The Indian way

SOME 30 YEARS AGO, THE CITY of Pune was hardly the setting for a business success story, much less two. But that’s what happened in the late ’70s and early ’80s. The two businesses, now among the country’s 30 largest, were vastly different. One was a respected business house; it wanted to expand production. The other was an unknown startup. They belonged to completely different sectors, but both had to confront the same nemesis: the government.

The firms were Tata Engineering and Locomotive Company (Telco), and Infosys. The Telco management wanted to set up a truck manufacturing plant in Pune in 1966. It made sense to have a factory in Maharashtra; Telco’s first factory was in Jamshedpur in what is now Jharkhand. But instead of welcoming the investment, the government set the Monopolies and Restrictive Trade Practices Commission on Telco in 1970. For more than three years, the Telco team was kept busy, not with engineering or business expansion, but with long deliberations with the commission to get no-objection certificates for a capacity of 9,000 units. The first Telco truck rolled out of Pune only in 1977, 11 years behind schedule.

Four years later, N.R. Narayana Murthy set up Infosys in Pune. Seeing greater potential in the U.S., he persuaded six of his colleagues to fly there. The business they built involved outsourcing work to India. Increased business meant that Infosys needed more equipment (computers and software). But importing these was almost impossible, thanks to tariff barriers and steep duties. “It would take nine months and 50 visits to New Delhi to modify a licence for equipment when a new software product arrived,” recalls Murthy. The duty on disk drives was more than 200% . Telco, meanwhile, faced the same problem when it wanted to import R&D.

History shows that both companies overcame government hurdles successfully. Today, Telco (now Tata Motors) is ranked 8 on the Fortune India 500, while Infosys is ranked 29. The need to manage government bureaucracy is one of the factors that unites most companies on the Fortune India 500. Then there’s the ability to use capital efficiently; to do more with less. The third common trait is innovation, fostered by the need to make do with what’s at hand. Added to these, in the past 20 years, there’s a new quality that’s come to define Indian business: entrepreneurship. Some experts believe this is an extension of jugaad, or making do, coupled with improved capital formation. Whatever the reason, it’s clear that entrepreneurs have been setting up more companies in the past 20 years than ever before.

MANAGING GOVERNMENT
Companies of all sizes know how to tackle bureaucracy effectively. “Even today, it hasn’t diminished entirely,” says Narayanan Vaghul, former chairman of ICICI Bank talking of the need to manage Delhi. “Industry depends heavily on government. That distinguishes the Indian brand of business from that of developed countries. The government’s long arm reaches every nook and corner of the country.” It is evident in the unending story of the telecom regulator’s and government’s roles in awarding 2G licences.

According to the Legatum Institute’s Survey of Entrepreneurs: India, 35% of respondents think government regulation presents the biggest barrier to starting business—a rise from 29% in 2009. But businesses have always managed to get around this barrier. Even in an era of protectionism, Telco and Infosys managed to get around government hurdles successfully. Here’s how: They flew their people abroad to learn business and technology practices.

While Murthy’s colleagues set up an office in Boston in 1987, from where Infosys kept up with technology shifts and opportunities, Telco engineers periodically flew to auto exhibitions overseas. “In those days, living allowances were $10 to $12 per day,” says Prakash Telang, managing director of Tata Motors, then an engineer at Telco. “It was hard to manage more than one full meal a day. In those conditions, when our engineers went abroad for an auto exhibition, they grasped as much as possible.” Back home, Tata Motors built systems to disseminate the imported information after the engineers returned. “They would make sketches by hand. The company was hungry for technological information,” adds Telang.

Vivek Paul is one of the most famous global citizens of India Inc. He spent a great part of his life in the U.S., and caught the imagination of the business community in India between 1999 and 2005, while with Wipro. He rose to vice-chairman, a unique experience because his growth occurred in a family-promoted company in a liberalised India.

“Governments hate to give up power,” he says matter-of-factly. “It has not liberalised industries. It has liberalised only as much it was forced to. There has been no seeking out or freeing up of the economy. The social miasma in India changes and keeps changing even though the government becomes more acquisitive and encroaches upon new areas. The government is reluctantly retreating, but the rest of the economy is growing fast enough.”

Paul may well be talking of pre-liberalised India, which, according to Azim Premji, chairman of Wipro (ranked 23 on the Fortune India 500), was characterised by “a controlled regime and a challenge at every stage of doing business.”

Paul’s resentment towards the government shows how deeply Delhi is entrenched in the psyche of big industrial houses in India. Immediately after independence, the government was focussed on keeping a diverse country together. Its priority was nation-building, and industry was not high on its agenda. Scale, seen in that context, was considered to be the preserve of government. Even today, 83 public sector undertakings and government entities feature on the list (16.6% of the list).

“A couple of things about the Nehruvian period need to be underlined,” says historian Ramachandra Guha. “First, he represented a consensus. There is no such thing as Nehruvian economics. There is state-interventionist economics that was ubiquitous all over the world in the 1950s, especially in state colonies and even more specifically to India, which was colonised by a Western national corporation.”

So, the idea to keep out foreign capital and that the state needs to have a commanding role was promoted by a cross-section of economists, the scientific elite, the political elite—and even the business class.

This was evident in the Bombay Plan of 1944, when seven prominent businessmen, including J.R.D. Tata and G.D. Birla, and economist John Mathai, called for a central directing authority over enterprise. The Bombay Plan did not go unnoticed when India’s first economic plan was drawn. “It is a mistake to blame Nehru alone for the state of the economy. His greatest failure was the lack of emphasis on primary education,” says Guha. “Indira Gandhi, who brought in protectionism, is in many ways the bigger culprit.”

Today, both industry and government are caught in the tug of war between two Indias: in large cities and the large number of villages and small towns. The size of the latter group determines the political fate of governments, whereas consumption in and around large cities propels economic growth and employment.

Indira Gandhi’s thrust to substitute imports had the potential of promoting local enterprise beyond cities, but it killed the idea of world-class innovation. The inadvertent result of this was to make India Inc. self-reliant.

A survey of Chinese entrepreneurs by Legatum Institute found that businesses rely heavily on their government for support. Indian enterprises have a better record of working without (or around) government policy.

COMPASSIONATE CAPITALISM
Compare the top 20 companies in 2000 (365-day average of market capitalisation) on the Bombay Stock Exchange (BSE), with the same list in 1990. Over the decade, the list was reshaped with new names such as Zee Entertainment, Infosys, NIIT Technologies, Wipro and HCL Technologies. By 2005, Bharti Airtel had made it to the list. All the while, the valuation of the top 20 of 2000 had gone up steadily.

In effect, a new generation of companies such as Bharti Airtel, Infosys and DLF replaced the 1990 BSE order. In the two decades, valuations of old faithfuls such as Reliance Industries and Larsen & Toubro have grown strong on the BSE. But it is hard to miss the new enterprises. These really are the children of a liberalised economy.

“The history of this transformation is unique. The entrepreneurial class is not as deep in number or activity anywhere else in the world,” says K.V. Kamath, chairman of ICICI Bank. He points out that this class of entrepreneurs aspires to high corporate governance standards and industry best practices. This is a marked change from the old guard.

What makes the new wave different is access to capital. According to Venture Intelligence, a research-service focussed on private equity (PE) and mergers and acquisitions (M&As), venture capital and PE investments in startups have risen seven times since 2000 to $7.4 billion (Rs 33,537 crore). Such investor activity was unimaginable even as late as 1995.

Financial institutions helped mobilise over Rs 60,000 crore of capital for the private sector in 2008-09—the year of the economic slowdown. That figure stood at a low Rs 2,136 crore in 1995-96, according to the Reserve Bank of India. This is clearly a different era for the private sector. Will this era retain any of the traits that have so far characterised Indian business? Kamath, for one, contests the cost-innovation legacy. Increased disposable income will result in different market behaviour from the India of the past 100 years, he argues. Better access to capital will fuel a wave of entrepreneurs.

Will this spawn a new Indian model? There are already traces of what Murthy calls “compassionate capitalism”, a concept unique to India. “Business in India has to be based on entrepreneurship that will leverage the power of scale at low per-unit cost,” he says, “because in India, the disposable income is low.” In a country where there is a lot of poverty, job creation becomes important. “There is still scepticism about capitalism in this nation. Therefore, if industry wants capitalism to take firm root here, the leaders of this initial wave will have to demonstrate their oneness with society. That is why business should not and cannot function in isolation,” he adds.

The Tata group (15 Tata companies made it to the Fortune India 500) is an excellent example, beginning with its unique shareholding pattern. It is promoted by Tata Sons, 66% of whose equity is held by a group of philanthropic trusts. It is also a private and unlisted company. However, it has spawned more than five large listed companies. The profits made by the subsidiaries are drawn to a parent that is predominantly a charitable trust.

R. Gopalakrishnan, who spent 31 years in Hindustan Lever (now Hindustan Unilever) before joining Tata Sons in 1998 as executive director, has overseen many Tata companies engage with a dynamic domestic market. “Capitalism here is in its adolescence, trying to find form and shape. It will be influenced by profit seeking, concern for society, Gandhism, and our mythology and spiritualism,” he says. If capitalism thrives in India, it will be inextricably linked to the power of scale: the Indian masses.

LEVERAGING THE MASSES
Since 2005, when the late professor C.K. Prahalad wrote the path-breaking The Fortune At The Bottom of The Pyramid, companies—local and foreign—have looked to innovate for the bottom of the pyramid (BOP) as the market. A noticeable example was when Hindustan Lever began selling shampoo in sachets, rather than in small bottles, because research showed that consumers buy based on requirement. Prahalad himself often invoked Mahatma Gandhi as the genesis of his thesis on the BOP.

Gandhi’s view of India was a diverse entity of 600,000 villages, and hence his call for swadeshi (self-reliance). In the new India, it has morphed into “global swadeshi”, as market strategist Rama Bijapurkar puts it. “We need to cobble together relevant-to-India best practices from around the world as well as within and create a ‘next practice’ global-swadeshi solution,” she states in the book Reliving Gandhi. With that approach, industry can’t go wrong with the mass power staring at them. Tata Motors’ Nano, in that sense, is a practical expression of global swadeshi.

Even microfinance institutions seek to apply scale in lending to the BOP. This means walking the thin line between supplying to the poor and meeting investor interests. The model isn’t foolproof or profitable yet in India, but MFIs are clear about one thing: they cannot ignore the BOP.

Empowering the masses has worked in unexpected quarters. In the late 1970s, Reliance Industries founder Dhirubhai Ambani pioneered the raising of capital in financial markets to power the expansion of his textiles venture. Instead of issuing shares, he issued convertible debentures for Rs 7 crore. “From the investors’ point of view, it was a much safer system as it guaranteed returns in the form of interest, while holding out the prospects of capital appreciation through future conversion into shares,” writes historian Dwijendra Tripathi in The Oxford History of Indian Business. It was a financial innovation, again mirroring the Indian acumen for capital utilisation. Dhirubhai, peerless in that respect, applied scale to raise finance and is credited with kick-starting the equity culture in middle-class India.

Scale here is also ingrained in the spirit of innovation. Take Tata Chemicals’ Swach, a water purifier whose business model is based on purifying a litre of water at a cost of one-tenth of a rupee. Its factory at Haldia in the state of West Bengal can make up to 1 million units a year, which the company plans to further increase. In the same vein, Godrej Appliances has developed a more accessible and dwarf refrigerator for rural India. “We innovated through Chotukool, an affordable refrigerator, for customers who not only wanted to experience the high of drinking chilled water, but also the prestige of serving it,” says Ashutosh Tiwari, executive vice president for strategic marketing in Godrej group.

Corporate India’s innovation journey is one that is today much more relevant to its large domestic market than the global one. But India’s track record with scale after liberalisation has acquired unprecedented proportions. As a nation, it came to the playing field late, when several evolutions of technology had taken place in other parts of the world. “This also means there are visible alternatives to conventional technologies,” Kamath says.

A car development project in India typically costs Rs 550 crore (less than $120 million), whereas it costs $150 million to $500 million for a single model in the U.S. Its cost models may not be on par with China, but the cars from India
have met the quality standards in Europe, as companies such as Mahindra & Mahindra have demonstrated. Equally, as scale has multiplied, it has become more relevant to a large-sized market of prudent buyers, as in the case of Tata Nano once again.

In effect, Indian businesses, while thrifty, are an agile and resilient bunch. This again is a hangover of government control. (Compare that with the conglomerate called China whose government patronises mass production among its state enterprises).

Tata Motors’ resilience in the new age was there to see as it leveraged its balance sheet in mid-2008 to acquire Jaguar and Land Rover from Ford Motor for $2.3 billion. The Indian automaker was shunned by the stock markets and Indian peers alike in the middle of the global financial meltdown of 2008. But it made it through the painful process of repaying its bridge loan, in return for global technology knowledge and assets. Indian companies that leverage the balance sheet are, however, rare.

While some companies, including conglomerates such as the Tatas and the Aditya Birla Group, are looking to expand abroad, they are not losing sight of home. The domestic market has been growing at 7% to 8%. “The Indian market itself has become a dominant demand side force in the global economy. Look at automobiles, retail or even information technology. Our domestic IT market is one of the fastest growing in the world,” says Wipro’s Premji.

According to the World Bank, per capita income in India is now at $1,134 in 2009, a three-fold increase from the pre-1991 era when TV shows on Doordarshan, the government broadcasting network, such as Nukkad and Wagle Ki Duniya mirrored an India dogged by unemployment and the middle-class life respectively.

Still, the enhanced earning capability for an Indian today is one-seventh of Brazil’s per capita income. India’s billion-plus population makes all the difference. And the glass is half full for Indian industry as it applies its own brand of free enterprise.

BUSINESS INTUITION
It’s been barely a day since Harsh Goenka returned from London to the RPG Enterprises headquarters in Worli, Mumbai. On a hot November day, the chairman of the Rs 17,000-crore conglomerate betrays no sign of jet lag. He travels back, this time, to 1987, straight into the summit of business talk in most family businesses: the dining table. “Most learnings in an Indian household take place over the dining table,” he says. “It is where business is discussed.” There is no attempt to distinguish work and life—another highlight of Indian business.

Goenka cites a conversation between his father Rama Prasad Goenka and B.M. Ghia, head of the Ghia Group, in 1987. The son, who has an MBA from a Swiss management institute, was flabbergasted then by how Goenka senior picked up the Ghia stake in Bayer India—in about three minutes. “My father asked, what is the size of the company? What is your expectation in terms of price? He then shook hands and told Mr Ghia, ‘Done’.” At the dining table, a 31-year-old Harsh questioned the manner of the buyout. “Why didn’t you negotiate?”

His father replied, “It was too good a deal.” First, Bayer was a huge name of German stock backed by good R&D. It was into agrochemicals, an industry that would grow in India, R.P. Goenka reasoned. It was also into pharmaceuticals, another growth area. It was into rubber chemicals too, that would have synergy with RPG’s tyre business (Ceat). “If I had negotiated, they would have gone to five more buyers and we may have lost a good deal. Or, I would have paid 5% to 10% more. We didn’t get into a bidding war.” Goenka doesn’t discount the value of that native intelligence. Instinct is inherent in Indian family businesses, he says.

Post-liberalisation, this wasn’t out of place. Be it Ambani’s decision to scale up in mobile telephony in 1999 after success in his refinery and textiles ventures, or Premji’s move to take Wipro from vegetable oil refining to global IT services, the agility of Indian family-promoted enterprises is evident.

Premji says the logic was simple. There weren’t many players in technology services, so there was an opportunity. “It was a scaleable business with an affordable entry cost.” Wipro swung into action.

There has also been a fair number of family-promoted conglomerates that transformed through joint ventures instead of radical overhauls and big acquisitions. Take Mahindra & Mahindra (M&M), ranked 19 on the Fortune India 500 list, for instance. In the past 15 years, it has absorbed best practices in passenger vehicle technologies from Ford Motor and Renault.

The Godrej group, under chairman Adi Godrej, grew increasingly aggressive on the joint-venture front. From alliances with GE Appliances and Procter & Gamble in 1993 to Pillsbury in 1995, the $2.6 billion conglomerate bridged the skills gap by engaging with global counterparts.

“It brought in a lot of modern thinking,” recalls Godrej. “We then invested heavily in R&D and technology absorption, even financial innovations such as variable remuneration to promote performance, and looked to take our companies public. Clearly, we cherished our family business values but our ways of doing business had to change with the times.” The change has been instrumental in market expansion.

Historians trace the Indian bent for capital utilisation to the business power and shrewdness of the Indian mercantile community of the 18th century. “Given the fragmented state of the market and the large prospects in trade, their lack of industrial initiative makes perfect sense,” writes Tripathi. “The available technology at any rate was not amenable to economies of scale.” This is one possible explanation for why capacity expansion in India has been markedly different from China’s. “Nobody in India sets up a grassroots plant 50 times the size of his existing capacity. Nobody,” says Kamath, referring to Indian industry’s care for return. “All have taken incremental steps.”

That slow and steady growth is evident across industries and across the country. And it might explain why, 18 years
after leaving for Bangalore, Murthy’s enterprise made a return of sorts near Pune in 2001, at a software technology park in Hinjawadi. By then, Pune had morphed into a jobs engine. And Infosys was well on its way to becoming a billion-dollar corporation.