India Transformed

by Rakesh Mohan

  Airtel’s outsourcing business model constituted an outstanding example of this. It was an unprecedented model, which envisaged outsourcing of key functions such as network management and IT services. Under the new model, we were not required to instal or maintain network equipment or IT infrastructure and, instead, had to focus on our core activities—marketing and customer care. We accordingly entered into Service Level Agreements (SLAs) with network-equipment suppliers such as Ericsson and Nokia, who had to set up the networks to provide us service and ensure a certain desired network uptime. Airtel was required to pay for capacities coming out of the network and not for the boxes. Often called the ‘dollar per Erlang model’, it ensured that Airtel no longer had to worry about how much infrastructure to add on as the suppliers had to plan and optimize the network to ensure adequate capacity and high quality. Many considered it a disastrous route to take, as letting the network be managed by an outside agency was like ‘giving your heart’ to be managed by someone else. We also entered into a long-term IT-outsourcing agreement with global giant IBM, under which every IT equipment (down to the desktop on an employee’s desk) was to be managed by them. The payment was linked to outcomes. Only a part of the payment was committed as ‘fixed’; most of it was linked to our revenues.

  The SLAs, in effect, not just resulted in a sharp drop in upfront capital expenditure but simplified the cost structure for the company. The model helped an operator expand its networks faster and simultaneously brought down overall costs significantly. The success of the new model silenced the critics and soon became the ‘new standard’ for operators across the world. This innovative business model went on to become a case study at the Harvard Business School.

  Another path-breaking innovation by the Indian telcos in the next few years was the ‘passive infrastructure sharing’, which meant that operators were ready to share their towers and related infrastructure with their competitors. It further eased up network expansion cost, facilitating a quick network rollout. Network and IT outsourcing and passive infrastructure sharing constituted the two basic pillars of Indian telecom’s low-cost business model, which later also facilitated rapid expansion of services in other emerging and developing markets.

  Coming back to the telecom growth story, by early 2005, Airtel had become the first private operator to have a pan-India footprint—a huge achievement in a country of our size, with twenty-three operational circles. Low call rates and affordable handset costs were gradually making mobile telephony a mass product, and the industry was suddenly experiencing a ‘hockey stick’ growth trajectory. The sudden change in the trajectory can be gauged from the fact that by 2003, Airtel had just 3 million customers on its networks; this has crossed 360 million today, including its customers in overseas markets. The explosive growth over the last decade or so clearly points to the very empowering nature of the technology and the extremely aspirational character of the Indian consumer, who turned out to be eager adopters of technology.

  No discussion on Indian entrepreneurship could be complete without a reference to the global aspirations of Indian businesses, which is essentially a phenomenon of the last ten years or so. It was very clear that Indian businesses were too small compared to their global counterparts when India opened its door to globalization in 1991. In fact, the critics of liberalization always predicted that Indian businesses would in no time be swept away by their foreign competitors once the different sectors are opened up to global competition. However, contrary to this pessimistic prognosis, Indian entrepreneurs were actually knocking on foreign doors in a matter of one and a half decade of liberalization for big M & A deals. From natural resources and commodities to telecom, IT, automobiles and pharmaceuticals, Indian companies have made their mark on the global stage by the sheer strength of their business models and appetite for growth.

  In telecom, Airtel has remained, till date, the only Indian company to have ventured into global waters in any significant way. With an innovative business model that helped us deliver one of the lowest tariffs in the world, we were fairly confident about replicating the business model in emerging markets. After putting our ability to test for overseas play in the South Asian neighbourhood—Sri Lanka and Bangladesh in 2009–10—Airtel finally made its big statement in Africa when it acquired Zain Telecom’s fifteen markets in the continent in June 2010. Valued at $10.7 billion, the deal remains the second-largest overseas acquisition by an Indian company till date. Today, as the third-largest mobile operator in the world (by customers), Bharti Airtel truly symbolizes the evolution of Indian telecom sector over the last two decades.

  Over the last twenty-five years, the economy has swung from a 3–4 per cent growth trajectory to more than 7–8 per cent. A large part of this growth is accounted for by the rapid growth of the service sector, led by sectors such as telecom, aviation, media, IT, ITES, retailing, healthcare and tourism. India too has emerged as a key global hub of research and development, largely on the strength of its huge pool of technical manpower. These sectors have emerged as a fertile ground for entrepreneurship. Today’s e-commerce and other Internet-based businesses led by entrepreneurs in their twenties and thirties are only an extension of this hugely transformational trend.

  From a conservative mindset that only encouraged young people to look at government jobs as preferred career options, Indian society has changed dramatically over these years. Entrepreneurship is considered a priority option today, as hundreds of bright engineering and management graduates from premier institutes are getting attracted to this exciting arena. Thanks to the rise of venture capitalists and private equity funds eager to place their bets on young Indian entrepreneurs, we are clearly looking at a future where entrepreneurship is going to play a pivotal role in economic growth. The cultural change is obvious when you look at the social background of some of the most successful technology- and Internet-based business entrepreneurs today.

  Liberalization has affected Indian society at multiple levels. Sustained economic growth and consumerism has often been perceived as the most prominent face of this process. But the underlying force driving these twin processes has undeniably been the entrepreneurs. They have continued to bloom in ever greater numbers every passing day to drive this powerful growth story forward. The story of Indian liberalization has truly been the story of Indian entrepreneurship.

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  Liberalization and a Tale of Two Companies: Open the Cage and Let the Birds Fly

  R. Gopalakrishnan

  The unshackling of the Indian economy led to dramatic changes within the Tata group, which rejuvenated existing businesses, developed new ones, aggressively expanded in overseas markets and launched breakthrough products, hiking its turnover by almost twenty times over the period. And HLL developed an enormous appetite for organic growth, something which industrial licensing had thwarted all these years, increasing its market cap by a factor of thirty in the process.

  During a visit to China in early 2016, I learnt of the ravaging consequences on Chinese labor because of the ongoing industrial restructuring in the Guangdong province. Older factories were closing, workers were being laid off, and new factories were coming up. There was considerable disquiet among the working class. The policy of the Guangdong government was reported to be Thong Long Huan Niao, a Cantonese expression that means ‘Open the Cage and Let the Birds Fly’. As I understood it, the provincial government likened the uncompetitive companies to caged birds and encouraged them to fly out and design a new life for themselves and their workers.

  Allegorically, Indian industry was in a similar situation in 1991 when liberalization occurred. The bird cages were indeed opened with the tectonic changes to Industries Development and Regulation Act, the Monopolies and Restrictive Trade Practices Act and the Foreign Exchange Regulation Act, three key laws that held industry on a draconian leash. Industrial licensing, monopoly laws and foreign-exchange transactions were relaxed, diluted and modified over a period of time. This essay is the story pr
incipally of two companies, their dilemmas, their pathway out of the cage and their transformation—HLL (Hindustan Unilever Ltd, aka HUL, but called HLL in the essay) and Tata (as a group of companies).

  Liberalization from My Perspective

  Liberalization events are viewed differently by several players, depending on from where they observed and experienced developments. In January 1991, some months before liberalization, I went away to Jeddah as chairman, Unilever Arabia. Things were not going well in India at the time; for that matter, neither was Arabia inviting, what with clouds over Kuwait followed by the Gulf War. I was apprehensive about how events would unfold in both geographies.

  Within a few months, a number of dramatic developments took place in India, which I watched from Jeddah. At the end of 1994, I returned as managing director of Brooke Bond Lipton India Ltd and, thereafter, as vice chairman of Hindustan Lever. Through these roles, I personally experienced the maelstrom of liberalization. As part of the team with HLL Chairman Susim Datta and colleagues, I participated in a dramatic rearrangement of Unilever businesses in India. Some years later, I joined Tata Sons as director; as part of the team with Ratan Tata and colleagues, I participated in the rearrangement of the Tata group. Both of these have been hugely impactful experiences from my professional point of view.

  For this essay, the editor requested me to write an anecdotal essay to answer questions such as:

  What transpired out there in the companies as liberalization occurred?

  What new degrees of freedom did companies get out of liberalization?

  What were some of their dilemmas and how did the companies resolve them?

  I felt that a good way to write would be to narrate a few events through the lens of what I saw firsthand or what I could relate with closely. HLL and Tata are two storied business groups with over a century of existence; they responded to the demands of the time and renewed as the ‘children of liberalization’. HLL was very keen on expanding in the Indian market, while Tata was eager to expand both in domestic and international markets. HLL was, and remains, the most ‘Indian multinational’ company, and Tata the most ‘multinational Indian’ group.

  I will also—albeit briefly—touch upon the wave of start-ups; as an aside, I will ponder over a non-technology Indian company—Patanjali Ayurved Limited—that has rapidly built a somewhat controversial FMCG business, the size of which took Unilever a century to build. Patanjali would not have happened without liberalization.

  The Early Years of Liberalization

  HLL

  In 1990, when Susim Datta became chairman of HLL, he inherited a fairly strong company, which had weathered numerous challenges of the infamous Licence Permit Raj. The vexatious issue of 51 per cent foreign equity for Unilever under FERA had lasted through the 1970s and 1980s, and was finally resolved through the strenuous efforts of T. Thomas and Ashok Ganguly, two earlier chairmen. However, HLL, being a FERA company, was not allowed to increase production of detergents or source from third parties, as a result of which the company had not been able to respond effectively to the market threat posed by Nirma, a small-scale manufacturer of detergents.

  In the early 1980s, HLL had grabbed an invitation from the Punjab government to buy into the equity of a sick, government-owned detergent company, Stepan Chemicals. Being outside the ambit of FERA, Stepan Chemicals was permitted to outsource products from third parties. What a circuitous route to take to get production capacity! To conform to FERA, HLL had entered into the chemicals and exports businesses, both of which were reasonably stable. But if there were to be some degree of liberalization, these just-stabilized businesses would face fresh challenges.

  The winds of change had been blowing through government and administrative corridors ever since, but they could not develop into a strong gale because of several political developments. As recounted later by Susim Datta, when he reflected on the contemporary national developments, it was obvious to him that dramatic change was around the corner. The trouble was that nobody knew exactly what the change, and how affecting, it would be. For many decades, multinational company leaders had been advocating liberal free market and consumer-driven markets as the panacea for Indian development. Their advocacy flowered into reality quite suddenly in May 1991 when Prime Minister P.V. Narasimha Rao (industry portfolio), Dr Manmohan Singh (finance portfolio) and P. Chidambaram (commerce portfolio) embarked on liberalizing industry and trade. HLL was psychologically prepared for change but, not knowing the contours of these changes, was only ready on a surface level.

  Early during liberalization, the company decided to seek external advice and engaged Professor Sumantra Ghoshal of London Business School to work with the leadership team. (In the Licence Raj, foreign exchange for such consultancy was difficult to get approved.) Liberalization appeared to bring with it new uncertainties, so HLL developed alternative scenarios along with an aggressive vision: to double sales every four years and double profits-after-tax every three years. This was akin to a pilot deciding to break the sound barrier with no experience of the resultant sonic boom: the pace of the company would have to increase to a level that nobody had experienced before. Such thinking became possible entirely due to liberalization.

  Now, HLL could expand production capacity and set up new capacities without the painful process of applying to the government for industrial licences. Even before 1991, HLL had built a couple of new factories, thanks to a government policy for industrially backward areas of the country. However, it could not refresh or resize its existing factories. Within the first decade and a half of liberalization, none of the six factories (in Bombay, Garden Reach, Shamnagar, Ghaziabad, Trichy and Etah) that produced products when I joined the company remained recognizable. Most were sold or closed down due to labor issues, product obsolescence or uncompetitive cost structures. Brand new and modern factories with new work practices were put up. Such a renewal of manufacturing could just not have been contemplated, let alone executed, during the licence-permit days. Susim Datta later recounted: ‘I would like to believe that although the initial problems were very large, in the end this dispersal of the manufacturing facilities has helped the company—certainly it did during the years I was there. It was against this backdrop that HLL settled into a period of growth, an era of mergers and acquisitions, and a period when there was a lot of media attention on us.’

  Another aspect that HLL had to completely reorient was consumer research. The company already had strong skills in market research, but realized that those would not be adequate to meet the needs of the future. Due to global exposure through media, the consumer would change rapidly, their expectations would escalate sharply, and competition would aggressively track these developments. The expenditure on consumer research was upped progressively and new techniques, such as simulated test markets, sequential recycling and qualitative research, were implemented.

  HLL developed an enormous appetite for organic growth, something that industrial licensing had thwarted all these years. This aspect of the company did not fetch newspaper headlines but some of the biggest successes were achieved through organic growth. The company’s large detergents division led the charge by developing the vision, foresight and courage to accelerate organic growth in order to improve its market presence by adopting a target of making and marketing ‘1 million tonnes by 1994’. Before liberalization, HLL’s detergent division was selling about 4,50,000 tonnes and this new ambition and the drive to get the growth to reach a million tonnes by 1994 was perceived as big, audacious and gutsy. HLL achieved this growth by organic means by building completely new factories and by backing chosen brands that included the Wheel detergent bar.

  Tata

  Just a kilometre away from the HLL office, a newly appointed corporate leader sat in his fourth-floor office at the eponymous Bombay House. On 23 March 1991, patriarch J.R.D. Tata had his ‘usual’ Monday morning meeting with his acolyte, Ratan Tata. However, the patriarch said something unusual at this usual meeting: ‘
I have decided to retire as chairman and to appoint you in my place as chairman of Tata Sons … I have not decided the date because I have to consult Ajit Kerkar.’1 Ajit Kerkar, the chairman of Indian Hotels, was very good at picking auspicious dates, and JRD clearly wanted the day to be an auspicious one. A wonderful example of tradition woven with modernity!

  After the initial period of what Ratan Tata subsequently termed, ‘basking in the glory of the change’, he settled down to the task of thinking about what his agenda should be. In reality, Ratan Tata had started thinking about transforming the group’s operations a decade earlier when the redoubtable J.R.D. Tata had appointed him as the chairman of Tata Industries. In that capacity, Ratan Tata had scripted a ‘Corporate Plan’, a sort of blueprint for the group, with some assumptions about the economy and government policy. The plan had to wait several years for the mantle of leadership to fall on his shoulders, and so also, coincidentally, the magic of liberalization.

  Like many other companies, Tata companies, in particular the flagship Tata Steel and Tata Motors, had suffered for decades during the Licence Raj era, with its unjustifiable controls over production and pricing, mindless quotas for allocation of resources and severe restrictions on imports. Foreign-exchange controls meant that companies had to struggle to convince officials while importing new machinery or deploying state-of-the-art technology; even business leaders and top executives found it difficult to travel abroad on business trips as there was a ceiling on the amount of foreign exchange that could be spent on a per diem basis.