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Why India seeks a future beyond IT

As India opens up its market to the world, Indian manufacturers are competing with international brands for consumers. Wharton experts recently discussed the country's strategy in the face of geopolitical and economic uncertainty and shared their advice for the future.

You'd be hard-pressed to walk even a few blocks in urban India today without running into an "STD/ISD/Internet" booth--a tiny mom-and-pop operation offering local and international telephone calls along with Web access and sometimes even mobile phone sales.

But rubbing shoulders with these ubiquitous outposts of high technology are more down-to-earth symbols of growth: countless advertisements for cement, cleaning products, heat-and-eat entrees, and the latest brand of instant dosa (a rice-and-lentil crepe) mix.

While India is known on the international stage for its success in information technology and business-process outsourcing, its internal focus appears to be making a shift. As the prolonged economic slump in the United States continues to keep the technology sector relatively soft, the subcontinent's business leaders are increasingly calling for India to become more competitive in other products and services. At the seventh annual Wharton India Economic Forum, held in Philadelphia recently, experts discussed the country's strategy in the face of geopolitical and economic uncertainty and shared their advice for the future.

As India opens up its market to the world, Indian manufacturers are competing with international brands for consumers. "All countries don't have the same degree of capabilities," noted Y.C. Deveshwar, chairman of ITC, an Indian conglomerate with $2 billion in annual revenue that is active in industries such as tobacco products, paperboard products and hospitality. "What happens in a country when tariffs are lowered is that branded goods and services are available from everywhere. That's the challenge," he said.

About five years ago, Deveshwar said, his company was involved in a number of different fields. "We had to ask: What are the things we want to focus on, and what do we want to exit? We got rid of areas where we couldn't add value, where the strengths and capabilities within the company didn't match marketplace opportunities."

Clearly articulating your strategic intent is key, he said. "'Either we become world-class or we leave the business was our principle. We also created a governance structure to support that view. We knew that in a mature economy, with developed market institutions, we were unlikely to be successful unless we were mostly focused on one theme."

Mind your verticals
Just making sure your business is top-flight isn't good enough, however; after all, a product is only as good as its components. "In an emerging economy, you can't become competitive unless your entire value chain is," explained Deveshwar. "Even if you are world-class in your particular area, unless the entire value chain is competitive you won't be up there. In a mature economy, you can become world-class by outsourcing and getting world-class inputs into the business."

Deveshwar illustrated his point with an example: "In 1996 everyone told me that we should exit paperboard products. We don't have forest cover in India, as other places do; Indonesia, Finland and Sweden, for instance, are much better off. So should we have exited that market?"

As the prolonged economic slump in the United States continues to keep the technology sector relatively soft, the subcontinent's business leaders are increasingly calling for India to become more competitive in other products and services.
In fact, said Deveshwar, the firm decided to remain in that market but to create the inputs it needed. "Much of the land in India is private wasteland, tribal forest land, etc. So what did we do? We provided saplings, helped till the land, and encouraged NGOs to create water-harvesting programs. We have grown 12 million trees to date. This gives employment to people in the villages. We meshed our objectives of creating shareholder value with the objective of creating wealth for these people. As a result, we have internationally competitive access to fiber and we do cogeneration of power at a reasonable cost." Because of the company's willingness to make that investment, it became a win-win solution for all parties.

One of the biggest challenges for consumer-goods manufacturers in India is to make people loyal to their brands. Becoming a household name in such a populous marketplace translates into millions of rupees of potential sales. Sunil Alagh, managing director and CEO of Britannia Industries, a leading purveyor of bakery and dairy products, outlined the company's process of expansion and strategic planning.

Before anything else, said Alagh, a firm needs to have an executable vision--not a pie-in-the-sky blanket statement but a realistic goal. "It's all about how you define the market, or how you redefine it for yourself. At Britannia, we asked ourselves, 'Can we write a one-line vision for our company?' We came up with the following: 'Every third Indian must be a Britannia consumer by 2004.' Why? Packaged products can be bought by just about every third Indian. We can always raise the bar, but the vision stays with the company."

The next step, Alagh said, was to strategically expand the product line. "So then we said, just selling biscuits was not good enough. Where do we go from there? We listed all the products used in a home, and the competitors in each space. We asked, can we become No. 1 or No. 2 in that market? Dairy seemed to be a good area for us to enter. There were mostly large cooperatives without too many branded products in the space. Amul was the leading producer. So we chose cheese, and we wanted to become No. 2. In three years, we became No. 1 in processed cheese. Now we're getting into fresh milk and butter, as well as ghee, bread, etc."

Britannia's success, says Alagh, is largely due to the company's razor-sharp clarity of purpose. "No one competes with our low-end brands in terms of price. We want to create an emotional service with our brand, to give the consumers more than they expect. We don't make the best biscuits in India. That's not our business. We're not a five-star hotel bakery. What we do provide, however, is consistency--the idea that wherever you open a packet of Britannia products, you'll get the same thing."

Alagh advised companies to be realistic. "Benchmark yourself with what the consumer expects of you. Don't take it to the extreme. You don't necessarily have to benchmark with the world. Don't get too specific in your research. Go for trends. With so many people, it's better to be approximately right than precisely wrong."

The market, continued Alagh, "is much bigger than you think. Be sure you have the right price, and the right definition. The consumer in India today needs international products at national prices. You don't always have to go out and create new categories; initially, get into an existing category."

Taking care of your customer
Jagdish Khattar, managing director of Maruti Udyog, India's largest car company, agreed with Alagh that the customer experience should be superior. "To be a market leader, you have to act like one," Khattar said. "An organization can choose its platform of market leadership. Maruti has chosen customer intimacy. Technology, design, etc., are generally all shared among manufacturers. But how a customer is helped to experience those things is the differentiating factor. A car is an investment. As the market leader, we have to help consumers tend to their investments."

The Indian customer "no longer regards cars as a luxury. In fact, the low-end Maruti is one of the cheapest personal cars in the world," remarked Khattar. "In the early 1980s, Indians started going out on drives, visiting friends and family." Maruti focuses on the consumer's entire life cycle, said Khattar, and keeps an eye on regional needs.

The necessary backdrop for all of these strategies, of course, is financing. Keynote speaker Arshad Zakaria, executive vice president and co-president of global markets and investment banking at Merrill Lynch, painted a cautious but optimistic picture of the capital markets.

"It's been a challenging year. We're experiencing the aftermath of the equity bubble. In the years 1997 to 2000, the margins in this business were so spectacular that a lot of competitors came into the business and assumed that those were the equilibrium margins," Zakaria said. "It created competitive pressure which was, in a strange way, a plus. So the top three or four firms could make money but it was tough for the rest. The long-term trends driving those top firms, however, are strong--globalization, deregulation, the easing and acceleration of capital flows, etc. All these are good for the global financial services industry over the next 10 to 15 years."

Zakaria pointed to the recent expansion of consumer services in India as evidence that globalization and privatization are having positive effects. "India is moving toward a services-based economy. Ten years ago, there were two television stations. Now there are some 100 channels; consumers have access to cable and satellite. The cell phone industry has exploded. Gross domestic product is growing at more than 5 percent a year. This is healthy, but the challenge is to move it to a plateau of more than 8 percent.

One of the biggest challenges for consumer-goods manufacturers in India is to make people loyal to their brands.

"India must continue to strengthen its image to outside investors and aggressively market some of those strengths," noted Zakaria. "It has a highly skilled, talented, English-speaking work force and a sound legal system compared with neighboring countries. These are very important factors. So while India has made great strides, there are still some issues that, if positioned properly and focused on, can take it to the next level. Everyone can work on this, including government officials and Indians overseas."

Change to survive One financial services success story is ICICI Bank, the largest private sector bank in India. Lalita Gupte, the bank's joint managing director, described the bank's leap of faith in changing from a development-centered institution to a diversified universal bank six years ago.

"We knew that if we continued being a single-product company, we'd die," Gupte said. "So we moved away from project financing and became more customer-credit oriented. We knew the future was in retail. We learned to be customer-centric, and to get out of our offices to find out their needs. We are today one of the top-recognized retail financial brands."

The change was not easy, but it was worth it, she said. "Retail is the growth engine, and it's a huge market. We were passionate about it. We went to car manufacturers and begged them to let us provide retail finance to them. The average age of a person buying a house has come down to 31. There are hardly any defaults on home loans. We're using ATMs as customer acquisition points. Within a month of setting up the ATMs they started breaking even. Instead of individuals withdrawing money once a month, they started withdrawing money several times."

The lessons learned? "You must have sufficient capital. Think of governance, investor relations, compliance, risk. Communicate with your investors." Gupte noted that it was always necessary to be continually aiming higher. "There's tremendous competition from the likes of HSBC, Citigroup, etc. It's a huge challenge. But there's also tremendous potential."

Mukesh Ambani, chairman and managing director of Reliance Industries, India's largest private-sector company, wrapped up the conference proceedings with a blueprint for better relations between India and the United States, especially in light of recent terrorist acts and the looming war with Iraq.

"Uncertainty shouldn't impede growth," Ambani said. "I believe India and the U.S. can navigate uncertainties. Nonlinear dynamics are necessary in Indo-U.S. relations. We only need the insight to discern them.

"India has already built a strong brand; incremental efforts such as call-center outsourcing represent the great potential that exists. Every activity in the connected world can be powered by Indian intellect," he said. "The U.S. leads the world in technology and has a commitment to growth. These assets can be leveraged."

Ambani noted that several sectors were prime candidates for more collaboration between the two nations. "India has major competitive advantages which it can use in several sectors, such as energy, information/communications, and life sciences. One should measure the depth of the relationship by India's contribution to reduce costs for the U.S. and America's contribution to increase technology in India," he said.

He urged the two countries to create a free-trade area in the knowledge space to facilitate the exchange of intellectual capital and highly skilled workers. If that happened, said Ambani, "much of the uncertainty that dogs U.S.-India relations would be history."

 
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