Among the small but growing group of Indian companies that have made a global impact in recent years is the New Delhi-based Hero Group. Launched in 1984 to make motorcycles in collaboration with Japan’s Honda, the US$3.2 billion company has emerged as India’s largest two-wheeler maker. By some measures, such as production volume, it is the world’s largest two-wheeler company. How can Indian manufacturers leverage their capabilities to grow into successful global players? How has India’s economic history affected their strategy?
India Knowledge@Wharton advisory board member Pankaj Dinodia and a Knowledge@Wharton editor discussed these questions and more with Sunil Kant Munjal, chairman of Hero Corporate Services, the services business arm of the Hero Group. A mechanical engineer by training, Munjal is a former president of the Confederation of Indian Industry (CII) and also serves on the board of the Indian School of Business.
An edited transcript of the conversation appears below.
Pankaj Dinodia: As someone who has been a founder and a part of several successful businesses in India, what has been your favorite business and why?
Sunil Kant Munjal: It is a difficult question because anything you start tends to become a favorite at that time. If you are not passionate about a business, there is no use doing it. That’s almost a philosophy for us — we will only [get involved in] businesses that have certain attributes. One is that they need to allow us to get into a significant leadership position in a reasonable timeframe. Two, we only do businesses that have a positive social impact; that is an essential requirement for us as a group, as a family, as individuals. And three, we like to do businesses that we enjoy. If you like what you do, you do not have to work.
Knowledge@Wharton: What have you enjoyed most about the different businesses you have started and what did you learn from them?
Munjal: I will tell you a bit about what I do and then maybe the perspective will become clearer. My role in the group is a mixed one. We are a group of companies whose majority owner is our family, and each of us in the family is involved in, or in charge of, a business unit, division, business, etc. Our group chairman and myself are the only two who have broader roles…. My role is less on the operational side, more on the strategic side, setting the philosophy, the tone of the business. What I enjoy is the hunt, looking for new opportunities. It is an intellectual exercise. You need to bring in all your experience because we do not want to get into a business where we will not be a big player.
Recently we worked on a joint venture with Daimler to make trucks and buses in India.It was equally exciting to set up a very small enterprise that created a new way for individuals to pay their bills in India called Easy Bill. Now that opportunity is [a business generating] a few million dollars [of turnover annually] and the [Daimler joint venture] could easily be US$10 billion to US$15 billion. Clearly it is not just about the sheer size.
It is an intellectual thrill to be able to [point] your finger [at an opportunity] and say, “This is something we should be doing.” We have a long list of criteria of why and how we do [a new venture]. Of course, there are commercial criteria. But more important than that is [asking] what kind of impact could we make on society and the nation. We recently opened a motorcycle plant in Haridwar for Hero Honda to add to the two plants we already have. We did a calculation of how many people this would impact, which was quite an interesting exercise. We figured 235,000 people would be positively [affected] by this company going to Haridwar and setting up the facility. That is what is exciting.
Knowledge@Wharton: How so?
Munjal: The reason is, in addition to Hero Honda’s own plant, some 200 to 250 other Tier 1, Tier 2 and Tier 3 [companies] will go there [after us]. Haridwar is just a regular town — most of its visitors go there to take a dip in the Ganga River or [pass through it on the way] to Rishikesh — so everything will have to be added on, all the services and utilities, whether it is transportation, suppliers of simple things like packaging or service providers for repair and maintenance…. I am not talking about people working at our company but the total number of individuals on whose lives the presence of the Hero Honda plant will make a positive impact.
What we said was, “We will not just build a plant … we are going to a special place.” Haridwar is a special place for many reasons. One is the eco-region. It touches the Rajaji National Park, which is a global heritage site. On the other side is the Ganga River, which is sacred and has something special about it. At the back of it, you have two mountain ranges, the Shivaliks and the Himalayas….
We have set up what might be one of the world’s greenest plants, [with] possibly one of the largest green rooftops and all the service blocks are green. We also looked for endangered plant species to put in the plant. They are being maintained by the people at the plant.
We did not hire a single operator from another plant. All of them were fresh hires. We set up a training school there almost a year before the plant opened…. [The new employees] were not just given training on how to operate the machines, but also in social interaction — attitude, etiquette, soft skills. The third part of the training — which is standard in all our companies — is [on a more personal level]: How to manage your own budget, why health and hygiene is important, yoga and awareness of HIV AIDS. The idea is that we ensure the constant growth of the people who come into the system. How do you ensure that they are a bit better off than they were when they walked into the job? There are positive [repercussions] on not only the company, but also their families, associates and friends.
We are not just putting up factories. We use the most modern technology and we build the most beautiful factories…. But what is important is the people. That is in some ways the key and also the differentiator as to why these companies have performed better than competition in so many areas. That is a long answer to your short question.
Dinodia: Indian businesses are becoming more global both in their reach and aspirations. What are some of the biggest strengths and weaknesses as this trend evolves?
Munjal: India has the burden of history…. India was one of the greatest trading nations in the world…. When the British came to India, Great Britain … had 1% world trade, India had 21%. India and China combined had more than 50% of the world trade.
What happened was devastating for India because in 1947 when the British left India, India had 1% of the world trade and the UK 21%. It was economic domination. They took all the value out of here and sucked it into the UK. Alongside that, they took a lot of the energy and initiative out of India’s economy. It was not just enslaving people. It was making a nation economically dependent. Many of our businesses and ideals around businesses either got lost or buried. Since then, we have had a pretty rough time in the business sense.
Then when [Jawaharlal] Nehru took charge as prime minister in the early 1950s, India chose a very strange system…. Because the Indian individual or enterprises were not allowed to accumulate wealth, enterprises were be set up by the government. If you remember, Nehru called them the temples of modern India. The dams, steel plants and so on were all set up by the government….
The government system believed it had all the answers. It became highly regulated. We inherited the bureaucracy from British but we, of course, [refined] it ourselves [so that] the government would tell you what to make, where to make it and even how much to make. That kind of constraint builds a completely new enterprise. People’s expertise was then about: “How can I get a license from the government and how can I block my friend’s or colleagues from getting licenses in the same business?” In a sense, the ability to get the license was the ability to make money. People built their entire knowledge, expertise and enterprise around that skill….
In Nehru’s time, a clear distinction was made about what individual enterprise and private enterprise could do and what public sector and the government could do…. [Then in the 1960s, as prime minister,] Lal Bahadur Shastri did something interesting. He said, “We need to focus on the armed forces for security and the Indian farmer because if you cannot feed your people, you frankly cannot do anything else…. His slogan was, if you remember, …
Knowledge@Wharton: “Jai Jawan, Jai Kisan.” [“Hail the soldier, hail the farmer.”]
Munjal: … [After that] Indira Gandhi, in some senses, made the biggest impact.She took a very rigid socialist stand…. But also in her time [in the late 1960s and 1970s], bureaucracy grew more than in any other period in India’s history and it started to play an obstructionist role, which therefore bred corruption….
Then came Rajiv Gandhi. He has never received credit for some of the things he did. What is not well known is that although the economic reforms were publicly announced in 1991, the reason it could be implemented so quickly was that Rajiv Gandhi had started to write a lot of this policy during [the 1980s] and had invited many smart Indians to return from overseas.
He also pushed organizations like the Confederation of India Industry (CII) and asked why India wasn’t interacting more with global communities. We went to the World Economic Forum in Davos for the first time. A few years ago, when I was president of the CII, we celebrated India’s 20th year of partnership with the World Economic Forum. That period was a true flowering of the Indian enterprise.
Let me come to what is happening to Indian enterprise now because of globalization. Trade and commerce come almost naturally to Indians. Indians are smart, they are good at math, and their ability to multitask is now being acknowledged by the world as a unique ability. We also have distinct disadvantages. Some are the result of the environment that we have worked and still work in, namely lack of physical infrastructure, which adds a burden of higher costs and low productivity. Second is that even though the system has improved, there is still corruption. Third is because [private] Indian enterprises are new [or had been used to competing under a licensing system], many haven’t had the scale to compete globally.
The model that India is developing now is different from China’s. I am going to mention China because we often are compared with that country. It is different from what Japan, Korea or Taiwan did and a little bit different from what Europe and North America did. India’s model is to develop a domestic business first and then make it global. With the number of people in India who can afford to buy goods and services, it has built a market of some size.
Look at the scale of companies like Maruti. Our motorcycle company is the largest in the world in terms of volume. Our bicycle company is also the largest in the world. Subhash Chandra’s Essel Group makes plastic packaging tubes and is now the largest in the world. Moser Baer is in the optical storage business. It is the second largest in the world. There are many Indian companies that have reached scale by exploiting or reaching out to the Indian market and now with that scale, they are going [global]. Those who are able to grow on the back of this are having a wonderful time.
There are two extremes in India. Everything you hear about India on any day is true and the exact opposite is also true. That is hard for many people who do not know India to understand…. We are struggling with 200 million people who do not get two square meals a day, yet we are able to launch satellites at the lowest cost.
[In terms of the auto industry,] India’s emission norms for automotives are among the tightest in the world. They are tighter than the U.S., barring California, and Europe. So new vehicles produced in India are as good as any in the world. But because they are made for this market in India, their pricing model is completely different than other vehicles. People are now sitting up and taking notice. When Tata launched its new Nano car [in 2008], people began saying, “It is not just a car; it is a possibility of what can be done with a unique method of engineering, a new economic model of building a business, ensuring full functionality and yet doing it in a package that will meet the aspirations of millions of people.
Knowledge@Wharton: If Indian companies have this capability of perfecting a system of production and organization within the Indian context and then making it available worldwide, what sort of a globalization strategy should they adopt? How would it differ from the way other Asian companies — such as Chinese or Korean firms — have gone global?
Munjal: There cannot be one standard system. There have to be different types of policies depending on the business vertical you pick, the potential markets you want to get into and the history or genetics of the business or enterprise itself. Since you mentioned China, I will give you some comparisons there. China develops products that are like the products already being sold in the U.S. Its expertise has been in low-cost mass manufacturing, which brings down costs dramatically. The second thing China has done is that it taught the world a completely new standard of scale….
India’s manufacturers are saying, “We willalso do some mass manufacturing. But we will do mass manufacturing that has more engineering, design and intellectual input built into it so that you get higher value out of the same or a similar product.” The Nano is a good example. There is a lot of engineering input that has gone into it. That provides a completely new product or product category, not a clone of another product.
Mahindra has done this if you look at its tractors. Two-wheeler companies in India have done it. Both Bajaj Auto and TVS have built markets in 30, 40 or 50 countries. It would have been very difficult 20 years ago to even imagine that Indian companies would sell these products globally. Now they are not only selling them; they are becoming key players in those markets.
Building brands is another area. While we understood intellectual property (IP), we did not understand how to patent it or protect it. That is a realization that has only come to India in the last 10 years. Today our IP laws are as good as any country’s… which is possibly the reason why 320 of the Fortune 500 companies are doing some form of research and development in India. Part of the Indian business philosophy and strategy when going global is to put more intellect and ideas into products and services, which is what makes us a little bit more distinctive.
The other [part of the strategy has to do with] the sheer connectedness of Indians living outside of India. There is always a natural affinity for an Indian product [among expats]. In some parts of the world, you walk into a shop and it looks like you are in India…. You go to parts of New Jersey and it is not different from being in, say, the Karol Bagh section of New Delhi, or locations in cities likeJalandhar or Ludhiana. Many Indian companies are focusing products now on the expat ethnic population….
Dinodia: You spoke about Tata’s Nano. But at the other extreme, there are scandals such as the one at Satyam. What has been the impact of both on the Indian economy?
Munjal: Let me talk about Satyam first. We need to acknowledge that what happened in Satyam is not unique. It is not unique to India. It is not unique to business. This is a reflection of accepted standards of behavior in any society.
Since the Satyam scandal broke, when any of us travelled outside of India, we were asked three questions: How often do you see this in IT companies? Is this a standard practice in family-owned businesses? Is it the result of a lack of control, governance, regulation or audit systems of listed companies?For India, this was a very big scandal — one, in terms of the sheer amount of money involved and two, the type and size of the company, its profile and the business it was in. IT services have been leading the Indian charge globally so IT-services companies have a certain global profile … and these companies are not just listed in India, but also overseas. They were being audited by the best of the biggest audit firms in the world. The different question asked was: Was there collusion or was this such a smart fraud that everybody got fooled by?
Both cases give reason to worry, which is why some of us went to the government and said, “You need to fix this quickly. This is not acceptable. The air of doubt is much worse so if you find a problem, you have to crack down hard and fix it.”
I must give credit to the government that they reacted quickly and responsibly. They put in a new board and allowed that board to function independently, and I can tell you that because I do know many of the people involved in that. It truly functioned independently and was able to allow the company to get through such a big crisis, which other countries have not done as successfully.
Scandals like this have broken out in Europe, the U.S. and Japan. I do not know of any other case that has been handled as quickly and efficiently as this one. Of course, it is not a good thing to happen but it reminds us that we must not over-react and start over-regulating. It is smart to have good regulation and good to have a check on the regulation itself every now and then. For example, now the concurrent audit has been ordered in 1,200 companies in India and peer reviews on a number of companies. The methods used by the auditors are being checked. Some people question whether you need to go so far but it adds a sense of responsibility to the system, which is very good.
Is corporate governance worldwide in the greatest shape today? I would say, of course not. Is it in the greatest shape in India? I would again say the same. But these things remind us that it is important that business leaders understand much more than in normal times that their role is to not only lead the business, but also be trustees of many other people — employees, shareholders, customers and society at large. This has made many companies look at their own internal systems. We had been doing it already in some companies but we reinforced that.
As for the second part of your question: the Tata Nano is not just a car. It is also a wonderful reminder that all of us need to look inwards to see where we can create efficiency and productivity, where can we start thinking completely differently to make quantum leaps of our own. It has also made the global business community sit up and take notice of India and say, “If they can do this, there must be more going on here.”The world has acknowledged in only the last 10 to 12 years that India is an important country and its economy is growing. [Before that,] there were not many companies below the top tier in Europe and North America — the GEs, Microsofts and Dells — that looked seriously at India. That has changed…. You saw at the Geneva Motor Show the big crowds around the Nano. But is this the only story, is this a myth or is this something real? That is also a big challenge and an opportunity for Indian business.
Knowledge@Wharton: You referred to the joint venture with Daimler. Could you speak about when it makes sense for two organizations to merge and when an alliance makes more sense?
Munjal: Mergers are very complex things to do. The initial complexity is with the experts — the investment bankers, lawyers, etc. But these guys do this every day…. The big exercise starts after that. Most people think the merger process is the most difficult part. [But what’s more difficult is actually] finding the right opportunity, partner, business fit, etc. to ensure that one plus one will be more than just two. That often is not the case. [M&A deals] are seen through rose-colored lenses because of ego, glamor, sheer opportunism or it’s what others in the world are doing. It feeds on itself and [the popularity of M&A] goes through big dips of up and down. But the most difficult part of a merger has to do with culture. No matter how small or big an organization is, no matter what business it is in or where it is located, it is like an individual or family and builds its own culture. There is enough research and data from experts like McKinsey and Boston Consulting Group to show that the majority of acquisitions and mergers do not meet the original objectives….
However, the minority that figure out M&A gets a leg up on their business. The difficulty is in understanding that once you put two organizations together, it is neither one organization’s culture nor the other’s, but a completely new culture and system that you have to work towards. That is much easier said than done.
In most cases, people look at M&A as an opportunity to reduce costs, mostly through headcount reduction, which is always a very painful process. When you shed people, the shadow cast over the company is difficult to control — what the message is that it gives to other companies and customers about its products and services. It can take on a life of its own and sometimes becomes a monster.
From that point of view, alliances are somewhat easier to do because they do not necessarily require the two companies to meld their cultures. It is only a business convenience. You are saying, “This is my objective, and it could be limited objective, a single exercise or project that we are going to work on.” The success rate of alliances is much higher than of mergers and acquisitions.
Joint ventures as opposed to alliances are again complex. They are like marriages, difficult at the best of times. A real test of how they will function is whether the two [parties] can shift their focus from their vested interests to the interest of this new baby they have created. That is something that’s hard to remember all the time. Worldwide, you’ll see very few joint ventures that have lasted beyond five or 10 years, even fewer beyond 10 to 20 years. Beyond that, there would only be a handful….
Knowledge@Wharton: What capabilities allow companies to implement successful joint ventures? What are the risks and how do you manage them?
Munjal: Before a joint venture is set up, both parties have to have something meaningful that they bring to the party. It is equally important that they cultivate this new entity with both sides providing additional input. If that is not happening, power sharing becomes unequal. If power sharing becomes unequal and something else is mismatched — say, the managerial roles or shareholdings — it is not going to work. Part of it is about understanding that I have to continue to contribute to this entity to get anything meaningful out of it. If I contribute less, my expectation of getting something out of this should also be less and if that is a mismatch, then it is a recipe for disaster.
It is very easy to say, “I am the junior partner so my expectation or my managerial role will be lower.” If you are able to accept that, life tends to work quite well for some of those entities. Like any relationship, they go through different periods, sometimes there is a great deal of friendship or compassion, then there is disdain. It is important to remember that there are three relationships here not two — the two parties and the new entity they have created. To balance the interest of all three is critical. Complementary skills, ideas, technologies and strengths also need to be put into this new entity. If both bring the same skills, there is a problem because they tend to step on each other’s toes. This has a lot to do with trust … that you both believe in it and that the other guy is trying to do the right thing….
Dinodia: I have a fun question for you. Do you think the Indian Premier League (IPL) is a viable business model and what can other sports in India learn from cricket?
Munjal: It depends on whose behalf you are asking this question because there are different constituents: the IPL’s management, the teams and their owners, the sponsors, the public and community at large, and the cricket fraternity.
Dinodia: It is the hot topic of the day.
Munjal: It certainly is. I should have mentioned that one more group of players is the TV channels. There are many different commercial angles to this and the skill lies in the ability to create more commercial angles for more revenue streams, which can have a positive impact on the whole system. It is a big business. For us in India, it is somewhat new, but the good thing is that the IPL is like many other things that have happened in India. It is not just replicating something else; it is creating a new business model. Now others want to learn from the IPL. It is another Nano…. IPL has become one of the largest commercial enterprises in sports. It is a fantastic success [in terms of viewers and in the number of media channels through which matches can be followed]….
IPL has created a new sporting [phenomenon] because the [traditional] five-day cricket game took too much time and energy and people were losing interest. People do not have time to spend five days [watching a match], and they used to say, “We watch games for five days and most of them end up in a draw.” Then the one-day match came and added a lot of interest. It became fun, like a family outing and involved a much larger audience than the cricket enthusiasts….For the TV channels and so on, it has added lot of viewers, and therefore is attracting a lot more sponsorship funding, something India never had earlier. Now the majority of cricket sponsorship worldwide comes from India.
Dinodia: Education and health care are globally known to be two great sectors, almost recession-proof to some extent. Have you thought about those sectors in terms of entry?
Munjal: We run a number of hospitals, schools, vocational training colleges, etc. Some of them are doing very well [but] we do not [publicize that we are involved in] many of these, we do not advertise them, they are not on our balance sheets, and many are run through our family foundation and trust.
Wherever we set up a factory, we set up a school, training [center] or hospital. …We like to do business that makes a positive social impact, in communities and with the environment…. I am personally head of a teaching hospital in Ludhiana. It is one of the largest hospitals in north India [with] 1,200 beds and 26 “super specialties”….
If anyone walks in who does not have money to pay for the treatment, it is free. It is a genuine community project…. Last month, we had 21 doctors from the Mayo Clinic [in the U.S.] spend a week with us. A month before that, we had two from the Cleveland Clinic [also in the U.S.]. These are all high-end services. We have a heart center called Hero DMC Heart Institute, where we do about 100 surgeries and 200 cardiology interventions a month. We are setting up a new cancer care facility there.
We run all kinds of schools — Hindi medium, Punjabi board, English medium and even a gurukul. This is very close to our hearts, and again, because we are not doing them for publicity, we never really make any announcements about them. But in last year’s Punjab board exams, 11 of the top 15 positions were from our schools.
It is all about opportunity, and once these kids get opportunities, they demonstrate what they can do. One of the girls from our schools got into the Indian Institutes of Technology (IIT) this year, and we all know how tough the IIT exam is. A couple of them have gotten into medical colleges. These are bright minds who unfortunately never had the opportunity earlier.
We have a training company, called Hero Mindmine Institute, which is part social initiative, part business. Through that entity, we set up a think-tank looking at issues about Indian industry and economy, and we have partnerships with the ISB, the IIT, the IIM Lucknow and the MDI. We run a CEO series, for which we had Arun Sarin [the former CEO of Vodafone] address us only two weeks ago. It is called the Mindmine Summit and we look at an issue from every perspective. We have had leaders from business, government, think-tanks, social organizations and performing artists to share their perspectives….
I am personally involved in a number of institutions. I sit on the board of the ISB and I was on the board of Doon School for many years. I was head of a committee the government set up for skills training as part of the labor reform. This is an area I feel strongly about and we are not doing enough.
Dinodia: The ISB has been a fantastic initiative. We just cannot wait to have something similar in north India.
Munjal: We are setting up a new ISB in Mohali. …The Bharti Group, Max Group, Punj Lloyd and Hero Group are supporting it and we are doing something quite unique. Kellogg, Wharton and the London Business School are three partners and besides the regular one-year business school program, this time we are setting up four institutes, which allows you to do an MBA along with a specialization. These are in the areas of interest that each of us has. Max is supporting health care management, Punj Lloyd is supporting infrastructure management, Bharti, public policy, and Hero Group, manufacturing and operational excellence. These are all areas crying out for education in India.
Knowledge@Wharton: What do you regard as the biggest leadership challenge you have faced? How did you overcome it and what did you learn from it?
Munjal: Family businesses are similar to other businesses, but also distinctive. The largest value creation worldwide comes from family businesses but they have their own set of challenges because you not only have to manage the business, you also need to manage the family….
How do you distinguish ownership and management, and where do the family and business overlap if both are equally important? How do you ensure family values are preserved as you diversify businesses because family values are our business values as well? It can be a big challenge to ensure that these are aligned. Each new generation comes in having been brought up in a different environment and is much more educated. We have had some members of our family work in firms like KPMG, Pepsi, Nestlé and Coca-Cola…. As a result, they bring [a wider] perspective and sometimes that agrees with our systems, sometimes it does not.
Also, how do you ensure that family members work as responsible executives and the [non-family] executives in our business feel like they are part of the family? This is one of our strengths and one of our biggest challenges. Fortunately, our bigger and older companies continue to do well so that provides a lot of strength to the system, but it is a constant challenge that all family businesses face. Some handle it better than others.
Knowledge@Wharton: How do you define success?
Munjal: I do not have a single definition for success. I do believe a few issues are important when you look at success. One is [relatively] simple: Are you getting the top and bottom line returns? The other one is more esoteric or difficult to put a number on, but is also more important is: Is this providing satisfaction to all the people involved?Is this providing a platform for growth, and has it become a continuously learning organization, which allows and even celebrates making mistakes?
One of the things we have done in our companies is to recognize that we do not have all the answers ourselves.We do two things extensively…. We encourage people at our companies to experiment, [knowing that they] are also going to make mistakes. If anyone makes a mistake, he or she gets a pat on the back and the response is, “Thank you for trying, but do not make the same mistake a second time.” It is cheaper to learn from other people’s mistakes. You do not have to make them all yourselves. The second thing we do is [build] partnerships. They bring a lot of added value.
Finally, are the people involved in that enterprise having fun? And I mean seriously having fun, because sometimes we tend to take ourselves so seriously that we forget there is real life to live. If the business is all consuming and not enjoyable, it can be very painful. It is not then a successful business.