Indian business.indd

SPECIAL REPORT
BUSINESS IN INDIA
October 22nd 2011
Adventures
in capitalism
SP EC IA L R EP O RT
BUSINESS IN INDI A
Adventures in capitalism
Indian businesses are rewriting the rules of capitalism in a
distinctive and unexpected way, says Patrick Foulis
ACKNOWLEDGMENTS
In addition to those mentioned and
quoted in the text, the author
wishes to thank the following people
for their help: Devendra Amin,
Pradipta Bagchi, Uday Baldota, Arun
Bhagat, Indrani Bhattacharya,
Debojyoti Chatterjee, Phiroza Choksi,
Shravani Dang, Anindya Datta, Mira
Desai, Charudatta Deshpande,
Shubhada Dharwadkar, Suprio Guha,
Sarika Kapoor Chokshi, Andrew
Lorenz, Kulsum Merchant, Jimmy
Mogal, Pankaj Mudholkar, Sachin
Mulay, Christabelle Noronha, Kirsten
Paul, Prasad Pradhan, Dr Pragnya
Ram, Mahesh Shah, Capt Kunal
Sharma and Milya Vered.
The Economist October 22nd 2011
ON AUGUST 1ST India’s nance minister, Pranab Mukherjee, gathered
the country’s senior businesspeople for a pep-talk in New Delhi. The
event (pictured) was notable for two reasons. First, the subject of discussion was the wobble in condence that has taken place over the past
year. Although a mini-industry has arisen of India optimists who predict
that the country’s entrepreneurial spirit will make it an economic superpower over the next two decades, many business folk on the ground feel
disillusioned. They worry that India’s notorious red tape, graft and lack
of infrastructure are nally catching up with it. Largely unnoticed abroad
and eclipsed by the rich world’s sovereign-debt crisis, the Indian economy has hit a sticky patch, with investment slowing, ination high and
growth expected to dip to perhaps 7%, from a peak of 10%. After two and a
half hours, needless to say, the bosses emerged and expressed boundless
optimism with the gru air of men in the grip of a half-Nelson.
The second surprise, given India’s reputation as a land of red-hot
start-ups and new entrepreneurs, was the dynastic nature of those captains of industry. They included Ratan Tata, the fth-generation head of
Tata Sons, a conglomerate; Anand Mahindra, the chief executive of the
Mahindra group, which was co-founded by his grandfather; and Anil
Ambani, who inherited a chunk of the Reliance empire built by his father. The main representatives of rst-generation entrepreneurs were
Shashi Ruia, who built the Essar group with his brother and who has
handed day-to-day management to his son; and Sunil Bharti Mittal, who
controls India’s biggest mobile-phone operator, and whose son recently
joined the rm after a stint as an investment banker in London. True, not
all Indian rms are dynastic: Y.C. Deveshwar, a veteran business leader,
attended in his capacity as chairman of ITC, a rm controlled by institutional investors, rather than a family. But ITC has become the kind of conglomerate that Western textbooks advise against, spanning everything
from stationery, cigarettes and spice-grinding to noodles and hotels.
Amid the barons and conglomerate bosses, the only man who represented a recognisably contemporary Western vision of the corporation
was N.R. Narayana Murthy, the lead founder of Infosys. It is focused on
one business line, computer services, which are mainly sold to rich countries. And it is owned by diuse institutional shareholders, has gold-stan- 1
CONTENTS
4 Family rms
The Bollygarchs’ magic
mix
7 Inbound and
outbound deals
Their oyster, with grit
included
10 Innovation and
cost-cutting
The limits of frugality
11 State-controlled rms
The power and the
glory
12 The outlook for
entrepreneurs
Looking for the next
Infosys
13 The Indian miracle and
the future
Rolls-Royces and
pot-holes
A list of sources is at
Economist.com/specialreports
An audio interview with
the author is at
Economist.com/audiovideo/
specialreports
1
S P ECI A L R E PO R T
BU SI N ES S I N I N D IA
Controlled by:
India’s top 20 listed firms
by market capitalisation
September 2011, $bn
Larsen &
Toubro
State Bank
of India
20.8
26.1
Reliance Industries
Tata Consultancy
Services
57.2
42.6
Bharat Heavy
Electricals
ITC
Coal India
32.5
HDFC Bank
50.7
17.4
23.9
Jindal
Steel
& Power
10.8
ICICI Bank
Hindustan
Unilever
21.6
15.5
Oil and Natural Gas
49.7
Housing
Development
Finance
NTPC
30.1
State
Family
Foreign
Diffuse
owners
Sun
Pharmaceutical
Bharti Airtel
Mahindra
&
Mahindra
31.0
10.3
Tata
Motors
Infosys
10.2
29.1
Wipro
10.6
17.6
20.6
Sector weights in the BSE 100 index, %
Basic materials,
utilities and energy
31.0
Financials 24.5
Consumer and
health care
17.1
Industrials 14.3
Technology
and telecoms 13.1
Source: Bloomberg
brainpower, complex algorithms, knowledge workers, call centres, transmission protocols [and] breakthroughs in optical engineering as the new sources of wealth, many of the latest generation of Indian oligarchs made their cash from old-fashioned
things like roads, mines, energy and property. In short, India has
not conformed to anyone’s template. It has gone its own way.
What does this new kind of capitalism look like? An immense, often unrecorded informal sector employs the majority
of Indians. But in terms of value addeda
crude way of measuring activity that is
used by economistsIndian capitalism is
concentrated. In 2007 a government survey of almost 200,000 services rms, formal and informal, concluded that the top
0.2% of them accounted for almost 40% of
output, and that companies in two states,
Maharashtra and Karnataka, which host
the commercial hubs of Mumbai and
Bangalore, collectively accounted for
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 value
sits in the BSE 100 index of the largest
socialism towards a Western form of institutionally run
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 standards. As a group, these businesses have a return on equity that
prevailed between independence in 1947 and liberalisation in
has declined in recent years but remains solidly in the mid-teens,
1991, towards a Western form of institutionally run capitalism.
making Indian rms more protable than many of their Asian
But that is not how things have turned out. Infosys has just been
peers, reckons Anirudha Dutta of CLSA, a brokerage. Debt levels
overtaken as India’s most valuable computer-services rm by
are low and growth has been strong, with prots rising sixfold
TCS, part of the 143-year-old Tata group. Look at India’s leading
since 2001 in dollar terms to $64 billion.
100 rms by market value and you will not see any others like InThat makes India big, but not that big. It accounts for about
fosysblue-chip, focused, diusely owned, created in the past
3% of the world’s stockmarket value. Cheered, feared and jeered
three decades and run on non-hereditary principlesbar a few
at home, India’s giants are mere middleweights on the global 1
nancial rms. And whereas Mr Friedman cited software,
2 dard corporate governance and accounting, and in the next four
years is expected to wave goodbye to the last of its founders still
playing an executive role. It is a corporate fairy tale: in a single
generation Infosys has leapt from a start-up, founded by a handful of engineers with $250, to global blue-chip company. The Infosys vision of Indian capitalism was popularised by Thomas
Friedman, an American journalist who had an epiphany after
playing golf in Bangalore and meeting Infosys’s chief executive.
Mr Friedman went on to write the 2005 bestseller The World Is
Flat. It described an India of buzzing entrepreneurs and startups, turbocharged by the internet, outsourcing and global communicationsa kind of giant Silicon Valley with worse roads
and spicier food. In the years since, perhaps reecting the woes
of the West and the rise of China’s state-backed approach, some
observers have been less restrained, celebrating a reassuring India of a billion innovators who, through a bottom-up revolution,
would propel their country to prosperity.
Just as Lenin hoped Russia could skip a Marxist phase or
two and jump from agriculture to communism, so these cheerleaders hoped India could leap from sclerotic socialism, which
2
The Economist October 22nd 2011
SP EC IA L R EP O RT
BUSINESS IN INDI A
2 stage. State Bank of India, India’s largest lender, is a tenth of the
size of China’s biggest, measured by prots. Reliance Industries,
a family-run conglomerate with a skew towards chemicals and
energy that is the subcontinent’s most valuable rm, is only a
third as big as Total of France. If all goes to plan and India’s economy grows quickly it will still be a decade before its rms begin
to challenge those of the rich world and China by size. After two
decades in which sunrise industries such as mobile telecoms,
media, health care and nance have thrived, India’s distribution
by sector now looks pretty conventional by global standards (see
graphic on previous page).
What makes India unusual, aside from its rapid growth, is
its form of ownership. Its evolution can be crudely split into
three periods. Until 1991, when liberalisation began, Indian businesses that had not been nationalised were family aairs that
survived in a world of micromanagement and ocial targets
the licence raj, a surreal mix of Soviet stupidity, British pedantry and Indian improvisation. Firms responded by branching out
into any activity where they could nd room to breathe, while
facing little serious competition in their main businesses. Many
enjoyed close links with the Congress Party that formed India’s
rst post-independence government and dominates the ruling
coalition today. By the time an economic crisis brought on liberalisation in 1991, though, most business folk were utterly fed up.
The pattern of ownership in the second period, between
liberalisation in 1991 and 2003 (when the economy’s growth rate
moved up another gear) was far more turbulent, as lazy old family groups were exposed to erce competition at home and from
abroad and the prices of everything from machines to India’s
currency were freed up. Many rms didn’t survive. Of the largest
20 listed on the stockmarket in 1990, only ve remain in a recognisable form in the top 20 private rms today, ranked by market
value. The big textiles houses that dominated the scene in 1990
were much diminished over the next decade (although Bombay
Dyeing is, despite its name, still in business), and some of the
grand families behind them such as the Mafatlals dropped from
the upper ranks of capitalist clans. Indian business in its rst decade of freedom, then, did destruction and creation. Indeed, as
the economy took o in 2003 the possibility that the old, oligarchic form of capitalism might be obliterated altogether, perhaps
even to be replaced by a freewheeling approach that had more
than a whi of America about it, seemed a sensible prediction.
Sensible, but wrong. For if an alien investor landed in
Mumbai today and ignored every aspect of life there other than
the structure of the stockmarket, the closest thing would not be
New York’s bourse, but a weird mix of São Paulo, Seoul and
Shanghai. Some 41% of India Inc, measured by the prots of the
1
Who owns how much
Profits of top 100 Indian listed firms by type of controlling shareholder, %
Institutional
Third or older
generation
State
First-generation
entrepreneur
Second generation
Foreign
100
80
60
40
20
2002
03
04
05
06
07
08
Fiscal years ending March
Sources: Bloomberg; The Economist
The Economist October 22nd 2011
09
10
11
0
2
Still ahead of the pack, just
Return on equity, %
25
India (BSE 100)
20
15
10
MSCI Emerging Asia
5
+
0
–
1997 98 99 2000 01
02
03
04
05
06
07
08 09
10 11
5
Sources: Thomson Reuters; CEIC
biggest 100 rms, sits in the hands of state-controlled companies,
from big oil rms to Coal India, with its vast empire of opencast
mines, its own corporate song and 377,932 loyal workers. Bluechip rms controlled by institutional owners, such as ITC, and a
handful of subsidiaries of foreign rms such as Unilever, together account for only 18% of overall prots. The remainder, some
41% of earnings, are made by rms under some form of family or
founder control. This special report will include Tata Sons in this
category even though the present fth-generation boss is likely
to be the last family member in charge and most of its shares are
owned by family trusts that are meant to be independent.
Capindialism
Within this broadly dened category of family or founder
rms it is also possible to nd examples of every kind of fresh
success. Gautam Adani, a strapping billionaire with a habit of
watching share prices on television as he talks, has used brawn
and guile to build from scratch an empire of ports, power and
coal centred in Gujarat, a western state. In a Mumbai suburb Dilip Shanghvi, a soft-spoken scientist, has turned Sun Pharmaceutical from a minnow into a global generic-drugs rm worth $10
billion. Yet the older family rms, toughened up by 20 years of
competition, matured by bitter feuds and splits, and still with remarkable reserves of animal spirits, have at least held their own.
India’s economy is one of the world’s most dynamic. Some
industries, such as media and aviation, are unrecognisable from
ten years ago. There has been a fair amount of turnover among
the leading rms. But overall, India’s form of ownership has
barely changed over the past decade. The division of prots
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
the prot share of family rms overall, of whatever vintage,
changed much. The mix of state, blue-chip, foreign and family
owners has been remarkably stable.
In the past decade Indian business has not been on a journey towards someone else’s economic model, whether Chinese,
European or American. It has not been growing out of an immature phase, or shaking o a simpler way of doing things. Instead
it seems to have established its own equilibriumwhat might be
called capindialismin which prots are controlled not by institutional shareholders but mainly by the state, or by entrepreneurs and their descendants. Outside the state rms, the ddly
conglomerate is the favoured form of organisation. This special
report will try to answer the big questions all this raises. Why has
Indian business developed in this way? Will it continue to? Can
the aspirations it has raised be met? And is this new form of capitalism good for Indiaand the world? 7
3
S P ECI A L R E PO R T
BU SI N ES S I N I N D IA
Family rms
The Bollygarchs’ magic
mix
Why India’s soft state encourages family-owned
rms and conglomerates
TO FIND RAJEEV PIRAMAL, the 35-year-old boss of Peninsula Land, you go down a drive in deafening Parel, an upand-coming business district in Mumbai that used to be the centre of the textile industry. A new tower block is zooming up on
one side, and nets hang overhead to guard against falling debris.
Mr Piramal’s oce is in an old mill building whose steel pillars
are stamped with Blackburn, the English town where they
were forged long ago. This is a place where corporate death and
rebirth is happening in real time; where derelict factories and
workers’ tenements are being demolished to make way for trading oors and media outts with ping-pong tables in their lobbies.
The family rm isn’t dying in this environment, it is thriving. Mr Piramal’s great-grandfather was a trader who made it big
in textiles in Bombay, as Mumbai was once known. The family’s
mills were clobbered in the 1980s and early 1990s, but unlike
some of Bombay’s other famous textiles clans, such as the Mafatlals, the Piramals have not faded away. They turned to property,
redeveloping their defunct industrial sites a decade ago, then
taking on others’ mill land and, most recently, evolving into a
mainstream developer across the country, with book equity of
some $300m. Rajeev’s branch of the family also dabbles in engineering and entertainment. Another bit of the clan split o in
1981 and operates a luggage business, while yet another, which
broke away in 2005, specialises in health care and glass. In 2010 it
sold its domestic drugs operation to Abbott, an American rm,
for a staggering $3.8 billion. This year it bought a 5.5% stake in Vodafone Essar, a big mobile-network operator.
Adaptable, ingenious and combustible, the family rm remains the backbone of India’s private sector, not an anachronism. This is politically incorrect, jokes Kumar Mangalam
Birla, who runs Aditya Birla, the third-biggest family business
house by sales, before going on to argue that the family, and the
vim it brings, is an essential part of India’s economy. There is no
easy way to categorise these business houses, but vintage is one
approach (see table). The oldest, such as Aditya Birla, Tata and
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
from his brother Anil in 2005, and whose late father’s rise from
petrol-pump attendant to billionaire is the stu of legend.
First-generation rms include the winners from sunrise industries such as telecoms and computing, which boomed in the
late 1990s and early 2000sBharti Airtel and HCL, a technology
rm, being two ne examples respectively. More recently the
ranks of rst-generation rms have been swelled by the Adani
group, big in ports and power, and GMR, an infrastructure rm
based in Bangalore. The shift from export and consumer-facing
industries towards rent-seeking sectors with more government
involvement is an important and, some say, worrying trend.
A nal category is the oshore Indian family group. The Hinduja brothers, who run everything from Ashok Leyland, a truckmaker in India, to a Swiss bank, are partly based in London. Vedanta, a big natural-resources outt, shifted there in 2003. Such
rms mix Indian and foreign activities. It is tempting to include
Mittal Steel, based in Europe and run by Lakshmi Mittal, in this
group. But he is better regarded as an escapee from India who
made his fortune only after leaving the country as a young man.
Doing it vertically and horizontally
Most of these groups have two shared characteristics. First,
complexity. Although many have simplied since 1990, most are
still ddly, with intricate chains of holding companies and subsidiaries. Second, they are conglomerates, often with one or two
core activities and a long and growing tail of others. The holding
chains are relatively easy to explain and are common in other
countries such as Italy and Brazil. A cascade of companies means
outside capital can be brought in at multiple levels without weakening family control. In India complexity is also sometimes a response to family spats, with rivals each given a distinct sphere of
inuence. India’s regulators help, too; they talk a good game
about corporate governance but do not require top-notch accounting and let rms build stakes in others without buying out
all minority shareholders. K.V. Kamath, the chairman of Infosys
and of ICICI, a bank, believes governance will improve. Companies will voluntarily change, he says. Others are less optimistic.
Meanwhile, the Reserve Bank of India, the central bank, frowns
upon using bank loans to fund takeovers, so they rarely happen.
The causes of the complexity, then, are understandable. It is
India’s love of conglomerates that is the mystery. Some blame history: before independence in 1947, British companies often oper-1
3
Top dogs
India’s major private business houses
Name
2011* sales, $bn
Generation
Comment
84
Tata family trusts
5th
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
Defies categorisation. A firm or a federation? Does control sit with independent trusts, outsiders or the boss?
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
4
Controlled by
Tata group
*Year ending March
†Estimate
The Economist October 22nd 2011
SP EC IA L R EP O RT
BUSINESS IN INDI A
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. Another explanation is cultural. Taking a sample of 16 of India’s big
houses, nine came originally from the Marwari and Bania communities, 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 ination.
Yet the best explanation is India’s soft state. Courts can take
years to make their minds up, so contracts are hard to enforce. Infrastructure 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 happens 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 oer lm-makers everything from
sets and camera equipment to editing services. Outside India,
his rm specialises: its Los Angeles arm helped ensure the 3D images 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 exemplies 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 benets of this second kind of expansion may seem less obvious, but it is still wildly popular, suggesting that synergies ow
from being part of a big group in terms of nancial muscle, managerial talent, brand, technology and inuence with ocials.
A test of the soft-state theory is whether rms that are not in
family hands also diversify vertically and horizontally. Very often they do. A good example is Larsen & Toubro (L&T), an engineering rm founded by two Danes in Bombay in 1938 which is
widely viewed as one of India’s best companies. Although it has
slimmed down in some areas, its activities are still very diverse,
from making submarines to building roads. Physical assets comprise a small share of its balance-sheet, with minority investments, loans made to customers and working-capital balances
making up the lion’s share of its assets. This suggests it is in part a
nancial rm now, and that it uses its muscle to compensate for
the lack of bank funding and bond-market nancing for infrastructure investments. This year L&T oated a nance business,
and it is considering applying for a banking licence. India’s family bosses would applaud.
Family rms dominate the private sector in much of Asia
and Latin America. But unlike in South Korea, where the chaebol
act in close concert with politicians, India’s rms only engage
with the state opportunisticallyit is their enemy as well as occasional partner. Nor should India’s conglomerates, particularly
family-owned ones, be slammed for rigging markets, as they are
said to in other countries such as Mexico and Israel. India’s capitalism doesn’t really work that way. The family houses go to war
with each other and face new entrants: in industries such as retailing, power and mobile telecoms, protability is poor as a result. In India the institution of the family rm is entrenched, but
there is constant turnover. Who is on top at any point never
The Economist October 22nd 2011
Reliance MediaWorks knows all about family dramas
stays the same, says Adi Godrej, the head of the Godrej group.
The numbers back this up. For family rms in the top 100, overall
returns on equity look similar to those of state-owned and institutionally owned rms, indicating that family rms are not making supernormal prots. This year an IMF study concluded that
although such rms were as dominant as ever and the number
of new entrants had fallen, competition was still lively.
India’s family capitalism is dynamic and its patriarchs are
the only people prepared to put billions of dollars at risk to build
the new India. It is, of course, possible to nd other objections,
from the crowding out of new entrepreneurs to inequality. But it
is also worth considering whether India’s family rms will zzle
out of their own accord. In other countries family conglomerates
and corporate federations have been merely a phase of capitalism, and have declined on their own. This can happen in three
ways. They can become abby and lossmaking, as in the case of
Japan’s keiretsu. The need to raise outside capital to nance
growth can slowly dilute the family’s stake to insignicance. Or
they can run out of credible heirs. The last two factors are common in America and Europe, where Hilton, Cadbury and others
have evolved into companies run for institutional investors.
Will India’s family rms fade of their own accord, too? To a
Western eye, Tata is far along this path. It is bewilderingly complex, with at least 20 operating divisions, a couple of them heavi- 1
5
S P ECI A L R E PO R T
BU SI N ES S I N I N D IA
4
The league table that really matters
Estimated return on equity of big business groups
Tata Sons
Mahindra & Mahindra
OP Jindal
Reliance Industries
Aditya Birla*
Reliance Group
(M. Ambani)
(A. Ambani)
30
20
10
2008
09
10
11
0
Fiscal years ending March
Sources: Bloomberg; The Economist estimates
*Excludes derivatives gains and losses at Novelis
2 ly lossmaking. After big foreign takeovers such as that of Jaguar
Land Rover, a carmaker, and Corus, a steel rm, it is capital-hungry. And when Ratan Tata, its patriarch, who has no children, retires at the end of 2012, there is no obvious family heirthe rm
has been trying to nd an outsider to ll his shoes. The main
holding company’s shares are controlled by family trusts and
Pallonji Mistry, a construction magnate. Those trusts are admittedly likely to retain Mr Tata as chairman even after he departs
from Tata itself, but are supposed to operate independently. And
already investors view the credit risk of Tata’s subsidiaries dierently, suggesting they are not convinced it is an integrated whole.
Tata, then, might seem so disparate and so close to losing any
family connection that it is ripe for a revolution.
The view from Bombay House, Tata’s headquarters in
Mumbai, is dierent. The end of family inuence need not imply
a change in strategy, the rm argues. Its biggest problem is to keep
a sense of direction once Mr Tata departssome outsiders say it
now lacks much of a common culture. Its nancial structure
does not compel it to change, either. Take its overall protability.
Like all Indian groups, Tata says it does not run the empire by
monitoring its totted-up share of all of the prots or losses of every subsidiary, as a Western conglomerate might. Yet unlike
infrastructure industry, heavy upfront investment and project
delays are leading to nancial engineering. Family groups like
GMR, which built Delhi’s wonderful new airport, and HCC,
which built the Sea Link bridge, Mumbai’s only showpiece development, are experimenting with raising equity at multiple
levels of their business, creating structures that look ddly and
could in time prove fragile. But the nances of India’s family
groups as a whole do not contain the seeds of their own destruction. Reliance Industries is both protable and has a rock-solid
balance-sheet. The more complex Aditya Birla group, to the extent one can tell from the outside, is more indebted and scores
less well on its return on equity, but is in serviceable condition.
Some, such as Mahindra, refuse to tolerate sloppy and lossmaking divisions. Bharat Doshi, the group’s chief nancial ocer,
sounds as if he could work for GE when he says all units must
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
brothers sold Ranbaxy, a third-generation pharmaceutical rm,
to Daiichi Sankyo of Japan for $4.6 billion. They have ploughed
almost $1 billion of their proceeds into their remaining healthcare business, Fortis, and Religare Capital, an emerging-markets
investment bank they are bravely trying to build from scratch.
Leave those kids alone
The third threat, succession, looms the largest. In India
there is a lot of talk that the next generation of hereditary capitalists, after studying abroad (usually in America), might be more
interested in becoming rock-climbers and rappers than industrialists. But in truth the lure of the family is still strong. Those barons with young children tend to say that they can do whatever
they like. But at almost all family groups where the children are
adults, they have joined the rm. Kids are expected to work their
way up, like their dads. Gautam Adani, the ports-and-power mogul, says of his eldest son: For ten years he will go through the
entire rmwe are grooming him.
The vulnerability this creates is twofold. First, there is the
problem of rows as succession takes place. To avoid this, the current vogue is for family constitutions, often drawn up by expensive lawyers in London. These show a touching faith in the power of a contract to overcome sibling
rivalry. Then there is the potential problem of credibility. Although India’s family bosses are generally an impressive and
engaged bunch, some of the current generation can seem semi-detached. In an interview 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 lackthe nance director of Tata Sons, the holding company. So allustre prots. It is that the kids aren’t good enough. One widethough some aky businesses do shelter under the Tata umbrelspread hope among families is a fudge, in which the next generla, gures shown to The Economist suggest that Tata’s overall
ation, even if uninvolved directly in the rm, still call the shots
protability 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 straprots help fund growth, and Tata Sons could raise almost $12 biltegic 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 inves51%. Mr Hussain says the rm aims to raise its stakes in group rms
tors have put into Indian rms means they may resist appointments based on surnames. To stay in control, Indian families will
where it owns less than 51%, not make them more independent.
have to stay involved and be competent, particularly as their
Across Indian family groups there are pockets of pressure.
rms grow larger, more complex and more global. 7
Anil Ambani’s Reliance Group needs to raise equity. And in the
6
The Economist October 22nd 2011
SP EC IA L R EP O RT
BUSINESS IN INDI A
Inbound and outbound deals
Their oyster, with grit
included
Cross-border deals involving Indian rms have been
more famous than protable
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 windturbine rm. These rms used money borrowed largely from
Western banks and money markets, in some cases secured only
against their targets’ cashows. As the crash in the West began,
their renancing options dried up and the target rms’ prots
slumped in most cases.
Things looked pretty bleak. Ishaat Hussain, the nance director of Tata Sons, recalls the group being battered and putting a
programme in place to raise spare cash. Tata Motors’ vice-chairman, Ravi Kant, says the combination of a deal and a nancial
crisis put great stress on the carmaker. At one point it asked the
British government for state aid. Smaller rms that had followed
the leveraged buy-out path got whacked, too. Havells, an electronics and consumer-goods outt, bought Sylvania, headquartered in Frankfurt, in 2007, but by 2008 its London bankers
threatened to pull the plug. Everything was on the line, recalls
Anil Gupta, its joint managing director: The family’s reputation,
our business’s reputation and our personal reputations.
His rm toughed it out and emerged stronger. Tata and Aditya Birla did too, though their subsidiaries Tata Motors and Novelis are still viewed as risky bets by debt investors. Suzlon, once a
darling of investors, had to restructure part of its debt. Mere survival, however, is not the point of takeovers. The real test is creating value. Tata has done very well on JLR but most analysts reckon it overpaid on its larger deal for Corus. Last year Novelis failed
to cover its cost of capital, though Mr Birla is optimistic. From a
shareholder’s perspective Suzlon has been a disaster. Indian
bosses tend to argue that they are building for the long term and
hint that return on capital is for wimps and nitpickers. Many Indians are also intensely patriotic about these deals. But at some
point a more sober judgment must be struck.
The leveraged buy-out approach may already be zzling
because the generous debt terms that it relied on are no longer
available. Mega-takeovers are likely to be the preserve of big,
cash-generative groups with simple structures. One such rm,
Reliance Industries, is on the prowl, though its proprietor, Mukesh Ambani, is thought to be impressively stingy about deals.
Bharti Airtel took the leap in 2010, paying $11 billion for Zain, an
African mobile operator. The acquisition makes strategic sense
but unfortunately looks like another case of overpayment, particularly because Zain’s prots have since disappointed.
For the many other Indian rms without giant resources
and a taste for Russian roulette, a more nuanced approach to
dealmaking abroad beckons. In a continuation of the vertical-integration habit, Indian rms have spent billions buying up coal 1
IN THE SOUTHERN state of Kerala earlier this year a treasure was discovered in a temple. Hidden in secret vaults for
hundreds of years, it is thought to be worth many billions of dollars and includes coins from the Roman empire, Venetian ducats,
16th-century Portuguese money, 17th-century Dutch East India
Company currency and even the odd nugget or two from Napoleonic France. The nd is like an economic history of India unfolding, says Gurcharan Das, a writer and former boss of Procter & Gamble in India. For most of its history the subcontinent
was open to trade and the outside world. The insularity and protectionism of the 1947-91 period was, he says, an aberration.
When it comes to trade, India is still not as open as China.
Exports, and not just software and outsourcing, are however
growing fast and there are signs that India is gaining traction as a
manufacturing centre. Bajaj Auto, a family rm, for example, exported almost 1.2m motorbikes and three-wheelers in the year to
March 2011, with about half going to Africa and the Middle East.
For all that, though, most Indian rms are making their mark not
by trying to be the workshop of the world, but by aspiring to be
multinationals: active, in control and physically present in lots of
countries, doing everything from development and manufacturing to branding and distribution. They are doing all this far earlier than rms in other emerging countries would dare.
Indian bosses, a sophisticated and worldly bunch, have a
huge cultural head start, as anyone who has witnessed a Chinese state-owned rm trying to charm the outside world can testify. They are sometimes said to have other advantages, too; Indian rms can handle diverse workforces, for example, since they
already do at home. The most breathless strain of this argument
is that if you can make money in India you can make it anywhere. Indian rms, it follows, are destined to rule the world.
That last claim is silly. Indian rms also face formidable disadvantages. One is their size: they are middleweights by international standards. Their ddly holding chains make it hard for
them to pay for things by issuing shares, and their cashows can
be thinly spread across many subsidiaries. Raising debt in India
to buy things abroad is expensive, with
base interest rates approaching 9%, and
dicult because the central bank frowns
Cross-border, cross shareholders
upon it. Indian rms raising funds abroad
Largest Indian cross-border deals, $bn (year)
are hobbled by the country’s poor credit
FOREIGN
I N D I A
FOREIGN
rating. India does have large foreign-exBuyer
Target
Buyer
Target
A INBOUND
OUTBOUND A
change reserves, but these are not recyVodafone: 18.6 (2007)
A
Hutchison Telecom
Tata Steel: 13.0 (2006)
A
Corus
cled as cheap foreign-currency loans to
Overpaid. Writedown after price war and tax spat
Impressive ambition, bad timing. Paid too much
fund corporate adventures, as they are in
BP: 7.2 (2011)
A
Stakes in Reliance
Bharti Airtel: 10.7 (2010) A
Zain Africa
China. T.C.A. Ranganathan, the boss of
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
Bold strategic move, scary valuation
Great deal, has confounded the critics
rst wave of takeovers abroad by Indian
NTT DoCoMo: 2.7 (2008)
A
Stake in Tata’s mobile
Abbot Point: 2.0 (2011)
A
Mundra Port†
rms, between 2004 and 2008, took such
Terms unclear, but Tata’s mobile arm is struggling
business
Secures coal supply with export hub in Australia
a peculiar form (see table). A product of
Sources: Dealogic; Bloomberg; Company reports
*Aditya Birla †Adani Group
the debt bubble, they were leveraged buyThe Economist October 22nd 2011
5
7
S P ECI A L R E PO R T
BU SI N ES S I N I N D IA
Made in India
2 resources in Australia and Indonesia. They may have to compete
against undisciplined Chinese buyers and there are worries
about political risk in Indonesia, but in the main these deals
make sense given the shortage of domestic production.
Another emerging trend is that of the pocket multinational, which uses a series of smaller bolt-on acquisitions to
build up its presence abroad. These can provide access to new
products, technologies and markets, but without an all-or-nothing gamble. Crompton Greaves, part of the Avantha group controlled by Gautam Thapar, underwent a strategic review in
2001-02. The results were sobering, he says. In response it
made a succession of foreign deals, mainly in Europe, in its area
of electronics and engineering, with the main aim of gaining
know-how and better products. With a total outlay of some
$250m these deals made a decent return on capital last year,
though trading has since been hit by the euro-zone crisis.
Godrej, a family conglomerate whose biggest line is consumer products, is another exemplar of this approach. Although
not closed to the idea of a large transformational acquisition, Adi
Godrej, its boss, says the rm was too disciplined during the
boom. Instead of betting the farm it spent about $1billion on a series of small purchases in niche areas, such as an Indonesian
rm that makes household products including insecticides and
air-fresheners, and a South African maker of hair products. Mr
Godrej says it is taking a hands-o approach to managing these
businesses and that the acquisitions have all made fair returns.
In most cases the aim of such deals is to marry the savvy Indian approach to things like working capital with the acquired
rms’ managers, technology and products. The danger is that the
acquiring rms are spreading themselves too thinly, creating the
overheads of a global company without the corresponding
sales. Still, it is an approach that is gaining popularity, with Infosys recently emphasising that it would consider bolt-on deals.
The technology rm also provides a good example of a third international expansion strategy, that of going abroad without
8
deals, but simply starting new operations in other countries. Infosys now has quite a big operation in China, for example. S. Gopalakrishnan, its chief executive, says it has been successful in recruiting Chinese talent and has done well at winning business
from the Chinese subsidiaries of multinational clients. But it is
still hard to sell to Chinese rms themselves, he says.
History suggests that building a multinational bit by bit and
eschewing giant, high-risk deals is the best way to create a durable rm without wasting money. But it takes time, and India Inc
has been in a terrible hurry. With nancing conditions now
tougher and some hard lessons learned from the rst round of
Indian takeovers, a more measured approach is likely in future.
Just the kind of approach, in fact, that mature multinationals
from the rich world, with decades of experience under their
belts and world-class advisers, take when viewing new markets
like India, right? Not quite. Foreign rms that have expanded into
India have had their share of problems, too.
A land of milk and honey
R.C. Bhargava can still remember the day the Maruti Suzuki
factory in Delhi started churning out small cars in 1983. To the
amazement of the newly hired Indian workers, the Japanese supervisor said the plant had to be spotless rst and, picking up a
mop, got to work. We decided from the start that we had to compare ourselves with the best in the world, Mr Bhargava says.
That included tea breaks exactly seven and a half minutes long.
Today he is chairman and Maruti Suzuki is one of India’s most
successful foreign-controlled rms, with about half a billion dollars of prots last year. Still, during 2011 it has suered a wave of
strikes in its factories. Even three decades on, the going isn’t easy.
If India is, as the cliché goes, a land of contrasts, then the
biggest may be that between the bosses of rms the world over
who are crazy about India, and their sta on the ground, who
have often become professional eye-rollers. Corruption, sloppy
standards, a lack of decent sta and red tape are the main gripes. 1
The Economist October 22nd 2011
SP EC IA L R EP O RT
BUSINESS IN INDI A
2 Many say Indian business culture, while beguiling, is less acces-
sible that it rst seems. Hierarchies can be rigid. And deals get
done through informal networks. For all that, however, their
bosses at home are often mustard keen, tantalised by projections
that show India is too big to ignore, with the world’s biggest and
youngest pool of labour and a growing middle class.
Tapping into the rst attribute, India’s labour force, has so
far mainly been the preserve of the technology industry. Following the lead of India’s outsourcing rms, IBM, for example, has
gradually built up a workforce of over 100,000 in India, a big
chunk of whom serve its clients abroad. But beyond outsourcing, using India as an export base tends to be hard work indeed.
Capital-intensive projects are formidably tricky to get started.
Posco, a South Korean steel rm, announced plans for a $12 billion investment in a factory in Orissa, an eastern state, in 2005,
aimed both at meeting domestic demand and producing for export. 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
government and judicial apparatus.
Carmakers are the great exception, but they come with a
twist. Maruti exports just over a tenth of its production, mainly
to Europe. Hyundai, a South Korean rm and the biggest exporter by volume, sells a fth of its production abroad, says Arvind
Saxena, a director of the Indian arm. Clusters of expertise exist in
the states of Tamil Nadu and more recently Gujarat, where most
car investments now tend to go, thanks to welcoming local ocials. Foreign car rms source almost all their components locally. Hyundai India led the way for 70-odd Korean suppliers who
have invested some $700m in facilities around its plants near
Chennai. The level of research and development by foreign car
rms in India is still puny, but in time that should come too.
What India does not seem to give foreign rms is a clear-cut
cost arbitrage over other places in the world, despite its vast and
cheap labour force. Other inputs such as electricity can be costly
and unreliable. Tricky logistics also make a dierence. To get its
nished cars to Chennai’s port, Hyundai has to pack them onto
trucks that rumble through the city centre every night during the
small hours. It reckons its Indian factories make vehicles at a similar price to its plant in Turkey, once trade duties are included.
For foreign carmakers it only makes sense to export from
6
Two-way trade
Cross-border Indian merger & acquisition deals, $bn
30
Outbound
Inbound
25
20
15
10
5
2000
01
Source: Dealogic
02
03
04
05
06
07
08
09
10
11*
0
*Year to September 23rd
Taste the Thunder, that tapped into the average Indian’s fears
and yearnings as the economy opened up in the early 1990s. It
was so successful that The Coca-Cola Company eventually
bought the drinksmaker and tried to replace the local brand with
its own global one. The result was an outcry, and the American
rm had to backtrack. Today Thums Up, owned by Coca-Cola, is
still in rude health, and keeping dentists busy.
If manufacturing in India is hard for foreigners, building a
customer-facing business is no walk in the park either. India has
been a success story for Nokia, Finland’s handset giant, and remains its second-biggest market and a big manufacturing base.
But sales there have declined since 2008, paradoxically reecting
both its lack of high-end devices to rival the BlackBerry and the
iPhone, and its lack of low-end ones, such as phones with dual
SIM-card slots that penny-pinchers use to surf between networks. To compete in India you need one eye on the world and
another on the street.
Ask a street vendor for a Cadbury and you’ll be given a
chocolate bar. That’s real distribution and branding power, but it
has taken a long time to build. The confectionery rm (originally
British and bought by America’s Kraft in 2010) has been in India
since 1948. Its local bosses are Indian. It belongs to a select group,
including Maruti Suzuki, of rms that have been in India for the
long haul, mainly employ locals and
seem to have developed deep competistrengths. Many have listed local subFor foreign rms, building a customer-facing business is tive
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
a century and now makes nearly $3 bileye on the world and another on the street
lion of sales there. It will soon employ
four foreigners for every 1,000 locals.
Hindustan Unilever, the local oIndia products that you are also selling
shoot of the consumer-goods giant,
there, to piggyback o the economies of
makes half a billion dollars of prot a
scale that India’s big domestic market
year and is one of the most prestigious
creates. Small cars are a great example.
employers. It takes reinvention seriously.
The hitch is that the products made in InWe need to innovate constantly, says its
dia have to be good enough and similar
boss, Nitin Paranjpe. If we obsessed
enough to be attractive to the rest of the
about minimising risk we’d do nothing.
world. That isn’t always a given.
The largely indigenised foreign rm
I remember sitting in a remote vilprospers in banking too, with India’s biglage with a man who was tasting cola for
gest foreign lendersCitigroup, HSBC and
the rst time. He spat it out and said, ‘this
Standard Charteredhaving pedigree
tastes like medicine’, recalls Ashok Kuthere. For all these rms their Indian units
rien, then a marketing guru and now an
have gone from being backwaters to
entrepreneur. I realised you couldn’t sell
growth engines for their parent compaa cola in this country on taste. His solnies and sources of talent. Eventually
ution was an advertising campaign for
some of these rms will be run by Indi- 1
Thums Up, a local cola, under the slogan
The Economist October 22nd 2011
9
S P E C I A L R E PO R T
BU SIN ES S IN IN D I A
2 ans who earned their spurs in the subcon-
tinentso far, most of the handful of Indians 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
hear, though. Many have gone for the
blunderbuss approach, with big upfront
investments in distribution to try to win
market share quickly. This often gets
messy. More than ten foreign life-insurance rms have rushed into India, all
with local partners. At their peak, before
the 2008 crisis, they employed armies of
agents to sell savings products, often unprotably, sometimes illegally. The industry has since shrunk and been clobbered
by regulators, and some foreigners are expected to exit. It was a mindless chase for
the top line, says one boss, a completely
reckless expansion. Chinese rms have
their own kind of land grab. Shanghai
Electric has won big contracts to build
power stations in India, aided by a big
slug of subsidised vendor-nancing from
state-backed banks to the Indian buyers.
Gently does it
The limits of frugality
Making things cheaper is not the same thing as making prots
THE MOST IMPORTANT event in Indian
business in 2011may have been an outburst on September 6th by Sunil Mittal, the
boss of Bharti Airtel, the mobile-phone
operator. India’s telecoms industry is
admired the world over for the innovative
way in which it has slashed prices and put
phones into the hands of even the very
poorest. Today there are some 600m active
subscribers in India, many of them in the
countryside. But Mr Mittal said the extra
cost of servicing rural customers, and their
low usage levels, had made things unprofitable. Prices are now expected to go up
across the industry, after two decades of
decline. India’s low-cost telecoms revolution has, it seems, reached its limit.
Indian rms have made much of their
ability to serve the poor masses at the
bottom of the pyramid. Along with cheap
phones, other celebrated examples include one-rupee sachets of shampoo and
clever schemes to get around the lack of
bank accounts. This reects raw commercial instinct, but also serves an ideological
purpose by showing that capitalism in
India is not just for the middle classes. It is
politic for Indian bosses to talk up their
ability to invent things that all can aord.
Whether their rms prot as a result
is less clear. Mobile phones are not the only
eld where the limits of frugality are being
reached. Tata Motors’ Nano, a $3,000 car,
has been a op so far. Some blame Tata’s
marketing, but other carmakers say they
cannot achieve such a low price without
compromising on quality, and that customers are wary. In air travel, insurance,
consumer nance and satellite TV, companies have cut prices to build their customer
bases over the past ve years but could not
reduce costs enough to compensate, and
For those who just can’t wait, the
only real option to achieve immediate
scale in India is the takeover. But since
most assets are in hot demand, the results
of foreign deals in India have been iy.
Vodafone has already written down its
purchase of a controlling stake in India’s
second-biggest mobile rm after a price
war, a legal tangle with its India partner
and an unforeseen tax claim by the government. Japan’s Daiichi Sankyo bought
a controlling stake in Ranbaxy, a genericdrugs company, in 2008 which it wrote
down heavily as it ran into glitches with
American regulators. And last year Abbott, an American health-care group, won
an auction for Piramal’s Indian drugs
unit, which came with manufacturing facilities and a local sales force. But the price
of $3.7 billion, or over seven times the target’s sales, suggests that the American
bosses forgot to take their medication.
Abbott aside, though, the period of
cross-border deals from and to India has
gone beyond the euphoric stage, reecting the wobble in India’s economy, concerns about corruption and the deep troubles of the rich world.
Both foreign rms keen on India and Indian rms keen to go
abroad must show more discipline. This is not just about price
one executive working for a global investigation rm says Western buyers, worried about graft, are nding out more about
whom they are doing business with in India. And with little inhouse market intelligence about far-o countries, Indian rms
need to be sure they aren’t buying lemons. Giant trophy takeovers are likely to be pursued only by the biggest rms. For the
others, a wave of smaller and probably more enriching deals
10
compromised on quality. As in telecoms,
this is likely to lead to price rises and the
exit of the weakest rms.
Today perhaps 17% of India’s population has half of its spending power,
according to the Asian Development Bank.
Over time the growing urbanised middle
class, who are getting richer fast, will
become relatively more important for
prots. Margins for these customers are
likely to be higher because the cost of
distributing products in cities is lower. The
boss of one large consumer-goods rm says,
in private, that today his company makes
two-thirds of its money from the poor and
lower middle classes, but adds it is not
enough to focus on them since the portion of upper middle class will become
substantially more important. He is tilting
his products accordingly. Consumer-goods
rms are often keen to move away from
cheap products, where Chinese rivals pose
the greatest threat.
One proxy for the dierence in protability between the urban rich and the rural
poor is the price paid for mobile-telecoms
spectrum. In the 2010 auctions for 3G telecoms licences, operators bid ten times more
for a slice of the airwaves in auent Delhi,
with 18m people, than in east Uttar Pradesh, with 120m people. Similarly, India is
about to auction o FM radio spectrum and
the competition is expected to be ercest
for the big cities, says N. Subramanian, the
chief nancial ocer of Radio Mirchi, a big
player today.
That is not to say that selling to the
poor masses, and inventing ways to cut
prices in order to appeal to them, is not
vital. It is, both from a moral standpoint
and because India’s stability depends on it.
But the big prots lie elsewhere.
and forays awaits. It takes longer to build champions this way,
but the end results will be stronger.
One thing is fairly clear. The shadiest and worst bits of the
economy, including natural resources and infrastructure, are notably bereft of outsiders. Where they have been allowed in, foreign rms’ enthusiasm for India, and their open cheque books,
have brought benets. They have usually raised standards and
cut prices through competition. But the power of competition
can of course be unleashed in India in other ways, too. How
about less government and more entrepreneurs? 7
The Economist October 22nd 2011
SP EC IA L R EP O RT
BUSINESS IN INDI A
State-controlled rms
The power and the
glory
7
In better nick than you’d think
Profits/losses of companies controlled by the central government, $bn*
Overall return on equity, %
30
20
India has its own form of state-backed capitalism too
IF YOU SIT in many places in India, whether in the oce of
the boss of Infosys in Bangalore or in a suburban home,
your host may clutch a remote control and appear anxious. You
are not the cause of this distress. Your host is waiting for a power
cut, after which the remote will be used to switch the air conditioning back on. Power, more than any other industry, captures
the prevalence of the state in Indian businessand 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
state. Often this set-up fails to deliver.
When people think of state capitalism, China springs to
mind, with its giant and opaque government-controlled rms.
But India, more cuddly and less competent, is not too dissimilar.
Some 40% of the prots of its 100 biggest listed rms come from
state-controlled ones. In nance, energy and natural resources,
they control at least two-thirds of production. Most were partially privatised over the past two decades, letting in a small proportion of outside shareholders. The latest example was Coal India,
the biggest producer of India’s main fuel. It was listed in 2010.
Over time, the zeal to sell big-enough chunks of these rms
to enable them to become more independent has dissipated. But
today’s halfway house is not all that bad. In aggregate, the 24
state outts in the top 100 generated a 17% return on equity last nancial year, on a par with the private sector, and prots almost
doubled in the past ve years. Privatisation has made some of
them more ecient. Bharat Heavy Electricals, which makes kit
for power stations, holds its own against Chinese competitors.
And State Bank of India (SBI) is as tech-savvy as its private rivals.
We’re from the government, and we’re here to help
The Economist October 22nd 2011
10
+
0
–
2001
02
03
04
05
06
07
08
09
10
10
Fiscal years ending March
Source: Department of Public Enterprises
*Converted at exchange rate of 45 rupees per $
Even if India doesn’t have the stomach for full privatisation, it is letting in the private sector in other, more subtle ways. A
creeping retreat of the state has taken place in many industries
thanks to competition. Thus two of India’s most successful industries, air travel and telecoms, are dominated by private companies, even though the original state monopolists remain under government control. Public-private partnerships are also
common on big infrastructure projects. You might conclude that
India, like China, has found its own equilibrium between the
state and market forces. But that view is premature. Public-private partnerships are all the rage, but more eort must be made to
ensure the private bit of them gets a reasonable return. GMR, the
infrastructure rm that built and part-operates Delhi’s new airport, is losing money on the project. Its boss, G.M. Rao, says he is
very condent that a settlement will be reached allowing it to
raise taris and extend its charges. But more clarity will be needed to attract private money for future projects of this kind.
The big listed rms, meanwhile, are subject to meddling.
Managers are appointed by the state. The energy companies are
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 furiously, loaned heavily and patriotically during 2008-09 to oset a
slump in credit from private banks. In 2011 it has booked big
write-os and had its credit rating downgraded as it digests the
binge. A big chunk of the economy is in eect 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 industrial 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 prots made by the listed giants.
Prot 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 prepared 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 currently pursuing isn’t workingas those power cuts testify. 7
11
S P ECI A L R E PO R T
BU SI N ES S I N I N D IA
The outlook for entrepreneurs
Looking for the next
Infosys
India has aspiring entrepreneurs aplenty. More of
them need to make it
of how easy it is to start a new rm. Given the propensity of established rms to diversify into new areas, it seems likely that
start-ups are sometimes crowded out. India’s banks are not huge
fans of lending to small rms; they often demand onerous
amounts of collateral or security on xed assets, exactly the
kinds of things start-ups cannot provide. There is a decent
enough venture-capital industry, but even so, new rms face hurdles that do not exist in other countries, which may require them
to invest more heavily upfront. Flipkart is a good illustration of
thiswith a happy ending.
It began as a Western rm might, as the middleman between book wholesalers and its customers, using third-party
couriers to deliver to people’s homes nationwide. But Flipkart
soon overwhelmed the local wholesalers and courier rms in
Bangalore. To cope, it has now built ve warehouses nationwide
and hired an army of delivery sta. In India you don’t have reliable service providers like DHL, says Binny Bansal. A round of
fund-raising in 2009 helped pay for these investments. By 2010
another problem had to be addressed: not many Indians have
credit cards, and those that do worry about security. The solution was to accept cash, or more recently credit cards, at the
doorstep. Meanwhile, Flipkart must also contend with the big
SACHIN BANSAL AND Binny Bansal are not identical
twins, or even related, but they should be. They both grew
up in Chandigarh in north-west India, studied computer engineering at the Indian Institute of Technology Delhi and spent a
brief stint working for the same American technology rm. Two
years after meeting in Delhi in 2005 they took $10,000 of their
savings, set up shop in a at in Bangalore and began an e-commerce business that delivered books to people’s homeslike
Amazon, but with an Indian twist.
Making the leap, says Binny Bansal, wasn’t dicult. Today the rm they co-founded, Flipkart, is one of India’s hottest
internet businesses, selling everything from books to phones.
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 celebrating India’s entrepreneurial zeal than
people actually starting new companies.
Take the latest gures from the Indian Institute of Management Ahmedabad
(IIMA), India’s leading business school.
Of the 314 graduates from its agship programme, only seven started a business.
An amazing 187 joined the gravy train and
got jobs in consulting or nancethe 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 numbers and criticise things. But he admits
defeat. They are all becoming spreadsheet wizards at banks.
The sense that entrepreneurs have
They don’t just sellthey deliver, too
not made the kind of mark they should
business groups, like Reliance Industries, which are interested in
have in the past decade seems to be true across the Indian econretail. The hope is that Flipkart’s heavy and early investment in
omy. In a paper published by the IMF in January, three econoits brand, including a big television campaign, will be enough of
mists, Ashoka Mody, Anusha Nath and Michael Walton, looked
a defence when the big boys move in.
at the Bombay Stock Exchange, a decent proxy for India’s formal
To succeed in India, then, Flipkart, like most bigger rms,
business sector, with thousands of rms listed on it, many very
has had to integrate vertically, taking on more processes itself,
small. They concluded that in the 1990s there was a surge of new
from storage to delivery and payments. That costs serious monrms without aliation to established family-controlled
ey. And from an early stage it has had to anticipate a competitive
houses, but that in the past decade the process of new entry virthreat from the big family giants. The upshot is that although Intually stopped. Similarly, the share of prots from new, indedia’s e-commerce opportunity is huge, the barriers to small rms
pendent companies, having risen rapidly in the 1990s, has since
are quite big too, requiring more capital, earlier, than might othstagnated. Many business folk reckon that the relatively few
erwise be the case. In the dotcom industry such funds are at least
newcomers that have made it big since 2000 are in old-economy
relatively easy to obtain. Ashok Kurien, the former Thums Up
rent-seeking sectors that require more brawn than innovation.
marketer, and since then a serial entrepreneur, is involved with
It’s not dicult to rustle up some possible reasons for all
several websites. One of them, called Bollywood Life, received 1
this. India scores abysmally in the World Bank’s global surveys
12
The Economist October 22nd 2011
SP EC IA L R EP O RT
BUSINESS IN INDI A
laughed him out. Now, however, they
might write a cheque.
And when it comes to small rms,
India certainly has a lot of raw material.
W. Sean Sovak of Lighthouse, a privateequity fund based in Mumbai that is focused on small companies, reckons there
are some 2,000 rms listed on Mumbai’s
stock exchange that are active and have
market values of below $200m. He rst
visited India in 2004 and was blown
away by its vigour. He and his co-founThe question for India is whether a few impressive
der, Mukund Krishnaswami, an American whose parents emigrated from India,
entrepreneurs here and there add up to a trend. The
both chucked in careers in America indata 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
small rms are in commoditised businesses, he says, and even
In 2008 his rm launched Colors, a Hindi entertainment channel
high-quality rms face lots of challenges and may struggle to
that became top-rated within nine months of its launch. It spent
manage their growth. But he too is optimistic. We’ve seen some
$125m up front on programming and promotions rather than enof the best entrepreneurs of our lives here, he says.
gage in a long war of attrition with the established channels.
Will they succeed? Mr Bansal of Flipkart reckons so. BeYou cannot tiptoe in India, he says.
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 challenge the established business order. In ve to ten years you
Banking may present start-ups with the most formidable
will see a shift happening, he predicts. It is vital for Indian capihurdles of all, in the form of India’s nancial regulators, and contalism that he is proved right. 7
sumers’ preference for established lenders, particularly stateowned 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 busiThe Indian miracle and the future
ness was a Herculean one. As part of our business culture, nobody helps the underdog, he says. Yes Bank broke through, Mr
Kapoor says, partly by focusing on squeaky-clean corporate governance from day one, and listing the rm as soon as possible to
gain attention and credibility.
And yet, for all these barriers, new rms are emerging in
unexpected places. Vinayak Chatterjee, who graduated from
Long-term economic success may make the current
IIMA in 1981, rst joined a consumer-goods rm. After deciding
way of doing business obsolete
against a life-sentence of selling soap, he went on to establish
IT’S NOT A movie set. Mumbai today really is a place where
Feedback Infra, an engineering and consulting rm in Delhi that
you can see Rolls-Royces bumping along pot-holed streets
specialises in infrastructure projects. With 1,250-odd sta, half of
past naked children, in the shadow of billionaires’ personal skythem engineers, and a list of blue-chip and government clients, it
scrapers. India’s capitalism is raw and sometimes ugly, but its
exemplies the kind of high-end services that India could excel
private-sector rms are dynamic and mostly optimistic. If the
at. Mr Chatterjee reckons his costs are a quarter of rich-world
country maintains its current rate of growth it is expected to berms’. Big parts of this business are no dierent fundamentally
come the world’s third-largest economy some time after 2030,
from IT outsourcing, he says. The priority for now, though, is to
and hundreds of millions of people will lift themselves out of
build scale at home. With about $50m of revenue, growing by
poverty. But it is not a second China. Thanks to an exhausted and
about 30% a year, the rm is on its way to that goal. A otation
cranky state, for which there is no prospect of dramatic reform,
would be a natural next stage in a few years’ time.
much of the job of development will fall upon the private sector.
Almost every investor and nancial rag has a list of their faIndia’s companies are refreshingly red-blooded, but more than
vourite entrepreneurs. The question for India is whether a few
other rms in the world they carry a giant responsibility.
impressive examples here and there add up to a trend. The data
This special report has argued that after a decade of euphofor the past decade look disappointing, suggesting that things
ria the business scene has sobered up, partly prompted by a
have deteriorated since the 1990s. The hope is that this is a backsticky patch in the economy and the depression in the rich
ward-looking signal about the dynamism of Indian capitalism.
world. Over the past decade a new kind of capitalism has enVijay Angadi, a veteran of small-company investing in India
trenched itself in India, in which large family concerns, often in
who runs Novastar, a $200m fund, is condent that a new genertheir second generation or older, hold remarkable sway. Yet the
ation of rms will come through eventually. He reckons that the
private sector is not the comfortable oligarchy it might seem, for
rst initial public oering of a venture-backed start-up in India
family rms compete head on and often live and die by the
took place only in 2004. He is optimistic that the venture-capital
sword. And although some big hereditary groups often seem to
industry has become more open-minded, and is no longer obprefer investing abroad to investing in India, collectively these
sessed solely with technology rms. Wealthy angel investors are
rms are prepared to stump up very large amounts of money on
becoming more important, too. A decade ago, approached by an
long-term capital projects in Indiathe kind of money that only 1
entrepreneur who was not in the family, they would have
2 2m unique visitors within 90 days of launch. He has already had
ridiculous oers from outside investors, he beams.
Outside the dotcom industry, though, raising money is
more of a slog. And there are big barriers to entry, just of a dierent sort. Memories of how much eort it took to succeed are
common the world over, but in India, it often seems that an extra
push was required. Haresh Chawla, the chief executive of Network 18, a broadcaster, says that when it launched its news channels in 2004-05, in partnership with CNN and CNBC, it threw
everything at it. Consumers only give you one chance, he says.
Rolls-Royces and
pot-holes
The Economist October 22nd 2011
13
S P ECI A L R E PO R T
BU SI N ES S I N I N D IA
the government in China, or
bond markets in the West, can
Number of Indian billionaires
conjure up.
Many of the big cross60
border takeovers of the past
seven years, by Indian rms
50
abroad and foreign rms into
40
the subcontinent, are not the
triumphs their promoters and
30
excited supporters claim. One
or two almost sank their back20
ers and some will never make
10
a decent return on capital. This
yardstick tends to be shrugged
0
2001
02 0304 0506 0708 0910 11
o by empire builders, but in
Source: Forbes
the long run it is the only one
that counts. Indian businesses
2 are going global quicker, earlier and more deeply than perhaps
any other country’s havebut the more durable trend is in the
myriad of smaller expansions below the surface, not the trophy
transactions bankers brag of.
At the same time, companies have discovered the limits of
frugality: cutting prices and building big customer bases may
sometimes lose them money, rather than making it. Big stateowned companies dominate in sectors politicians judge to be
strategic. The areas where the government still runs the show are
often plagued with problems. And despite all the hype about
new entrepreneurs, they have had a mediocre decade.
Some Indians feel that Western critics of their approach are
hypocriticalafter all, didn’t America also have a stage when
families dominated the business scene? They have a point. But
the idea that India is merely at an earlier evolutionary stage on
an American journey looks misplaced. India’s soft state encourages the conglomerate form of doing business, whether owned
by a bloodline or not. This corporate model does not contain the
nancial seeds of its own destructionnot immediately, anyway. Over time the problems of succession and attracting outside capital will eventually cause families to cede control. But no
sudden change is likely.
The triumph of the conglomerate in India, often familycontrolled, does contain a contradiction, however. Today’s way
of doing things reects a rational and even admirable capitalist
response to the shortcomings of the state, and has helped India’s
economy motor along despite them. But at some point the muddle-through approach may yield diminishing returns. The recent wobble in the
economy and dip in investment by the
private sector has come after a long period of government inertia and scandal. It
has prompted some to doubt whether the
country can really deliver growth of 8% or
more without sparking ination.
If India is to nish the long journey
to superpower status that has been plotted for it by many forecasters, it will have
to get its act together on things like infrastructure, ecient land allocation, education, 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
groupssometimes almost like ministates in their own right, as substitutes for
the real thingwill gradually disappear. A
big danger, then, to Indian business’s curA tale of two cities
Abundant
14
8
rent way of doing things is longterm economic success. It would
make today’s approach to organising rms redundant. And there is
another danger that is rarely mentioned in the oces of business
bigwigs.
Don’t just adapt. Lead
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International banking May 14th
lost enthusiasm for pushing
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simple but vital areas like accountPrevious special reports and a list of
ing. In the past year of corruption
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against graft, and of raising standards, has therefore been left to
big street protests of urban middle-class people who are fed up.
The second danger for India’s business establishment is
straightforward: hope. Especially in the cities, aspirations have
been raised. That powerful and inspiring optimism is the underlying engine of India’s miracle, but it is politically essential that
people’s expectations be met. In the next decade many more entrepreneurs must break through the established business order.
Opportunities must be seen to grow as fast as prots. Otherwise,
at some point, the giant crowds of frustrated urbanites might
turn their attention from India’s government to its billionaires. 7
The Economist October 22nd 2011