INDIAN COMPANIES COMPETING IN ADVANCED GLOBAL MARKETS. S Mukherji Indian Institute of Management Bangalore, India

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1 INDIAN COMPANIES COMPETING IN ADVANCED GLOBAL MARKETS S Mukherji Indian Institute of Management Bangalore, India

2 GLOBALIZATION IS NOT NEW 2 Globalization, especially where a set of firms from developing economies has risen and challenged established players of developed economies, has happened several times in the past In early 1500s, European enterprises sailed out to Indian & China to trade silver for spice In early 1900, enterprises from the United States challenged dominance of European manufacturers In 1970s, Japanese manufacturers invaded US markets with their low-cost, high-quality products In 1980s, Mexican enterprises, post NAFTA, challenged incumbents in N America In 1990s, firms from S Korea posed challenges before the incumbents in developed markets Is there any difference this time?

3 BUT IT SEEMS TO BE DIFFERENT THIS TIME ON THREE KEY DIMENSIONS 3 1 Unique origin of challengers 2 Deconstruction of value chain 3 Deep desire for achievement and recognition

CHALLENGERS ARE VERY LARGE IN SIZE 4 1 2 3 Unique origin of challengers Deconstruction of value chain Deep desire for achievement and recognition Large size of

4 CHALLENGERS ARE VERY LARGE IN SIZE Unique origin of challengers Deconstruction of value chain Deep desire for achievement and recognition Large size of challengers make them a vibrant source for physical assets and resources talent and labour pool markets POPULATION IN BILLIONS CHINA BRAZIL EUROPE INDIA RUSSIA USA JAPAN

5 CONTINUOUS AND COMPLIMENTARY MANAGERIAL INOVATIONS Unique origin of challengers Deconstruction of value chain Deep desire for achievement and recognition Advancement in information and communication technologies have enabled deconstruction of production value chains Availability and processing of information and data at lower costs facilitate market based transactions. This has led to emergence of specialists players that can leverage global economies of scale and scope In the past, Portuguese merchants in Macao had to build their own ships, French traders had to borrow from local money-lenders and the Japanese had to send undercover agents to understand buying habits of US consumers

6 IMPACT OF SUCCESS FELT AT GLOBAL INDUSTRY LEVEL Unique origin of challengers Deconstruction of value chain Deep desire for achievement and recognition Unrelenting hunger for learning, improvement, achievement, success and recognition Rapidly growing economies with young and poor population, overburdened infrastructure, and inexperience in modern business are in a hurry to grab hold of opportunities and improve their fortunes Countries like India and China want to regain their place of pride in the new world order. For a long time they have been shut out of the prosperous and developed world now they sense an opportunity to claim leadership position Executives and workers routinely put long hours, sometimes seven days a week and many of them take second jobs

1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 INDIA S ENGAGEMENT WITH GLOBAL MARKETS HAVE CHANGED 7 US$ Million 50000 40000 30000 20000 10000 CAGR of 17.

7 INDIA S ENGAGEMENT WITH GLOBAL MARKETS HAVE CHANGED 7 US$ Million CAGR of 17.3% ( ) Exports as a proportion of GDP has risen from 3.35% in 1970 to 10.4% in Statistical analysis (Chow Test) shows that the structure of Indian exports have changed significantly around Knowledge intensity of exports has increased from 12% (1970) to 30% (2004) Source: Annual Report, Ministry of Commerce & Industry, GOI

8 POST-1992 CONTRIBUTION LOW HIGH ALL SECTORS HAVE NOT ADAPTED TO CHANGING CONTEXT 8 Software Gems&Jewelry Engineering Goods Drugs & Pharmaceuticals Readymade Garments Jute Tea LOW HIGH PRE-1992 CONTRIBUTION

9 INDIA HAS SIGNIFICANT LABOUR COST ADVANTAGE 9 Cost of production workers in India remains a small fraction of that in developed countries and considerably less than many emerging economies of Central Europe and Latin America Despite salary increases cost of engineering talent in India remains at 10-15% of developed countries Labour cost advantage provides Indian companies a platform to make an entry into the global markets Labour Cost Comparison : Average hourly compensation including benefits for production workers (US$) Indonesia China India Russia Mexico Poland Brazil Hungary S Korea United Kingdom Japan United States Germany Source: Economonitir, US Department of Labour & Boston Consulting Group

10 LABOUR COST ADVANTAGE IS USUALLY UNSUSTAINABLE IN THE LONG TERM 10 The Chinese example Chinese textile makers planning to shift production to India Increased labour cost - New labour law making companies contribute more to social security, insurance and retirement fund Appreciation of yuan -16% appreciation between May 05 and May 08 Reduced subsidy from government -WTO signatory - Subsidy was $1.93 B in 1998 Labour cost comparison Average cost $ / operator hour % of US Cost China India Indonesia Vietnam Bangladesh Source: Warner International published in Business Standard, 02-June-08

INDIAN FIRMS FACE UNIQUE CHALLENGES WHEN THEY COMPETE IN GLOBAL MARKETS

legal context Adverse perception Multiplying Resource constraints in

11 INDIAN FIRMS FACE UNIQUE CHALLENGES WHEN THEY COMPETE IN GLOBAL MARKETS 11 A vicious cycle Necessitating Resource commitment Technology, innovation Brand building Distribution network Confronting High entry barriers in advanced markets Powerful incumbents Strong regulatory & legal context Adverse perception Multiplying Resource constraints in emerging markets Small scale Inability to retain high quality talent Absence of venture capital

12 WHAT CAN INDIAN ORGANIZATIONS DO TO SUSTAIN THEIR COMPETITIVE ADVANTAGE IN GLOBAL MARKETS? 12 Sustainability of firm competitiveness Build organization / industry specific advantages Evidence from software services, pharmaceutical and auto component industries indicate that firms and industries that have been able to change their basis of competitive advantage from position to competencies are the ones who have been most successful Leverage country specific advantages Time

13 13 BHARAT FORGE LIMITED: FORGING SUCCESS IN A DIFFICULT TERRAIN

forging company 600,000 T forging capacity World s largest axle component manufacturer India s largest exporter of auto components 70% revenues

14 Snapshot of BFL s Performance (FY 95-07) 14 Revenue (Rupees crores) 5000 PAT (INR cr.) US$ 1 Billion World s second largest forging company 600,000 T forging capacity World s largest axle component manufacturer India s largest exporter of auto components 70% revenues from overseas markets 40% of global workforce (~ 2500) are non-indians 9 manufacturing facilities, 7 abroad 1 17% revenue from nonauto segment 1. Three in Germany, one each in USA, Sweden, Scotland & China

15 15 How did Bharat Forge, from a relatively marginal position of being a forged auto - component manufacturer located in India, become the second largest forging company in the world? How did the industry characteristics such as cyclicality and cost reduction drives by major OEMs impact BFL s internationalization?

16 16 Between 1987 & 89, BFL invested Rs million and installed two state-of-the-art forging press lines from Muller Weingarten, Germany with a combined capacity of MTs. This was at a time when their hammer shop (3000 MT) was operating at a 50% capacity. Such heavy duty investment was dubbed by popular press as WHITE ELEPHANT! Would you have agreed with the view of popular press? What was the pressing need for creating capacity by investing in the forging presses? I realized that the Indian manufacturing model of low capital, low technology and high manual labour will not work for us. We will never be competitive and would always remain dependent on the Japanese or the Germans

17 17 Why did BFL recruit new employees to run the automated press shops? Why did they not train the existing employees, upgrade their skills? Was this fair to the old employees? Is this change process too ruthless? What does it communicate to you about Baba Kalyani s leadership abilities?

18 MULTIPLE OBJECTIVES ACHIEVED THROUGH PRESS LINES 18 Upgrade manufacturing process Improvement in consistency and quality Improvement in productivity Converting a craft mode of production into an engineering production - deskill the process - replace muscle power with intellectual ability Communicate value Communicate delivery capability to prospective clients Change agent for the organization Communicate the intent to compete in global markets / become world class to employees and other stakeholders Creating a vehicle / key event around which the organization would be transformed. New employees with qualitatively different capabilities would be recruited Breakthrough into customer accounts Creating large capacities in anticipation of demand

19 19 Between 1996 and 2001, BFL undertook a series of measures aimed at improving operational efficiency, financial restructuring and cost rationalization. What was the consequence of these initiatives? Did BFL achieve anything of significance in the global market because of these measures? Why or why not?

20 INITIATIVES ALONG MULTIPLE DIMENSIONS 20 Financial restructuring Retire high cost debts Foreign currency debts Divestment of portfolio investment Divestment of holdings in group companies Upgrade people processes Three layered structure New performance management system Competency upgradation TPM, 7 S, Kaizen VRS, redeployment Improve operational efficiency Reduce energy costs Streamline vendor management process Integrated supply chain Information system Diversifying product portfolio Machined forgings Small forgings for passenger cars Specialized component for drilling Build design competence Computerized design Simulation, Finite Element Analysis Correlation analysis Toolmakers specialized knowledge captured in system

21 21 What was the significance of the Kirkstall acquisition? What did BFL really acquire through the deal?

22 22 Why did BFL acquire CDP? What was the intended benefit? Was there any unanticipated benefit of the acquisition? What were the key factors that enabled a smooth integration process?

0 60,000 Sept 2005 Imatra Kilsta Sweden 57.5 100,000 & Scotish Stamping Dec 2005 Joint venture with FAW 28.

23 BFL CONTINUES ITS INORGANIC GROWTH 23 DATE COMPANY PRICE($ million) FORGING CAPACITY (MT) 2000 Kirkstall Forge UK 4.5 Dec 2003 CDP Germany ,000 Dec 2004 CDP AT, Germany ,000 June 2005 Federal Forge, USA ,000 Sept 2005 Imatra Kilsta Sweden ,000 & Scotish Stamping Dec 2005 Joint venture with FAW ,000 Forging China (52%) What is BFL planning to achieve through all these acquisitions / joint ventures? Is BFL biting more than it can chew / digest? Source: ABN-AMRO

24 Gross Sales (Rs. crore) PAT (Rs. crore) Bharat Forge: Performance ( ) Gross sales PAT CDP & CDP AT Acquistions (Jan & Dec 2004) Federal Forge, Imatra and FAW deals (2005) Decision to diversify into capital goods and infrastructure (2006) JV with Areva, Alstom, NTPC (2010) Domestic growth postliberalization Kirkstall Acquistion (Jan 2002) Loss Rs. 63 crore (2010)

25 COMPETITIVENESS OF INDIAN SOFTWARE SERVICES INDUSTRY 25 (Unique) characteristics of the Indian Information Technology industry Born global, services business, matching economic conditions Factors contributing to the growth and success of the industry Demand and supply side factors Evolution of the industry Comparative advantage (body shopping) to competitive advantages (managerial and business model innovations) Challenges today Non linear growth, product innovation, internationalization

26 26 SNAPSHOT OF THE INDIAN IT INDUSTRY OVER THE LAST DECADE REVENUE US$ BILLION REVENUE as % of GDP 70 10% CAGR of Industry revenue: 29% FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY08 Industry witnessed rapid and sustained growth primarily driven by exports of software services Domestic industry is roughly a split between hardware and software, while hardware exports are negligible Industry figures include revenue from ITES / BPO comprising about 17% of total revenue 5% 0% REVENUE US$ BILLION CAGR of industry exports: 38% FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY08 REVENUE US$ BILLION CAGR of domestic industry revenue: 20% FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY08

27 SOFTWARE SERVICES IS A PEOPLE INTENSIVE BUSINESS 27 While employment has grown steadily DIRECT EMPLOYEES ( 000) FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY08 industry has witnessed productivity gains Number of Employees in Software exports ( 000) Export revenue per employee: US$ Productivity gains are likely to be more if we take out the ITES-BPO component

EXPORTS ACCOUNTED FOR ~ 17% OF INDIA S GDP IN 09-10 AND INFORMATION TECHNOLOGY PRODUCTS AND SERVICES ACCOUNTED FOR ~30% OF INDIA S EXPORTS 28 GDP of India in 09-10: US$ 1.

28 EXPORTS ACCOUNTED FOR ~ 17% OF INDIA S GDP IN AND INFORMATION TECHNOLOGY PRODUCTS AND SERVICES ACCOUNTED FOR ~30% OF INDIA S EXPORTS 28 GDP of India in 09-10: US$ 1.73 Trillion Billion US$ 118 Service Export 178 Merchandize Export Total Exports 24 IT Merchandize Exports 65 IT Software Exports Caveat: Data is compiled by author from multiple sources and therefore might not be exact. Treat these as indicators of trends

29 THE NEXT WAVE NEEDS TO COME FROM INNOVATION 29 Indian firms need to build on their process competencies to create innovative products and services Markets need to be broad based, reducing dependencies on developed countries Develop greater understanding of consumer needs in emerging nations Ability to withstand retaliation by incumbents Sustainability of firm competitiveness Innovation, global mindset, managing global organizations Process competencies, building global scale of operations Leverage country specific advantages Time

30 30 Thank You

Bharat Forge Limited. Analyst/Investor Update

Bharat Forge Limited. Analyst/Investor Update Bharat Forge Limited Analyst/Investor Update July 20, 2002 Financial Highlights Corresponding Quarter Analysis (April - June 2002 v/s April- June 2001) Total sales increased by 27% at Rs.1433.6 million.