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Tuesday, August 01, 2006

How the elephant can use the dragon

Fifteen years ago, when India was taking its first diffident steps towards economic unshackling, a full complement of analysts and strategists were ready with their growth prescriptions. A lot of water has flown under the bridge since then.

The question now is - has India lived up to its potential?

This question was put to three Harvard Business School professors - associate professor (administration) Das Narayandas, senior associate dean Krishna Palepu and chair, organisational behaviour Nitin Nohria.

Nitin Nohria told CNBC-TV18, "I think it's really remarkable to see that how much progress has been made over the last year. My sense is that the sea change that I see or the critical inflection point that I see is that, companies have moved from a defensive posture to now being in a genuinely aggressive posture in terms of global competition.

Until the last year, the sense was that Indian companies were really trying to fix their own businesses to compete domestically relative to the global competitor. I think now that they have developed the confidence that they can be successful, they are finally beginning to look outwards.

Like the Tata Group going out and buying Daewoo, it's just one example of how this more offensive posture in terms of what, at least we think, is a shift that we have see in the last year."

Krishna Palepu echoes Nohria, "I think that's a very important change that has taken place. The level of confidence (has grown) in risk-taking and in exploiting, not only the domestic market but global markets as well, and seeing growth opportunities as opposed to thinking in term of restructuring.

"The only contrast is the ambition level that Indian companies exhibit, (which) is modest compared to, for example, the ambition level that the Chinese companies are exhibiting. It's a first step but we still have a long way to go."

Chinese companies have been aggressive and have been gobbling up big chunks of the world's output of grains and metals, especially steel. So has India remained quivering, in the wings and just watching it all happen or are we participating?

Says Das Narayandas, "I think till a few years back or till last year, the dominant question was can we, in the face of everything that's happening, survive and manage in the domestic markets? This year, as I look around, I think it's (now) changed so we can."

This new found confidence has changed the equations considerably for many. Narayandas said, "If the first few things don't happen right, which will be the case if you are going to be more aggressive, then it shouldn't be that we immediately start to climb up and become self-doubting thomases.

"It is very important to have the resilience and the market should be willing to take a couple of hits but (should) support entrepreneurs, who do take the chances. So any mistakes will not be the entrepreneurs'. I mean they have to take chances and they will. It will be the markets (responsibility) and their patience and their willingness to stay with them."

Palepu adds, "Not only with the markets but the press actually because the press has to mature in analysing these things, that when you have moved industrial activity to a more risky path and more ambitious path, there will be mistakes that will be made, but that's a part of the learning process and people need to put that in perspective and educate the market.

"For example, if one of our pharmaceutical companies spends a lot of money on R&D, which doesn't work out, but that's R&D done, sometimes it doesn't work out. You can't just write it off saying that now this company doesn't know what it is doing."

He elaborates, "If one of the companies goes into acquisitions and has difficulty in integrating it, that's part of the learning process. So you need to have an overall perspective. But at the same time, that's not a license for being totally careless in the way you do things.

"But (my) interacting with Indian managers (shows that) they are pretty cautious actually. I think historically, they have been trained to be very cautious in the way they grow and manage things and so I don't worry as much about people making reckless moves, as much as, not having high enough ambitions, as a vision for the next 5-10 years."

Nohria commented on the changes in the business environment in India, "There are many companies (which) are examples of really major players that were non-entities ten years ago. I mean Bharti is a company that Krishna has studied and this was non-player ten years ago and it's a huge enterprise right now. Jet Airways is another example."

He explained, "If you look at what has just happened with deregulation. Over ten years, there are clearly some examples that have built really substantial companies in a domestic sense and then hopefully, some of these people will become global too. As we know, airlines are expanding or being given opportunities to go international. At least this is an opportunity for Jet Airways to become a major rival to British Airways in the London-Bombay route, which is the most profitable route. So there are clearly opportunities that are being created. There have been many more Indian companies (that) we now take for granted but they weren't there ten years ago."

About five years ago, China was where the MBA students seemed headed. This was an exciting, unexplored, fertile business turf. But with perceptions changing, a fast track route and a single window clearance being promised in India, China is losing its allure, or is it?

Says Nohria, "As we have been struggling with trying to clean our act, China has had its act in place. So, as we were in this mode, that was more defensive, they were in a mode that (was) relatively more offensive and so it got framed as India versus China debate.

"There is something inherently energising about a comparative debate. But I think there is probably a better way of framing it and I think Krishna has really framed this in a way that I find very compelling."

Palepu reiterates, "The other very important thought process we need to have is that, it's not just China, but China plus Hong Kong plus possibly, Taiwan because they have lot of business linkage.

"So, when you think about that and actually think about India and compare, the comparison really doesn't make sense because it's a agglomeration of three very different stages of development. Hong Kong is almost in an advanced kind of stage. Taiwan has been in the middle stage of development and then you have China. That's really the combination that you are looking at."

He explains, "So if you frame it as comparative issue, it's a lost cause in some sense because you are not just looking at China. We can say we (India) have an advanced financial system in the stock market but China doesn't have it. Not true, if you include Hong Kong stock exchange or you can say we have entrepreneurial companies but China doesn't have, not true if you include Taiwanese companies. So actually frame it as a total stuff, it's a more complicated issue."

Palepu adds, "But I think the opportunity here is to take advantage of the complementarities between the two countries. I think individual companies, to their credit, as opposed to observers like us, who might be thinking about a comparative race, are seeing these synergies.

"I think first of all, Indian IT companies are going and setting up shop in China to exploit markets from China into Japan or into Korea, where actually the language skills and the culture is more compatible. Indian pharmaceutical companies are going into China and trying to exploit the domestic market there."

Palepu suggests synergy can be achieved in other sectors, apart from IT. He says, "Take Tata Motors and Indica. There is a niche in China, that is very similar to the niche that Tata Motors has been able to hit so well and there are a large number of consumers in China, looking for a product like that (Indica), which they don't have because all multinational car companies roll out their own traditional stuff and therefore an opportunity is there."

"Other areas could be hotels because of the explosive growth in the Chinese economy, so business travel is increasing. I can think of many areas where Indian companies can go there and given the skill that we have, the market is somewhat similar, in many ways and slightly ahead of us. Open your mind (to Chinese competition) and not see them as rivals but as a business opportunity (that can be) taken advantage of and for collaborating."

Krishna Palepu's Case study: Where India scores

A Taiwanese hardware company called Inventek, that has major operations in China has a billion dollar plant in China, that produces notebook computers and is a very sophisticated operation. (They crank out a notebook computer in 15 seconds.) But the one thing that the CEO was telling me is that despite their being very sophisticated and an extremely productive operation, they don't make much money, and the reason is that there is lot of competition for this kind of contract manufacturing, and China makes it very easy with all the infrastructure being available.

Inventek's CEO admires Indian software companies, which serve the same customer that he serves, but they are making a lot of money. Inventek started 20 years before the Indian software companies did and they actually have more advanced technology but don't make any money. The software companies from India, who started 10-15 years later, are able to make lot of money. So how does India do it?

The CEO came to India on a mission to learn and to find out how to serve customers and make money. Now, Inventek is considering setting up a software facility in India and when Palepu asked him, "why do you want to set up in India?" He said, "If you really want to learn how to build a big software business, you have got to go to India." So they are considering setting up an operation in Hyderabad but in a way that is synergistic with their hardware operation but (plan) to build more value-added components using Indian talent.

Written for www.moneycontrol.com

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