuel-efficient cars. Vehicles are also becoming smarter, with increasing use of electronic systems. Trends such as these are driving rapid growth for KPIT Cummins, which develops embedded software for automobile manufacturers and provides IT services aimed at streamlining operations. Headquartered in Pune, some 100 miles from Mumbai, the company had US$174 million in revenues in 2009, a growth of 20% over the previous year. Its 4,800 employees operate in 10 countries, including the U.S., Japan, Poland and France.
KPIT Cummins, launched in 1990, evolved out of an accounting and tax advisory business; the company went public in 1999. Ravi Pandit, chairman and group CEO, and Kishor Patil, CEO and managing director, spoke with India Knowledge@Wharton about the changing auto landscape and the opportunities, risks and challenges it presents.
An edited transcript of both conversations appears below.
Knowledge@Wharton: It is unusual for a company that has been in the accounting and tax advice business to morph into an IT firm, let alone one that focuses on the auto industry. How did this happen?
Ravi Pandit: Restlessness is the key characteristic of certain people, and I happen to be one of them. But in a sense, it is also very logical. As an accounting company, you tend to deal with a lot of information [that you] analyze [and] try to make sense of. Graduating from an accounting company to an information technology company, especially on the business IT side, is a kind of a natural progression. As you go along, you look at everything that you can do to do a good job for a client to deliver value. That is how [our] progress has been.
We have been an accounting company but today we are [also] essentially a company focused on the manufacturing industry's information technology needs. There are two parts to it. Unlike many Indian IT companies, we are a vertically focused company. Something like 95% of our revenue comes from large, discrete manufacturing companies -- companies that manufacture, say, automotive, farm or other industrial equipment and companies that manufacture chips for them. That has something to do with [being based] in Pune, because the city is strong in manufacturing. It also has to do with our relationship with Cummins, which is our partner. The second reason [for our focus] is a belief that manufacturing has an important role to play and it is going to be a major industry, especially in this part of the world.
Knowledge@Wharton: I am glad you brought up manufacturing because the perception outside India -- and maybe to some extent within it -- has been that the division of labor in Asia seems to be China for manufacturing and India for services. What you are saying suggests that it is not a watertight division.
Pandit: Within manufacturing, India still has a large role to play. We are maybe a bit disadvantaged when it comes to infrastructure, but we have an advantage when it comes to intelligent manufacturing, innovation in manufacturing, or short-cycle-time manufacturing. [Also, as for KPIT] we do not look at ourselves as an Indian company based in India and working for Indian clients, because something like 95% of our revenue comes from outside India.
Knowledge@Wharton: Could you give some examples of the work you do for companies internationally involving intelligent manufacturing and how that is changing?
Pandit: The work we do fits broadly into two buckets. First, we help our clients design better products. This is embedded software or value engineering for mechanical or chip design so that the products our customers make are more "intelligent." For instance, we have been working with automotive companies to make better or more efficient safety systems, body electronics and more fuel-efficient cars.
The second part of our work helps customers work more efficiently. That is the business IT and processing part. How can we help them shorten supply chains, manage their businesses more efficiently by having better information about cost structures and things like that.
We work with most of the OEMs to help them embed software into their products. What has been happening so far is that a lot more electronics have been going in cars -- whether it is your safety system or body or any of these areas -- and the thrust until recently has been making electronics provide a richer or better experience. It's not about worrying about the cost, but how to put in more electronics.
Now we see a change [as customers ask] how can they have the same functionality for reasonably high-end cars go into low-end cars. That is a new challenge. In the current environment, you need on the one hand more electronics in cars for more efficient fuel usage, and on other, you need electronics in [the growing number of] low-end cars. The issue is to come up with light electronics, light software, that provide basic comfort at a low cost. If you can give 80% of the functionality at 40% or 50% of the cost, it is a great deal.
Knowledge@Wharton: You talked about working with OEMs. What about the Detroit Three, as they are now called?
Pandit: We work with one of them in Detroit, we are beginning to work with a second one in Detroit, and we worked with the third one in Europe. We work with most of the American companies, and quite a few German, Korean and Japanese companies.
Knowledge@Wharton: Focusing on U.S. companies, it is not secret that they are in big trouble. How has this affected the work you do for them and their suppliers?
Pandit: The work we do is the kind of stuff they need to do, irrespective of whether they are Chrysler in the current form, become Fiat Chrysler or whatever.... We will continue to work with them. We may not get paid for some of the work immediately but the nature of the work being what it is means we will continue to work with them.
Knowledge@Wharton: Do you see similar issues with car companies in other parts of the world?
Pandit: Different companies have different degrees of problems. If you looked at how auto companies have been hit in the past year, you will find the likes of VW being the least hit because of [lower end models like] Skoda and not just Audi. Maybe other companies, like Mercedes and BMW, were hit a little more because they only have certain types of cars. But you see Suzuki and Hyundai doing quite well. There is an intrinsic shift in the industry, a change in demand from SUVs to smaller, more fuel-efficient cars. These are extremely interesting times.
Knowledge@Wharton: In what direction is the industry going?
Pandit: Some very broad statistics: In the U.S., for every 1,000 people, there are 480 cars. In China, for every 1,000 people, there are 80 cars. In India, it is 8.5 cars [per 1,000 people]. Indians need personal transportation as much as anybody else does.
You see a shift.It might mean the design happens in one place and production in different places globally. And the nature of the cars will change. They will be smaller and far more fuel-efficient. You will probably see more electric and hybrid cars or better diesel cars than the current ones, because the diesel internal combustion engine has not really lost its life yet.We see changes with global, more integrated manufacturing, shorter product cycles and therefore better use of information technology.
Knowledge@Wharton: But as the saying goes, "When times are interesting, sometimes they bring risks as well as opportunities." What are the risks that you see in these times?
Pandit: The risk is in changing an old industry structure. The companies that have been set in their ways are definitely going to have problems. Why should it take the big U.S. automakers so long to move to an electric car when some scrappy companies can do [them] very quickly? Or why is it that a Tier One has to come up with a proposal to a Big Three saying, "We will do the electric car for you. You can do the rest of the shell"? Why is it that a small entrepreneur can say, "For US$2,500, I will convert your internal combustion car into an electric car"? If you are not moving fast, there are risks. But for everybody else, it is fantastic opportunity.
Knowledge@Wharton: Do you think the Tesla Roadster, Tesla Motor's electric car, is viable?
Pandit: Tesla is a car you could fall in love with.... The cost will come down and there will be a niche for it. But there will be a lot of other electric cars. There will be a completely different urban electric infrastructure. We are looking at a lot of things changing in the mobility industry and not all of it will be public transport.
Knowledge@Wharton: How do you compare what Elon Musk is doing with the Tesla with what Shai Agassi is doing with Better Place? From the perspective of KPIT, where do you see opportunities?
Pandit: Better Place is a lot about the infrastructure for electric vehicles. There is going to be a lot of investment in that area, not just in the physical parts. For example, when you charge up your car, how commercial transactions can happen quickly, how you use gas stations to [refuel] or how you use a car not only just as a consumer but as a producer of electricity. There is a lot of room to play.
On the other hand, with something like the Tesla, there might be more emphasis on recharging a battery at home or having a more powerful battery to give you a longer run [between refueling]. A range of solutions will come in. The role we can play is in battery management because there is a lot of electronics in it. We have some patents in that area and we see more work being done there.
The other area of electronics in a car will remain unchanged. You will still need the "infotainment" system and a lot of safety features. There is lot of work there. Our strength in electronics is in making sure each part of the car's electronics "talk" to each other seamlessly.
Knowledge@Wharton: What were some of the biggest leadership or entrepreneurial challenges you faced in taking KPIT to where it is today and how did you overcome them?
Pandit: We went public in 1999. The Indian stock market was just recovering from the Harshad Mehta [stock market] scam and the market was down. We were uncertain as to how things would pan out and corporate governance was a major issue. That is what we put on the table, and our issue was oversubscribed almost 50 times. It was a major success and we were gung ho about the future.
At that time, one of our clients was a bank called NatWest and we used to work with them in Greece. It was almost 40% of our revenue and maybe 120% of our profit.As luck would have it, within a quarter of the public issue, that bank was sold to another bank, which did not need the type of services we were doing and they packed us off in 30 days. The stock market had barely given us this resounding response and within a quarter we were telling them that we were going to have a loss. It was a terrible time but luckily our team stuck together. We had a loss in one quarter, but in the next quarter we were profitable and grew quite well. But this was under the glare of investors wondering, "Are you one of those guys who tell us one thing until the money is collected, then suddenly have a different story?"
Knowledge@Wharton: How did you go back to being profitable in just one quarter? What did you learn from that experience that might benefit other entrepreneurs?
Pandit: We were on a growth path [but] we had to work on our costs quickly. We had to keep on pushing the pedal on growth. Not that we became hugely profitable the next quarter. It was good teamwork.
The most important thing to remember is that world is full of uncertainties. Sometimes things will happen to you and people will be more suspicious than sympathetic. But you have to take it in your stride and have faith in yourself and your team. A new enterprise is like a child, inherently susceptible to every change. It is a miracle that it survives, and that miracle needs a lot of work from a lot of people.
Knowledge@Wharton: That is true. What is your vision for KPIT?
Pandit: We want to be sharply focused on the manufacturing segments of the [auto] industry. We want to be a company that helps our clients grow rapidly and in an environmentally sustainable way. We want to be leaders in doing that. Many people in the world are going to need many more material things than they have today and that is the basic seed for growth. We do not want it to be a senseless growth at the cost of lives. Growth has to be sustainable -- environmentally sustainable especially. That is our vision.
Knowledge@Wharton: One thing that strikes me as somewhat paradoxical is that the future is going to be smaller, maybe less expensive cars, and there will be many more of them. How is that environmental challenge going to be met even if the cars themselves are more fuel-efficient?
Pandit: One can and will come up with a zero-emission car. Most cars will be recycled. It is not that I buy a ton of metal; it is that I rent a ton of metal for a period of 10 years, and then it transforms itself into another car. I do not think there is a problem with availability of energy. Even with our profligate use of energy, the energy that mankind consumes in a year is supplied by the sun in a day. The issue is how to capture it and use it well.... We can all have personalized transport used in the right occasion and in such a way that we do not become an environmental burden.
Knowledge@Wharton: Will electric hybrids be the way to go?
Pandit: Yes. The issue is how to get that electricity. If you get it out of coal-fired plants, you are back to square one. But there are enough technologies generating energy from renewable resources. It is just that because we never put a [price] on spoiling the environment before, we never looked at those solutions.
Knowledge@Wharton: You have reminded me of another issue that seems to be an obstacle to realizing the vision that you talk about -- the standards for the batteries for electric cars. I have often heard that the people who will really benefit most from the change to electric cars are not so much the carmakers but the people who make the batteries that can switch between cars. The analogy perhaps is the way Microsoft benefited from the emergence of [personal computers]. Do you have any thoughts on that issue?
Pandit: If more energy-efficient batteries can be made and the battery makers benefit, so be it. But work has to be done to make batteries efficient and it is not only the battery maker's job to do that. For example, electronic companies have a lot to do because how you manage your batteries or create data of battery usage so people can use batteries more efficiently. All those issues will come into play. There are very interesting opportunities.
Knowledge@Wharton: How do you define success?
Pandit: I want to read you something because that is a question I keep asking myself and I often use a quote from Emerson.Fifteen years ago, I was traveling on the subway in New York and I saw a big quote in a New York Times that someone had left behind, which I cut out and have here with me now.
Knowledge@Wharton: Willyou read it for us?
Pandit: "To laugh often and much; to win the respect of intelligent people and the affection of children; to earn the appreciation of honest critics and endure the betrayal of false friends; to appreciate beauty, to find the best in others" -- and this is very important -- "to leave the world a bit better, whether by a healthy child, a garden patch, or a redeemed social condition; to know even one life has breathed easier because you lived. This is to have succeeded."
Part Two: Conversation with Kishor Patil
Knowledge@Wharton: How did a company that started in the accounting and tax advice business end up in IT, and such specialized IT that focuses on the automotive business?
Kishor Patil: When we started as a accounting firm, we had two key values: making customer relationships long term -- or customers for life -- and being leaders in the area in which we operated. When we started -- as normal middle-class people -- we said first we need to be the best or the biggest in Pune. Good or bad, that happened in three or four years. So we thought we should do something different.
Then we asked, "How can we be one of the bigger ones internationally?" We started looking at what other companies were doing. At that time, there were 10 big accounting companies in India. We thought we had to look at being a specialized company. I took some time off. I came up with this area. Accenture and all those have come out of accounting backgrounds. We thought we should do that.
Knowledge@Wharton: What was the initial customer base like?
Patil: The customers were not very big [and] they were quite local. They were transport companies, textile mills, those kinds of companies. We also did a lot of work for Tata Group because I had been an auditor there. Our work was largely related to our core domain, which was accounting, MIS and business intelligence.
After a while, we realized there was a big opportunity, and it could not be a service that we were offering to our existing customers. It had to be a business in its own right.... [and] it had to be a global business. We also thought we should do products. But if we did products, engineering products may be better than other types.... We sold it in India. We sold it abroad.
Then we realized a lot of money would be needed for marketing, so we decided to be in the global services market because that is a proven market. Then we started opening offices. I had never traveled abroad before that, but that is how we started building our presence globally. It was an absolutely exciting experience because we were hiring local people, trying to understand the culture, people and customers.
Knowledge@Wharton: What mistakes did you make as you developed this strategy and what did you learn from them?
Patil: Let me tell you some of the good things we did, and then I will tell you some of the bad things we did. When we did our initial public offering, most companies thought you got money to build a good campus and the customer would come to you. Many companies -- even smaller companies than us -- had big campuses. When we went public, we thought we should invest in the market [rather than in a campus]. We burned more than 80% of the money we raised in establishing a sales and marketing network. At our size, it was a big move. But we were very entrepreneurial. We thought that if we built a market [and] a customer base, we would have enough business to build a campus.
The second [good] thing we did was to establish a strategy that we believed would probably be good for us, and we went after it.
Knowledge@Wharton: Can you explain the strategy and how you formulated it?
Patil: We always thought that the customer is our biggest asset, so we involved customers in our strategy. We [looked at this from several] views: what our customers wanted in the future, what they think the opportunities are and what could be an opportunity for a company like us.Then we looked at our internal strengths.
Knowledge@Wharton: Can you give me some examples?
Patil: A lot of products are becoming intelligent -- for example, cars that have a lot of electronics and software. That would be an opportunity.... And if you looked at TCS, Infosys, Wipro or any of the bigger companies, their growth has been based around one anchor customer, such as GE or Citibank. We needed one anchor customer, and that is how we got Cummins.
Knowledge@Wharton: How did the deal with Cummins come about?
Patil: First came our strategy, then we found them. When we [looked at] which of our customers could become anchor customers, we identified five and [then we wanted to narrow that short list down to] one that we could strike a deal with. Cummins was based in the same city and some of our people knew some of its people. We began helping them by leveraging what we had built in terms of quality systems, etc., and we got involved in their strategy sessions.
We did a formal strategy exercise and said we want to get from US$10 million [of annual revenue] to US$100 million in five years. I am proud to say that not only did we do it in five years, but we did it in the way we said we would. The second is that we have learned quite a bit. We are a customer-centric organization and we listen to our customers carefully. That has been our strength....
The mistakes were made initially. We built the business from the ground up but instead we could have inducted more people from the industry [early on]. For about eight years, we learned everything the hard way and I think it wasn't until 1997 that we hired a really seasoned person from the industry.
Knowledge@Wharton: Was there a reason why you did not do it sooner?
Patil: I do not think that was a big issue [that we needed to focus on at the time]. We are the only company of our size to have done six acquisitions in some difficult cultures, like France and Germany and we deal with Japanese and Korean customers. We deal with a lot more than any other company of our size. We are comfortable in different cultures. Out of six acquisitions, four were strategically successful. [Hiring industry expertise in our early days] was not what we needed to fear. I do not know the reason I could give [for not doing it sooner], but I think we were late.
The second mistake we made was we did not invest where the market was at first. In one way, it helped us because we invested in Europe when everybody else was investing in the U.S. But we could have invested in the U.S. earlier.
Knowledge@Wharton: What challenges did you face in the acquisitions?
Patil: We only do acquisitions that help us to further our strategy. We have never done an acquisition just to add numbers. And we look at the people. An acquisition will only be as successful as the people we get. Our most successful acquisition did not give us revenue, but all the people we got were exceptional. We could leverage them for much bigger business.
Another thing is how we understand value creation. You cannot negotiate to a level where one of the parties fails. It has to be a win-win. In my second acquisition, we offered a price and somebody [at the target company was offered] double that amount by a competitor. I asked him, "Do you want to be a part of this organization, which will grow the business?" He said, "Of course. I am not retiring. I want to be a part of this. I want to be a part of the bigger game." I asked him, "Are you going to divest the shares?" He said no. I told him, "Then you shouldn't think about the price that you are getting today, but the business you will build over the next three to five years, and you have to make a decision about where will you build the value and with whom." He went with us.
The good part was that after three years, he made four times the money we gave him because of the stock price and the value we built, and we paid half of what the competition would have paid. I am happy to say that in all our acquisitions, the people who have sold to us have made money and we have not had to pay premium prices. If we pay exceptionally high, the value is going to come down.
Knowledge@Wharton: Research shows that quite a few acquisitions destroy value. What's your secret?
Patil: We are a very customer-centric organization. If you look at the six acquisitions, only two came through an investment bank. We spotted the other four ourselves.
Knowledge@Wharton: How do you spot the target?
Patil: I do this by thinking: This is my strategy, this is where I want to be. Now, what can take me there? Can I build it brick by brick? Is something already there that is affordable or is there something in between that I can acquire and build on? I do this analysis and then build a relationship.
The second most important part is whether you can work together. Most of this organization is based on relationships built before an acquisition over several years -- not after but before we acquired.
Knowledge@Wharton: What is your strategy for the future?
Patil: We want to be best in class in the areas we operate. We know that we cannot compete with some of the big firms on scale, but we can on quality. It is also a factor of time. Look at history. Out of the top ten companies in the world at the beginning of 19th century, only GE existed at the end of that century. Things change. Either you make a smart move or somebody else makes a mistake. So we would like to build a company based on leadership, high quality and good people.
In engineering, we believe the automotive world is going to change more, and it is going to be a bigger game. We are considered to be leaders worldwide in that area so we have a big chance to capture that opportunity, [replicating] some things we did well in the past [while doing other things we should have or could have] done in the past but didn't.
We have learned the importance of strong customer relationships and we would like to build on that.... We have also been good at developing new markets, like when we decided that automotive is the area we wanted to be in. We did not have an office in Detroit, so we built one. We built an office in Munich, in Korea, in Tokyo. We have started in China.
Without size, you can compete with quality and knowledge. So we are focusing on [intellectual property]-led services and a knowledge-based approach. But the automotive industry is changing fast, and the markets -- especially the emerging markets -- are changing, and now bigger is not better. Bigger cars are not necessarily better; the story is smaller cars.
Knowledge@Wharton: How do you see the future of the auto industry and how are you using that understanding to shape your strategy?
Patil: Small cars, emerging markets, electric vehicles and "infotainment" that is becoming more standardized around the world are areas we would like to capture.
We are in a much better position [than our competitors] because we are a part of the revenue equation of the customer, not the cost equation. We are building products for them; we are not necessarily reducing their costs. So we may have a better opportunity to change what a business wants. And as we build knowledge-based and IP-led services, we can find something better for ourselves than we had in the past.
Knowledge@Wharton: What do you think about the situation in the U.S. and the opportunities in that market?
Patil: The [U.S. auto companies] were largely mechanical. As the industry started to become electronics-based, they did not know what to do, so they outsourced to Tier One or other companies like us.Americans only knew how to build big cars. There was a competency gap. Another thing was the market. America was the biggest market; it is not now. They need to understand how to operate in Europe and in emerging markets. We have worked with all the leaders in other markets, so they can get value by working with us not by building their own captives or working locally. We have tremendous value to offer and they do not have time to build it incrementally because they are already late.
Knowledge@Wharton: You have expressed insightful ideas about your opportunities. Can you discuss the risks and how you manage them?
Patil: India is in a unique position. But China also has a lot of strengths, as do some of the other emerging markets. These are markets in which people are not as experienced as in the West. How we operate successfully in these markets is going to be critical and how quickly we learn that is going to be important.
The technological shift is [also important]. New leaders can emerge. They can emerge in Pune, China or some other country. How do we capture that quickly, work with them and be closer to them? Geography, the customer and technology -- all three things are changing ... and are all uncertainties.
Knowledge@Wharton: Are you studying any models?
Patil: Not all customers will be successful, but there are some who will always be successful globally. We believe we work with some of the best companies in the world. We can work with them anywhere we go and we can learn from them.
We are a more entrepreneurial company than most others. We find what the model is to get into countries where the gains are different than just scale and infrastructure. In many ways, Asia is a big play and from that perspective, we have been comfortable working there. We have worked in Japan, Korea and India, and we have been exploring China for the last few years. We should be in a position to get that equation correct. But there is always some risk.
We are trying to hire people from different backgrounds here, and have them work in India for 18 to 24 months. It has helped us learn more about the countries ... and now we are [sending] them back to their own countries.
Knowledge@Wharton: What has been your biggest leadership challenge? How did you overcome it and what did you learn from it?
Patil: The biggest leadership challenge is still making one seamless company across the globe. There are people who sit in the U.S. and Europe and a large number here. How [to get] 5,000 people looking at a problem in one way is very difficult. People look at things within their boundaries.
I am very proud of our management team. They have the ability to look beyond boundaries. As and when we make that work in a larger part of the organization, we will be successful. For many years, we have struggled to do that in a way that I would like to -- by being 5,000 or 10,000 miles from the customer and [still be able to] think the same way as that person. All the mechanics for doing that -- the people, travel, information -- are there. But we are still not in a position to do it, and that is our challenge.
What we have tried to do is make the organization more front-end focused, where the closeness with customers is key. But that model is not sustainable unless all the people in the company are aware of it and technology keeps the customer [in focus]. Otherwise innovation will not happen.
In a services model, you can have people close to the customer who [can communicate] what the customer wants, and that can be done by somebody [outside the company]. But if you want an organization to be built around innovation, you need to have a deeper understanding yourself of customers' issues. Despite the fact that we are a customer-centric organization, we have not been in a position to do that.
Knowledge@Wharton: How do you define success?
Patil: I look at success in a few ways. If I make my customer successful, I am very happy. We recently used our network to help a customer move into a new industry segment. Within two years, he became a leader in that segment and the company's president said on the record that [he could see the company building on] this partnership with KPIT.
The second important part is when our employees grow ... and the third thing -- which hardly feels necessary to say -- is to make a return [on investment]. Unless we make good returns for our financial investors, we are not creating value. Fortunately, we have been growing very fast and we've been giving shareholders good value. But ultimately, unless we fulfill the first two, the third will not happen. I cannot focus on the third and then get the first two. But if I focus on the first two, we have a better chance of getting the third.