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.
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.
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.
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.
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
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
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
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.
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.
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.
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.
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
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.
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.
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.
sourcing include subsidiary in Singapore and for various procurements. A few
other diversifications include 1.1 million tonnes steel plants and 15 MW wind
in international trade have thrown up following lessons: