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INDIAN COMPANIES COMPETING IN
ADVANCED GLOBAL MARKETS
S Mukherji
Indian Institute of Management Bangalore, India
© S Mukherji
2
Globalization, especially where a set of firms from developing economies has risen and challenged established players of developed economies, has happened several times in the past • In early 1500s, European enterprises sailed out to Indian & China to trade silver for spice • In early 1900, enterprises from the United States challenged dominance of European manufacturers • In 1970s, Japanese manufacturers invaded US markets with their low-cost, high-quality products • In 1980s, Mexican enterprises, post NAFTA, challenged incumbents in N America • In 1990s, firms from S Korea posed challenges before the incumbents in developed markets
Is there any difference this time ?
GLOBALIZATION IS NOT NEW…
© S Mukherji
3 …BUT IT SEEMS TO BE DIFFERENT THIS TIME
ON THREE KEY DIMENSIONS
1
2
3
Unique origin of challengers
Deconstruction of value chain
Deep desire for achievement and recognition
© S Mukherji
4 CHALLENGERS ARE VERY LARGE IN SIZE
1
2
3
Large size of challengers make them a vibrant source for • physical assets and resources • talent and labour pool • markets
Unique origin of challengers
Deconstruction of value chain
Deep desire for achievement and recognition
POPULATION IN BILLIONS
CHINA
INDIA
BRAZIL
RUSSIA
EUROPE
USA
JAPAN
© S Mukherji
5 CONTINUOUS AND COMPLIMENTARY MANAGERIAL INOVATIONS
1
2
3
Unique origin of challengers
Deconstruction of value chain
Deep desire for achievement and recognition
Advancement in information and communication technologies have enabled deconstruction of production value chains Availability and processing of information and data at lower costs facilitate market based transactions. This has led to emergence of specialists players that can leverage global economies of scale and scope In the past, Portuguese merchants in Macao had to build their own ships, French traders had to borrow from local money-lenders and the Japanese had to send undercover agents to understand buying habits of US consumers
© S Mukherji
6 IMPACT OF SUCCESS FELT AT GLOBAL INDUSTRY LEVEL
1
2
3
Unique origin of challengers
Deconstruction of value chain
Deep desire for achievement and recognition
Unrelenting hunger for learning, improvement, achievement, success and recognition Rapidly growing economies with young and poor population, overburdened infrastructure, and inexperience in modern business are in a hurry to grab hold of opportunities and improve their fortunes Countries like India and China want to regain their place of pride in the new world order. For a long time they have been shut out of the prosperous and developed world – now they sense an opportunity to claim leadership position Executives and workers routinely put long hours, sometimes seven days a week and many of them take second jobs
© S Mukherji
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INDIA’S ENGAGEMENT WITH GLOBAL MARKETS HAVE CHANGED
US$ Million
Source: Annual Report, Ministry of Commerce & Industry, GOI
CAGR of 17.3% (1970-2004) Exports as a proportion of GDP has risen from 3.35% in 1970 to 10.4% in 2005
Statistical analysis (Chow Test) shows that the structure of Indian exports have changed significantly around 92-93
Knowledge intensity of exports has increased from 12% (1970) to 30% (2004)…
© S Mukherji
8 ALL SECTORS HAVE NOT ADAPTED TO CHANGING CONTEXT
PRE-1992 CONTRIBUTION
PO
ST
-19
92
CO
NT
RIB
UT
IO
N
LOW
LO
W
HIG
H
HIGH
Software Gems&Jewelry
Engineering Goods
Drugs & Pharmaceuticals
Jute Tea
Readymade Garments
© S Mukherji
INDIA HAS SIGNIFICANT LABOUR COST ADVANTAGE 9
Labour Cost Comparison : Average hourly compensation including benefits for production workers (US$)
2003
Indonesia 0.30 0.70 China 0.80 1.27 India 1.12 1.68 Russia 1.50 2.38 Mexico 2.45 3.28 Poland 2.70 3.83 Brazil 2.75 3.90 Hungary 3.53 5.30 S Korea 9.99 13.01 United Kingdom 17.87 20.14 Japan 20.68 22.61 United States 21.86 25.34 Germany 30.60 34.46
Source: Economonitir, US Department of Labour & Boston Consulting Group
2009
Cost of production workers in India remains a small fraction of that in developed countries and considerably less than many emerging economies of Central Europe and Latin America
Despite salary increases cost of engineering talent in India remains at 10-15% of developed countries Labour cost advantage provides Indian companies a platform to make an entry into the global markets
© S Mukherji
LABOUR COST ADVANTAGE IS USUALLY UNSUSTAINABLE
IN THE LONG TERM 10
Labour cost comparison - 2007
Average cost $ / operator hour
% of US Cost
China 0.85 50 India 0.69 40 Indonesia 0.65 40 Vietnam 0.46 30 Bangladesh 0.28 20
Source: Warner International published in Business Standard, 02-June-08
Chinese textile makers planning to shift production to India • Increased labour cost
- New labour law making companies
contribute more to social security, insurance and retirement fund
• Appreciation of yuan -16% appreciation between May 05 and May 08
• Reduced subsidy from government -WTO signatory - Subsidy was $1.93 B in 1998
The Chinese example
© S Mukherji
11
A vicious cycle
High entry barriers in advanced markets
• Powerful incumbents • Strong regulatory & legal context • Adverse perception
Resource commitment
• Technology, innovation • Brand building • Distribution network
Resource constraints in emerging markets
• Small scale • Inability to retain high quality talent • Absence of venture capital
Necessitating Confronting
Multiplying
INDIAN FIRMS FACE UNIQUE CHALLENGES WHEN
THEY COMPETE IN GLOBAL MARKETS
© S Mukherji
12 WHAT CAN INDIAN ORGANIZATIONS DO TO SUSTAIN THEIR
COMPETITIVE ADVANTAGE IN GLOBAL MARKETS?
Leverage country specific advantages
Time
Sustainability of firm
competitiveness
Build organization / industry specific advantages
Evidence from software services, pharmaceutical and auto component industries indicate that firms and industries that have been able to change their basis of competitive advantage from “position” to “competencies” are the ones who have been most successful
© S Mukherji
13
BHARAT FORGE LIMITED:
FORGING SUCCESS IN A DIFFICULT TERRAIN
© S Mukherji
14 Snapshot of BFL’s Performance (FY 95- 07)
0
1000
2000
3000
4000
5000
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
0
100
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300
400
Revenue (Rupees crores) PAT (INR cr.)
• World’s second largest forging company 600,000 T forging capacity • World’s largest axle component manufacturer • India’s largest exporter of auto components • 70% revenues from overseas markets • 40% of global workforce (~ 2500) are non-Indians • 9 manufacturing facilities, 7 abroad1 • 17% revenue from non- auto segment
1. Three in Germany, one each in USA, Sweden, Scotland & China
US$ 1 Billion
© S Mukherji
15
How did Bharat Forge, from a relatively marginal position of being a forged auto - component manufacturer located in India, become the second largest forging company in the world ? How did the industry characteristics such as cyclicality and cost reduction drives by major OEMs impact BFL’s internationalization ?
© S Mukherji
16
Between 1987 & 89, BFL invested Rs. 1500 million and installed two state-of-the-art forging press lines from Muller Weingarten, Germany with a combined capacity of 22000 MTs. This was at a time when their hammer shop (3000 MT) was operating at a 50% capacity. Such heavy duty investment was dubbed by popular press as WHITE ELEPHANT !
Would you have agreed with the view of popular press ? What was the ‘pressing’ need for creating capacity by investing in the forging presses ?
“ I realized that the Indian manufacturing model of low capital, low technology and high manual labour will not work for us. We will never be competitive and would always remain dependent on the Japanese or the Germans”
© S Mukherji
17
Why did BFL recruit new employees to run the automated press shops ? Why did they not train the existing employees , upgrade their skills ? Was this fair to the old employees ? Is this change process too ruthless ? What does it communicate to you about Baba Kalyani’s leadership abilities ?
© S Mukherji
18 MULTIPLE OBJECTIVES ACHIEVED THROUGH PRESS LINES
• Improvement in consistency and quality • Improvement in productivity • Converting a craft mode of production into an engineering production
- deskill the process - ‘replace muscle power with intellectual ability’
• Communicate delivery capability to prospective clients
• Communicate the intent to compete in global markets / become world – class to employees and other stakeholders • Creating a vehicle / key event around which the organization would be transformed. New employees with qualitatively different capabilities would be recruited • Creating large capacities in anticipation of demand
Upgrade manufacturing process
Communicate value
Change agent for the organization
Breakthrough into customer accounts
© S Mukherji
19
Between 1996 and 2001, BFL undertook a series of measures aimed at improving operational efficiency, financial restructuring and cost rationalization. What was the consequence of these initiatives ? Did BFL achieve anything of significance in the global market because of these measures ? Why or why not ?
© S Mukherji
20 INITIATIVES ALONG MULTIPLE DIMENSIONS
Financial restructuring
• Retire high cost debts • Foreign currency debts • Divestment of portfolio investment • Divestment of holdings in group companies
Upgrade people processes
• Three layered structure • New performance management system • Competency upgradation TPM, 7 S, Kaizen • VRS, redeployment
Improve operational efficiency
• Reduce energy costs • Streamline vendor management process • Integrated supply chain • Information system
Build design competence
• Computerized design • Simulation, Finite Element Analysis • Correlation analysis • Toolmakers specialized knowledge captured in system
Diversifying product portfolio
• Machined forgings • Small forgings for passenger cars • Specialized component for drilling
© S Mukherji
21
What was the significance of the Kirkstall acquisition ? What did BFL really ‘acquire’ through the deal ?
© S Mukherji
22
Why did BFL acquire CDP ? What was the intended benefit ? Was there any unanticipated benefit of the acquisition ? What were the key factors that enabled a smooth integration process ?
© S Mukherji
23
DATE COMPANY PRICE($ million) FORGING CAPACITY (MT)
BFL CONTINUES ITS INORGANIC GROWTH
2000 Kirkstall Forge – UK 4.5 Dec 2003 CDP Germany 39.3 100,000 Dec 2004 CDP – AT, Germany 8.53 10,000 June 2005 Federal Forge, USA 11.0 60,000 Sept 2005 Imatra Kilsta Sweden 57.5 100,000 & Scotish Stamping Dec 2005 Joint venture with FAW 28.0 100,000 Forging China (52%)
What is BFL planning to achieve through all these acquisitions / joint ventures ? Is BFL biting more than it can chew / digest ?
Source: ABN-AMRO
Bharat Forge: Performance
(1990-2012)
6314
413
0
200
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800
1000
1200
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6000
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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
PAT (
Rs.
cro
re)
Gro
ss S
ale
s (R
s. c
rore
)
Gross sales
PAT
Decision to diversify into capital goods and
infrastructure (2006)
JV with Areva, Alstom, NTPC (2010)
Domestic growth post-liberalization
Kirkstall Acquistion (Jan 2002)
CDP & CDP AT Acquistions
(Jan & Dec 2004)
Federal Forge, Imatra and FAW
deals (2005)
Loss Rs. 63 crore
(2010)
© S Mukherji
COMPETITIVENESS OF INDIAN SOFTWARE SERVICES INDUSTRY
(Unique) characteristics of the Indian Information Technology
industry
Born global, services business, matching economic conditions
Factors contributing to the growth and success of the industry
Demand and supply side factors
Evolution of the industry
Comparative advantage (body shopping) to competitive advantages
(managerial and business model innovations)
Challenges today
Non linear growth, product innovation, internationalization
25
© S Mukherji
26 SNAPSHOT OF THE INDIAN IT INDUSTRY OVER THE LAST DECADE
0
10
20
30
40
50
60
70
FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY08
0%
5%
10%
0
10
20
30
40
50
FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY08
0
10
20
30
40
50
FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY08
REVENUE US$ BILLION REVENUE as %
of GDP
REVENUE US$ BILLION
REVENUE US$ BILLION
CAGR of Industry revenue: 29%
CAGR of industry exports: 38%
CAGR of domestic industry revenue: 20%
• Industry witnessed rapid and sustained growth primarily driven by exports of software services • Domestic industry is roughly a 50-50 split between hardware and software, while hardware exports are negligible • Industry figures include revenue from ITES / BPO comprising about 17% of total revenue
© S Mukherji
27 SOFTWARE SERVICES IS A PEOPLE INTENSIVE BUSINESS
0
250
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1250
1500
1750
2000
FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY08
DIRECT EMPLOYEES (‘000)
1630
1293
1058
830
670
522 430
284 230
190
0
50
100
150
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300
90-91 96-97 99-00 00-01 01-02 02-03 03-04
0
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25
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35
40
45
50
Number of
Employees in
Software exports
( 000)
Export revenue per
employee: US$’ 000
While employment has grown steadily… …industry has witnessed productivity gains
Productivity gains are likely to be more if we take out the ITES-BPO component
2010
© S Mukherji
EXPORTS ACCOUNTED FOR ~ 17% OF INDIA’S GDP IN 09-10 AND
INFORMATION TECHNOLOGY PRODUCTS AND SERVICES
ACCOUNTED FOR ~30% OF INDIA’S EXPORTS
28
Billion US$
Service Export
Merchandize Export
178
118
24
65
GDP of India in 09-10: US$ 1.73 Trillion
Total Exports
IT Merchandize Exports
IT Software Exports
Caveat: Data is compiled by author from multiple sources and therefore might not be exact. Treat these as indicators of trends
© S Mukherji
29 THE NEXT WAVE NEEDS TO COME FROM INNOVATION
Indian firms need to build on their process competencies to create innovative products and services
Markets need to be broad based, reducing dependencies on developed countries
Develop greater understanding of consumer needs in emerging nations
Ability to withstand retaliation by incumbents
Leverage country specific advantages
Time
Innovation, global mindset, managing global organizations
Process competencies, building global scale of operations
Sustainability of firm
competitiveness