SPECIAL REPORT BUSINESS IN INDIA October 22nd 2011
Adventures in capitalism
Indian business.indd 1 11/10/2011 13:32 SPECIAL REPORT BUSINESS IN INDIA
Adventures in capitalism
Indian businesses are rewriting the rules of capitalism in a distinctive and unexpected way, says Patrick Foulis ON AUGUST 1ST India’s nance minister, Pranab Mukherjee, gathered CONTENTS the country’s senior businesspeople for a pep-talk in New Delhi. The event (pictured) was notable for two reasons. First, the subject of discus- 4 Family rms sion was the wobble in con dence that has taken place over the past The Bollygarchs’ magic year. Although a mini-industry has arisen of India optimists who predict mix that the country’s entrepreneurial spirit will make it an economic super- 7 Inbound and power over the next two decades, many business folk on the ground feel outbound deals disillusioned. They worry that India’s notorious red tape, graft and lack Their oyster, with grit of infrastructure are nally catching up with it. Largely unnoticed abroad included and eclipsed by the rich world’s sovereign-debt crisis, the Indian econ- omy has hit a sticky patch, with investment slowing, in ation high and 10 Innovation and growth expected to dip to perhaps 7%, from a peak of 10%. After two and a cost-cutting half hours, needless to say, the bosses emerged and expressed boundless The limits of frugality optimism with the gru air of men in the grip of a half-Nelson. 11 State-controlled rms The second surprise, given India’s reputation as a land of red-hot The power and the start-ups and new entrepreneurs, was the dynastic nature of those cap- glory tains of industry. They included Ratan Tata, the fth-generation head of Tata Sons, a conglomerate; Anand Mahindra, the chief executive of the 12 The outlook for Mahindra group, which was co-founded by his grandfather; and Anil entrepreneurs Ambani, who inherited a chunk of the Reliance empire built by his fa- Looking for the next ACKNOWLEDGMENTS ther. The main representatives of rst-generation entrepreneurs were Infosys In addition to those mentioned and Shashi Ruia, who built the Essar group with his brother and who has 13 The Indian miracle and quoted in the text, the author handed day-to-day management to his son; and Sunil Bharti Mittal, who the future wishes to thank the following people controls India’s biggest mobile-phone operator, and whose son recently Rolls-Royces and for their help: Devendra Amin, joined the rm after a stint as an investment banker in London. True, not Pradipta Bagchi, Uday Baldota, Arun pot-holes Bhagat, Indrani Bhattacharya, all Indian rms are dynastic: Y.C. Deveshwar, a veteran business leader, Debojyoti Chatterjee, Phiroza Choksi, attended in his capacity as chairman of ITC, a rm controlled by institu- Shravani Dang, Anindya Datta, Mira tional investors, rather than a family. But ITC has become the kind of con- Desai, Charudatta Deshpande, glomerate that Western textbooks advise against, spanning everything Shubhada Dharwadkar, Suprio Guha, from stationery, cigarettes and spice-grinding to noodles and hotels. Sarika Kapoor Chokshi, Andrew A list of sources is at Lorenz, Kulsum Merchant, Jimmy Amid the barons and conglomerate bosses, the only man who rep- Economist.com/specialreports Mogal, Pankaj Mudholkar, Sachin resented a recognisably contemporary Western vision of the corporation Mulay, Christabelle Noronha, Kirsten was N.R. Narayana Murthy, the lead founder of Infosys. It is focused on An audio interview with Paul, Prasad Pradhan, Dr Pragnya the author is at Ram, Mahesh Shah, Capt Kunal one business line, computer services, which are mainly sold to rich coun- Economist.com/audiovideo/ Sharma and Milya Vered. tries. And it is owned by di use institutional shareholders, has gold-stan- 1 specialreports
The Economist October 22nd 2011 1 SPECIAL REPORT BUSINESS IN INDIA
India’s top 20 listed firms Controlled by: by market capitalisation State Larsen & September 2011, $bn State Bank Family of India Toubro 26.1 20.8 Foreign Tata Consultancy Diffuse Reliance Industries Services owners 57.2 42.6 ITC Bharat Heavy Coal India 32.5 Electricals 50.7 HDFC Bank 17.4 23.9
Mahindra Bharti Airtel & Hindustan Mahindra 31.0 Jindal ICICI Bank Unilever Steel Oil and Natural Gas 10.3 & Power 21.6 15.5 10.8 49.7 Tata Motors Infosys Sun 10.2 NTPC Housing Pharmaceutical 29.1 Development Wipro 30.1 Finance 10.6 20.6 17.6
Sector weights in the BSE 100 index, % Basic materials, Consumer and Financials Industrials Technology utilities and energy 31.0 24.5 health care 17.1 14.3 and telecoms 13.1 Source: Bloomberg
2 dard corporate governance and accounting, and in the next four brainpower, complex algorithms, knowledge workers, call cen- years is expected to wave goodbye to the last of its founders still tres, transmission protocols [and] breakthroughs in optical engi- playing an executive role. It is a corporate fairy tale: in a single neering as the new sources of wealth, many of the latest gener- generation Infosys has leapt from a start-up, founded by a hand- ation of Indian oligarchs made their cash from old-fashioned ful of engineers with $250, to global blue-chip company. The In- things like roads, mines, energy and property. In short, India has fosys vision of Indian capitalism was popularised by Thomas not conformed to anyone’s template. It has gone its own way. Friedman, an American journalist who had an epiphany after What does this new kind of capitalism look like? An im- playing golf in Bangalore and meeting Infosys’s chief executive. mense, often unrecorded informal sector employs the majority Mr Friedman went on to write the 2005 bestseller The World Is of Indians. But in terms of value added a Flat . It described an India of buzzing entrepreneurs and start- crude way of measuring activity that is ups, turbocharged by the internet, outsourcing and global com- used by economists Indian capitalism is munications a kind of giant Silicon Valley with worse roads concentrated. In 2007 a government sur- and spicier food. In the years since, perhaps re ecting the woes vey of almost 200,000 services rms, for- of the West and the rise of China’s state-backed approach, some mal and informal, concluded that the top observers have been less restrained, celebrating a reassuring In- 0.2% of them accounted for almost 40% of dia of a billion innovators who, through a bottom-up revolution, output, and that companies in two states, would propel their country to prosperity. Maharashtra and Karnataka, which host Just as Lenin hoped Russia could skip a Marxist phase or the commercial hubs of Mumbai and two and jump from agriculture to communism, so these cheer- Bangalore, collectively accounted for leaders hoped India could leap from sclerotic socialism, which about half of output. Next, look at the stockmarket. It is not an ideal proxy for India Inc, but it is Cheerleaders hoped India could leap from sclerotic the only reliable one. About 70% of its val- socialism towards a Western form of institutionally run ue sits in the BSE 100 index of the largest rms, the smallest of which is worth just capitalism. But that is not how things have turned out under a billion dollars, below which a rm is considered a tiddler by global stan- prevailed between independence in 1947 and liberalisation in dards. As a group, these businesses have a return on equity that 1991, towards a Western form of institutionally run capitalism. has declined in recent years but remains solidly in the mid-teens, But that is not how things have turned out. Infosys has just been making Indian rms more pro table than many of their Asian overtaken as India’s most valuable computer-services rm by peers, reckons Anirudha Dutta of CLSA, a brokerage. Debt levels TCS, part of the 143-year-old Tata group. Look at India’s leading are low and growth has been strong, with pro ts rising sixfold 100 rms by market value and you will not see any others like In- since 2001in dollar terms to $64 billion. fosys blue-chip, focused, di usely owned, created in the past That makes India big, but not that big. It accounts for about three decades and run on non-hereditary principles bar a few 3% of the world’s stockmarket value. Cheered, feared and jeered nancial rms. And whereas Mr Friedman cited software, at home, India’s giants are mere middleweights on the global 1
2 The Economist October 22nd 2011 SPECIAL REPORT BUSINESS IN INDIA
2 stage. State Bank of India, India’s largest lender, is a tenth of the size of China’s biggest, measured by pro ts. Reliance Industries, Still ahead of the pack, just 2 a family-run conglomerate with a skew towards chemicals and Return on equity, % energy that is the subcontinent’s most valuable rm, is only a 25 third as big as Total of France. If all goes to plan and India’s econ- India (BSE 100) omy grows quickly it will still be a decade before its rms begin 20 to challenge those of the rich world and China by size. After two decades in which sunrise industries such as mobile telecoms, 15 media, health care and nance have thrived, India’s distribution 10 by sector now looks pretty conventional by global standards (see MSCI Emerging Asia 5 graphic on previous page). + What makes India unusual, aside from its rapid growth, is 0 its form of ownership. Its evolution can be crudely split into – 5 three periods. Until 1991, when liberalisation began, Indian busi- 1997 98 99 2000 01 02 03 04 05 06 07 08 09 10 11 nesses that had not been nationalised were family a airs that Sources: Thomson Reuters; CEIC survived in a world of micromanagement and o cial targets the licence raj , a surreal mix of Soviet stupidity, British pedant- ry and Indian improvisation. Firms responded by branching out biggest 100 rms, sits in the hands of state-controlled companies, into any activity where they could nd room to breathe, while from big oil rms to Coal India, with its vast empire of opencast facing little serious competition in their main businesses. Many mines, its own corporate song and 377,932 loyal workers. Blue- enjoyed close links with the Congress Party that formed India’s chip rms controlled by institutional owners, such as ITC, and a rst post-independence government and dominates the ruling handful of subsidiaries of foreign rms such as Unilever, togeth- coalition today. By the time an economic crisis brought on liber- er account for only 18% of overall pro ts. The remainder, some alisation in 1991, though, most business folk were utterly fed up. 41% of earnings, are made by rms under some form of family or The pattern of ownership in the second period, between founder control. This special report will include Tata Sons in this liberalisation in 1991and 2003 (when the economy’s growth rate category even though the present fth-generation boss is likely moved up another gear) was far more turbulent, as lazy old fam- to be the last family member in charge and most of its shares are ily groups were exposed to erce competition at home and from owned by family trusts that are meant to be independent. abroad and the prices of everything from machines to India’s currency were freed up. Many rms didn’t survive. Of the largest Capindialism 20 listed on the stockmarket in 1990, only ve remain in a recog- Within this broadly de ned category of family or founder nisable form in the top 20 private rms today, ranked by market rms it is also possible to nd examples of every kind of fresh value. The big textiles houses that dominated the scene in 1990 success. Gautam Adani, a strapping billionaire with a habit of were much diminished over the next decade (although Bombay watching share prices on television as he talks, has used brawn Dyeing is, despite its name, still in business), and some of the and guile to build from scratch an empire of ports, power and grand families behind them such as the Mafatlals dropped from coal centred in Gujarat, a western state. In a Mumbai suburb Di- the upper ranks of capitalist clans. Indian business in its rst de- lip Shanghvi, a soft-spoken scientist, has turned Sun Pharmaceu- cade of freedom, then, did destruction and creation. Indeed, as tical from a minnow into a global generic-drugs rm worth $10 the economy took o in 2003 the possibility that the old, oligar- billion. Yet the older family rms, toughened up by 20 years of chic form of capitalism might be obliterated altogether, perhaps competition, matured by bitter feuds and splits, and still with re- even to be replaced by a freewheeling approach that had more markable reserves of animal spirits, have at least held their own. than a whi of America about it, seemed a sensible prediction. India’s economy is one of the world’s most dynamic. Some Sensible, but wrong. For if an alien investor landed in industries, such as media and aviation, are unrecognisable from Mumbai today and ignored every aspect of life there other than ten years ago. There has been a fair amount of turnover among the structure of the stockmarket, the closest thing would not be the leading rms. But overall, India’s form of ownership has New York’s bourse, but a weird mix of São Paulo, Seoul and barely changed over the past decade. The division of pro ts Shanghai. Some 41% of India Inc, measured by the pro ts of the made by family rms between those in their rst, second and third or older generations has stayed pretty constant. The new kids on the block have made gains but not won the day. Nor has Who owns how much 1 the pro t share of family rms overall, of whatever vintage, changed much. The mix of state, blue-chip, foreign and family Profits of top 100 Indian listed firms by type of controlling shareholder, % owners has been remarkably stable. First-generation Third or older Institutional entrepreneur generation In the past decade Indian business has not been on a jour- Second generation State Foreign ney towards someone else’s economic model, whether Chinese, 100 European or American. It has not been growing out of an imma- ture phase, or shaking o a simpler way of doing things. Instead 80 it seems to have established its own equilibrium what might be 60 called capindialism in which pro ts are controlled not by in- stitutional shareholders but mainly by the state, or by entrepre- 40 neurs and their descendants. Outside the state rms, the ddly 20 conglomerate is the favoured form of organisation. This special report will try to answer the big questions all this raises. Why has 0 2002 03 04 05 06 07 08 09 10 11 Indian business developed in this way? Will it continue to? Can Fiscal years ending March the aspirations it has raised be met? And is this new form of capi- Sources: Bloomberg; The Economist talism good for India and the world? 7
The Economist October 22nd 2011 3 SPECIAL REPORT BUSINESS IN INDIA
Family rms Bajaj, stretch back over three or more generations and are wily survivors. Second-generation rms include Reliance Industries, India’s biggest private rm, run by Mukesh Ambani, who split The Bollygarchs’ magic from his brother Anil in 2005, and whose late father’s rise from petrol-pump attendant to billionaire is the stu of legend. mix First-generation rms include the winners from sunrise in- dustries such as telecoms and computing, which boomed in the Why India’s soft state encourages family-owned late 1990s and early 2000s Bharti Airtel and HCL, a technology rms and conglomerates rm, being two ne examples respectively. More recently the ranks of rst-generation rms have been swelled by the Adani TO FIND RAJEEV PIRAMAL, the 35-year-old boss of Penin- group, big in ports and power, and GMR, an infrastructure rm sula Land, you go down a drive in deafening Parel, an up- based in Bangalore. The shift from export and consumer-facing and-coming business district in Mumbai that used to be the cen- industries towards rent-seeking sectors with more government tre of the textile industry. A new tower block is zooming up on involvement is an important and, some say, worrying trend. one side, and nets hang overhead to guard against falling debris. A nal category is the o shore Indian family group. The Hin- Mr Piramal’s o ce is in an old mill building whose steel pillars duja brothers, who run everything from Ashok Leyland, a truck- are stamped with Blackburn , the English town where they maker in India, to a Swiss bank, are partly based in London. Ve- were forged long ago. This is a place where corporate death and danta, a big natural-resources out t, shifted there in 2003. Such rebirth is happening in real time; where derelict factories and rms mix Indian and foreign activities. It is tempting to include workers’ tenements are being demolished to make way for trad- Mittal Steel, based in Europe and run by Lakshmi Mittal, in this ing oors and media out ts with ping-pong tables in their lobbies. group. But he is better regarded as an escapee from India who The family rm isn’t dying in this environment, it is thriv- made his fortune only after leaving the country as a young man. ing. Mr Piramal’s great-grandfather was a trader who made it big in textiles in Bombay, as Mumbai was once known. The family’s Doing it vertically and horizontally mills were clobbered in the 1980s and early 1990s, but unlike Most of these groups have two shared characteristics. First, some of Bombay’s other famous textiles clans, such as the Mafat- complexity. Although many have simpli ed since 1990, most are lals, the Piramals have not faded away. They turned to property, still ddly, with intricate chains of holding companies and sub- redeveloping their defunct industrial sites a decade ago, then sidiaries. Second, they are conglomerates, often with one or two taking on others’ mill land and, most recently, evolving into a core activities and a long and growing tail of others. The holding mainstream developer across the country, with book equity of chains are relatively easy to explain and are common in other some $300m. Rajeev’s branch of the family also dabbles in engi- countries such as Italy and Brazil. A cascade of companies means neering and entertainment. Another bit of the clan split o in outside capital can be brought in at multiple levels without weak- 1981 and operates a luggage business, while yet another, which ening family control. In India complexity is also sometimes a re- broke away in 2005, specialises in health care and glass. In 2010 it sponse to family spats, with rivals each given a distinct sphere of sold its domestic drugs operation to Abbott, an American rm, in uence. India’s regulators help, too; they talk a good game for a staggering $3.8 billion. This year it bought a 5.5% stake in Vo- about corporate governance but do not require top-notch ac- dafone Essar, a big mobile-network operator. counting and let rms build stakes in others without buying out Adaptable, ingenious and combustible, the family rm re- all minority shareholders. K.V. Kamath, the chairman of Infosys mains the backbone of India’s private sector, not an anachro- and of ICICI, a bank, believes governance will improve. Compa- nism. This is politically incorrect, jokes Kumar Mangalam nies will voluntarily change, he says. Others are less optimistic. Birla, who runs Aditya Birla, the third-biggest family business Meanwhile, the Reserve Bank of India, the central bank, frowns house by sales, before going on to argue that the family, and the upon using bank loans to fund takeovers, so they rarely happen. vim it brings, is an essential part of India’s economy. There is no The causes of the complexity, then, are understandable. It is easy way to categorise these business houses, but vintage is one India’s love of conglomerates that is the mystery. Some blame his- approach (see table). The oldest, such as Aditya Birla, Tata and tory: before independence in 1947, British companies often oper-1
Top dogs 3 India’s major private business houses
Name 2011* sales, $bn Controlled by Generation Comment Tata group 84 Tata family trusts 5th Defies categorisation. A firm or a federation? Does control sit with independent trusts, outsiders or the boss? Reliance Industries 58 Mukesh Ambani 2nd Built on dad’s epic tale of rags to riches, big in energy and chemicals. Strongest balance-sheet in India Aditya Birla 35 KM Birla 4th An early mover in professionalising, going abroad and doing deals. Metals, textiles, cement and mobile phones Hinduja 25 Hinduja brothers 2nd HQ moved from Mumbai to Iran and now Europe. Truckmaker Ashok Leyland and Gulf Oil are flagship firms Essar 17 Ruia brothers 1st Active in steel, ports, shipping and energy. Essar Energy arm is London-listed and leads expansion abroad OP Jindal 14 Jindal family 2nd Steel and power. Four brothers each have their own subsidiaries. Unclear if whole runs as an integrated entity Mahindra 13 Mahindra family 3rd Had a second wind in the past decade. Known for tractors and SUVs, but stretches to finance and hotels Bharti 12 Sunil Mittal 1st Biggest mobile firm. Diversifying into retail, TV and finance. Pricey African deal will test its global credentials Vedanta 11 Anil Agarwal 1st London-listed natural-resources group, tilting back to India with plan to buy Cairn Energy’s Indian arm Reliance Group 9† Anil Ambani 2nd Younger Ambani split off in 2005, taking capital-intensive power, infrastructure and mobile. Under pressure Wipro 7 Azim Premji 2nd Azim Premji turned the family vegetable-oil maker into a tech giant. Had a tricky year as it restructures
Sources: Companies; The Economist *Year ending March †Estimate
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2 ated with a local managing agent who had his ngers in lots of pies. Alternatively, during the socialist era between 1947 and 1991, Indian rms faced claustrophobic restrictions from the state and tended to expand in any direction where they could get air. An- other explanation is cultural. Taking a sample of 16 of India’s big houses, nine came originally from the Marwari and Bania com- munities, famous for their trading nous. Perhaps these cultural roots come with a preference for how to organise rms. Even tax might be important: one baron says that capital controls make it hard to get family money abroad legally. If it has to stay at home, better to put money into a new business than a bank account that returns less than in ation. Yet the best explanation is India’s soft state. Courts can take years to make their minds up, so contracts are hard to enforce. In- frastructure is often poor, supply chains tricky, red tape a hazard, and markets for people, materials and nished goods unreliable. Tarun Khanna and Krishna Palepu of Harvard Business School coined this idea in a 1997 paper. In these circumstances it makes sense to do things yourself. Such vertical integration even hap- pens at Infosys, which generates much of its own electricity and tops up the education of new recruits. The Adani group will soon mine coal in Australia that is delivered to its own port in Gujarat and used partly to re its own power stations. Even Bollywood does vertical integration. In Film City, a leafy area north of Mumbai reserved for movie sets, Anil Arjun runs a new facility that will o er lm-makers everything from sets and camera equipment to editing services. Outside India, his rm specialises: its Los Angeles arm helped ensure the 3D im- ages in Avatar were properly aligned. But inside India it does the Full Monty, even owning cinemas. The company in question is Reliance MediaWorks, and it exempli es a second kind of way of spreading out a conglomerate: horizontally, across unrelated industries. It is part of the Reliance Group, run by Anil Ambani and active in power, nance and telecoms, among other things. The bene ts of this second kind of expansion may seem less ob- vious, but it is still wildly popular, suggesting that synergies ow from being part of a big group in terms of nancial muscle, man- agerial talent, brand, technology and in uence with o cials. A test of the soft-state theory is whether rms that are not in Reliance MediaWorks knows all about family dramas family hands also diversify vertically and horizontally. Very of- ten they do. A good example is Larsen & Toubro (L&T), an engi- neering rm founded by two Danes in Bombay in 1938 which is stays the same , says Adi Godrej, the head of the Godrej group. widely viewed as one of India’s best companies. Although it has The numbers back this up. For family rms in the top 100, overall slimmed down in some areas, its activities are still very diverse, returns on equity look similar to those of state-owned and insti- from making submarines to building roads. Physical assets com- tutionally owned rms, indicating that family rms are not mak- prise a small share of its balance-sheet, with minority invest- ing supernormal pro ts. This year an IMF study concluded that ments, loans made to customers and working-capital balances although such rms were as dominant as ever and the number making up the lion’s share of its assets. This suggests it is in part a of new entrants had fallen, competition was still lively. nancial rm now, and that it uses its muscle to compensate for India’s family capitalism is dynamic and its patriarchs are the lack of bank funding and bond-market nancing for infra- the only people prepared to put billions of dollars at risk to build structure investments. This year L&T oated a nance business, the new India. It is, of course, possible to nd other objections, and it is considering applying for a banking licence. India’s fam- from the crowding out of new entrepreneurs to inequality. But it ily bosses would applaud. is also worth considering whether India’s family rms will zzle Family rms dominate the private sector in much of Asia out of their own accord. In other countries family conglomerates and Latin America. But unlike in South Korea, where the chaebol and corporate federations have been merely a phase of capital- act in close concert with politicians, India’s rms only engage ism, and have declined on their own. This can happen in three with the state opportunistically it is their enemy as well as occa- ways. They can become abby and lossmaking, as in the case of sional partner. Nor should India’s conglomerates, particularly Japan’s keiretsu. The need to raise outside capital to nance family-owned ones, be slammed for rigging markets, as they are growth can slowly dilute the family’s stake to insigni cance. Or said to in other countries such as Mexico and Israel. India’s capi- they can run out of credible heirs. The last two factors are com- talism doesn’t really work that way. The family houses go to war mon in America and Europe, where Hilton, Cadbury and others with each other and face new entrants: in industries such as re- have evolved into companies run for institutional investors. tailing, power and mobile telecoms, pro tability is poor as a re- Will India’s family rms fade of their own accord, too? To a sult. In India the institution of the family rm is entrenched, but Western eye, Tata is far along this path. It is bewilderingly com- there is constant turnover. Who is on top at any point never plex, with at least 20 operating divisions, a couple of them heavi-1
The Economist October 22nd 2011 5 SPECIAL REPORT BUSINESS IN INDIA
infrastructure industry, heavy upfront investment and project The league table that really matters 4 delays are leading to nancial engineering. Family groups like Estimated return on equity of big business groups GMR, which built Delhi’s wonderful new airport, and HCC, Tata Sons Mahindra & Mahindra OP Jindal which built the Sea Link bridge, Mumbai’s only showpiece de- Reliance Industries Aditya Birla* Reliance Group velopment, are experimenting with raising equity at multiple (M. Ambani) (A. Ambani) levels of their business, creating structures that look ddly and 30 could in time prove fragile. But the nances of India’s family groups as a whole do not contain the seeds of their own destruc- 20 tion. Reliance Industries is both pro table and has a rock-solid balance-sheet. The more complex Aditya Birla group, to the ex- 10 tent one can tell from the outside, is more indebted and scores less well on its return on equity, but is in serviceable condition. 0 Some, such as Mahindra, refuse to tolerate sloppy and lossmak- 2008 09 10 11 ing divisions. Bharat Doshi, the group’s chief nancial o cer, Fiscal years ending March sounds as if he could work for GE when he says all units must Sources: Bloomberg; The Economist estimates *Excludes derivatives gains and losses at Novelis have a return above their cost of capital. And when family groups do sell out, they often reinvest, rather than retiring to nightclubs in San Tropez. In 2008 the Singh 2 ly lossmaking. After big foreign takeovers such as that of Jaguar brothers sold Ranbaxy, a third-generation pharmaceutical rm, Land Rover, a carmaker, and Corus, a steel rm, it is capital-hun- to Daiichi Sankyo of Japan for $4.6 billion. They have ploughed gry. And when Ratan Tata, its patriarch, who has no children, re- almost $1 billion of their proceeds into their remaining health- tires at the end of 2012, there is no obvious family heir the rm care business, Fortis, and Religare Capital, an emerging-markets has been trying to nd an outsider to ll his shoes. The main investment bank they are bravely trying to build from scratch. holding company’s shares are controlled by family trusts and Pallonji Mistry, a construction magnate. Those trusts are admit- Leave those kids alone tedly likely to retain Mr Tata as chairman even after he departs The third threat, succession, looms the largest. In India from Tata itself, but are supposed to operate independently. And there is a lot of talk that the next generation of hereditary capital- already investors view the credit risk of Tata’s subsidiaries di er- ists, after studying abroad (usually in America), might be more ently, suggesting they are not convinced it is an integrated whole. interested in becoming rock-climbers and rappers than industri- Tata, then, might seem so disparate and so close to losing any alists. But in truth the lure of the family is still strong. Those bar- family connection that it is ripe for a revolution. ons with young children tend to say that they can do whatever The view from Bombay House, Tata’s headquarters in they like. But at almost all family groups where the children are Mumbai, is di erent. The end of family in uence need not imply adults, they have joined the rm. Kids are expected to work their a change in strategy, the rm argues. Its biggest problem is to keep way up, like their dads. Gautam Adani, the ports-and-power mo- a sense of direction once Mr Tata departs some outsiders say it gul, says of his eldest son: For ten years he will go through the now lacks much of a common culture. Its nancial structure entire rm we are grooming him. does not compel it to change, either. Take its overall pro tability. The vulnerability this creates is twofold. First, there is the Like all Indian groups, Tata says it does not run the empire by problem of rows as succession takes place. To avoid this, the cur- monitoring its totted-up share of all of the pro ts or losses of ev- rent vogue is for family constitutions, often drawn up by expen- ery subsidiary, as a Western conglomerate might. Yet unlike sive lawyers in London. These show a touching faith in the pow- er of a contract to overcome sibling rivalry. Then there is the potential pro- blem of credibility. Although India’s fam- ily bosses are generally an impressive and engaged bunch, some of the current gen- eration can seem semi-detached. In an in- terview with The Economist in May 2011, Naveen Jindal, a member of parliament In other countries family conglomerates have been and head of a steel rm worth $9 billion merely a phase of capitalism, and have declined of their that is the biggest branch of the OP Jindal Group, seemed hazy about and reluctant own accord. Will that happen in India? to discuss the details of his rm. The biggest long-term risk for Indian most, it does measure this, under an initiative by Ishaat Hussain, family rms is not competition probes, rickety nances or lack- the nance director of Tata Sons, the holding company. So al- lustre pro ts. It is that the kids aren’t good enough. One wide- though some aky businesses do shelter under the Tata umbrel- spread hope among families is a fudge, in which the next gener- la, gures shown to The Economist suggest that Tata’s overall ation, even if uninvolved directly in the rm, still call the shots pro tability has recovered after a slump due to its acquisition but employ professional managers to run things day to day. This splurge (see chart 4). Nor is the group short of resources. Its high seems unlikely to work: what chief executive would accept stra- pro ts help fund growth, and Tata Sons could raise almost $12 bil- tegic direction from a chairman with no experience? And even if lion by reducing its stake in TCS, its technology arm, from 74% to the family retains control, the amount of money outside inves- 51%. Mr Hussain says the rm aims to raise its stakes in group rms tors have put into Indian rms means they may resist appoint- where it owns less than 51%, not make them more independent. ments based on surnames. To stay in control, Indian families will Across Indian family groups there are pockets of pressure. have to stay involved and be competent, particularly as their Anil Ambani’s Reliance Group needs to raise equity. And in the rms grow larger, more complex and more global. 7
6 The Economist October 22nd 2011 SPECIAL REPORT BUSINESS IN INDIA
Inbound and outbound deals outs in all but name, from Tata’s trio of deals to those undertaken by Hindalco (part of the Aditya Birla Group) and Suzlon, a wind- turbine rm. These rms used money borrowed largely from Their oyster, with grit Western banks and money markets, in some cases secured only against their targets’ cash ows. As the crash in the West began, included their re nancing options dried up and the target rms’ pro ts slumped in most cases. Things looked pretty bleak. Ishaat Hussain, the nance di- Cross-border deals involving Indian rms have been rector of Tata Sons, recalls the group being battered and putting a more famous than pro table programme in place to raise spare cash. Tata Motors’ vice-chair- IN THE SOUTHERN state of Kerala earlier this year a trea- man, Ravi Kant, says the combination of a deal and a nancial sure was discovered in a temple. Hidden in secret vaults for crisis put great stress on the carmaker. At one point it asked the hundreds of years, it is thought to be worth many billions of dol- British government for state aid. Smaller rms that had followed lars and includes coins from the Roman empire, Venetian ducats, the leveraged buy-out path got whacked, too. Havells, an elec- 16th-century Portuguese money, 17th-century Dutch East India tronics and consumer-goods out t, bought Sylvania, headquar- Company currency and even the odd nugget or two from Napo- tered in Frankfurt, in 2007, but by 2008 its London bankers leonic France. The nd is like an economic history of India un- threatened to pull the plug. Everything was on the line, recalls folding, says Gurcharan Das, a writer and former boss of Proc- Anil Gupta, its joint managing director: The family’s reputation, ter & Gamble in India. For most of its history the subcontinent our business’s reputation and our personal reputations. was open to trade and the outside world. The insularity and pro- His rm toughed it out and emerged stronger. Tata and Ad- tectionism of the 1947-91period was, he says, an aberration . itya Birla did too, though their subsidiaries Tata Motors and Nov- When it comes to trade, India is still not as open as China. elis are still viewed as risky bets by debt investors. Suzlon, once a Exports, and not just software and outsourcing, are however darling of investors, had to restructure part of its debt. Mere sur- growing fast and there are signs that India is gaining traction as a vival, however, is not the point of takeovers. The real test is creat- manufacturing centre. Bajaj Auto, a family rm, for example, ex- ing value. Tata has done very well on JLR but most analysts reck- ported almost 1.2m motorbikes and three-wheelers in the year to on it overpaid on its larger deal for Corus. Last year Novelis failed March 2011, with about half going to Africa and the Middle East. to cover its cost of capital, though Mr Birla is optimistic. From a For all that, though, most Indian rms are making their mark not shareholder’s perspective Suzlon has been a disaster. Indian by trying to be the workshop of the world, but by aspiring to be bosses tend to argue that they are building for the long term and multinationals: active, in control and physically present in lots of hint that return on capital is for wimps and nitpickers. Many In- countries, doing everything from development and manufactur- dians are also intensely patriotic about these deals. But at some ing to branding and distribution. They are doing all this far earli- point a more sober judgment must be struck. er than rms in other emerging countries would dare. The leveraged buy-out approach may already be zzling Indian bosses, a sophisticated and worldly bunch, have a because the generous debt terms that it relied on are no longer huge cultural head start, as anyone who has witnessed a Chi- available. Mega-takeovers are likely to be the preserve of big, nese state-owned rm trying to charm the outside world can tes- cash-generative groups with simple structures. One such rm, tify. They are sometimes said to have other advantages, too; Indi- Reliance Industries, is on the prowl, though its proprietor, Mu- an rms can handle diverse workforces, for example, since they kesh Ambani, is thought to be impressively stingy about deals. already do at home. The most breathless strain of this argument Bharti Airtel took the leap in 2010, paying $11billion for Zain, an is that if you can make money in India you can make it any- African mobile operator. The acquisition makes strategic sense where. Indian rms, it follows, are destined to rule the world. but unfortunately looks like another case of overpayment, par- That last claim is silly. Indian rms also face formidable dis- ticularly because Zain’s pro ts have since disappointed. advantages. One is their size: they are middleweights by interna- For the many other Indian rms without giant resources tional standards. Their ddly holding chains make it hard for and a taste for Russian roulette, a more nuanced approach to them to pay for things by issuing shares, and their cash ows can dealmaking abroad beckons. In a continuation of the vertical-in- be thinly spread across many subsidiaries. Raising debt in India tegration habit, Indian rms have spent billions buying up coal 1 to buy things abroad is expensive, with base interest rates approaching 9%, and di cult because the central bank frowns Cross-border, cross shareholders 5 upon it. Indian rms raising funds abroad Largest Indian cross-border deals, $bn (year) are hobbled by the country’s poor credit rating. India does have large foreign-ex- FOREIGN INDIA FOREIGN change reserves, but these are not recy- Buyer A INBOUND Target Buyer OUTBOUND A Target cled as cheap foreign-currency loans to Vodafone: 18.6 (2007) A Hutchison Telecom Tata Steel: 13.0 (2006) A Corus fund corporate adventures, as they are in Overpaid. Writedown after price war and tax spat Impressive ambition, bad timing. Paid too much China. T.C.A. Ranganathan, the boss of BP: 7. 2 (2011) A Stakes in Reliance Bharti Airtel: 10.7 (2010) A Zain Africa Will BP’s help increase output? Industries’ offshore fields Early days but looks pricey. Zain has since stumbled Export-Import Bank of India, a state body Daiichi Sankyo: 4.6 (2008) A Ranbaxy Labs Hindalco*: 5.7 (2007) A Novelis aimed at nancing trade, says it simply Fiasco. Shares worth less than half purchase price Recovery under way but yet to cover cost of capital does not have the same risk appetite as its Vedanta: 4.5 (2011) A Cairn Energy India ONGC: 2.6 (2008) A Imperial Energy Chinese equivalents. Oil deal bogged down in red tape for a year Production has missed targets since the deal These factors help explain why the Abbott Labs: 3.7 (2010) A Piramal Healthcare Tata Motors: 2.3 (2008) A Jaguar Land Rover rst wave of takeovers abroad by Indian Bold strategic move, scary valuation Great deal, has confounded the critics rms, between 2004 and 2008, took such NTT DoCoMo: 2.7 (2008) A Stake in Tata’s mobile Abbot Point: 2.0 (2011) A Mundra Port† a peculiar form (see table). A product of Terms unclear, but Tata’s mobile arm is struggling business Secures coal supply with export hub in Australia the debt bubble, they were leveraged buy- Sources: Dealogic; Bloomberg; Company reports *Aditya Birla †Adani Group
The Economist October 22nd 2011 7 SPECIAL REPORT BUSINESS IN INDIA
Made in India
2 resources in Australia and Indonesia. They may have to compete deals, but simply starting new operations in other countries. In- against undisciplined Chinese buyers and there are worries fosys now has quite a big operation in China, for example. S. Go- about political risk in Indonesia, but in the main these deals palakrishnan, its chief executive, says it has been successful in re- make sense given the shortage of domestic production. cruiting Chinese talent and has done well at winning business Another emerging trend is that of the pocket multina- from the Chinese subsidiaries of multinational clients. But it is tional , which uses a series of smaller bolt-on acquisitions to still hard to sell to Chinese rms themselves, he says. build up its presence abroad. These can provide access to new History suggests that building a multinational bit by bit and products, technologies and markets, but without an all-or-noth- eschewing giant, high-risk deals is the best way to create a dura- ing gamble. Crompton Greaves, part of the Avantha group con- ble rm without wasting money. But it takes time, and India Inc trolled by Gautam Thapar, underwent a strategic review in has been in a terrible hurry. With nancing conditions now 2001-02. The results were sobering, he says. In response it tougher and some hard lessons learned from the rst round of made a succession of foreign deals, mainly in Europe, in its area Indian takeovers, a more measured approach is likely in future. of electronics and engineering, with the main aim of gaining Just the kind of approach, in fact, that mature multinationals know-how and better products. With a total outlay of some from the rich world, with decades of experience under their $250m these deals made a decent return on capital last year, belts and world-class advisers, take when viewing new markets though trading has since been hit by the euro-zone crisis. like India, right? Not quite. Foreign rms that have expanded into Godrej, a family conglomerate whose biggest line is con- India have had their share of problems, too. sumer products, is another exemplar of this approach. Although not closed to the idea of a large transformational acquisition, Adi A land of milk and honey Godrej, its boss, says the rm was too disciplined during the R.C. Bhargava can still remember the day the Maruti Suzuki boom. Instead of betting the farm it spent about $1billion on a se- factory in Delhi started churning out small cars in 1983. To the ries of small purchases in niche areas, such as an Indonesian amazement of the newly hired Indian workers, the Japanese su- rm that makes household products including insecticides and pervisor said the plant had to be spotless rst and, picking up a air-fresheners, and a South African maker of hair products. Mr mop, got to work. We decided from the start that we had to com- Godrej says it is taking a hands-o approach to managing these pare ourselves with the best in the world, Mr Bhargava says. businesses and that the acquisitions have all made fair returns. That included tea breaks exactly seven and a half minutes long. In most cases the aim of such deals is to marry the savvy In- Today he is chairman and Maruti Suzuki is one of India’s most dian approach to things like working capital with the acquired successful foreign-controlled rms, with about half a billion dol- rms’ managers, technology and products. The danger is that the lars of pro ts last year. Still, during 2011it has su ered a wave of acquiring rms are spreading themselves too thinly, creating the strikes in its factories. Even three decades on, the going isn’t easy. overheads of a global company without the corresponding If India is, as the cliché goes, a land of contrasts, then the sales. Still, it is an approach that is gaining popularity, with Info- biggest may be that between the bosses of rms the world over sys recently emphasising that it would consider bolt-on deals. who are crazy about India, and their sta on the ground, who The technology rm also provides a good example of a third in- have often become professional eye-rollers. Corruption, sloppy ternational expansion strategy, that of going abroad without standards, a lack of decent sta and red tape are the main gripes. 1
8 The Economist October 22nd 2011 SPECIAL REPORT BUSINESS IN INDIA
2 Many say Indian business culture, while beguiling, is less acces- sible that it rst seems. Hierarchies can be rigid. And deals get Two-way trade 6 done through informal networks. For all that, however, their Cross-border Indian merger & acquisition deals, $bn bosses at home are often mustard keen, tantalised by projections that show India is too big to ignore, with the world’s biggest and 30 youngest pool of labour and a growing middle class. Outbound 25 Tapping into the rst attribute, India’s labour force, has so Inbound far mainly been the preserve of the technology industry. Follow- 20 ing the lead of India’s outsourcing rms, IBM, for example, has 15 gradually built up a workforce of over 100,000 in India, a big chunk of whom serve its clients abroad. But beyond outsourc- 10 ing, using India as an export base tends to be hard work indeed. 5 Capital-intensive projects are formidably tricky to get started. Posco, a South Korean steel rm, announced plans for a $12 bil- 0 lion investment in a factory in Orissa, an eastern state, in 2005, 2000 01 02 03 04 05 06 07 08 09 10 11* aimed both at meeting domestic demand and producing for ex- Source: Dealogic *Year to September 23rd port. Today work has yet to begin and the plan is still in limbo. The long squabble seems to have involved every part of India’s Taste the Thunder , that tapped into the average Indian’s fears government and judicial apparatus. and yearnings as the economy opened up in the early 1990s. It Carmakers are the great exception, but they come with a was so successful that The Coca-Cola Company eventually twist. Maruti exports just over a tenth of its production, mainly bought the drinksmaker and tried to replace the local brand with to Europe. Hyundai, a South Korean rm and the biggest export- its own global one. The result was an outcry, and the American er by volume, sells a fth of its production abroad, says Arvind rm had to backtrack. Today Thums Up, owned by Coca-Cola, is Saxena, a director of the Indian arm. Clusters of expertise exist in still in rude health, and keeping dentists busy. the states of Tamil Nadu and more recently Gujarat, where most If manufacturing in India is hard for foreigners, building a car investments now tend to go, thanks to welcoming local o - customer-facing business is no walk in the park either. India has cials. Foreign car rms source almost all their components local- been a success story for Nokia, Finland’s handset giant, and re- ly. Hyundai India led the way for 70-odd Korean suppliers who mains its second-biggest market and a big manufacturing base. have invested some $700m in facilities around its plants near But sales there have declined since 2008, paradoxically re ecting Chennai. The level of research and development by foreign car both its lack of high-end devices to rival the BlackBerry and the rms in India is still puny, but in time that should come too. iPhone, and its lack of low-end ones, such as phones with dual What India does not seem to give foreign rms is a clear-cut SIM-card slots that penny-pinchers use to surf between net- cost arbitrage over other places in the world, despite its vast and works. To compete in India you need one eye on the world and cheap labour force. Other inputs such as electricity can be costly another on the street. and unreliable. Tricky logistics also make a di erence. To get its Ask a street vendor for a Cadbury and you’ll be given a nished cars to Chennai’s port, Hyundai has to pack them onto chocolate bar. That’s real distribution and branding power, but it trucks that rumble through the city centre every night during the has taken a long time to build. The confectionery rm (originally small hours. It reckons its Indian factories make vehicles at a sim- British and bought by America’s Kraft in 2010) has been in India ilar price to its plant in Turkey, once trade duties are included. since 1948. Its local bosses are Indian. It belongs to a select group, For foreign carmakers it only makes sense to export from including Maruti Suzuki, of rms that have been in India for the long haul, mainly employ locals and seem to have developed deep competi- For foreign rms, building a customer-facing business is tive strengths. Many have listed local sub- sidiaries. Siemens, Germany’s industrial no walk in the park. To compete in India you need one giant, has been present in India for almost eye on the world and another on the street a century and now makes nearly $3 bil- lion of sales there. It will soon employ four foreigners for every 1,000 locals. India products that you are also selling Hindustan Unilever, the local o - there, to piggyback o the economies of shoot of the consumer-goods giant, scale that India’s big domestic market makes half a billion dollars of pro t a creates. Small cars are a great example. year and is one of the most prestigious The hitch is that the products made in In- employers. It takes reinvention seriously. dia have to be good enough and similar We need to innovate constantly, says its enough to be attractive to the rest of the boss, Nitin Paranjpe. If we obsessed world. That isn’t always a given. about minimising risk we’d do nothing. I remember sitting in a remote vil- The largely indigenised foreign rm lage with a man who was tasting cola for prospers in banking too, with India’s big- the rst time. He spat it out and said, ‘this gest foreign lenders Citigroup, HSBC and tastes like medicine’, recalls Ashok Ku- Standard Chartered having pedigree rien, then a marketing guru and now an there. For all these rms their Indian units entrepreneur. I realised you couldn’t sell have gone from being backwaters to a cola in this country on taste. His sol- growth engines for their parent compa- ution was an advertising campaign for nies and sources of talent. Eventually Thums Up, a local cola, under the slogan some of these rms will be run by Indi- 1
The Economist October 22nd 2011 9 SPECIAL REPORT BUSINESS IN INDIA
2 ans who earned their spurs in the subcon- tinent so far, most of the handful of Indi- ans who’ve made it to the top of global rms emigrated from the mother country when they were fairly young. That success in India just takes time is not a message other foreign rms like to The limits of frugality hear, though. Many have gone for the blunderbuss approach, with big upfront investments in distribution to try to win Making things cheaper is not the same thing as making pro ts market share quickly. This often gets messy. More than ten foreign life-insur- THE MOST IMPORTANT event in Indian compromised on quality. As in telecoms, ance rms have rushed into India, all business in 2011may have been an out- this is likely to lead to price rises and the with local partners. At their peak, before burst on September 6th by Sunil Mittal, the exit of the weakest rms. the 2008 crisis, they employed armies of boss of Bharti Airtel, the mobile-phone Today perhaps 17% of India’s pop- agents to sell savings products, often un- operator. India’s telecoms industry is ulation has half of its spending power, pro tably, sometimes illegally. The indus- admired the world over for the innovative according to the Asian Development Bank. try has since shrunk and been clobbered way in which it has slashed prices and put Over time the growing urbanised middle by regulators, and some foreigners are ex- phones into the hands of even the very class, who are getting richer fast, will pected to exit. It was a mindless chase for poorest. Today there are some 600m active become relatively more important for the top line, says one boss, a completely subscribers in India, many of them in the pro ts. Margins for these customers are reckless expansion . Chinese rms have countryside. But Mr Mittal said the extra likely to be higher because the cost of their own kind of land grab. Shanghai cost of servicing rural customers, and their distributing products in cities is lower. The Electric has won big contracts to build low usage levels, had made things unprof- boss of one large consumer-goods rm says, power stations in India, aided by a big itable. Prices are now expected to go up in private, that today his company makes slug of subsidised vendor- nancing from across the industry, after two decades of two-thirds of its money from the poor and state-backed banks to the Indian buyers. decline. India’s low-cost telecoms revolu- lower middle classes, but adds it is not tion has, it seems, reached its limit. enough to focus on them since the por- Gently does it Indian rms have made much of their tion of upper middle class will become For those who just can’t wait, the ability to serve the poor masses at the substantially more important . He is tilting only real option to achieve immediate bottom of the pyramid . Along with cheap his products accordingly. Consumer-goods scale in India is the takeover. But since phones, other celebrated examples in- rms are often keen to move away from most assets are in hot demand, the results clude one-rupee sachets of shampoo and cheap products, where Chinese rivals pose of foreign deals in India have been i y. clever schemes to get around the lack of the greatest threat. Vodafone has already written down its bank accounts. This re ects raw commer- One proxy for the di erence in pro t- purchase of a controlling stake in India’s cial instinct, but also serves an ideological ability between the urban rich and the rural second-biggest mobile rm after a price purpose by showing that capitalism in poor is the price paid for mobile-telecoms war, a legal tangle with its India partner India is not just for the middle classes. It is spectrum. In the 2010 auctions for 3G tele- and an unforeseen tax claim by the gov- politic for Indian bosses to talk up their coms licences, operators bid ten times more ernment. Japan’s Daiichi Sankyo bought ability to invent things that all can a ord. for a slice of the airwaves in a uent Delhi, a controlling stake in Ranbaxy, a generic- Whether their rms pro t as a result with 18m people, than in east Uttar Pra- drugs company, in 2008 which it wrote is less clear. Mobile phones are not the only desh, with 120m people. Similarly, India is down heavily as it ran into glitches with eld where the limits of frugality are being about to auction o FM radio spectrum and American regulators. And last year Ab- reached. Tata Motors’ Nano, a $3,000 car, the competition is expected to be ercest bott, an American health-care group, won has been a op so far. Some blame Tata’s for the big cities, says N. Subramanian, the an auction for Piramal’s Indian drugs marketing, but other carmakers say they chief nancial o cer of Radio Mirchi, a big unit, which came with manufacturing fa- cannot achieve such a low price without player today. cilities and a local sales force. But the price compromising on quality, and that custom- That is not to say that selling to the of $3.7 billion, or over seven times the tar- ers are wary. In air travel, insurance, poor masses, and inventing ways to cut get’s sales, suggests that the American consumer nance and satellite TV, compa- prices in order to appeal to them, is not bosses forgot to take their medication. nies have cut prices to build their customer vital. It is, both from a moral standpoint Abbott aside, though, the period of bases over the past ve years but could not and because India’s stability depends on it. cross-border deals from and to India has reduce costs enough to compensate, and But the big pro ts lie elsewhere. gone beyond the euphoric stage, re ect- ing the wobble in India’s economy, con- cerns about corruption and the deep troubles of the rich world. and forays awaits. It takes longer to build champions this way, Both foreign rms keen on India and Indian rms keen to go but the end results will be stronger. abroad must show more discipline. This is not just about price One thing is fairly clear. The shadiest and worst bits of the one executive working for a global investigation rm says West- economy, including natural resources and infrastructure, are no- ern buyers, worried about graft, are nding out more about tably bereft of outsiders. Where they have been allowed in, for- whom they are doing business with in India. And with little in- eign rms’ enthusiasm for India, and their open cheque books, house market intelligence about far-o countries, Indian rms have brought bene ts. They have usually raised standards and need to be sure they aren’t buying lemons. Giant trophy take- cut prices through competition. But the power of competition overs are likely to be pursued only by the biggest rms. For the can of course be unleashed in India in other ways, too. How others, a wave of smaller and probably more enriching deals about less government and more entrepreneurs? 7
10 The Economist October 22nd 2011 SPECIAL REPORT BUSINESS IN INDIA
State-controlled rms In better nick than you’d think 7 The power and the Profits/losses of companies controlled by the central government, $bn* Overall return on equity, % glory 30 20
India has its own form of state-backed capitalism too 10 + IF YOU SIT in many places in India, whether in the o ce of 0 the boss of Infosys in Bangalore or in a suburban home, – your host may clutch a remote control and appear anxious. You 10 are not the cause of this distress. Your host is waiting for a power 2001 02 03 04 05 06 07 08 09 10 cut, after which the remote will be used to switch the air condi- Fiscal years ending March tioning back on. Power, more than any other industry, captures Source: Department of Public Enterprises *Converted at exchange rate of 45 rupees per $ the prevalence of the state in Indian business and the harm it can do. Private capital has poured into building power stations, but most other bits of the supply chain are in the hands of the Even if India doesn’t have the stomach for full privatisa- state. Often this set-up fails to deliver. tion, it is letting in the private sector in other, more subtle ways. A When people think of state capitalism, China springs to creeping retreat of the state has taken place in many industries mind, with its giant and opaque government-controlled rms. thanks to competition. Thus two of India’s most successful in- But India, more cuddly and less competent, is not too dissimilar. dustries, air travel and telecoms, are dominated by private com- Some 40% of the pro ts of its 100 biggest listed rms come from panies, even though the original state monopolists remain un- state-controlled ones. In nance, energy and natural resources, der government control. Public-private partnerships are also they control at least two-thirds of production. Most were partial- common on big infrastructure projects. You might conclude that ly privatised over the past two decades, letting in a small propor- India, like China, has found its own equilibrium between the tion of outside shareholders. The latest example was Coal India, state and market forces. But that view is premature. Public-priv- the biggest producer of India’s main fuel. It was listed in 2010. ate partnerships are all the rage, but more e ort must be made to Over time, the zeal to sell big-enough chunks of these rms ensure the private bit of them gets a reasonable return. GMR, the to enable them to become more independent has dissipated. But infrastructure rm that built and part-operates Delhi’s new air- today’s halfway house is not all that bad. In aggregate, the 24 port, is losing money on the project. Its boss, G.M. Rao, says he is state out ts in the top 100 generated a 17% return on equity last - very con dent that a settlement will be reached allowing it to nancial year, on a par with the private sector, and pro ts almost raise tari s and extend its charges. But more clarity will be need- doubled in the past ve years. Privatisation has made some of ed to attract private money for future projects of this kind. them more e cient. Bharat Heavy Electricals, which makes kit The big listed rms, meanwhile, are subject to meddling. for power stations, holds its own against Chinese competitors. Managers are appointed by the state. The energy companies are And State Bank of India (SBI) is as tech-savvy as its private rivals. forced by the government to subsidise the costs of some kinds of fuel, to the tune of billions of dollars, by smoothing retail prices. Coal India’s allocations of production seem to be decided at the highest level of government. And SBI, although it denies it furi- ously, loaned heavily and patriotically during 2008-09 to o set a slump in credit from private banks. In 2011 it has booked big write-o s and had its credit rating downgraded as it digests the binge. A big chunk of the economy is in e ect run by political at. Allowing competition while neither privatising nor killing o the original state incumbents means big losses at some dying public rms. Air India and MTNL, a telecoms company, between them lost almost $2 billion in the scal year 2009-10. Of 217 in- dustrial enterprises owned by the central government in 2010, 59 made losses (see chart 7). At the state-government level there are perhaps another 850-odd government-owned rms, including zombie local electricity distributors. Their losses would wipe out most of the pro ts made by the listed giants. Pro t and loss is the least of it. India’s inexorably growing power crisis is a bottleneck that threatens to hobble its overall growth rate. An orthodox Western remedy would be to let in BHP Billiton, an Australian mining colossus, to dig up India’s coal faster, while selling o the bankrupt electricity boards to private rms, who have made dramatic improvements in the few places in India where they have taken charge. But if the state is not pre- pared to let the private sector tackle its rotten parts, then it will need to adopt a more strong-armed, Chinese-style approach to making sure the state sector delivers. The middle way it is cur- We’re from the government, and we’re here to help rently pursuing isn’t working as those power cuts testify. 7
The Economist October 22nd 2011 11 SPECIAL REPORT BUSINESS IN INDIA
The outlook for entrepreneurs of how easy it is to start a new rm. Given the propensity of es- tablished rms to diversify into new areas, it seems likely that start-ups are sometimes crowded out. India’s banks are not huge Looking for the next fans of lending to small rms; they often demand onerous amounts of collateral or security on xed assets, exactly the Infosys kinds of things start-ups cannot provide. There is a decent enough venture-capital industry, but even so, new rms face hur- dles that do not exist in other countries, which may require them India has aspiring entrepreneurs aplenty. More of to invest more heavily upfront. Flipkart is a good illustration of them need to make it this with a happy ending. SACHIN BANSAL AND Binny Bansal are not identical It began as a Western rm might, as the middleman be- twins, or even related, but they should be. They both grew tween book wholesalers and its customers, using third-party up in Chandigarh in north-west India, studied computer engi- couriers to deliver to people’s homes nationwide. But Flipkart neering at the Indian Institute of Technology Delhi and spent a soon overwhelmed the local wholesalers and courier rms in brief stint working for the same American technology rm. Two Bangalore. To cope, it has now built ve warehouses nationwide years after meeting in Delhi in 2005 they took $10,000 of their and hired an army of delivery sta . In India you don’t have reli- savings, set up shop in a at in Bangalore and began an e-com- able service providers like DHL, says Binny Bansal. A round of merce business that delivered books to people’s homes like fund-raising in 2009 helped pay for these investments. By 2010 Amazon, but with an Indian twist. another problem had to be addressed: not many Indians have Making the leap, says Binny Bansal, wasn’t di cult . To- credit cards, and those that do worry about security. The sol- day the rm they co-founded, Flipkart, is one of India’s hottest ution was to accept cash, or more recently credit cards, at the internet businesses, selling everything from books to phones. doorstep. Meanwhile, Flipkart must also contend with the big The site clocks up sales of $10m a month from over 1m registered users. Flipkart is said to be negotiating a fourth round of funding from venture-capital rms at an appropriately stonking valuation. Such success stories should be what India is all about. But there is a nagging worry that there are far more consultants, bankers, academics and journalists cele- brating India’s entrepreneurial zeal than people actually starting new companies. Take the latest gures from the Indian In- stitute of Management Ahmedabad (IIMA), India’s leading business school. Of the 314 graduates from its agship pro- gramme, only seven started a business. An amazing 187 joined the gravy train and got jobs in consulting or nance the kind of statistic common in rich countries which is now taken as a symptom of their decline. One bigwig at a large Indian rm says he implores his younger relatives: Make something. Don’t just look at num- bers and criticise things. But he admits defeat. They are all becoming spread- sheet wizards at banks. The sense that entrepreneurs have They don’t just sell they deliver, too not made the kind of mark they should have in the past decade seems to be true across the Indian econ- business groups, like Reliance Industries, which are interested in omy. In a paper published by the IMF in January, three econo- retail. The hope is that Flipkart’s heavy and early investment in mists, Ashoka Mody, Anusha Nath and Michael Walton, looked its brand, including a big television campaign, will be enough of at the Bombay Stock Exchange, a decent proxy for India’s formal a defence when the big boys move in. business sector, with thousands of rms listed on it, many very To succeed in India, then, Flipkart, like most bigger rms, small. They concluded that in the 1990s there was a surge of new has had to integrate vertically, taking on more processes itself, rms without a liation to established family-controlled from storage to delivery and payments. That costs serious mon- houses, but that in the past decade the process of new entry vir- ey. And from an early stage it has had to anticipate a competitive tually stopped . Similarly, the share of pro ts from new, inde- threat from the big family giants. The upshot is that although In- pendent companies, having risen rapidly in the 1990s, has since dia’s e-commerce opportunity is huge, the barriers to small rms stagnated. Many business folk reckon that the relatively few are quite big too, requiring more capital, earlier, than might oth- newcomers that have made it big since 2000 are in old-economy erwise be the case. In the dotcom industry such funds are at least rent-seeking sectors that require more brawn than innovation. relatively easy to obtain. Ashok Kurien, the former Thums Up It’s not di cult to rustle up some possible reasons for all marketer, and since then a serial entrepreneur, is involved with this. India scores abysmally in the World Bank’s global surveys several websites. One of them, called Bollywood Life, received 1
12 The Economist October 22nd 2011 SPECIAL REPORT BUSINESS IN INDIA
2 2m unique visitors within 90 days of launch. He has already had laughed him out. Now, however, they ridiculous o ers from outside investors, he beams. might write a cheque. Outside the dotcom industry, though, raising money is And when it comes to small rms, more of a slog. And there are big barriers to entry, just of a di er- India certainly has a lot of raw material. ent sort. Memories of how much e ort it took to succeed are W. Sean Sovak of Lighthouse, a private- common the world over, but in India, it often seems that an extra equity fund based in Mumbai that is fo- push was required. Haresh Chawla, the chief executive of Net- cused on small companies, reckons there work 18, a broadcaster, says that when it launched its news chan- are some 2,000 rms listed on Mumbai’s nels in 2004-05, in partnership with CNN and CNBC, it threw stock exchange that are active and have everything at it. Consumers only give you one chance, he says. market values of below $200m. He rst visited India in 2004 and was blown away by its vigour. He and his co-foun- The question for India is whether a few impressive der, Mukund Krishnaswami, an Ameri- entrepreneurs here and there add up to a trend. The can whose parents emigrated from India, both chucked in careers in America in- data for the past decade look disappointing vesting in small rms and headed to Mumbai to set up Lighthouse in 2006. Mr Sovak cautions that all is not rosy; many In 2008 his rm launched Colors, a Hindi entertainment channel small rms are in commoditised businesses, he says, and even that became top-rated within nine months of its launch. It spent high-quality rms face lots of challenges and may struggle to $125m up front on programming and promotions rather than en- manage their growth. But he too is optimistic. We’ve seen some gage in a long war of attrition with the established channels. of the best entrepreneurs of our lives here, he says. You cannot tiptoe in India, he says. Will they succeed? Mr Bansal of Flipkart reckons so. Be- tween 2004 and 2009 there was not a lot coming out in terms of Just ll in a few forms rst, please entrepreneurs, he says. But over time they will begin to chal- Banking may present start-ups with the most formidable lenge the established business order. In ve to ten years you hurdles of all, in the form of India’s nancial regulators, and con- will see a shift happening, he predicts. It is vital for Indian capi- sumers’ preference for established lenders, particularly state- talism that he is proved right. 7 owned ones. Rana Kapoor, who in 2004 founded Yes Bank, now one of the larger private players, jokes that getting a licence was a Himalayan task , taking over a year, while building the busi- The Indian miracle and the future ness was a Herculean one. As part of our business culture, no- body helps the underdog, he says. Yes Bank broke through, Mr Kapoor says, partly by focusing on squeaky-clean corporate go- Rolls-Royces and vernance from day one, and listing the rm as soon as possible to gain attention and credibility. pot-holes And yet, for all these barriers, new rms are emerging in unexpected places. Vinayak Chatterjee, who graduated from IIMA in 1981, rst joined a consumer-goods rm. After deciding Long-term economic success may make the current against a life-sentence of selling soap, he went on to establish way of doing business obsolete Feedback Infra, an engineering and consulting rm in Delhi that IT’S NOT A movie set. Mumbai today really is a place where specialises in infrastructure projects. With 1,250-odd sta , half of you can see Rolls-Royces bumping along pot-holed streets them engineers, and a list of blue-chip and government clients, it past naked children, in the shadow of billionaires’ personal sky- exempli es the kind of high-end services that India could excel scrapers. India’s capitalism is raw and sometimes ugly, but its at. Mr Chatterjee reckons his costs are a quarter of rich-world private-sector rms are dynamic and mostly optimistic. If the rms’. Big parts of this business are no di erent fundamentally country maintains its current rate of growth it is expected to be- from IT outsourcing , he says. The priority for now, though, is to come the world’s third-largest economy some time after 2030, build scale at home. With about $50m of revenue, growing by and hundreds of millions of people will lift themselves out of about 30% a year, the rm is on its way to that goal. A otation poverty. But it is not a second China. Thanks to an exhausted and would be a natural next stage in a few years’ time. cranky state, for which there is no prospect of dramatic reform, Almost every investor and nancial rag has a list of their fa- much of the job of development will fall upon the private sector. vourite entrepreneurs. The question for India is whether a few India’s companies are refreshingly red-blooded, but more than impressive examples here and there add up to a trend. The data other rms in the world they carry a giant responsibility. for the past decade look disappointing, suggesting that things This special report has argued that after a decade of eupho- have deteriorated since the 1990s. The hope is that this is a back- ria the business scene has sobered up, partly prompted by a ward-looking signal about the dynamism of Indian capitalism. sticky patch in the economy and the depression in the rich Vijay Angadi, a veteran of small-company investing in India world. Over the past decade a new kind of capitalism has en- who runs Novastar, a $200m fund, is con dent that a new gener- trenched itself in India, in which large family concerns, often in ation of rms will come through eventually. He reckons that the their second generation or older, hold remarkable sway. Yet the rst initial public o ering of a venture-backed start-up in India private sector is not the comfortable oligarchy it might seem, for took place only in 2004. He is optimistic that the venture-capital family rms compete head on and often live and die by the industry has become more open-minded, and is no longer ob- sword. And although some big hereditary groups often seem to sessed solely with technology rms. Wealthy angel investors are prefer investing abroad to investing in India, collectively these becoming more important, too. A decade ago, approached by an rms are prepared to stump up very large amounts of money on entrepreneur who was not in the family, they would have long-term capital projects in India the kind of money that only 1
The Economist October 22nd 2011 13 SPECIAL REPORT BUSINESS IN INDIA
the government in China, or rent way of doing things is long- O er to readers Abundant 8 bond markets in the West, can term economic success. It would Reprints of this special report are available. Number of Indian billionaires conjure up. make today’s approach to organis- A minimum order of ve copies is required. Please contact: Jill Kaletha at Foster Printing Many of the big cross- ing rms redundant. And there is Tel +00(1) 219 879 9144 60 border takeovers of the past another danger that is rarely men- e-mail: [email protected] seven years, by Indian rms tioned in the o ces of business 50 abroad and foreign rms into bigwigs. Corporate o er 40 the subcontinent, are not the Corporate orders of 100 copies or more are triumphs their promoters and Don’t just adapt. Lead available. We also o er a customisation 30 service. Please contact us to discuss your excited supporters claim. One As the corporate scene has requirements. 20 or two almost sank their back- found its own rhythm in the past Tel +44 (0)20 7576 8148 ers and some will never make decade, something has been lost: e-mail: [email protected] 10 a decent return on capital. This the idea that the company does For more information on how to order special 0 yardstick tends to be shrugged not merely adapt to the society it reports, reprints or any copyright queries 200102 03 04 05 06 07 08 09 10 11 o by empire builders, but in operates in, but also acts to drive you may have, please contact: Source: Forbes the long run it is the only one up standards, even if the state can- The Rights and Syndication Department 26 Red Lion Square that counts. Indian businesses not. The original stars of India’s London WC1R 4HQ 2 are going global quicker, earlier and more deeply than perhaps miracle, rms like Infosys, were Tel +44 (0)20 7576 8148 any other country’s have but the more durable trend is in the like breaths of fresh air, with top- Fax +44 (0)20 7576 8492 myriad of smaller expansions below the surface, not the trophy notch governance. Today’s bosses e-mail: [email protected] transactions bankers brag of. seem world-wearier, while o - www.economist.com/rights At the same time, companies have discovered the limits of cials in some cases have been cap- Future special reports frugality: cutting prices and building big customer bases may tured by vested interests and have International banking May 14th sometimes lose them money, rather than making it. Big state- lost enthusiasm for pushing Australia May 28th owned companies dominate in sectors politicians judge to be through world-class standards in Italy June 11th strategic. The areas where the government still runs the show are simple but vital areas like account- China June 25th often plagued with problems. And despite all the hype about ing. In the past year of corruption Previous special reports and a list of forthcoming ones can be found online: new entrepreneurs, they have had a mediocre decade. scandals, too many Indian busi- economist.com/specialreports Some Indians feel that Western critics of their approach are nesses have been cowardly, like hypocritical after all, didn’t America also have a stage when witnesses so terri ed of being im- families dominated the business scene? They have a point. But plicated that they do not de- the idea that India is merely at an earlier evolutionary stage on nounce a crime. The job of prodding the government into action an American journey looks misplaced. India’s soft state encour- against graft, and of raising standards, has therefore been left to ages the conglomerate form of doing business, whether owned big street protests of urban middle-class people who are fed up. by a bloodline or not. This corporate model does not contain the The second danger for India’s business establishment is nancial seeds of its own destruction not immediately, any- straightforward: hope. Especially in the cities, aspirations have way. Over time the problems of succession and attracting out- been raised. That powerful and inspiring optimism is the under- side capital will eventually cause families to cede control. But no lying engine of India’s miracle, but it is politically essential that sudden change is likely. people’s expectations be met. In the next decade many more en- The triumph of the conglomerate in India, often family- trepreneurs must break through the established business order. controlled, does contain a contradiction, however. Today’s way Opportunities must be seen to grow as fast as pro ts. Otherwise, of doing things re ects a rational and even admirable capitalist at some point, the giant crowds of frustrated urbanites might response to the shortcomings of the state, and has helped India’s turn their attention from India’s government to its billionaires. 7 economy motor along despite them. But at some point the mud- dle-through approach may yield dimin- ishing returns. The recent wobble in the economy and dip in investment by the private sector has come after a long per- iod of government inertia and scandal. It has prompted some to doubt whether the country can really deliver growth of 8% or more without sparking in ation. If India is to nish the long journey to superpower status that has been plot- ted for it by many forecasters, it will have to get its act together on things like infra- structure, e cient land allocation, educa- tion, bond markets, reliable supply chains and the enforcement of contracts. Yet if it manages to make progress in these areas, the rationale for sprawling big business groups sometimes almost like mini- states in their own right, as substitutes for the real thing will gradually disappear. A big danger, then, to Indian business’s cur- A tale of two cities
14 The Economist October 22nd 2011