India Transformed

by Rakesh Mohan

  Companies not yet quite ready for initial public offering (IPO) comprise the second category. Over the last decade, Chandru Raheja and his sons, Neel and Ravi, have founded up to fifteen candidates for listing. Other pre-IPO stage potentials include Flipkart and Snapdragon, firms established by the GVK and GMR groups respectively, as well as the infra companies Anil Ambani promoted around 2008. Leena Tewari’s USV, a diabetes-focused pharma, may be another company-in-waiting. These represent the tip of the iceberg.

  A brief glance at the activities of the first- and second-generation throws up some interesting differences. First, the pharmaceuticals sector dominates both lists. The second, and perhaps the most important, difference between the two groups, is that the first-generation group launched several consumer-facing businesses, while many in the second-generation group demonstrate a continuation of manufacturing traditions.

  Who in the days of the Monopolies and Restrictive Trade Practices (MRTP) would have thought that homely offerings such as batteries and healing balm, television programmes, text messages and toothpaste tubes would translate into billion-dollar companies? Several first-generation entrepreneurs were able to introduce attractive product offerings, establish pan-India brands and pan-India availability. The rapidity, scale and success of this entrepreneurship is as extraordinary as was the journey of Lever Brothers in the colonial era.

  Banking, telecommunications and Internet networks provided the critical backbone for these first-generation business families. Equally important was the logistics revolution that followed liberalization, as interstate borders became easier to navigate. Newcomers such as Gati and older firms such as Patel Roadways expanded road and air transport, and invested in warehousing and IT solutions. GDP growth combined with good monsoons in the post-liberalization era enabled higher per capita income, which kicked in consumer spending. Given the size of India’s population, if a brand catches the aam admi’s attention, sales follow.

  Table 1 throws up an interesting facet of entrepreneurship in India’s business families. ‘Like father, like son’ is a common cliché. Here, we see that at least 12 per cent of the first-generation entrepreneurs in our sample appear to be inspired by their fathers. Anil Aggarwal’s father, Dwarka Prasad, made a modest living by making aluminium conductors in Patna (Bihar). Dilip Shanghvi’s father, Shantilal, was a trader of bulk pharma products in Kolkata. Kiran Mazumdar-Shaw’s father, Rasendra Mazumdar, was head brewmaster at United Breweries. Radhe Shyam Agarwal’s father, Bansilal, had a shop in Kolkata’s Burrabazar, selling women’s cosmetics. Rahul Bhatia’s father, Kapil, was a travel agent. Shashikant Ruia’s father, Nand Kishore, had a shipping and exports business in Madras, as the city was called in 1956. Most of these fathers were either content with what they did or, in a few cases, failed to make a name, fame and financial success in their chosen profession. But their experiences seemed to have egged on their children to expand and grow in the same sectors.

  The post-liberalization first-generation entrepreneurs are likely, in the fullness of profits and progeny, to bloom into business families. We have to wait and watch which daughters and sons have the talent and business skills, but it would be natural to assume that there is a decent line of business families waiting in the wings to edge into the elite ranking of India’s top fifty as soon as one falls off it and a place opens up. And if it is easy to slide down the ladder, it is also easier today to move up the ladder. Interestingly, Anil Agarwal, a first-generation entrepreneur in the prime of his life, has announced that he won’t leave the businesses he established to his children. But what about the children of the second generation? Will they become another statistic buttressing the cliché of ‘clogs to clogs in three generations’? Or will they consolidate and strengthen the companies they will inherit? Or will they participate in and grow with future opportunities?

  Time will tell.

  Table 2 distils the second-generation entrepreneurs from Annex 1. Here, we see that while services crowd Table 1, Table 2 has a decidedly manufacturing bias. As in Table 1, the pharmaceutical sector is as attractive to the second-generation as to the first-generation, but the auto sector (Hinduja, Munjal and Kalyani) has its own appeal.

  In the next section, we take a closer look at some of the reasons behind the failure of business families.

  The Challenge of Consistence Performance

  ‘In a deregulated, competitive economy driven by the cruel logic of markets, a company that fails to change fast enough can and will die—as is manifest in the slow march to extinction that has already become inevitable for some of India’s great old companies … Why then do managers not see how poor their performance is compared to that of their key competitors? The answer is very simple. It lies in a corporate disease called satisfactory underperformance. It is a pervasive disease—we have confronted it in companies all over the world. It is a disease that is very easy to catch—indeed, finding a way to avoid it is the unnatural act.’

  —Sumantra Ghoshal, Euroguru (1948–2004)

  My co-author, the late Sumantra Ghoshal, and I wrote these words in our book, Managing Radical Change—What Indian Companies Must Do To Remain World-Class. The pathology of ‘satisfactory underperformance’ is widely prevalent in India. In many business families, top management feels that everything is going fine when actually the organization is not fine at all. Top management blinkers itself to changing economic and competitive situations. A slow but steady decline in financials is brushed off, claiming it to be temporary when it is not. Outdated, slow-moving products or services with declining profitability and generating long tails become drags on the company, but top management is reluctant to cull the products, recommending instead that even if these products are not selling in big numbers, they still bring in some revenues on depreciated assets.

  In this cocooning, what is lost is the urgency to find great new products or services to serve a newly liberalized India with a young population. Managers take their cues from promoters, searching for the convictions and passions that lie behind the emails, speeches and planning sessions. When managers discover platitudes instead of true aspirational leadership, what chances can managers have of leading change in their own organizations?

  The Nirlon case, with which this essay opens, is a classic example of the pathology of satisfactory underperformance. Content with the super profits from a protected business, the patriarchs of the two business families were unable to cope with the changes in the regulatory environment.

  The evidence from Annex 1 leaves no doubt that many business families had, and continue to have, trouble shifting mental attitudes and organizational gears. In contrast, Table 7 provides examples of some business families that have not allowed this addictive pathology to overwhelm them. Yet, I am beginning to wonder what other factors, beyond the pathology of satisfactory underperformance, lie behind the recent sharp decline in some business families.

  The traditional arguments offered for the failure of a business family are:

  a business family seeks to be a challenger but cannot match incumbents;

  a business family becomes a shooting star because its steady performance plods behind rising stars pushing upwards;

  a technology tweak makes uneconomic a business family’s operations;

  inheritors fail to grow the family firm, either because of lack of talent or interest; and

  a family split is often the last straw.

  A classic case study is the Mafatlal group, where all five factors listed above came into play with disastrous effect. The group was founded by Mafatlal Gagalbhai (1873–1944) when he acquired a small, defunct cotton textile mill in Ahmedabad in 1905. By 1930, the group was running nine cotton textile mills, had fingers in insurance, retail, financial services, textile trading and, for brief moments, a jute mill and a shipping company. The group’s most ambitious foray was in petrochemicals, and in 1963, it pioneered NOCIL, a project large enough for Time magazine to fly a reporter from New York to Bombay (as Mumbai was t
hen known). By the 1990s, however, low investments in technology, product development and HR practices for their core businesses sapped the Mafatlal group’s textile business. NOCIL became a pigmy in front of the Ambanis’ Reliance group. The inheritors were unable to leapfrog into the future. Internecine family dynamics further contributed to the group’s decline.

  But is there something deeper to explore beyond the pathology of satisfactory underperformance and the traditional five arguments for the decline of business families? Did liberalization contribute to the debacle of seven business families sliding down the ranks and thirty-six families falling off completely between 1990 and 2016 from the list of top fifty business families as Table 3 divulges? If so, how?

  Table 3: Snakes and Ladders, Top Fifty, 2016

  1990–2016

  Survivors

  15

  Exits

  36

  New Entrants

  35

  Same Rank

  2

  Move Up

  6

  Move Down

  7

  Note: Totals do not add up to fifty because of corporate activities such as takeovers, mergers and family splits.

  Source: Extracted from Annex 1.

  The New Economic Policy was a radical intervention by the P.V. Narasimha Rao administration. New technologies create new markets; the IT sector is an example. A series of generous monsoons enabled the opening up of the rural economy as the sharp growth of the FMCG (fast moving consumer goods) sector shows. When per capita income rose, so did consumer spending; the entry of global giants such as Amazon into India confirms this trend. The lifting of trade barriers enabled exports, the pharmaceutical sector, for example. Once the state allowed entrepreneurs to borrow in global markets, animal spirits led to a rash of international acquisitions.

  However, it would be facile to fall into these apparently logical traps to explain what really happened post-liberalization. It would also be facile to jump to the conclusion that old business families fell of the cliff and disappeared.

  One, as new business families thrust their way upwards, the old ones dropped down the rankings, and several continue to function today. Two, most companies survived, often because they were acquired by fresh blood. A few continue to linger in pain: it’s not easy to close down a company in India. Some companies morphed under the old managements. This made many old business families profitable but not necessarily at par with their golden-age era. Mumbai’s old textile mill industry is an example where real-estate uses diversified. We see very few examples of companies actually imploding.

  An additional answer to the question of why business families failed possibly lies in the new pace of churn that we are beginning to see today, and the challenge of consistent performance.

  Annex 1 reveals that the most hectic activity—both upwards and downwards—takes place towards the lower half of the top fifty league. This is the arena where incumbents or newcomers thrust themselves upwards, pushing weaker incumbents downwards. The phenomenon is not unique to India and is mirrored in several countries, including in developed economies.

  However, churn today has changed enormously from pre-liberalization years, making the challenge of consistent performance very much harder. The pace of slipping and sliding, or flourishing and climbing has become much, much faster. Rankings have become much more fluid than they used to be, with business families moving up and slipping down on a yearly basis instead of decades.

  Chart 1 illustrates the point. Its compiler, Mint’s Prabhat Singh analyses companies, but the approach is a useful proxy for business families. The table depicts how after liberalization, it became much harder for a company to remain in the top fifty list of companies for any significant amount of time.

  Chart 1: Challenge of Consistent Performance, Top Fifty Companies, 2014

  Source: Prabhat Singh, ‘More to Indian business than crony capitalism’, Mint, 29 September 2014.

  India on the World Map

  ‘Enterprise which depends on hopes stretching into the future benefits the community as a whole.’

  —John Maynard Keynes, British economist (1883–1946)

  For Dr Yusuf Khwaja Hamied (b. 1936), vindication came just in time. Or ten years late. It depends on which side of the line you stand. Ten years late because thousands died during a 1990s global AIDS epidemic, who could have lived had their governments allowed them access to Triomune, Cipla’s low-cost drug for AIDS. Just in time because results of the open clinical trial conducted in a developing country (Cameroon) were published on 3 July 2004, exactly 180 days before TRIPS1 would kick in on 1 January 2005.

  Working in his Goa and Mumbai laboratories, Hamied had discovered the efficacy of a combination of nevirapine, stavudine and lamivudine—three generic drugs—packed into a single tablet, taken twice a day. Hamied began reverse engineering AIDS drugs in 1992, because he realized the epidemic would hit India hard. ‘Lamivudine took four years of my life,’ he told the New York Times. Hamied’s talent for chemistry was spotted in 1953 by Lord Alexander Robertus Todd (1907–1997). Todd, who would earn a Nobel Prize in 1957, took the Mumbaikar under his wing, inviting the teenager to Cambridge University’s Christs College in 1954.

  Triomune was effective. It was cheap. And it challenged incumbents, in particular, America’s giant multinationals with their expensive, entrenched brands.

  In September 2000, Hamied spoke at a conference of European Union health ministers and chief executives of major pharmaceutical multinationals, and quietly dropped a bombshell. He proposed plans for producing the HIV cocktail for $800 per person per year, a fraction of the $14,000 being charged by the multinationals. He went further. ‘Cipla will give technical know-how to any government of the developing countries who wish to produce their own HIV drugs … we will give the drug that stops the transmission of HIV from mother to child totally free,’ he announced. ‘You could hear the breath being sucked out of the room,’ reported UK’s Guardian.

  Hamied pushed prices down further. On 7 February 2001, the New York Times front page blazed ‘Indian Company Offers AIDS Cocktail at a Dollar a Day’. ‘My life has not been the same since then,’ Hamied admitted to Tarun Khanna, a professor at the Harvard Business School. ‘I want to make this very clear, despite what the multinationals say, I abide by the laws of the country in which I do business. I am not against patents; I am against monopolies.’

  This was the spirit that shaped the India Patents Act, 1970, which took effect in 1972. Instead of recognizing product patents, India reserved protection for process patents. But the World Trade Organization came into existence on 1 January 1995 and along with it came TRIPS (Agreement on Trade Related Aspects of Intellectual Property Rights). Like many developing nations, India initially opposed TRIPS but eventually agreed to make its patent laws TRIPS-compliant by 1 January 2005. This situation gave pharma techpreneurs a ten-year window to grow its scientific and technological base. By 2015, India was the world’s third-largest producer of affordable generic drugs. Hamied and Cipla breasted the deadline with mere days to go.

  Table 4: Patent Laws and Company Incorporations

  Business Family

  Principal Company

  Incorporation

  Yusuf Khwaja Hamied

  Cipla

  1935

  1972 PATENT ACT COMES INTO FORCE

  Sudhir Mehta

  Torrent Pharma

  1972

  Basudeo N. Singh

  Alkem Lab

  1973

  Glenn Saldanha

  Glenmark Pharma

  1977

  Kiran Mazumdar-Shaw

  Biocon

  1978

  Desh Bandhu Gupta

  Lupin

  1983

  Kallam Satish Reddy

  Dr Reddy’s

  1984

  P.V. Ramaprasad Reddy & K. Nityanand Reddy

  Aurobindo Pharma

  1986

  Ajay Piramal

  Pir
amal Enterprises

  1988

  Murali Krishna Divi

  Divi’s

  1990

  1991 NEW ECONOMIC POLICY INTRODUCED

  Dilip Shanghvi

  Sun Pharma

  1993

  1995 INDIA JOINS WTO

  Pankaj Raman Patel

  Cadila

  1995

  2005 TRIPS COMES INTO FORCE

  Source: Compiled from Annex 1, company websites and documents, CMIE Prowess, moneycontrol.com and bseindia.com, media reports, my own books, articles and interviews

  In a country where business, economics, politics and the state rarely mesh, the pharmaceutical industry is perhaps one of the few sectors where players share a common ultimate goal even where there are differences over how to get there. Table 4 outlines the symbiotic relationship between policy and pharma company incorporations in India’s business families. Table 5 describes the tremendous achievement of Indian pharma in the world. A small footnote: during his restructuring of the Tata group in the 1990s, Ratan Tata sold off the pharma companies. In hindsight, was that a good or poor decision?

  The fine performance of these pharma companies has the unfortunate upshot of training a spotlight on the paucity of world-class and world-size Indian family-run multinationals. True, the Tata group’s global footprint spans more than 100 countries in six continents, and in 2014–15 it had impressive international revenues of $73.4 billion, but like GE, the group is an aggregation of companies. Unlike GE, the Tata firms still have some way to go before gaining global leadership status. The small size of the Indian market is a critical inhibiting factor. Reliance is a juggernaut, but the focus of the Ambanis is India, and the Indian market so far is too small for the creation of truly global giants in the sectors they are in.