MRF: leader today. but tomorrow?

Early this June, the Mappillai family gathered at its Kodaikanal summer house. It was the family's customary annual meeting; only they had a little more reason to be worried this time. There has been an exodus of senior marketing executives from their tyre company, MRF. Sources within the group say that 18 such executives have quit in the last six months. While some of them have joined the dot.com rush, others have crossed over to MRF's competitors, including Apollo Tyres and Bridgestone. For example, MRF's former commercial director T. Eapen Koshy, a distant relative of the Mappillais, has joined Apollo Tyres as an advisor; Fred Lewis, an EXPAT who had advised MRF on technology issues for close to a decade, is now an advisor to competitor Apollo; and Ashok Iyer, who was the tyre company's erstwhile head of marketing operations, has been poached by Apollo.

At the moment, MRF can probably afford to shrug it off. It is the largest tyre company in India, with a turnover of more than Rs 2,400 crore. It also has one of the highest profitability ratios in the industry: for the year ending September, 1999, it made a net profit of Rs 98.67 crore-a gross profit margin of 11 per cent against to Apollo's 6.5 per cent and Goodyear India's 4.74 per cent. Quips a Chennai-based consultant: ''They run a tight ship.''

One reason why executives are leaving MRF is because of its modest pay-structure. Car loans, for instance, at the middle-management level are restricted to a measly Rs 1 lakh. Says an MRF executive: ''As a rule, MRF never ups salaries to retain executives who want to leave.''

Not many believe that MRF can afford a run on its talent. Competition in the Rs 9,000-crore tyre industry-dominated by eight large companies-is becoming intense. Global majors such as Bridgestone, Michelin, and Pirelli are already here. More worryingly, by March, 2001, the punitive tariff on used tyres ($175 on large tyres and $25 on smaller ones) might be removed. If that happens, tyre prices will come crashing down. Reason? In a bid to get rid of environmentally-unfriendly tyres, developed countries like the US will sell them to Indian importers at throwaway prices. ''We fear India will become a dumping ground at the cost of the local industry,'' says D. Ravindran, 62, director-general, Automotive Tyre Manufacturers Association.

It's not just the used-tyres deluge that MRF has to worry about. Tariff sops to China, which already makes the cheapest tyres in the world, will further squeeze margins in the OE market. MRF has been putting its response in place. For instance, it has invested in a new radial plant to leverage scale-economies. But technology will continue to be a key challenge. Ever since MRF split up with Group Michelin in 1993, it hasn't had any foreign technology. If, as many expect, the competition in the automobile industry boils down to a handful of foreign vehicle manufacturers, the components part of the business is likely to be restricted to their follow-through vendors. MRF Chairman K.M. Mammen Mappillai's reluctance to tie up could, then, prove costly. As on March 16, 2000, about one-third of the shares in MRF were held by financial institutions and foreign investors; 9 per cent by MRF employees, and one-third by the family. Besides MRF, the Mammen family also owns Malayala Manorama, M.M. Rubber, and the toy manufacturing company Funskool.

But MRF is indubitably the jewel in the family's crown. However, with its stake in the company dispersed between eight branches of a family that is now into its third generation, differences may crop up any time. Then, family meetings will be a battleground for survival.

Murugappa: it's taken the plunge; now, the swim

There is nothing remarkable about the sixth floor of Tiam House, which overlooks the vast watery expanse of Chennai Harbour. Yet, all of Corporate Chennai's eyes are on it. The floor's new occupants-who share a common executive washroom-are nothing short of pioneers compared to their counterparts. In a radical redesign of their organisational structure, the five family members have virtually kicked themselves upstairs to a Murugappa Corporate Board (MCB), and handed over the running of their key companies to professional CEOs. Scions of other local business families are waiting to see if Murugappa's bold move will pay off. For, it's not just the Murugappa family which is under test; its professional managers also are. Says A. Vellayan, 48, a family director on MCB: ''It's early days yet, but I am enjoying what I am doing.''

For a diversified Murugappa group, the problem is one of size. Except abrasives, it is not a leader in any of the eight industries it operates in. Three-fourths of its turnover comes from agro-products, fertilisers, cycles, and tubes. Abrasives and financial services account for another 15 per cent, while ceramics and engineering account for most of the rest.

The restructuring has three objectives: higher growth and profitability; market leadership through technology and innovation; and creating an organisation of empowered intrapreneurs. Listing profitability and growth ahead of the other objectives is not incidental. All of the group's big companies are under tremendous pressure. In 1998-99, on a close to Rs 1,000-crore turnover, flagship EID-Parry's net profit was a poor Rs 31 crore; Tube Investments, the next big company, had Rs 706 crore in sales last year, but the bottomline was just Rs 6.69 crore. Similarly, abrasives manufacturer Carborundum Universal and Coromandel Fertilisers netted less than 10 per cent of their topline as profits. Says V.A. Raghu, 58, managing director, TI: ''We did not spend enough time building our brands.''

The first thing that new CEOs like Raghu are doing is to draw up a strategic assessment of where their companies should be going. Raghu, for instance, wants to push TI's turnover to more than Rs 2,000 crore by 2005. For starters, he is focusing on improving efficiencies along the supply chain and marketing. TI has a lot of catching up to do. Hero Cycles, which entered the bicycle business decades after TI, now rules the market with a 40 per cent share (TI has 25 per cent).

In fertilisers, EID-Parry has lower gross profit margins (GPM) than most other industry players, including its own Coromandel Fertilisers. Consider this: Chambal Fertiliser had a GPM of 29 per cent, Nagarjuna Fertiliser 22.7 per cent, Indo-Gulf and Coromandel 16 per cent, and GNFC 14 per cent. Sure, EID-Parry also makes sugars and tiles, but they comprise less than one-fifth its turnover. Says Raju of M.K. Raju and Associates: ''To survive the wave of globalisation, companies will need to worry about four things: financial muscle, management calibre, economies of scale, and world-class technology.''

The Murugappa scions will now spend more time on strategic issues. Accordingly, each of the five members has a functional role across the group companies as well as a mentoring role specific to companies. M.V. Subbiah is the chairman of MCB and his brief is to develop a new vision for the group. M.A. Alagappan is responsible for group strategy and is also a mentor to TI; Vellayan supervises group marketing, and mentors EID-Parry and Coromandel Fertilisers; M.M. Murugappan handles technology and research, and counsels Carborundum and the plantations business. M.M. Venkatachalam is in charge of the group's human resources and mentors Parry's Confectionery. Says Vellayan: ''The idea is to narrow down to a final portfolio which is global in scale and competence.''

Obviously, the new structure will need a couple of years to prove itself. Further, it will help bring cohesion, reducing chances of a split. What it has also done is to enable the business heads to assess their companies impartially. Some of them are already talking about divesting non-core operations. Says Ram Bajekal, 42, CEO, Parry Agro: ''The entire wealth of the group has been put in the hands of professionals. It's an enormous responsibility.'' And if the sixth floor occupants of Tiam House ever move back, it will be because the professionals did not deliver.

Without exception, the four Southern groups have over the years been weaned on the belief that risk is evil. Be it in terms of new businesses, borrowings, partnerships, or management de-control. The family must do only as much as what its members themselves can. But today, they must ramp up to global capacities, invest in technology, and become market savvy in order to survive. The biggest hurdle in doing so? The family. Points out a scion of the TVS family: ''They have to decide which is more important: the family, or their businesses.'' South India Inc. had better decide fast.

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