Notes from a shop floor

IT'S A SATURDAY morning at the steel-and-glass Noida headquarters of electrical goods manufacturer Havells, but it’s nothing like a weekend. The entire top management, a dozen-odd executives, including chairman Qimat Rai Gupta, his son and the company’s joint managing director Anil Gupta, and president Sunil Sikka, have filed into the boardroom, and are staring into an 80-inch LCD screen. Advertising firm Lowe Lintas is presenting the first cut of a campaign featuring one-time megastar Rajesh Khanna who, in the early 1970s, generated a mass hysteria no other actor has been able to replicate. It’s a rare appearance for 70-year-old Khanna.

The commercial ends on a smart, though somewhat poignant note—Khanna realises his worshipping fans are a thing of the past; what remains as solid and faithful as ever are his Havells fans. The management likes the black humour. But Anil Gupta has a problem: Khanna’s movements look computer-generated in parts, especially when he turns. “It could pass for a cheap ad—not the Rs 2 crore one it actually is,” he says. Lowe Lintas chairman and chief creative officer
R. Balakrishnan steps in and explains that the commercial has the right look.

Anil Gupta’s reaction underscores the image Havells has relentlessly tried to build—of a premium brand which focusses on quality and style. At a time when cheap, Chinese-made fans, lights, switches, etc., continues to sell in very large numbers, Havells makes expensive products. The downturn and the promise of volumes in inexpensive products haven’t altered this. Kuldeep Aggarwal, promoter of Tarzan Electricals in Delhi, says he doesn’t need to push Havells products too hard. “Customers ask for them.”

Aggarwal sold Rs 90 crore worth of Havells products last fiscal, nearly 40% more than the previous year. In contrast, Crompton Greaves accounted for just Rs 8 crore. Tarzan’s association with Crompton goes back 10 years before Havells.

The Guptas always believed India had the potential to be a global manufacturing hub for electrical goods. What it lacked was investment in world-class factories. They also felt that Indians would be willing to pay a premium for the right product.

Around 2002, when Havells made miniature circuit breakers (MCB), cables, and electricity meters (a business it has since quit) it made plans to commit big money to make fans, lights, etc. Import duties for many of these products were tumbling, and Chinese imports found a ready market in the construction boom under way. Many of Gupta’s competitors were contemplating sourcing from abroad. To pledge capital to make fans, for example, when they could easily be imported seemed either astutely contrarian or deeply flawed.

Today, the Guptas can even be called visionary. From being a marginal player, Havells has grown 30 times in the last decade to emerge as India’s largest consumer electricals company, overtaking older brands such as Crompton Greaves and Bajaj Electricals. Over the same period, its market capitalisation has jumped 65 times to Rs 6,700 crore. Had you invested Rs 10,000 in the Havells stock in FY03, it would be worth Rs 6.5 lakh now, not to mention the recurring dividend income. The street is appreciative: The stock gained by 40% over the last year against the market’s decline of 10%.

There are dealers who wish Havells would launch a lower-priced range. “I have been requesting Havells to enter the low-end fan segment. But I’m told Qimatji refuses to play the competitors’ price game,” says Vipul Dileep Shah, owner of Mumbai-based New Electric Trading Company, a leading fan dealer who sold Havells fans worth Rs 2 crore last fiscal.

Anil Gupta puts Havells’s success down to his father’s entrepreneurial instincts—in some ways an innate ability to take just the right amount of risk—that comes from being a street-smart businessman for decades. “It’s more my father,” he says. “I am an MBA [from Wake Forest University, North Carolina] who learnt entrepreneurship at my father’s feet.” Gupta senior says he has always tried being “different” and taken “risks”.

That’s how Lowe’s Balakrishnan views the company. After having handled the account for five years, he says the Havells management “is open to new ideas even if it means taking some risks with the brand. It has successfully transformed a low-involvement category such as switches, wires, and fans into a high recall brand.” But while Havells commercials have always stood out, its willingness to back its products heavily (in FY11, it spent Rs 72 crore on advertising against Rs 60.4 crore by Bajaj Electricals and Rs 53 crore by Crompton Greaves) comes from an even bigger bet the company has made—manufacturing.

While India’s economic rise is well chronicled, it’s often forgotten that after de-licensing, Indian manufacturers, especially those that made engineered products, have often been in retreat. Outside of automobiles and automobile components, the story has been dismal. For example, the entire consumer electronics (TVs, fridges, etc.) business has passed into the hands of the Koreans, Japanese, and Americans, who either have their own factories here, or source from abroad, often China. Ditto for industries such as telecom, computers, computer peripherals, etc.

Yet, in the last 10 years, Havells has built seven facilities to manufacture ceiling fans, motors, lighting fixtures, switches, and compact fluorescent lamps (CFLs). Currently, it has turned its attention to household appliances such as water heaters, toasters, food processors, blenders, and electric irons as well. In the last five years alone, Havells has quadrupled its manufacturing assets, investing nearly Rs 1,000 crore in new factories and expanding the existing ones. Domestic manufacturing now accounts for nearly 95% of its sales in India. In contrast, Bajaj Electricals and Crompton Greaves depend on outsourcing from China or small domestic vendors. Nearly 70% of Bajaj Electricals’ Rs 2,700 crore revenue in FY11 came from outsourced products.

Similarly, Crompton Greaves, the current market leader in fans, has added just Rs 150 crore in capital investments in its consumer products division in the last five years.

From a straight-up perspective of return on capital employed, Bajaj Electricals and Crompton Greaves may be right. They don’t block capital in building factories. But analysts question the long-term wisdom of asset-light strategies.

Says Biswanath Bhattacharya, director at management consultancy KPMG Advisory: “Outsourcing works for ordinary products bought in bulk. Outsourcing products with many features and variants can make the supply chain complicated and messy. In-house manufacturing enables a firm to customise products and improve customer experience.” Companies such as Apple and Samsung are ample proof that control over the supply chain works.

Anil Gupta says the public position of their competitors often is that electrical items such as fans, switches, and lamps are commodities with little scope for product differentiation or premium pricing. “So we have to work hard explaining to channel partners why we invest so much on manufacturing, rather than import from China.”

AT THE BADDI factory (in Himachal Pradesh), one can see Havells’s obsession with manufacturing. Here switches are randomly tested to check if they last a million operations, 10 times what is prescribed by Indian standards. “In real life, a switch doesn’t suffer even 5% of that stress. We have raised our bar to ensure consumers have no complaints,” says Jitendra Mishra, assistant general manager at the switch unit.

It’s the same at Neemrana in Rajasthan, where Daljit Singh, associate vice president, operations and technical (lighting division), is responsible for the manufacture of CFLs. He has to make sure each CFL leaving the factory is trouble-free, unlike competitors which rely on random sample testing.

Each (yes, each) CFL is kept alight for 90 minutes at different voltages on a conveyor belt. Lamps that pass this are allowed to cool for 48 hours. After that, they are checked again, before being boxed. This is done even though three randomly picked lamps from every batch are tested for their prescribed life of 6,000 hours in a specially designed hall. The company began checking all lamps from August last year after it received complaints from some dealers that every now and then a CFL would fail. “This led to a change in the company’s quality policy and we were asked to move from sample testing, the industry practice, to 100% product testing,” says Singh.

At another factory in Haridwar, where fans are made, line managers not only have to focus on the longevity of fans, but their looks as well. Havells has invested in robotic paint shops similar to those used by car makers so that every Havells fan shines like a new car. Every fan has to also pass through eight different tests (speed at various voltage levels, noise during revolution, etc.) before being dispatched. There is even a lab which measures the circulation of air by a ceiling fan in an Indian bedroom under different conditions.

The next frontier for R.S. Nehra, an electrical engineer and the key person behind the success of Havells fans, is to make pedestal and exhaust fans. “Most of the pedestal fans sold in India come from China because their manufacturing is highly labour intensive and difficult to automate, unlike ceiling fans. We have been able to automate some of the processes and have put up a test line for pedestal fans. If it proves viable we will scale it up,” says Nehra, now a consultant at Havells after spending 25 years at Larsen & Toubro.

QIMAT RAI GUPTA, now 75, always wanted to be a manufacturer. Indeed, the turning point for Havells was its shift from assembling to manufacturing. He started off as a schoolteacher in Malerkotla, Punjab, and in 1958 switched to selling electrical goods in Bhagirath Palace, the wholesale market for electrical items in Delhi’s Chandni Chowk. His ambition was to own a brand and become a manufacturer. He found what he wanted in 1971: the Havells brand, owned by one Haveli Ram Gupta, which he bought for Rs 7 lakh.

Those days Havells assembled MCBs at Badli, on the outskirts of Delhi. The components that went into an MCB, about 44 of them, came from different vendors and were of inconsistent quality.

In 1987, Qimat Rai Gupta decided to manufacture MCBs in Badli, not just assemble them. Over the next decade odd, he also dabbled in making other electrical products (see timeline) before deciding to put up a world-class MCB factory, this time at Baddi. Handpicked for the job was B.S. Galgat, who ran the Badli unit. Now senior vice president of operations of the company, Galgat is considered the brain behind the Baddi operations.

Before joining Havells, Galgat, an engineer, had spent over 10 years in the auto-component industry (Amtek Auto) and was trained in total quality management (TQM) by Japanese management guru Y. Tsuda. Galgat eats, breathes, and lives engineering and is credited with revolutionising manufacturing in Havells, besides building a team of 191 engineers who share his passion. Together, they have enabled the company to change the game.

Galgat’s team first set up two manufacturing lines for MCBs. “The first line used imported equipment, while the second was assembled in-house at a fraction of the cost with components available off the shelf,” says Galgat. A Rs 7 crore German automated set for calibration and testing in the first line was replicated at a cost of Rs 35 lakh. What it lacked was a chilling chamber (to cool the MCBs when they heat up during calibration and testing) and the good looks of its European counterpart.

What Galgat liked best was that the top management stayed out. “Decision making at the headquarters is quick. After that, the ownership is passed on to the line managers with full powers. I remember approving equipment purchases worth
Rs 5 crore. The finance department’s role was limited to releasing the money to the supplier,” recalls Galgat.

The results have been dramatic: The Baddi facility is now the world’s sixth-largest MCB plant with a capacity to manufacture 60 million pieces annually—half of Havells’s total MCB capacity. The unit is a money-spinner for Havells, accounting for nearly half its FY11 profit even though it contributes to just a quarter of the company’s revenue in India. Every rupee invested there earns 66 paise. The success of the MCB division gave Havells the confidence to replicate the manufacturing model across other product lines.

At the QRG Center for Research and Innovation in Noida (the initials are the Havells patriarch’s), 43 engineers, headed by Paritosh Bhardwaj, vice president, work almost round the clock. They are working on 61 products to be rolled out over the next two years. They have just finished work on Havells’s most expensive MCB to be sold under its premium global brand Crabtree. Bhardwaj has secured two patents on this MCB, which has 10 new features and is priced nearly 15% more than its nearest rival. “A great change came over the company in 1999, when the chairman told us to make directors irrelevant. That was a turning point,” says Bhardwaj.

Like Galgat, he was pleasantly surprised to find he had a free hand in developing the division: He could hire people and develop products without much interference.

Qimat Rai Gupta didn’t just allow his managers freedom. Having started off as a dealer, he also set the tone for the way Havells engages with dealers. All 5,300 of them get the same rate of discount irrespective of volumes, unlike some other companies which offer greater discounts for higher volumes. Moreover, Havells dealers and their immediate family members get a medical insurance cover of Rs 5 lakh. The latest offering to its dealers is the QRG Growth Fund—a mutual fund managed by four institutions, including IIFL and Barclays. “The schemes are self-funded [by the dealers] and the company keeps its working capital to a minimum,” says Sikka.

“To encourage dealers to pay their dues faster, we told them that 0.3% of the cash collected would go back to them as points that could be encashed for vacations. But the points collected faster than the dealers could encash, so we bought a health cover. But even that wasn’t enough. So the balance is deposited in the fund with a lock-in of three years.”

NOW HAVELLS WANTS TO BUILD expertise in areas beyond manufacturing—packaging, sales, and distribution. “Our strategy is to own the entire value chain so as to give the best experience to customers,” says Anil Gupta.

And so, at a time when most companies are cutting jobs and outsourcing non-core functions, Havells has employed 40 designers and four paper technologists to design its cartons and product literature. A. Vijay Narayanan, vice president - marketing at Havells, quotes Qimat Rai Gupta: “Our chairman says every box carries the hard work of 4,500 people [Havells employees]. So it can’t be just any carton but should reflect Havells’s values. The customer should be proud of his purchase from the time he opens his box.”

While giving finishing touches to a new case containing the instruction CDs that accompany a new range of consumer appliances, Narayanan says: “I could have used envelopes, but I’ve spent three times more on designing a CD case so that the recipient feels proud of his association with Havells.” Narayanan worked with LG Electronics before moving to Havells eight years ago.

Havells’s ambition of outperforming its rivals has led it to selling through its chain of Havells Galaxy and Havells World stores. It’s what the company calls its “integrated product management strategy”.

Sikka says: “For us, entry into any new category is like starting a company from scratch. Havells is not one but 15 different businesses with their own dedicated infrastructure, be it manufacturing, product development, sales and service, marketing, or branding. Only resources such as finance and legal are shared.”

Control over the entire value chain makes Havells’s business less vulnerable than rivals who are overly dependent on outsourcing to drive their growth, says Ajay Parmar, head, investment banking, Emkay Global Financial Services.

KPMG’s Bhattacharya feels it allows a company to introduce new products faster and improve its time to market. Its desert coolers, for instance, use paper that doesn’t rot in water, like grass does. At Rs 12,000 a piece, they cost as much as a small window AC and are about 50% more expensive than competition, but the company is not worried. “For the current summer, we’re sold out,” Sikka says. He feels it’s the end-to-end product capability that helps Havells command premium pricing across product categories.

IN A RECENT TENDER FOR 13,000 fans for a large institutional user, Havells quoted Rs 1,400 a piece as against
Rs 1,140 asked by a bigger competitor. “When we were asked to justify our pricing, we compared our technicals with the competitor’s. We also revealed the price at which we had closed a similar deal,” says Sikka. Havells won the order. For Anil Gupta this example epitomises Havells.