"Why me? I have done everything right, haven't I? A 35-year-old business can only get better at what it is doing. And while my competitors have been busy diversifying into unrelated areas, I have consciously stuck to my knitting: synthetic yarn. And that was the management gurus' prescription for success. But my rivals are prospering--and I am sinking. Core competence, competitive advantage: they seem to be so convincing. But they have yielded nothing." Those were the unpleasant thoughts plaguing Raj Bahadur Singh, the 55-year- old CEO of the Rs 353-crore Bharat Synthetics, even as he was reading a letter from his creditors, holding him responsible for the mess that Bharat Synthetics had got into. As his childhood friend, and management consultant, Abhinav Paul, explained to Singh, Bharat Synthetics was stuck in the past. For a business that was becoming global, scale was critical; so was vertical scope. And Bharat Synthetics had neither. Crompton Greaves' Ranjan Dasgupta, Zenith Computers' Raj K. Saraf, and GSL's G. Balakrishnan probe Bharat Synthetics's problems, and offer Singh a way out. A BT Case Study.

Raj Bahadur Singh, the 55-year-old CEO of the Rs 353-crore Bharat Synthetics, was taken aback at the tone of the letter he had just received from his creditors. Expressing concern at the lack of seriousness in initiating a turnaround strategy, and the inordinate delays in the repayment of loans, it said that Singh should now make way for a new CEO. "In the considered view of the consortium of lenders," it said, "only a professional manager can steer Bharat Synthetics towards growth." The news was worrisome. Clearly, the letter was a vote of no confidence in Singh's ability to lead a 35-year-old company in a highly-competitive marketplace.

"Damn liberalisation!" swore Singh. "Why did it have to rock my cosy world?" The economy had opened up all right, but, to his dismay, it had left Bharat Synthetics in limbo. Or had it? "Perhaps I did not read the signals right," he said to himself. After all, economic liberalisation had also created a world of opportunities that many entrepreneurs had grabbed quickly. He wondered if he had done anything wrong by refraining from diversification. Recalling the time, only four years ago, when Bharat Synthetics was perceived as a good investment opportunity, Singh was troubled at the way the tide had changed.

Later, at a luncheon meeting with Abhinav Paul, 54, executive director of the management consultancy firm, Quotient, Singh ruminated. "It does not make any sense," he told Paul, who was a childhood friend. "I have been practising for years all that management consultants have been preaching. Core competence. No unrelated diversification. I was doing well without these fancy buzzwords. I have stuck to man-made fibres throughout my career. Why, then, am I in this mess? And look at my competitors. They did everything that went against present business wisdom. They diversified into unrelated areas--one of them even set up a cement plant--without giving a damn about core competence. Another ventured into financial services and hoteliering. Still, they seem to prosper."

"Interesting," said Paul. "You know, although we have never discussed business, I have been tracking Bharat Synthetics' progress. Its predicament is typical of what has been happening to many commodity businesses since the economy opened up. Costs, you must understand, are driven by two factors: economies of scale and technology. Bharat Synthetics' products are out-priced and no longer competitive. I am aware that after record profits of Rs 34 crore in 1994-95, Bharat Synthetics today has accumulated losses of Rs 27 crore, and is unable to service its total debt of Rs 60 crore. You have a big crisis on hand. But we could find a way out of the mess. Why did you think of man-made fibres in the first place? Did you have any expertise?"

"We took the plunge into rayon filament yarn simply because we had a licence to make the product," said Singh. "In those days, if you remember, the choice of business was determined by official approvals--not market needs. You needed a licence to be competitive. Of course, being a cellulose derivative, rayon was a perfect substitute for cotton. So, its manufacture made good business sense. It was also a sellers' market. We could sell everything we produced. So, we set up a plant in 1963 at Surat, to make rayon yarn. Profits posed no problem, since pricing was done on a cost-plus basis.

"I was also keen on improving the quality of our products. So, in 1966, we collaborated with a Japanese company. We also began trading in finer deniers of rayon filament yarn, which are used in the manufacture of chiffon and georgette. A decade later, we commissioned a nylon filament yarn plant in collaboration with an Italian company. Simultaneously, we went into the manufacture of polyester filament yarn (PFY). And, in 1984, we started making nylon cord--which is consumed by the tyre industry--in collaboration with a Japanese firm. Today, we have four product categories: rayon yarn, which has a capacity of 4,500 tonnes per annum (tpa); nylon yarn (2,500 tpa); nylon cord (4,000 tpa); and PFY (15,000 tpa). And we have been operating at full capacity for years."

"Frankly, those capacities look minuscule," said Paul, "in relation to global scales of 100,000-plus tpa. And India is gradually becoming a global market. In fact, your are incurring losses despite optimum capacity utilisation. This is a clear indication of poor economies of scale. Was there any synergy among the four products?" "No," replied Singh. "It was the availability of a licence that influenced the choice of products. Each product-line is characterised by its own value chain. Except rayon, all others are derived from naphtha. So, a common feedstock was the only link between the products. Which meant that synergy lay in backward integration up to the feedstock."

"You mentioned poor economies of scale," continued Singh. "That, precisely, is the root of our problems. The government did not permit large capacities when we started because of apprehensions of creating monopolies. Capacities and marketshares were fragmented across small players. There are 30 players in the industry today. Scale did not matter for decades because we had large tariff barriers. The import duty on PFY, for instance, was 150 per cent. But with liberalisation, the duty has fallen to 32 per cent today. I don't see any reason why a customer should buy from Bharat Synthetics."

"But why didn't you augment capacity even after the licence-permit era ended?" asked Paul. "After all, most of your competitors have gone in for capacities over 50,000 tpa. For instance, Vimoline Industries has not only set up a 200,000-tpa capacity, it has also integrated backwards, right up to the primary feedstock."

"A valid point," conceded Singh. "You know, Bharat Synthetics was doing well till the mid-1990s, with operating margins of upto 40 per cent. We were declaring dividends of between 20 and 25 per cent for years, and Bharat Synthetics was the darling of the bourses for a decade. We paid our 3,500 employees well, and a job with Bharat Synthetics carried a premium. Our credibility with bankers was high. We rode the textile boom all through the 1980s. We thought the good times would last. We were in no mood to see the flipside."

"The classic trap of success," said Paul.

"On hindsight, yes," said Singh. "It was only in 1995--when profits began to decline--that we thought of expanding polyester capacity. Paradoxically, it triggered off a spiral from which we have not recovered as yet. Since the primary market was languishing, we decided on a rights issue of Rs 70 crore in mid-1995 to fund capacity expansion in PFY, and backward integration into polyester chips. But the rights issue flopped. All major shareholders, including our collaborators, renounced their entitlements. The trouble was that we had already taken a bridge loan of Rs 40 crore from financial institutions. As the original promoter, I was forced to subscribe to more than 80 per cent of the issue, increasing my stake from 12 to 34 per cent. Unfortunately, the proceeds of the issue were frozen following a court order. Unsure of getting their money back, the institutions had taken the matter to court. Sooner than we realised, we got into working capital problems. And while servicing the debt, our business priorities went haywire. One example: although we imported the plant and machinery, it could not be commissioned for two years for lack of funds."

"It is a typical trap that most companies get into," said Paul. "I have seen how companies get trapped when cash flows go haywire. The choice of the product is decided by the availability of working capital. You end up making something that costs less to produce but is not the most profitable product. You are compelled to source cheaper raw materials, affecting quality and revenues. Exigency becomes all. I don't know if you have also been facing that situation at Bharat Synthetics."

"That is just the paradox at Bharat Synthetics," said Singh. "But the fact is that, despite a range of businesses, we're a small player in each of them. And none of these businesses is sustainable in the long run because of scale and technology. Take nylon tyre cord. It does not have a future because most tyre manufactures are now switching to radials that do not use nylon cord. As far as polyester is concerned, there is a glut in India. And our scale is not large enough to warrant a full-fledged business unit. Nylon is threatened by a substitute: polypropylene fibre yarn. And although rayon is the only substitute for cotton, the rate of growth in demand has been a measly 4 per cent per annum. Unfortunately, there are simply no buyers around."

"The threat is obvious: technology is changing the rules of the game. Without large scale economies, you are extremely vulnerable. Your immediate priority is to prevent bleeding. Do you have an action plan?" asked Paul. "On the operations front, yes," replied Singh. "It centres around diversifying the client base and enlarging the end uses of our products. We have developed--and successfully test-marketed--several types of industrial products. Flame-retardant polyester, in particular, has a big demand. Bharat Synthetics has also developed adhesive-activated polyester industrial yarn, which is used in rubberised goods. We are also making fancy yarn by combining various types of filament yarns. All these products have improved our cash-flow substantially.

"To cut costs, we are recycling solid waste from the nylon tyre-cord and the polyester plants to produce chips and industrial yarn. But none of these initiatives can solve the fundamental problem. The Return On Capital Employed (ROCE) in our businesses is a measly 3 per cent. There are two redeeming features, though. We have fixed assets worth Rs 130 crore. And we have a locational advantage. Surat has one of the largest concentration of powerlooms, and one of the largest segments of synthetic yarn users. We are close to the customer."

"Close to the customer," repeated Paul. "That is interesting. How about the long term?" "Well, there are several options," said Singh. "In order to generate some quick resources, we will be selling off some unproductive assets like our corporate office in Mumbai. We are also negotiating with some firms for the sale of some of our existing businesses. In fact, that is what the consortium of lenders has proposed. Of course, once we clear our debt, newer options will open up. One option: forward integration, from polyester into textiles and finished products. Another: a joint venture with our technology partner to produce and market polyester yarn. We are also open to the idea of entering into non-textile-related businesses like chemicals and engineering. Bharat Synthetics is also considering a proposal to become a contract manufacturer for a larger player like Vimoline, which is already operating at full capacity."

"It is noteworthy that the ROCE is less than the average cost of fresh capital," continued Singh. "So, we might be better off selling the business and investing in risk-free financial instruments than in remaining in a business which does not have inherent long-term strengths."

"You spoke of Bharat Synthetics being close to the customer," said Paul. "There could be a clue there. You also spoke earlier about how you stuck to what you believed was your core competence. Tell me, what do you understand by core competence?" "Core competence," said Singh, "is a process by which you have an edge over the competitor, and which you do well, along with the customer, to create superior value. Bharat Synthetics' strength is product quality. And customer loyalty. Most powerlooms in Surat preferred to deal with us than with our competitors. Liberalisation changed those equations. We are no longer cost competitive."

"Frankly," said Paul, "I don't think you have a clear understanding of the concept of core competence. India is acknowledged to be one of the few countries in the world possessing a natural advantage in processing cotton and cellulose derivatives. That was a start-up advantage. But did you build on it? Did you make any attempt to identify the skills that could set you apart from competition? You accessed newer technologies, but did you leverage them fully? Did you strengthen your locational advantages? Did you ever find out where the Indian synthetics market was heading? You have been in the synthetics business for 35 years. How could you not anticipate its future? If you had done that exercise, you would not be in this situation today."

Is there hope for Bharat Synthetics? Are its problems the result of circumstances alone? Or is it all its own doing? Do its business portfolio and product range need a fresh look? How can Bharat Synthetics improve its cash-flow to strengthen its grip on business? Should the company move out of its core business? Is unrelated diversification an answer to its predicament? Or, can it afford to bank on forward integration into fabrics and ready-mades to reverse its fortunes?

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