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International Business Operations and Role of Indian Infrastructure, Shri R V Shahi, Former Secretary, Ministry of Power

J.K. School of Business organised a Workshop at Delhi on "Strategy of Managing International Business" on December 12, 2008. I chaired the Session on Identifying Growth and Diversification Opportunities including Global Sourcing. A gist of the introductory remarks made by me are as follows:

  • last few years, international trade and business, in so far as Indian business is concerned, grew at a highly satisfying rate. On account of a very liberal and business friendly policy framework, not only experts became attractive, and a major earning for growth and expansion, but also liberalised import enabled the industry and business to have cost effective import and enhance their competitive capability. Many areas, which were under the jurisdiction of Government controlled organisations, were opened up for private sector, many restrictions on import were lifted, duty structure on import has continuously under gone positive changes and above all the Government support in an institutionalised manner facilitated Indian industry and business to expand their operations in international business.

  • This process had been going on smoothly. But the recent developments of last one year, first in the U.S.A., then among European nations and subsequently throughout the world, with slowdown followed by recession, further followed by depression in many economies, have made a significant change in the whole environment of international business. Therefore, to cope with the challenges, and of course opportunities, in the areas of international trade, it will be necessary that we understand and analyse the implications of global slowdown. It may be recalled that just about a year back, most of our economists, bankers, industry captains and even senior level Policy makers in the Government were of the view that Indian growth story primarily revolved around its own plans, programmes and activities of infrastructure development and therefore it is more or less decoupled from the global phenomenon of slowdown or recession. A few months later, differing perceptions started surfacing and many of those, who had advanced the theory of decoupling, started recognising that there could be marginal effect of global slowdown on Indian economy. When the intensity of the situation in an aggravated fashion emerged a few months back in the U.S.A., and four out of their five top Banks collapsed, requiring massive bailout package by the Government, and when this was followed by similar problems and, therefore, similar responses in most of the developed economies in Europe, Indian Policy makers and others did have a second thought on their earlier assessment. They started expressing that Indian economy could not remain insulated from such global phenomenon. This obviously brings about a major shift in the types of issues, concerns, constraints and challenges that Indian business would need to fully capture, understand, analyse and evolve measures, so that not only their impacts on our business operations is reduced but in some way these challenges are converted into opportunities.

  • Perhaps the most important ingredient of international business is Export of goods and services. In today's environment, in economies abroad, demands for goods have declined sharply. The retailers, therefore, are confronted with mounting inventories. The second dimension of the problem is that, even though these markets are heavily dependant on imports from outside, where Indian business has a slice of such a market, they also have domestic manufacturing. Obviously, the issue would be whether they would continue sourcing from outside or would first, on a preferential basis, source their requirement domestically and then only if further demand is there, tap the external markets. This poses a serious problem leading to likely decline in demands and, therefore, adversely affecting our exports. There is still a possibility that to face this situation, Indian business looks at its competitive edge, further fine tunes its quality aspects and pricing structure and convincingly beat the competition problems in such economies. A favourable thing, from export point of view, which has happened in recent months, is in respect of dollar - rupee exchange rates. Though, declining value of rupee may have other implications, from export point of view, it has created better competitive ability for our business abroad.

  • Another positive impact of slowdown could be availability of capital goods at highly reduced prices. Industries abroad, in order to survive, shall have to adopt the approach of marginal pricing or else they will face closure. Drastic decline in demands in domestic markets would inevitably mean lowering of prices. This could therefore be the time for such Indian industry and business as need machines, parts and components to procure them most competitively. It is reported that there have been radical reductions in the prices of rigs which may be needed for petroleum and gas industry. Just a year back, we were given to understand that prices of rigs have touched the roof thereby rendering the cost of our gas very high. Price reduction of rigs and other machinery will make these projects more cost effective. Another dimension of the same issue is that many of the manufacturers of these capital goods were so heavily loaded, with order books full, that our industry had the problem of not being able to source these equipment as per the schedules they would have wanted. Now the situation is changed. Not only prices could be very favourable but schedules as well could be decided as per needs. In the power industry, power developers did face such problems just a year back. In managing these operations effectively, in depth understanding of emerging situations in different parts of the world, not for the economy as a whole for a country, but knowledge about specific manufacturers and suppliers, will be essential. Only then our industry could benefit from the global slowdowns.

  • Managing finances, from the point of view of international operations, has also an implication in the present situation. Interest rates by the Federal Banks are being reduced in every country. Only a couple of days back, U.S. treasury has reduced the interest rate to almost zero and similar has been the action in Japan. Indian Government liberalised, about a month back, the Policy on external commercial borrowing, and it is reported that further liberalisations are in the pipeline. Understanding the implications of these changes effected abroad and how to take advantage on the basis of the Policies that exist in India, would be an important expectation from Indian Managers entrusted with responsibility of international business operations.

  • Another positive impact of global slowdown has been the reduction in price of crude. Within a period of less than one year the price which increased from $ 60 a barrel to $ 140 a barrel has now come down sharply to less than $ 35 a barrel. This has its impact on almost all the economies and on most of the economic activities all over. In Indian context, the Government is saved of enormous subsidy burdens caused on account of excessive increases in the global crude price which has impact on the basket of fuels in India which determines the burden the Government has to support in various types of subsidies. Though there are other factors but the sharp reductions in crude price has also a major impact on inflation rates in our country. The rate which had gone as high as about 12% a few months back has, in last few weeks come down gradually to 6.84%. It should definitely bring down the cost of domestic production and, therefore, improve the competitive ability of our manufacturing sector to export abroad.

  • A major area of opportunities, as an inevitable consequence of the slowdown, is the availability of low cost assets. Valuations all over have shown tremendous down turns. In each area of industry and business possibilities of acquisitions abroad at prices which could be half or one third are available. Evaluation of these opportunities and taking appropriate strategic decisions could be major challenge for such international business operations. While evaluating such opportunities it would be important to see what has been the impact of slowdown on domestic operations, to what extent the assets are or would be under utilised and whether in such a situation further acquisition abroad would be advisable.

  • Various assessments have been made by economist in India and abroad about the likely durations of the recession. The estimates vary from one year in India to over two years in many other parts of the world. Timing of any acquisition of assets or business abroad so that these acquisitions could be effected at reasonably low rates on the one hand and they do not remain idle or underutilised for a long period, would of essence. This could be a good strategy for expansion of existing business as also for diversification into directly or indirectly related businesses.

  • Last few years have particularly brought out the importance of energy and of energy sources. It has been found that natural resources of any country, particularly of fast developing economies like India, may be available for a limited period of time. Therefore, acquisition of energy sources abroad, such as coal mines and oil and gas fields, have been considered as important energy strategy. For Indian industry and business this is even more important. Attention of public and private sector corporates have got focussed on this in last two years, but they found in many cases the prices as prohibitive. Now in the new situation reasonable deals could be expected to be negotiated.

After the above introductory remarks, three Presentations were made in this Session. They covered (a) the Infrastructure, Policies and Procedures to backup export of Indian goods and services, (b) Procurement of automobile components for domestic automobile manufacturing company, and (c) Diversification strategy of MMTC. Briefly outlined below are the salient points of these presentations. The subject of Indian infrastructure to expand Indian export would be presented in greater details.

  • Though exports from India have experienced rapid increases in last few years, infrastructural bottlenecks do stand in the way of smoothly carrying out the business to the satisfaction of clients abroad. If we had larger and better Port facilities we could definitely do much more. Because of the bottlenecks arising out of inadequate Port facilities including the inadequacies in handling systems, quite often despatches get delayed. What customers need is adherence to the committed schedule of deliveries because delays could adversely affect their own business operations.

  • Cost of handling, in view of lack of modernisation of facilities, and larger dependence on manpower, whose productivity is comparatively less, impinges upon the competitive advantages in price. It has been found that the logistic cost in India is estimated to be 13% of GDP as compared to 7% in advanced countries.

  • In view of inadequacies in Ports, the despatches have to wait for shipment. These add to inventory holdings which, in turn, lead to higher cost of inventory thus further eroding the competitive advantage in price.

  • Apart from logistics of infrastructure, there are issues concerning process. Our procedures for handling import and export, though have undergone changes in last few years, need further improvement so that the whole process is made export friendly and simple.

  • Taxation issues also need further rationalisation, so that Indian exports get competitive advantage and the volumes further increase.

  • While talking of infrastructure, it is not only the Port which needs attention. Energy is another important ingredient, whose cost significantly affects the overall cost of production. In many industries, in which electricity consumption is a significant portion of the cost, higher energy cost in India does lead to a disadvantage to our products being competitive abroad.

  • Automobile industry in India, in last ten to fifteen years, has witnessed major transformation. Maruti Udyog is an example of leading such a change process. The case of Maruti was presented to highlight the procurement strategy from the point of view of international interface.

  • Though Maruti started with major imports from Japan, over a period of time, almost 90% is indigenised. Maruti has now set up factory facilities in many parts of the world and, therefore, there is a strategy on engineering specifications to be standardised. This leads to a common strategy for procurement of various parts and components. There are components which have been left to be procured locally wherever the major automobile manufacturing facility of Maruti has been set up, but there are components whose procurement is finalised on a global basis in a pooled manner to meet the requirements of different factories. This strategy led to Policy formulation on procurement on the basis of detailed analyse of all the nuances of international business operations.

  • In the case of automobile industry, environmental norms are becoming, and rightly so, more challenging. This calls for continuous revisiting of design and material specifications. Scanning the technology abroad, best of norms of emissions achieved anywhere in the world and how best to excel on these norms are becoming more and more challenging. A proper blend of domestic manufacturing of components and those to be sourced from outside is the issue. It would require an optimal balance, so that best of technology resulting in best of environmental safeguards at optimum cost are achieved.

  • A question arose that if for a group of factories of Maruti abroad, the procurement is organised from sources outside the country whether it will conflict with the overall objective of expanding local manufacturing capability. It was clarified that such procurements on the basis of the principle of pooling of requirements for a number of factories in different parts of the world is limited to only about 10 to 15% of the cost and balance 85 to 90%, in any case, is dependent upon the local manufacturing.

  • Another case presented was on MMTC. The Company is an example of successful diversification as a suitable answer to the changing environment in terms of policy changes, liberalisation, competition, emerging global opportunities etc.

  • In the beginning, MMTC concentrated on minerals and metals, and subsequently it extended its operations to fertiliser. Its diversification into new products like Coke, Thermal Coal, Agro commodities was necessitated on account of stresses and strains in its conventional business of the past and better emerging opportunities in these new areas.

  • Power sector growth and shortage of coal in domestic coal industry necessitated large amount of import of coal for running the power plants at full capacities. MMTC took full advantage of the situation and has benefited immensely.

  • Its diversifications into precious metals has again been a rewarding experience. Retail outlets for jewelleries for MMTC jewelleries in gold and silver was responded overwhelmingly by the market and this diversification has given good financial benefits to the company.

  • MMTC's global sourcing include subsidiary in Singapore and for various procurements. A few other diversifications include 1.1 million tonnes steel plants and 15 MW wind farm.

  • MMTC's experiences in international trade have thrown up following lessons:

  1. Integration into various businesses both forward and backward - from minds to market in last few decades are the examples of such a strategy.

  2. Short term gains may be sacrificed if they conflict with the interest of long term business opportunities and advantages.

  3. Aggressive marketing aimed at proper assessment of what the markets need and what they will need in the future. This should be suitably incorporated in the overall marketing and business strategy.

  4. State-of-the-art Technology leads to more efficient, speedy and profitable decision making.