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Nineteen
ninety-five to now, it's been a stunning decade for the Indian
entrepreneur. Few could have imagined back then that in a country
where restricting manufacturing capacities was a stated policy
for decades, there would emerge entrepreneurs who lead the notoriously
difficult world of commodities. Yet, the unthinkable has happened.
In a range of industries, the Indian entrepreneur is the biggest
manufacturer or at least among the top manufacturers globally.
Lakshmi Niwas Mittal of Mittal Steel is the world's biggest manufacturer
of steel by far, with an annual capacity of 70 million tonnes
(mt); his nearest rival, Arcelor, has a capacity of just 40 mt.
Purnendu Chatterjee of the Chatterjee Group has just acquired
the world's largest manufacturer of plastic polypropylene, Basell,
from Royal Dutch/Shell for a whopping $5.7 billion or Rs 25,080
crore (you find a story on him elsewhere in the issue). The Ambanis
of Reliance Industries run the world's largest polyester plant
in Patalganga, with a capacity of 1.8 mt per annum. Kumar Mangalam
Birla of the Aditya Birla Group is the world #1 when it comes
to viscose staple fibre and white cement. His group also operates
the world's largest single-location refiner of palm oil, and is
the world's fifth-largest producer of carbon black. The list doesn't
end there. The Munjals have been in the Guinness book since 1986
as the world's largest manufacturer of bicycles, rolling out 5.2
million of them last year. And Subhash Chandra is the numero uno
manufacturer of laminated tubes, producing 4 billion tubes every
year from 18 manufacturing plants in 12 different countries. Even
in chemicals and pharmaceuticals, India has global leaders.
Commodity industries aren't the easiest of
businesses to operate in. Demand is cyclical, because of which
prices are volatile and profit margins thin. Economies of scale
are a must, costs must be squeezed out of every single process
every day, and poor production planning can easily tip the manufacturer
into the red. So what makes the Indian entrepreneur so adept at
the commodities game? His process and finance skills. Those who
manufacture in India also leverage other advantages like relatively
cheap raw materials and labour. For example, even though Mittal
operates all his steel mills outside of India, his core team of
turnaround managers comprises seasoned Indians, who walk into
rust bucket factories that he typically acquires, but quickly
turn them into some of the most efficient producers of steel.
Similarly,
Reliance has a track record of executing complex, multi-crore
projects at the lowest costs and in record speed. A proof of Reliance's
in-house project management capability is its $6-billion (Rs 26,400-crore)
integrated Jamnagar complex, which it executed in a record three
years. It's believed to have been done at 30 per cent lower capital
cost than a comparable global plant. "This fundamental strength
is at the heart of Reliance's low-cost positions in all its businesses,"
Dhirubhai Ambani once said. Last year, Reliance acquired a high-cost
polyester producer, Trevira GmbH of Germany. The idea is to get
entry into the European markets and in the long term transfer
those production capacities to India. The Noida-based Moser Baer,
too, continues to tinker with production processes to shave some
milli-seconds off, say, the etching process. Says Rakesh Govil,
Head of Corporate Strategy, Moser Baer: "We are 10-15 per
cent cheaper than our Taiwanese competitors because we have been
able to do a fair amount of line integration ourselves, including
design (thus reducing turnaround time), and been able to do a
a lot of chip fabrication in-house, besides substituting imported
raw material." Hero Cycles uses an Indian version of just-in-time
production to drive costs down.
Perhaps, something more important that's
driving the emergence of the Indian entrepreneur on the global
commodities stage is the newfound sense of confidence. "I
see that Indians are showing outstanding confidence based on their
increased competitiveness and global outlook," says Tarun
Das, Chief Mentor of CII and who's watched Indian industrialists
from close quarters for more than four decades. Agrees Rahul Bajaj,
Chairman of Baja Auto: "The common factor here is that entrepreneurship
is blossoming in a free market environment post-1991."
What's also helping is that countries that
traditionally were centres of manufacturing are now finding their
competitiveness getting eroded by other low-cost countries and,
therefore, are opting out of the game. In Europe, for example,
a lot of small auto-component manufacturers are selling out and
are being snapped up by the likes of Bharat Forge. In other industries
like textiles and apparel, factors such as low labour costs and
access to raw materials are forcing a shift in industries to low-cost
countries.
Tomorrow, it could even be industries like
automotive. Are the Tatas and Mahindras listening?
-Sahad P.V.
DOGGED
Simputer Ver. 2.0
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Showtime: Science & Technology
minister Kapil Sibal (L) with CSIR Director General R.A. Mashelkar
at the Mobilis launch |
Okay, it's not
an upgraded simputer, but encore software's newest laptop offering,
the Mobilis, comes with the same philosophy of low-cost computing.
Priced between Rs 10,000 and Rs 20,000, the Mobilis (like its
two other variants) doesn't have a hard drive (it uses Flash Memory),
has a smaller seven-inch display and shorter battery life compared
to conventional laptops. Why does Encore feel it can sell 25,000
Mobilises in Year One? "It has its own market and applications,
but will be able to run Simputer applications too," says
Mark Mathias, the company's President. Its big hope, however,
is a deal with itc for the tobacco giant's e-Choupal initiative.
SECOND
The Crisis In Cooperative Banks
Urban cooperative banks go belly up with
a frightening regularity. There's only one way to prevent that:
Make RBI their sole regulator.
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Seeking answers: Depositors protest
outside a failed cooperative bank |
In
the last five years, at least 10 cooperative banks have gone bust.
In 2001, Ahmedabad-based Madhavpura Mercantile Cooperative Bank
went famously belly up following its involvement in the Ketan
Parekh scam. An estimated Rs 600 crore of the total deposits of
Rs 1,200 crore belonged to small depositors, most of whom were
farmers. The following year, urban cooperative banks (UCBs) fell
like ninepins. Wardha District Central Cooperative Bank, Osmanabad
District Central Cooperative Bank, Satguru Jangli Maharaj Cooperative
Bank of Pune and Nagpur District Central Cooperative Bank were
forced to down shutters after the Home Trade scam. In 2004, it
was the turn of South Indian Cooperative Bank and Maratha Mandir
Cooperative Bank to go under-simply because the banks had racked
up huge non-performing assets (NPAs), eroding their capital base.
There are about 2,100 UCBs in the country
with more than Rs 1,00,000 crore in deposits and Rs 65,000 crore
in advances (yes, their assets and liablities don't match). According
to the RBI's Trends and Progress in Banking Report of 2004, 1,926
UCBs had an average NPA of 17.60 per cent of their total advances.
Needles to say, depositors in these banks are at risk of losing
their hard-earned money.
But why are the UCBs in such bad shape? The
answer has to do with the way such banks are run. To start with,
the UCBs (because they are cooperatives) are owned by a limited
number of members, belonging either to a specific community or
vocation. Because only shareholders can borrow from such banks,
the biggest borrowers often tend to be bigger shareholders, meaning
that the banks have little incentive in going after them, should
the loans turn bad. And since the administration of such cooperatives
is with the state-level Registrar of Cooperatives, and the Reserve
Bank of India (RBI) only oversees banking transactions in a limited
way, there's rampant mismanagement of the UCBs. (One classic example:
Madhavpura's Chairman Ramesh Parikh even used the bank's money
to settle his stockbroker son, Vinit's market dues.) Says Ashwin
Parekh, Executive Director, Deloitte Touche, a global consulting
firm: "The current ownership model of the UCBs won't work
in the long term."
Changing the nature of ownership of the UCBs
is trickier than ensuring better management. The latter is easily
achieved by giving the RBI greater powers to regulate them, and
bringing in banking norms that make them at least as well managed
as other commercial banks. That apart, the government may need
to help the UCBs restructure their balance sheets, by strengthening
their capital base. Various expert committees in the past have
also suggested that the central and the state governments should
share the cost of such a restructuring. Indeed, following the
release of its vision document for UCBs in March this year, the
RBI has begun the process of involving state governments in rehabilitating
the weak banks.
The rationale of cooperative banks is infallible.
It's just that they need to be run like they are supposed to.
-Roshni Jayakar
UPA
Vs NDA: The First Year
Which of the two coalition governments worked
harder in its first year?
Governments,
like CEOs, get their first year in power watched closely. Why?
First impressions matter. Based on how much enthusiasm governments
show to get cracking on key issues, stakeholders make their call
on the course of the economy-and the longevity of the administration.
The Manmohan Singh-led United Progressive Alliance (UPA) finished
its first year on May 21, 2005. Did the dream team work any harder
than the Atal Bihari Vajpayee-led National Democratic Alliance
(NDA) government that it replaced?
THE UPA SCORECARD |
»
Implemented the Fiscal Responsibility and Budget
Management Act
» Introduced
National Food for Work Programme
» Introduced
the products patents regime by pushing through the Patents
(Amendment) Act, 2005
» Scrapped
the restrictive (to a foreign partner in a JV) Press Note
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» Hiked
FDI in telecom to 74 per cent and real estate to 100 per cent
» Signed
an Air Transport Agreement with the US
» Put
in place strategies to enhance access to oil in India and
abroad
» Implemented
the long-pending switchover to Value-Added Tax |
THE NDA SCORECARD |
»
Replaced the fixed licence fee regime in basic
and cellular services with a revenue-sharing system
» Opened
up long distance services in telecom to all players
» Allowed
derivatives trading in commodities
» Raised
the limit for foreign corporate acquisitions from $15 million
(then Rs 64.5 crore) to $50 million (Rs 215 crore)
» Exempted
tax on dividend income from equity mutual funds
» Proposed
divestment (via IPO) in national carriers Air-India and Indian
Airlines
» Divested
18 per cent in GAIL via Global Depository Receipts
» Passed
the Insurance Regulatory and Development Bill |
To your right is a quick comparison of the
key initiatives the two governments unleashed in their first 365
days in power. It's obvious that the UPA regime, despite recidivist
communist allies, has pushed through more important policies than
the NDA did. A word of caution, though: When the NDA came to power
(for the second time, after a short-lived 13-month stint in 1998),
the global economy was just recovering from a slump. The East
Asian countries like South Korea and Hong Kong were still suffering
from a hangover of their currency crisis, Japan showed no signs
of emerging out of its recession and Brazil had just devalued
its currency, real. The UPA, in contrast, took over at a time
when the Indian economy was galloping at 8.5 per cent a year and
the stock market had started on its bull run. But then, who says
life is fair?
-Ashish Gupta
CREDIT
Will
Debt Get Dearer?
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Indian banks: Good borrowers wanted |
Almost
certainly, if not immediately. Interest rates on housing loans
have already started moving up, and other retail loan segments-cars,
durables and personal-could get dearer too. "The cost of
funds (for banks) has gone up in the last quarter of 2004-05,"
says V. Vaidyanathan, Head of ICICI Bank's Retail Business. So
why haven't rates hardened across the board yet? "While funding
costs have increased, so has competition," explains Nicholas
Winsor, Head of Personal Financial Services at HSBC India. In
other words, there's more money to lend than good borrowers. Still,
if interest rates in the US continue to climb, bankers in India
may be emboldened to follow suit.
-Swati Prasad
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