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

BARON'S EXCISE EMBARRASSMENT

In a sense, Kabir Mulchandani has his back to the wall. Pursued by various investigating authorities-including the Excise Department, the Directorate of Revenue Intelligence (DRI), and the Enforcement Directorate (ED)-the Baron Group (Baron) CEO is already saddled with 3 show-cause notices, issued on June 12, 1997, May 22, 1998, and June 13, 1998, respectively. While these 3 notices-alleging an evasion of Rs 71.47 crore-have been issued by the Excise Department, more are likely to follow since the DRI and the ED are pursuing cases relating to violation of foreign exchange regulations.

The first notice alleged that Baron International had evaded Rs 27.58-crore excise duty by getting its CTVs assembled by J.R. Electronics, over which Mulchandani had management control. Thus, the duty was paid by J.R. Electronics, which sold the 21-inch sets at Rs 7,900 per set to Baron International, which sold them at Rs 19,000. But this could be deemed illegal if it can be proved that J.R. Electronics, owned by Zaffar Hussain Rizvi, is 'related' to Baron International. Indeed, Rizvi told the excise authorities that he gave unusual financial powers to Baron International's Delhi-based whole-time director, S.C. Gupta. Stated the notice: ''...(Gupta) was given powers to act in every aspect relating to running the business of J.R. Electronics.'' ''We were only providing services for which we charged Rs 50 lakh a year,'' counters Mulchandani.

However, after the notice was issued, Baron International shifted its assembling operations to Viacom Electronics, ostensibly because the new plant was located closer to both the colour picture tube suppliers and the biggest markets. In September, 1997, the government imposed excise duty on the Maximum Retail Price (MRP) printed on each set. But the second notice alleges that Baron International then printed MRPU/E-MRP Under Exchange Offer-which, at Rs 8,500 for a 21-inch set, was much lower than the actual price of Rs 13,000. The difference was paid back to the company by the dealers as 'Other Service Charges' for refurbishing and repairing the old TV sets.

But then, Budget 98 specified that manufacturers selling under MRPU/E should pay a specific excise duty of Rs 3,000 for a 21-inch set. However, Baron still pays the duty on an ad-valorem basis on the lower price, which is now shown as the mrp. And the exchange scheme continues, but is now run by the Akai Dealers Association (ADA). Says Mulchandani: ''Since the scheme is now run by ADA, I don't need to pay the specific rate of duty.'' The excise department believes otherwise.

Baron has also run into another problem. The third notice alleged that, since it charges an extra Rs 1,250 for all sets as ''octroi, local levies, and handling charges,'' this is a new way to evade duty. Mulchandani admits the mistake: ''We are willing to pay the extra excise.'' Baron sure needs to exorcise its excise ghost.

There are no doubts that Mulchandani's plans will suffer if Akai severes its agreement. But he exudes confidence-even arrogance: ''If Akai walks out, we will merge Baron Electronics with Baron International. And the merged entity will continue to grow-with or without Akai.'' The optimism stems from the perception that Akai would not have contributed more than 15-20 per cent of the group turnover after the proposed diversifications.

If only it were that simple. In September, 1998, Mulchandani had projected that while the Akai brand would contribute 58 per cent of the group's Rs 1,502.20-crore turnover in 1998-99, it would fall to 44 per cent of the sales of Rs 2,501.10 crore by 2000-01. Thus, if Baron loses Akai, its sales will drop drastically since prospective Akai buyers may end up buying other brands. Worse, since AIWA currently has a minuscule share of the CTV market, Baron Electronics will have to grow the brand from scratch. Even recapturing Akai's 17.70 per cent marketshare may not be simple.

In addition, if Mulchandani decides to merge the 2 companies in the group, this may squeeze margins, thanks to an accounting adjustment. Ever since its inception, Baron International has been excluding part of its expenditure on advertising and publicity from the Profit & Loss Account. In fact, till 1995-96, it adjusted the annual expenditure over a 3-year period, which was reduced to two-and-a-half years in 1996-97, and 2 years in 1997-98. Declares Baron International's 1997-98 balance-sheet: ''Advertising and publicity expenses... from this year onwards, will be written off over a period of 2 years.'' However, this has forced the company to show higher expenses-and, therefore, understate profits-in a bid to adjust the deferred amount over a shorter period. So, its 1996-97 net profits of Rs 25 crore, and its 1997-98 net profits of Rs 39.84 crore were understated by Rs 7.19 crore and Rs 31.25 crore, respectively. That could force down the profits for the next 2 years. And this would be reflected in the P&L Account of the merged entity too, particularly since advertising expenditure may zoom in a bid to grow the new AIWA brand.

Irrespective of the structural problems that Baron's break-up with Akai, and its alliance with AIWA may generate, Mulchandani's fate will really be decided by 2 factors. First, whether his price-war can win consumers permanently. Analyses Abraham Koshy, 45, Professor, Marketing, Indian Institute of Management, Ahmedabad: ''Discounted brands inevitably become promotion-dependent. They survive only on the crutches of such campaigns. But the customer always expects more frills and defers her purchase in anticipation.'' In such a situation, Baron will have to keep lowering the price of its products, no matter the brand. Agrees Easwaran: ''A price-led strategy alone is not sustainable in the long run unless the company continues to cut prices. Most often, the leader becomes a victim of his creation.''

And that, in turn, needs competencies that Baron has not yet demonstrated although it isn't impossible to grow or acquire them. Worse, Mulchandani's strategy may be under attack if Akai decides to enter the Indian market on its own, or in a tie-up with the Videocon Group, which already sells the Sansui brand. Don't forget, Akai and Sansui-as well as Singer, the brand under which Singer India markets sewing machines, TVs, and kitchen appliances-are all owned by the Ontario-based Semi-Tech Corporation.

Ironically, Mulchandani's AIWA strategy is most likely to succeed while the recession continues. For, that's when the consumer will keep looking for the best value for her money instead of shopping for advanced technology which comes with an advanced price-tag. Baron's problem is that, having built Akai, rather than itself, as the low-price brand, it must now do the same all over again for AIWA. And while Akai had nobody to dislodge from the consumer's mindspace, AIWA must first nudge Akai away, and only then take its place. That's why Kabir Mulchandani will find it a lot tougher to replay his four-letter discount ditty in 1999.

"IF WE ARE FORCED TO CHOOSE BETWEEN THE TWO PARTNERS, THEN AIWA IS OUR CHOICE"

In a chaotic send-off to 1998, Kabir Mulchandani, 27, spent the last days of December grappling with excise investigations, an incipient break-up with his Japanese partner Akai Electric, and a growing relationship with his new associate, AIWA. BT's Rajeev Dubey had to remain hot on the heels of the Baron Group CEO for 2 weeks in order to get him to speak of the past and the future, the Akai and the AIWA, of his business. Excerpts from a series of exclusive interviews:

ON BARON'S PROBLEMS WITH AKAI. What has happened between Baron International and Akai is something which happens with a number of companies. Akai is really our creation, but it has certain weaknesses. For instance, it doesn't have the size that its global competitors have. Hence, its competitiveness is getting eroded. Therefore, Akai hasn't been able to bring down the prices (of its kits) to the extent it should have. And, being the marketers of a price-value driven brand, it becomes difficult for us to ensure that the brand continues to do well. In comparison, AIWA is giving us a price which is close to what we desire.

ON THE POSSIBILITY OF BARON'S BREAKING UP WITH AKAI. There are always ups and downs in business relationships. I don't think the agreement is under threat. Akai has raised a valid point that there might be a conflict of interest due to our tie-up with AIWA. That we might be focusing on AIWA and playing off one partner against the other to get even lower prices. These issues have been discussed, but we haven't reached a stage where they can't be reconciled. According to me, the best option is to have both the partners. But if we're forced to choose between the two, AIWA's the choice.

ON BARON'S FUTURE AFTER AKAI. Any company can be restructured to counter such emergencies. We can merge the 2 companies, and Baron International, with or without Akai, will continue to grow. The Baron Group is in the distribution business, and we can sell hardware, software, or consumer products. In the long run, Akai would not have contributed more than 15-20 per cent of our revenues.

ON THE POSSIBILITY OF AKAI TYING UP WITH THE VIDEOCON GROUP. I don't think so. I think Akai would like to come on its own. Any way, it will not be easy for Akai to withdraw from its contract with Baron International. Legally, we can make a claim against them. We can also stop Akai from entering the Indian market. As per our agreement, Akai has to give us an offer-a reasonable offer-before it can withdraw from the contract. And if it does, I may not refuse it.

ON WHY BARON APPROACHED AIWA IN THE FIRST PLACE. So that we could continue growing at the same pace as in the recent past. The fact is that one can grow a brand only to an extent; after that, the brand continues to acquire marketshare but doesn't improve the bottomline. What's the point of having a 30 per cent marketshare if nothing comes into my pocket? We chose aiwa because it is the world's largest producer of mini hi-fi audio systems. It is also the largest manufacturer of sub-21 inch CTVs in Japan. And it is totally involved in making the Indian foray a success.

ON WHETHER BARON IS PURSUING A SHORT-TERM STRATEGY. Akai may pull out, but we have made a fortune. We'll probably lose future earnings, but that would be because of our own choice. Baron has also built the most efficient distribution network in the country. The Akai brand helped us build that network. Now we are adding other products to milk the system further. The TV business is a low-margin one. You need value-added products to increase margins.

ON BARON'S EFFICIENT SUPPLY-CHAIN. From the day the components are shipped from Hong Kong, we track them. Advance clearance ensures delivery of the components within 4 days of the vessel's docking at the Indian port. Within the next 11 days, the finished products are dispatched. At the warehouses, the average inventory time is just 5 days. The average credit we offer is of 29 days. If you add the 13 days taken to ship the components, that's 62 days from the time components are dispatched to the time we receive the sale proceeds.

ON BARON'S PENDING EXCISE-RELATED CASES. We see the first notice as serious. The second one is not. In the first case, the department has alleged that J.R. Electronics was a front company. Yes, we did finance it, but we also charged an interest. All I can say about the second case is that there's no way the government can win. In the third case, there may have been mistakes, and we are willing to pay the differential.