HCL, one of India’s — and the world’s — first computer companies, was launched in 1976 by six co-founders and has grown during the past 31 years to annual revenues of more than $4 billion. One of the co-founders, Ajai Chowdhry, is the CEO of HCL Infosystems, the company’s Indian operation. During the 1980s, Chowdhry, an engineer with a flair for marketing, built HCL’s international operations out of Singapore. In recent years, he has turned HCL Infosystems into a distributor of high-tech products ranging from Nokia’s mobile phones to Apple’s iPods. Chowdhry met with India Knowledge at Wharton in his office in Noida, near New Delhi, to discuss how HCL Infosystems has grown from annual sales of $89 million when he took over as CEO in 1994 to $2.7 billion today.
India Knowledge at Wharton: Could you tell us about your background before you launched HCL with Shiv Nadar and other co-founders?
Chowdhry: I was the youngest child of my parents. My mother was in the IAS (Indian Administrative Service). I studied electronics and communications engineering and began my career with DCM Data Products, like Shiv and the other HCL co-founders; all of us left together to start the company in 1976.
The division of labor among the founders was interesting. Initially, everybody did everything, because we were too small to specialize. But conceptually, when we started out, we knew we wanted to be in all four corners of India — so one of the founders went North; one went South; one went East; one went West; and we also had a presence in the center of the country. All of us got involved in marketing because we wanted an on-the-ground feel for what companies were looking for and how we could partner with them. Since we wanted a national operation right from the beginning, it didn’t make any sense for us to think about phases of expansion.
I basically built the Southern India market for HCL. I started out in Chennai [then Madras] and then developed the company’s operations in Coimbatore, Bangalore and Hyderabad. That was our South Zone.
My role evolved as the company grew. After working on the southern operation during the first year, in the second I did some product development, and then went back to the South in the third year. After that, starting in 1980, I spent eight or nine years in Singapore building HCL’s global business. We initially exported hardware from India and then got into the systems integration business. With Singapore as the headquarters, we started up operations in China, Malaysia, Thailand, Indonesia and Hong Kong. That is how we learned what it meant to run a global business — and we did all this when HCL was just three years old. In those days, the Indian economy was much smaller than it is today, and we wanted to ensure that HCL did not depend upon demand in just one country. Things have changed a lot since then.
India Knowledge at Wharton: What were the key challenges HCL faced at that time and how did you overcome them?
Chowdhry: Building the international operations was a major challenge. At that time, few countries were trying to export computer hardware — HCL was one of the pioneers in developing hardware globally. We felt that India and also Singapore would offer interesting opportunities. We saw that Singapore and other countries in the region were investing heavily in education and e-governance. As you know, the Singapore government has been a big proponent of IT. We participated in many of the discussions and debates over e-governance. We also started doing more business in fields such as telecommunications, banking, finance and insurance.
For me, personally, being in Singapore was a fantastic learning experience. When I first went there, India was at the same level as Singapore — or perhaps even slightly ahead. But during the nine years that I was there, Singapore moved fast, and by the time I left, it was far ahead of India. It was fascinating to see that country create a long-term strategy for developing its IT infrastructure in a very big way. That was a very good learning ground for me.
India Knowledge at Wharton: In 1994 you took over as the CEO of HCL Infosystems. Since then, the company has seen revenues grow from $89 million to $2.7 billion. What were the principal drivers of this growth, and what strategies did you employ to achieve it?
Chowdhry: One thing that was clearly in our minds was that PC penetration was very low in India. We wanted to continue to have a leadership position there. We aimed to remain the No. 1 PC desktop supplier in the country, and we have been able to do that. We believed that the country, at some stage, would grow strongly in PC penetration. That is what it initially looked like until the late 1990s; then we realized it might take more time. Taxes and prices [of PCs] were very high. One of our objectives was to work with the government to reduce taxation — and we succeeded in getting that done.
In tandem with these efforts, we saw a key opportunity during the late 1990s in the wireless area. We began to look into whether — in addition to the work we were doing on PCs and systems integration — we might see growth in distribution of products for global companies. We initially started with many products in office automation; then we added products such as projectors and multi-function devices.
In the Indian high tech market we saw two parallel tracks had begun to emerge. The first was the PC growth track, and the other was the wireless growth track. We believed that the wireless phone business would boom in a very big way in India. We saw this coming during the mid-1990s, when none of the major wireless services players were active in India…they had just started setting up operations.
We recognized that the wireless device market in India could be a huge opportunity. We decided to bet on somebody, so we went and met with a whole bunch of companies — Motorola, Nokia, etc. — and we finally struck a deal with Nokia. When Nokia entered the country, the customs duties were extremely high and so were the prices of devices as well as the costs of making mobile phone calls. Still, we knew the wireless market was bound to grow because it was so difficult to expand India’s landline infrastructure.
For the first five to six years, we hardly made any money selling Nokia phones. The numbers were small because the prices were high; it was a very small business. But we created a special distribution network. When we initially went to the market with these cell phones, no one knew the name ‘Nokia.’ When we met with people, they called it ‘Nokio’ — they thought it was a Japanese company. When we started out, we did not realize how big this could be — we simply made a bet on getting into distribution and on the wireless market.
In early 2000, we told Nokia to think about doing something special for India. We said, “Don’t think of India as just another market. If you want to crack this market, you will have to look at the low end as well as the high end. You will have to bring prices down to ‘normal levels’ for this country.”
We worked with Nokia to develop a three-fold strategy. First, we convinced Nokia to come up with “India pricing” for at least one of their models. Second, we worked with the government to lower import duties on cell phones. And third, the government had come out with a unified licensing policy — and we went along with that. These three factors got the momentum going. From just having a few thousand retailers in India, we expanded to 70,000 during the next three to four years.
As Nokia began to gain more confidence in the Indian market, they began to create specific products for this market — and we worked with them to create this “Made for India” strategy and marketing campaign. Both were resounding successes.
India Knowledge at Wharton: How did that come about?
Chowdhry: The idea was to create a product for India — the Nokia 1100 — that was priced for the low-end of the market. It had features that were good for India. For example, it was waterproof — because this country has a lot of moisture and it is so hot that when people use the phone, they sweat. This phone was also dustproof. A third feature was that by pressing a button, you could turn the phone into a flashlight.
In addition, for the first time, Nokia developed a promotional campaign that was designed and developed in India. In the past, like most international firms, it had depended upon campaigns that were developed globally — and then brought them into India. But this new campaign was structured around specific Indian features and it had a local flavor — and the Nokia brand really took off. The ad campaign showed a Nokia phone hanging from the grille of a truck and going from one end of India to the other. It showed the phone going through water and dust in all kinds of weather — and, in the end, it still worked. It was a huge success.
As Nokia’s distributor in India, we played a critical role in this strategy. When we look at distribution, our objective is to make our partner successful. Most distributors function as fulfillment companies — they move products from A to B, and after that, they simply manage their receivables. In contrast, we define our role as value-added distributors. We initially work with our partners to define a strategy for market entry; then we focus on market growth; and finally we work together to achieve market leadership. That is how we view our role. It involves everything from providing marketing and strategic advice to developing a successful business model.
We develop strategies for each region, because each part of India is different and poses its own challenges. We have made huge investments in warehousing so that we can respond quickly to the requirements of our distributors. In addition, we provide market information to ensure that pricing is consistent everywhere in the country. The most unsuccessful marketing in India is done by companies that are unable to maintain price consistency across the country. We call that “pricing hygiene” — because if it is not maintained, people start undercutting one another, it leads to unhealthy competition, and distribution is disrupted. That has happened to every one of our competitors.
Another advantage we had is that we invested heavily in IT. Each of our offices is connected to an IT network, which allows us to keep track of what is happening hour by hour and day by day all over the country. We have much more information than even Nokia does about its sales in India. Our IT system is so advanced that you could almost call it real time. We know the level of stock available at each location in the country at any time. We know what we have sold every day. We know what models were sold, and also the revenue per day. It is managed to the last point. And because our IT systems are connected to our mobile phones, I can look at this [holds up his cell phone] and tell you what our sales were yesterday. I know our daily sales, receivables, the amount we owe Nokia, and other information — I get updates four times a day.
Wherever I am in the world, my mobile phone tells me how my business is doing. That is possible because of our integrated IT system. In addition, we are constantly working with Nokia to make process improvements. It’s a very intricate distribution capability that we have developed, and it’s not something that others can replicate overnight.
India Knowledge at Wharton: You referred to HCL’s 70,000 dealers — and that reminded me of Peter Drucker’s statement that organizations sometimes grow so huge as to be unmanageable. How did you build such a large organization, and how do you run it and sustain it?
Chowdhry: In building the network, we adopted a two-tier approach. It is not possible to be in touch with 70,000 dealers every day — so we decided to create a second tier between us and the retailers. This second level is a reflection of HCL; we call them regional stockists or redistributors. We work with them to create the forecast for the day, week and month. Based on those forecasts, we pick up products from Nokia and deliver them to the redistributors. Then it is the redistributors’ job to deliver products to the retailers. That is how we manage the network; there’s a method to our madness. Without such a structure, it would be too overwhelming. So, instead of managing 75,000 retailers, we manage 150 regional redistributors.
India Knowledge at Wharton: How does this structure affect the agility of your supply chain?
Chowdhry: It moves very, very fast. We can deliver to our regional redistributors two times a day. That is the kind of warehousing we have created all over the country. We work off the forecasts, but in case we need to move products rapidly, we can do that.
Another advantage of our structure is that the regional redistributors don’t just move products; they also manage receivables. Can you imagine HCL having to manage the receivables of 70,000 dealers? It would be impossible! We manage the receivables of our redistributors, and they manage the dealers’ receivables. That lets us share risk across the network.
India Knowledge at Wharton: What challenges did you face in building your distribution network, and how did you overcome them?
Chowdhry: The principal challenge was selecting the right redistributors, since they play a crucial role in our chain. We developed some strong criteria in collaboration with Nokia, and once these principles were identified, Nokia allowed us to decide whom to involve in our network. As we have grown, the criteria have become more stringent and the due diligence process has become more rigorous. We look at their financials, their background, we cross-reference them with people with whom we have worked before….
We went into this business knowing that it had as much growth potential as an FMCG (fast-moving consumer goods) business, so we created a distribution model that looked very similar to that. That is what has allowed us to succeed. We actually picked up a whole bunch of FMCG redistributors and stockists. We wanted them to have the same agility that they provide to retailers.
Our decision to adopt this approach in the early days has proved to be correct. We knew that if we created this distribution capability, it would become a barrier to entry for others, and that is just what has happened. We also knew that this capability would allow us to add new products, which is what we are doing now. Last year, we introduced what we call our “digital lifestyle” strategy. We picked up a whole bunch of digital lifestyle products — and we have pumped them into our network.
We see India as a very young country — which is likely to use digital lifestyle products. We started with Nokia phones, but then we added Apple iPods, after that we went into gaming devices, and then accessories for these products. We have also added digital cameras and other similar products. Now that we have created this well-oiled capability, we want to use it to sell other products that are likely to appeal to the same customer base.
We have also opened retail stores — 32 of them — to enable us to distribute these products. By the end of this year we are looking at having at least 100 stores that will be franchises as well as company-owned.
India Knowledge at Wharton: What are the unique challenges of marketing iPods in India?
Chowdhry: Our biggest challenge is the grey market — which is close to 90%. We are working with the government to reduce duties on all imported electronic goods. We have told the government that these high duties make no sense since these products can easily be smuggled into India. That is what is happening. If you go to Palika Bazaar in New Delhi or other such markets, you will find smuggled goods being sold. As HCL, we want to do ethical business with products that are imported legally. In two or four years if the duties are corrected, that market could become as big as the one for Nokia phones. Working towards that is our long-term objective.
In the past we placed a bet on wireless; today we are betting on music. We know that more than 1,000 movies are made each year in India. Each movie has at least seven songs. Just look at the vast library of songs that has been built up in the past few decades. India is a musical country; you would be surprised at how much music people listen to here. Lots of international companies don’t understand this. The first time I spoke to people from Apple, even they found it hard to believe. I told them that they need to look at India completely differently. Apple came looking for us because we have built the most successful technology distribution business in the country. That is how we were able to take Nokia from a relatively small market share to a dominant one of more than 80%. That is not a joke. It shows people what we are capable of doing.
