INDIAN COMPANIES COMPETING IN ADVANCED GLOBAL … - Indian Companies... · INDIAN COMPANIES COMPETING IN ADVANCED GLOBAL MARKETS ... Snapshot of BFL’s Performance (FY 95- 07) 14

INDIAN COMPANIES COMPETING IN

ADVANCED GLOBAL MARKETS

S Mukherji

Indian Institute of Management Bangalore, India

© S Mukherji

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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

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Unique origin of challengers

Deconstruction of value chain

Deep desire for achievement and recognition

© S Mukherji

4 CHALLENGERS ARE VERY LARGE IN SIZE

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Large size of challengers make them a vibrant source for • physical assets and resources • talent and labour pool • markets




POPULATION IN BILLIONS

CHINA

INDIA

BRAZIL

RUSSIA

EUROPE

USA

JAPAN

© S Mukherji

5 CONTINUOUS AND COMPLIMENTARY MANAGERIAL INOVATIONS

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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

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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

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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

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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

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BHARAT FORGE LIMITED:

FORGING SUCCESS IN A DIFFICULT TERRAIN

© S Mukherji

14 Snapshot of BFL’s Performance (FY 95- 07)

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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

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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 ?

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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”

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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

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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

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What was the significance of the Kirkstall acquisition ? What did BFL really ‘acquire’ through the deal ?

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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 ?

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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)

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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

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© S Mukherji

26 SNAPSHOT OF THE INDIAN IT INDUSTRY OVER THE LAST DECADE

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FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY08

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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

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DIRECT EMPLOYEES (‘000)

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Employees in

Software exports

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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

© S Mukherji

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Thank You [email protected]

INDIAN COMPANIES COMPETING IN ADVANCED GLOBAL … - Indian Companies... · INDIAN COMPANIES COMPETING IN ADVANCED GLOBAL MARKETS ... Snapshot of BFL’s Performance (FY 95- 07) 14

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