Corporate: New Economy - Sowing Seeds of a Digital Harvest

NEW ECONOMY
Sowing Seeds of a Digital Harvest

Tempted by the low entry barrier and the high valuation prospects, Indian industrial houses are finding the dot.com lure hard to resist.

By Suveen K. Sinha

There's nothing particularly unique about www.indiawomanpower.com. As the name suggests it is another horizontal portal for women that offers tips on everything from coping with an asthmatic child to building a successful career in market research. The only thing that stands out about IWP is its parentage: it is owned by capital goods and consumer appliance manufacturer Crompton Greaves.

Crompton Greaves isn't the only old economy company with digital dreams. Some of licence-raj biggies have them, and their dreams extend from the logical (extensions of their business) to the fantastic (need we explain this?). Thus, JK Industries is looking to strengthen its tyre business by facilitating B2B (with dealers) and b2c (with customers) transactions. The Calcutta-based Apeejay Surrendra Group is crafting an e-business strategy that is built around its existing strengths in tea and financial services.

Another Calcutta-based group, RPG, is building 10 vertical portals (vortals), again, around its existing businesses like power, music, and financial services. And Shreevardhan Goenka, who will one day head yet another Calcutta-based group (there must be something about the city), Duncan Goenka, is in the process of making an assault on the new economy from as many as five different platforms.

The rational-e

That these elephants are learning to dance isn't really surprising. Many of them-although, given the varied parentage of the companies venturing into software and Net businesses, it is difficult to generalise-operate in commodity businesses where the margins are low and scale is all that matters. And balance-sheets that aren't exactly in the pink of health prevent some of them from investing in much-needed capacity expansions or technologies.

New economy opportunities allied to the Net aren't capital intensive. It's easy for any company that wishes to enter these businesses at a cost that is relatively low, compared to setting up another manufacturing facility. The Apeejay Surrendra Group's entire investment in its tea portal www.teastall.com has been a mere Rs 70 lakh, chai-money for the six-business conglomerate. Says P.V. Narasimham, 58, Chairman and Managing Director, IFCI: ''It is easier for established firms, with cash flows, to diversify into some new economy initiative that needs low investment, as opposed to trying to expand capacities in their existing businesses.''

The market too values new economy scrips far higher than it does the traditional ones. In March this year, 50 per cent of the total market capitalisation of the Bombay Stock Exchange's (BSE) 500 Index was accounted for by new economy scrips. Concedes Vinay Rai, 50, Chairman, Group Usha: ''Information Technology India Ltd (ITIL) is certainly the group flagship by the sheer strength of its market-capitalisation.'' This, when the 15-year-old ITIL has got its act together only in the last two years. Agrees Sanjay Jain, 40, Partner, Andersen Consulting: ''The biggest driver is valuation. And a new economy initiative does make a company appear forward-looking.''

It isn't just the prospect of low entry barriers and higher valuations that attracts the older behemoths to new economy opportunities: it's what they can achieve with these higher valuations. Group Usha, for instance, can raise money on the strength of the ITIL stock (Rs 550 on July 10, 2000, at the BSE, giving the company a market capitalisation of Rs 6,472 crore). And invest this money elsewhere. Says Narasimham: ''A company that diversifies successfully into a new economy business will see its valuations zoom. This valuation can be leveraged to acquire real assets.'' The key word there, though, is successfully.

It is also very difficult for a company or group whose businesses aren't performing to turn a blind eye to the many diversification opportunities presented by the new economy. Avers P.K. Choudhury, 53, Managing Director, ICRA: ''If the new generation of a business family proposes a new economy foray that doesn't need much capital, the patriarch may find the temptation difficult to resist, especially if the existing businesses (of the group) aren't doing too well.''

Will the strategy work?

The answer to that question is fairly straightforward. New economy diversifications will fail in the case of companies venturing into totally unrelated areas, merely chasing the flavour of the month. Thus, it may be logical for the RPG Group with its treasure trove of music (through the Gramophone Company of India) to vend music on-line. But, it certainly isn't for Crompton Greaves to venture into the business of managing women's portals.

As for the LNJ Bhilwara Group's proposed diversification into software development, and the Duncan Goenka Group's efforts to diversify into ERP and supply-chain management; e-Commerce; healthcare software; Euro-conversion projects; and embedded software and systems, they could well work. However, only if these groups focus on building these businesses from the ground up. Says Ashish Guha, 42, COO, Lazard India: ''A clear focus on technology and products, a grasping of the market requirements, and the ability to provide the right solutions will be the key.''

That these firms never managed to set the track on fire in their old economy businesses, though, is cause for concern. As is the fact that most of these groups are targeting the front-end of new economy businesses, where investment requirements are low, as opposed to the back-end, which is capital-intensive, but where business opportunities exist. ''e-Commerce lives and dies by the supply and distribution chains,'' says Martin Keogh, 39, Business Development Director, Alta Vista. For, while low-entry barriers make for an easy diversification, the key to success in new economy businesses remains the same as that in old economy ones: a sustainable business model.

-Additional reporting by Rakhi Mazumdar

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