Investigation: From AKAI to AIWA: The Baron's Last Stand

He has switched on to AIWA. And he may well be switched off by Akai in the process. But even if he loses the brand that enabled him to turn India's consumer electronics market upside down, Kabir Mulchandani doesn't intend to give up the mantle of being the ultimate price-warrior. However, playing a reprise of the Akai success story with AIWA will not be as simple as an exchange offer. The inside story.

India's most aggressive price-warrior is changing his spots. But not his slot. Surprisingly, Kabir Mulchandani, 27, the Managing Director of Baron International, may soon be breaking off with his partner-in-prime-price-cuts, Akai Electric. And repositioning his new ally, AIWA, in, more or less, the same groove. His original gamble was outrageous enough: challenging the might of global megabrands like Sony, Panasonic, and Thomson as well as firmly-entrenched local players like BPL, Videocon, and Onida simply on price by using a brand that had all but faded from the public mindspace. But his second roll of the dice makes the first one look like a safe bet.

This time, Mulchandani is preparing to switch off the very association that made him the owner of a 17.70 per cent share in the Rs 3,900-crore CTV market, and 2.40 per cent in the Rs 1,500-crore audio products market. And substitute it with a brand which is even more of a newcomer than Akai was. Is the CEO of the Baron Group (Baron)-a compulsive gambler from his college days-playing his cards right? What's the ace up his sleeve? Will the dice roll the right way for him again? Sure, Mulchandani is using a virtual rerun of his earlier pricing strategy: a combination of 2-products-for-the-price-of-1, exchange schemes with huge price-offs, and free bundled software to raise the value of the product without charging more for it. But will consumers allow Mulchandani to play a reprise of his cut-price tune?

Explains Sunil Gupta, 42, Senior Vice-President, Hindustan Thompson Associates: ''Mulchandani was the first to understand the consumer psyche, and quickly latched on to the important need for product replacement. He made the consumer believe that it was possible to strike a good bargain, especially on high-value products.'' Now, he must make the consumer believe that again. But then, there is a strategy behind the speculation, plotted by Mulchandani along with his mother, Shakun Mulchandani, 48, who looks after the group's finances. What the mother-and-son duo is counting on is the competence that Baron has developed in playing the price game. Which is backed by a well-greased marketing and distribution network. The actual identity of the brand being used is secondary in this context-or so the Mulchandanis imagine. ''Akai is our creation. I see Baron in an endless growth phase, and emerging as a multi-brand marketing and distribution corporation,'' boasts Mulchandani.

THE BARONESS BEHIND THE BARON

She's the woman behind this man. Shakun Mulchandani, 48, Kabir Mulchandani's mother and the Chairperson of Baron International, provided the big push that the then-bankrupt owners of Bush India needed to relaunch their products in 1992. She pumped in her savings, augmented to Rs 6 crore, into a new company, Baron International, and recalled her son from Stanford University immediately after a deal was struck with Akai Electric. Reminisces Shakun: ''It was a gamble for us. I had to take a decision on how to invest every penny in the business. Impulsively, I called him (Kabir).''

Over time, she took on the role of trouble-shooter. For instance, it's the mother who's managing the response of the 3 show-cause notices issued by the excise authorities to Baron International. Shakun also looks after the finances of the Baron Group, while the son manages the day-to-day marketing affairs. And her husband, J.R. Mulchandani, who had set up Bush India, oversees the production at Baron International's assembler, Viacom Electronics, in Vadodara.

In retrospect, the decision to recall Mulchandani turned out to be a great move. Says Shakun: ''We've clicked as a team-as business partners, as mother-and-son, and as friends.'' But Shakun also runs a garments export outfit, Shakun Silkens, whose clients include global fashion labels like Louis Ferraud, Oscar De La Renta, and Christian Dior. While Shakun conceptualises the designs, the stitching is done by Zaffar Hussain Rizvi, who was also the proprietor of J.R. Electronics, the assembling arm of Baron International till June, 1997. Indeed, Rizvi, who is now in trouble with the Excise Department, was asked to enter the electronics business by Shakun.

The idea was that Rizvi would manufacture the Akai brands, which would be marketed by Baron International. The mechanism which, allege the excise authorities, was a way to evade duty, was devised by Shakun. As the son readily agrees: ''She proved to be a good inspiration for me.'' Which makes Shakun, literally, the mother of all price-cutters.

Ever since Baron entered the Indian CTV market on December 23, 1994, reviving the moribund Akai brand, prices have crashed. While a 21-inch CTV sold for nearly Rs 19,000 a set in 1992, it's easy to buy one now for less than Rs 13,000. Initially, Mulchandani dropped prices through attractive exchange offers: in 1995, he sold a brand-new CTV for as low as Rs 13,000-while the market-price was Rs 16,500-in exchange for old music systems and TVs. Baron International also wowed customers through its free-gift schemes: a free 14-inch CTV, a mobile phone, a refrigerator, or even a Bajaj Sunny moped on the purchase of a 21-inch CTV. In the process, Baron International's CTV sales grew from 2,500 in 1993-94 to 4.29 lakh in 1997-98, with every company being forced to jump on the giftwagon and emulate the exchange offers.

What Mulchandani-who dropped his dreams of being a Wimbledon champ when he went to Stanford University to study for an MBA in 1990-used, however, to stay ahead of his competitors was a constant stream of offers. Analyses Jayram Easwaran, 45, CEO, Maadhyam Advertising: ''Mulchandani launched focused buy, buy, buy campaigns with his full-page ads. He didn't allow the consumer time to lie back and think. Most purchases were instinctive, which is what the campaigns hoped to achieve.'' Now, Baron plans to coast in the slipstream of that strategy. Having created a situation where 30 per cent of CTV sales today are under such schemes, Mulchandani is counting on a blitz of bargains from AIWA to keep the advantage in Baron's favour-even if the brand is a different one.

Of course, it isn't just Mulchandani-and his consumers-who will determine the success or failure of Operation AIWA. Or, for that matter the identity of the survivors in the menage-a-trois that the Baron-Akai-AIWA network has developed into. Although the 2 Japanese brands are marketed by 2 separate companies-Baron International in the case of Akai, and Baron Electronics in the case of AIWA-it's becoming clear that the relationship isn't big enough for the 3 of them. On November 19, 1998, Baron International refused to take delivery of Completely Knocked-Down (CKD) TV units supplied by Akai Electric. And BT learns that Akai is agitated with Baron's August, 1998, tie-up with the former's global competitor, AIWA. And Akai may well renege on its 4-year-old agreement with Baron International. To defuse the crisis, Mulchandani visited Akai's Yokohama headquarters as well as its Hong Kong offices, in December, 1998, but in vain.

Even as he downplays the problem, saying: ''I don't think the deal (with Akai) is under threat,'' the predatory-pricing baron does agree: ''Akai has asked us about our tie-up with AIWA. It thinks that there might be a conflict of interest since we can play one partner off against the other to get lower prices.'' In the same breath, Mulchandani also states that he would like to retain both the brands. But if the choice is between Akai and AIWA, ''Baron will opt for the latter.'' But with 3 show-cause notices issued by the Excise Department in the past 18 months alleging that the group has evaded duties of Rs 71.47 crore, this may not be the best of times for Mulchandani to start a new innings.

Just why did Baron have to forge an alliance with AIWA when its partnership with Akai was producing great results? The answer lies in the foundations of any cost-driven formula, which is to keep reducing the price of the product. That's imperative since competitors can always emulate the price-leader. For instance, both BPL and Videocon today sell their 14-inch CTVs at Rs 7,990 versus Akai's Rs 7,940. Obviously, Baron International's net margins-6 per cent in 1997-98-will come under pressure in the near future.

Says the CEO of a competitor: ''Baron's strategy cannot be sustained in the long run. It begins to flounder the moment your rivals manage to reduce your competitive (cost) advantage.'' Adds a director in another competing company: ''It's easy to reduce prices, but difficult to maintain such a lead.'' Given the fact that Baron International already pays a meagre Rs 190 per CTV set as conversion charges to its domestic assembling unit, Viacom Electronics and that its marketing and distribution system is stretched, there's only one way to lower prices: continue reducing the cost of components and the imported CKD kits. Confirms Atul Lal, 36, Director, Dixon Utilities, which used to assemble Akai's 14-inch CTVs: ''We felt that the kind of manufacturing charges we were getting were not worth it. They gave us 65-70 per cent of what others give. We went into business with them for purely economies of scale.'' And that's where the deal with AIWA fits in.

Admits Mulchandani: ''AIWA is giving us the kits at (10-15 per cent) lower prices than Akai. AIWA also has a wider range of products, like mid-size hi-fi systems, VCPs, home theatre systems, car audios, and hybrid products, which can generate additional income for the group.'' So, he swung a deal with AIWA in July, 1998, when the company's Chairman and CEO, Kenji Tamiya, visited India. He was amazed at the success that Baron had achieved with what essentially was AIWA's global strategy, and decided that Mulchandani would be his best entry-vehicle into the country. Says Mulchandani: ''He was really turned on by the potential of the market. When I went to Japan a month later, AIWA's coo sat through every minute of the 4-day meeting and went through the details of every feature that we wanted in our televisions and audio models. That's the level of commitment that the company has.''

AKAI'S ALTERNATIVES

It won't be sayonara from Akai to India. If it does part ways with Baron International, it might join hands with Videocon International Ltd (VIL). VIL already has a relationship with Akai: it sells the Sansui range of TVs and audios. And Sansui's owner is Akai Electric, owned by the Ontario-based Semi-Tech Corporation, which also owns the Singer brand.

Promoted by James Henry Ting, who controls a 45 per cent stake, Semi-Tech owns plants spread across East Asia and Europe through a complicated holding structure. For instance, it has a 43 per cent equity stake in the Bermuda-based Semi-Tech Global which, in turn, owns 71 per cent of Akai Electric. Akai Electric, which controls 42 per cent of Sansui Electric and 10 per cent of Baron International, has a fully-owned subsidiary, the Hong Kong-based Kong Wah. The CTV manufacturing arm, Kong Wah, has manufacturing units in China, Malaysia, and the UK, and supplies the completely-knocked down kits and sub-assemblies to Baron International.

The Mulchandanis' association with Akai dates back to 1984, when Mulchandani's father, J.R. Mulchandani, launched the Akai-Bush video cassette-players. But when Mulchandani launched Akai products in December, 1994, it was a slow starter. Only after Akai Electric acquired Kong Wah did Akai TV sales take off in India.

In 1997, CTVs made up 43 per cent of Akai Electric's global (excluding India) sales. Today, Akai has a 5 per cent share in Western Europe, 2 per cent in China, and 10 per cent each in Russia, CIS, and Australia. And it's unlikely to meekly give up the 17.70 per cent of the Indian market that Mulchandani has carved out for it. If the Baron Group switches its partner channel, so can Akai.

Which is hardly surprising. AIWA is much more aggressive in the global market than Akai. For instance, 7 years ago, both Akai and AIWA were neck-and-neck in sales. But today, the latter's annual sales of $3.23 billion far exceed Akai's $600 million. In fact, AIWA, which is a 50.60 per cent subsidiary of Sony Corporation-and, thus, may offer Mulchandani a powerful ally-has emerged as the world's largest manufacturer of mid-range hi-fi music systems with a 20 per cent share of that market.

Fortunately for Baron, AIWA too believes in the low-cost strategy. As a recent press release announcing the introduction of its new range of home theatre systems screamed: AIWA sets a new benchmark in value. Obviously, compared to Akai, margins will be higher for AIWA products because of the lower prices of CKD kits. Since competitors have also got into the low-cost game, Mulchandani is trying to either force Akai to sell its kits at the same price as AIWA, or choose the latter as the future partner for Baron. One major reason for Akai's being unable to match AIWA's prices is that, globally, Akai Electric is getting out of low-margin products. As a statement by James Henry Ting, Executive Chairman and CEO, Semi-Tech Corporation-which owns Akai Electric-in the company's 1997 Annual Report declares: ''Operations were rationalised and production downsized to eliminate small-screen TVs and other low-margin products.''

Baron may not, therefore, get to play the 2-brand strategy that it had planned. Under the original plan, Mulchandani had intended to use the AIWA brand to build on Akai's huge marketshare. While Akai was to be a low-priced product to maintain volumes, AIWA would be targeted at the mid-priced segment to earn higher margins. In a presentation made to foreign institutional investors in September, 1998, the group projected that, in 2000-01, Baron International's (Akai's) gross margins of 24 per cent would be less than Baron Electronics' (AIWA's) 34 per cent. In value terms, Akai's contribution would be Rs 255 crore in that year, and AIWA's, a higher Rs 408 crore, although on lower volumes.

But the 2-brand plan could fail since Akai is associated with a cheap product. Explains K.S. Raman, 49, President, Consumer Electronics & Television Manufacturers' Association: ''In the end, it is quality which can sustain volumes. And quality comes at a price; it is not dirt cheap. Thus, any brand with the tag of being cheap cannot survive for a long time.'' Things became worse when competitors like Videocon offered a quality product at similar prices.

Agrees Mulchandani: ''We have to give value-for-money in the price- and volumes-driven game by constantly reengineering our products.'' And it is AIWA that seems to fit the bill on both counts. Given the low cost of its CKD units, Baron Electronics now plans to offer a 14-inch and a 21-inch AIWA CTV together at a price of Rs 18,990-9.57 per cent lower than the combined prices of the 2 sets. Moreover, these TVs will feature 210 channels, additional picture functions, and a snazzy look. In other words, AIWA will be the old Akai under a new name.

In the new scheme of things, volumes will become the main pillar to protect the cost-leadership. Obviously, scale can be used by Baron to drive down the prices of the components and CKD kits. Explains Shakun: ''Kabir's ready to take risks. While negotiating with AIWA, he agreed to buy 40,000 CKDs (for CTVs) a month, although he could have easily bagged a deal at the same price even with half that volume.''

Risk is right. In November, 1998, Mulchandani committed himself to buying 2.50 lakh music systems a year from AIWA while estimates made by the ORG-MARG Retail Audit peg annual sales at only 1.20 lakh units. In the fifth year of the relationship, he has agreed to buy 8 lakh CTVs, 5 lakh headphone stereos, and another 1 lakh portable audio sets. And, confident that he can sell over a million CDs a year, Mulchandani predicts: ''We will sell vcds at Rs 240, which is less than the cost of an audio CD.'' So long as he can cut prices, sales will continue to grow. Agrees Rajan Gandhi, 51, the proprietor of the Delhi-based Pankaj Electronics: ''We were selling just 1 or 2 hi-fi audio systems a day before AIWA entered the market. Today, we sell 10-12 sets, most of them AIWA.''

Apart from offering products at low prices, volumes can only be sustained through an efficient and effective supply chain. Indeed, Baron's excellent inventory management ensures that its finished goods turnover is 5 days and net working capital, 24 days. In comparison, the figures for BPL, for instance, are 23 days and 61 days, respectively. Explains Anil Nayar, 48, coo, JCT Electronics: ''Mulchandani keeps stocks of less than 2 days at his assembling unit.'' What's more, Baron International's assembling and administrative costs are only 1 per cent of sales, compared to 2.60 per cent for BPL and 3.60 per cent for Videocon.

Moreover, if the system is kept well-oiled, it can be used to sell any brand. Claims Mulchandani: ''The targets we have agreed on for various AIWA products by the fifth year will be achieved in the first year itself. AIWA is already a Rs 100-crore-a-month brand today.'' Mulchandani now plans to expand the range of his offerings further, to include set-top boxes which will transform CTVs into Internet-receivers, cellphones, CDs, and white goods. And some of them may not be under the AIWA brand.