How big is the mailbag of the world’s most populous democracy? In a recent annual report, the Indian Department of Posts claims that its mail traffic was 8.6 billion pieces in 2003-04. In 2004-05, it says, that number dipped to 7.4 billion. Sound like a business in gradual decline? Not so, say the top brass at Pitney Bowes, the U.S.-based provider of mail management services, which has $5.5 billion in annual revenues and more than 35,000 employees worldwide. With its December 2004 acquisition of the mailing division of its Indian distributor, Kilburn Office Automation Systems, Pitney Bowes established direct operations in India — even as official statistics on mail traffic warned of a downward slide.
So why did Pitney Bowes bet on India, and how has its foray fared to date? For some insights, India Knowledge at Wharton spoke with the executives directly responsible for the company’s India strategy and implementation, as well as other experts.
Statistics Don’t Tell the Whole Story
When Pitney Bowes began considering its Asia Pacific strategy in 2001, the senior leadership requested a thorough analysis of the existing situation. “Our CEO, Michael Critelli, was interested in assessing the Indo-China corridor as well as other emerging markets,” says Deepak Chopra, former president of Pitney Bowes Asia Pacific and Distributor Operations, who currently serves as president of Pitney Bowes Canada. “Our reach in the Asia-Pacific region had primarily been through distributors; we had some direct operations in Australia, Japan, and Hong Kong but with only limited success.” Chopra identified China, Brazil, Japan and India as key markets where Pitney Bowes needed to go aggressively. “They asked me to find out if [the buzz about the region] was hype or true opportunity,” he notes. “Were countries like India ready for our technology, products, and solutions?”
Accordingly, Chopra and his team began assessing the state of the Indian marketplace for mail as well as its readiness for automation. They looked at the postal regulatory regime, the government’s appetite for reform, and the state of paper-based communications. During this analysis, Chopra stumbled upon some odd data. “The Indian postal service was reporting that mail volumes were declining,” Chopra notes. “But when we actually talked to businesspeople on the ground, we found that, in fact, mail was growing exponentially. It just wasn’t officially reported.” The country’s high GDP growth rate, the rapid increase in cell phone subscribers and statement-based credit and debit card usage, and computerized billing by utilities were all indicators that mail traffic was in fact going up, not down.
Why the discrepancy? Indian laws specify that letters under a certain weight must be carried by the official national postal service. “But in major cities,” explains Chopra, “lots of bicycle courier companies had sprouted up. They were carrying mail at half the rate of the post — two to three rupees (4 cents) instead of five rupees (9 cents). In other words, they were competing illegally with India Post, catering to high-density areas. But the cost of breaking the law was negligible — postal regulations were based on the Indian Post Office Act of 1898, and the penalty for violation was only around Rs. 50 (about $1). We assessed that about one-half of all mail was not being carried by India Post. So, we estimated that it was actually the sixth largest mailing market in the world — which would probably put India somewhere between Japan and the U.K.”
Wooing the Customer
Having established that India merited attention due to its surprisingly high mail volume, Pitney Bowes proceeded to approach large business customers to evaluate their readiness for the folding, sorting, and postage systems they could offer. “We found that the landscape was changing rapidly — old-fashioned bank passbooks were being replaced by monthly statements, credit cards were being launched,” says Chopra. “All the mailings were being done manually. We visited telecom companies, banks, etc. to validate the mail volumes. One company we visited was GE Capital. We saw dozens of people there stuffing envelopes by hand. But their business was growing rapidly, and they had started a joint venture with State Bank of India — which had 90 million account holders. The systems we offered could process anywhere from 2,000 to 22,000 envelopes an hour.”
Thus, Chopra concluded, all the ingredients were in place. Just as in other parts of the world, India needed the software, solutions, and facilities management options that the company offered; it only needed to educate the customer and lobby the government on postal reform.
But when Chopra floated the idea of automating processes to potential customers, their reaction was skeptical. Labor, after all, was inexpensive and plentiful. “We had to convince companies that their current system just wasn’t scalable enough to support the rapid growth they were experiencing,” says Chopra. “We were talking about using our automation systems for payroll, real estate, employee management, and so forth. Then they finally understood, and ended up investing in a lot of Pitney Bowes technology.”
Acquired with Care
As a global company, Pitney Bowes could have chosen to commence direct operations in India through an original startup. Instead, it decided to acquire its existing distributor. Kilburn had been a pioneer in the field of manufacturing and marketing mechanical franking machines in India. After India Post migrated to electronic franking machines, Kilburn began to promote Pitney Bowes’s products in the Indian market. “We had a 50-year history of selling meters in India through our distributor,” says Chopra. “But the value proposition had eroded, since private couriers were so much cheaper and didn’t require meters. India is a large, complex country — for us to start up a company there would have been much harder. Creating the infrastructure [from scratch] would have been expensive.”
The acquisition gave Pitney Bowes an instant 17-location footprint and 200-employee workforce in India, allowing them to enter the market without a startup phase. “For a company with national requirements in terms of sales and service like ours, it’s always better to do it through acquisition than through a startup,” says Chopra. “Whether you’re selling widgets or services, you need local knowledge. But you have to pick your partner carefully: What does the talent underneath the top two or three look like? Who are the 200 people below them? If you look at all this, then your probability of success post-acquisition goes up.”
The advantages of expansion abroad through acquisition are numerous, agrees Heather Berry, a professor of management at Wharton. “Firms can enter or expand much more rapidly than they can via greenfield investment; they can acquire operations that local customers are already familiar with; and they inherit local employees and managers. This can help them to look more like a ‘local’ player.” Of course, there is a major potential pitfall as well: “It can be difficult to integrate an acquired company into an existing hierarchy within a multinational,” Berry notes. There are many examples of clashes that caused not only the exit of key managers but decreasing performance for the company as a whole. DaimlerChrysler’s experiences reveal many of the difficulties of merging the operations of two companies. While Pitney Bowes is obviously much larger than its acquired distributor, there are still many potential clashes that can arise.”
As with any acquisition, there were indeed issues to be ironed out as Pitney Bowes took over the management of the distributor. Some operations had to be physically moved.” The distributor was based in Calcutta, but since postal headquarters were in New Delhi it made sense for us to be based there,” notes Chopra.
Acquiring an existing entity did not entirely reduce red tape, either. “For all practical purposes it was like starting a new operation,” says K.M. Nanaiah, managing director of Pitney Bowes India. “We had to get registrations and clearances from individual states in India, and that posed a significant challenge to continuity of business during the first few months of operation. Dealing with the expectations of the employees we acquired involved special sensitivities, because the employees were concerned about calculation of years of service, retirement benefits and other issues. All these issues were eventually addressed and resolved.”
“What we found was that the energy level of people in India was extremely high and they were determined to succeed,” says Chopra. “It really made the integration an enjoyable rather than a painful process. We have done startups in China, Korea, and Thailand and, despite local bureaucratic challenges, our experience in India was on balance quite positive. On the customer side, we had many postage meter customers, but the distributor hadn’t driven our other products and services. So now we already see high-end business success in our quarter-of-a-million-dollar machines. In the first year after integration we’ve been reasonably profitable, and have seen good growth on both the top and bottom line. Of the emerging markets I mentioned, our time to profitability was the shortest in India because the talent we acquired was able to run the business effectively from day one.”
That success has in part depended upon Pitney Bowes’s willingness to adapt to local conditions in India. “We sell machines that operate on electricity,” notes Chopra. “But when you only get power for four hours a day, you have to change the document management process to accommodate that. We have also had to modify some of our products to make them more rugged — to withstand heat, dust, and the moisture.”
A Push to Reform
When half the actual mail traffic in a country goes through “under-the-radar” channels, it is tough to make progress in areas that depend on a credible and efficient official postal system. In the Indian government, the Department of Post falls under the Ministry of Communications and Information Technology. “[The ministry] already oversees one of the largest and fastest growing economic sectors,” observes Nanaiah. “As a result, sometimes it is hard to capture the attention from the government that our sector needs.”
The brief tenures of the department’s directors-general pose an additional challenge, requiring potential lobbying forces to renew their relationships constantly. “Our message is simple: A healthy postal sector and network are critical for overall development in the economy,” says Nanaiah. “Real reform requires sustained persuasion, and that is only possible with stable leadership. There are also pressures against postal reform from the courier industry, because the present system enables courier companies to cherry-pick the most profitable business whereas India Post must comply with its universal service obligation.”
Indeed, notes Chopra, postal officials themselves are often frustrated about the lack of political will to reform the system and enforce true exclusivity over letter mail. “They said to us, ‘We need your help lobbying the government to establish postal reform,'” he says. “We’re also lobbying the government to raise the profile of postal services in general. They don’t usually see the postal network as an essential element of trade and commerce — they’re obsessed with sexier things like telecoms and bridges. But through mail, you can reach anyone for a uniform cost. It’s a very underleveraged asset in emerging markets. It can be a revenue stream for the government if they offer track-and-trace services. In addition, a courier cannot offer proof of delivery in a court of law, so the current system is an unnecessary burden on the courts.”
Enforcing universal and exclusive letter mail service can facilitate debt collection, official document mailings, insurance premium collection, and so forth, thus ensuring the sustainability of trade and commerce, Chopra notes. “Otherwise you will simply have a chaotic postal system with no standards.”
Ideally, Pitney Bowes would like to see a postal reforms bill passed that creates a level playing field for all stakeholders in the letter mail industry as well as India Post. “That would bring about competitiveness in quality of service and lead to service quality level based pricing,” says Nanaiah.
In addition, paper handling products currently attract the highest level of customs tariffs. “Lowering the customs duty would help us popularize paper handling products in India,” says Nanaiah. “As there are no Indian manufacturers of high-end paper handling solutions, this would not affect Indian industry. It would enable increased access to technology by Indian companies to help them improve their efficiencies in the operational process.”
Given the existing system, though, lobbying efforts in India can be a delicate art. “The road to reform is slow enough in the U.S., let alone India,” says Chopra. “You have to invest with an eye toward the long term. The bureaucracy is quite intelligent and capable, and the caliber of the Indian civil service is high, but they lack decision making authority, so you eventually have to work with the politicians.”
Solutions for the Future
Currently, Pitney Bowes India focuses on five primary market segments: financial services firms including banking and insurance; utilities; telecoms; government, including central, state, defense, and education sectors; and small and medium sized enterprises. To help convince new customers, Pitney Bowes offers to test out its services on a trial basis and customizes its solutions for India’s needs. “The market is highly price sensitive and prefers to rely on proven products and solutions,” says Nanaiah. “Because our solutions are new, customers feel more comfortable with pilot projects.”
What makes customers reluctant? Low labor costs don’t help, but another issue is the high cost of stationery required for mechanized mailing systems. “With manual processing, the thickness of the document and quality of envelope are not an issue,” says Nanaiah. “To use Pitney Bowes systems, however, customers require higher quality stationery or else the documents will jam in the mailing machine. That actually leads to a higher cost per mail piece as compared to traditional practices in India. In light of this, we must work extra hard to demonstrate how using our systems can help customers grow their business; otherwise, they can’t justify the cost.”
Pitney Bowes’s impact on Indian society is already being felt, albeit in a small way. “It is early, but our solutions are starting to make a difference in the marketplace,” says Nanaiah. “We have enabled certain customer-facing government agencies to deliver their services more efficiently and effectively than before, to great public benefit. We have installed a production mail solution on a pilot basis at the Income Tax department in Mumbai. Now, salaried taxpayers in Mumbai city are able get their tax assessment orders and their tax refunds in time. This enhances confidence in the system and generates higher levels of compliance. We also have postal franking machines installed in quite a few rural post offices in India, making it more convenient for the rural public to use postal services.”
The company has also provided tax evidencing solutions to Indian states like Maharashtra, Gujarat, and Andhra Pradesh for payment of the stamp duty — a huge revenue stream for state governments. Traditional proof of stamp-duty payments are in the form of physical papers. Making the right denominations available, as well as tracking and handling distribution logistics and security for the stamp papers, are challenges. Simply managing the process and printing the stamp papers also add to the cost of collecting the revenue. Pitney Bowes’s alternative provides evidencing through digital indicia. “We built our solutions around the present pain points of the state governments,” says Nanaiah. “This solution enhances security, provides complete flexibility on availability of denominations, and creates audit trails and clear accounting. It also reduces the cost of revenue collection. All these benefits are based on proven technology platforms and hardware — the tax meter.”
Indeed, large consumers of stamp papers could buy tax meters and obtain a license for captive use. “In this scheme, the government incurs virtually no cost and the stamp duty payment is received in advance, i.e., when loading the meter for desired value,” says Nanaiah.
So far, state governments have looked favorably on Pitney Bowes’s offerings. “The value proposition to tax authorities has been substantial, so initial investment on their part has not been an issue. However, as we enhance the technology, the level of investment required might rise and we would consider leasing or click charge-based models,” Nanaiah says.
With Pitney Bowes laying all this groundwork, will it be easier for the company’s competitors to rush in and grab market share? Probably, but that’s not the company’s focus, says Chopra. “Ultimately competitors will of course enter, at some point. But we take the high road — what’s good for the customer? What’s good for the economic development of the country? If reforms are good for us, then certainly they will also benefit our competitors. Our philosophy at Pitney Bowes is to develop the market as a whole.”