October 26,1998
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CORPORATES What Recession! A number of Indian companies are trying to buck the economic downtrend through ingenious cost-cutting and by exploring new avenues of growth. By V Shankar Aiyar It is a matter of perception. It could be an onrushing train. Or it could be light at the end of the tunnel. To its credit, India Inc is out betting on optimism. As the country gets engulfed by a prolonged recession, captains of industry are busy re-engineering the parameters from costing to revenue realisation which factor to prop up that all important graph: the bottomline.
Almost every day sees companies reinventing themselves. The Aditya Birla Group is consolidating its cement business, RPG is getting out of textile machinery, Videocon has acquired the Philips plant in West Bengal, Kinetic is dumping its small car project, Tisco plans to prune its staff by 3,000, Ashok Leyland is cutting down on work days, Bajaj Auto is pushing in new motorcycles, Indian Airlines is removing yoghurt from its flight menu ... the saga continues. Re-engineering, in fact, has become so much of an obsession with Indian business leaders that it is taking up much of their waking hours. Last Monday, Anand Mahindra, managing director of Mahindra and Mahindra, called the chief financial officers (CFOs) of all his divisions at the Kandivili plant at 6 p.m. for what he calls the "Midnight Meeting". The objective: aim at a target to achieve new standards of efficiency in their tractor, farm products and automobile divisions. Each CFO came armed with information on costs and revenue. The condition: the meeting will continue till such time that the CFOs achieve some success.
The quest to push bottomlines up is now a full-time obsession with corporates even amidst good news. The day after Reliance Industries Limited announced its spectacular second quarter results, the Ambani brothers were busy at what they call "creating shareholder value". Managing Director Anil Ambani was at the Unit Trust of India making a presentation on future plans. At that very moment brother Mukesh was busy at his fourth floor office in Maker IV discussing the plans and projections of the third quarter on video conference with his executives at the plant in Hazira. Hit by the gale of global competition, chief executives and pashas of India Inc are busy finding ways and methods to improve the two factors that determine success in the business world: costs and revenue even if the emphasis seems to be on costs. M.B. Athreya, management adviser, feels that while "better managed companies had become aware and active in cost management, especially after the liberalisation of 1991, the laggards have been forced to act now". Every management tool is on trial and consultants are in business. And not without reason. Corporate India is going through the worst. What's more, Manmohan Singh's observation that "things get worse before they get better" has provided little comfort.
Says Arvind Pande, senior associate at Booz Allen Hamilton: "The twin- pronged approach is simply improving internal productivity and searching for new avenues of growth." What this means is that companies across the board are looking at ways and means of cutting costs and finding more customers for your product to emerge globally competitive. Finding new customers in a sluggish economy is a long-term plan. The immediate focus thus is on cost-cutting. And that is not limited to slashing the labour force which many corporates have done over the past 18 months. Now the quest is decimal management for a better financial picture. One corporate has done away with supplying pens and clips at its offices. Some have even cut on the number of tubelights in their work place. Significantly, corporates are even talking about it. Says
Mukesh Gupta, vice-chairman of the Lloyds Group, a badly hit steel manufacturer: "We
have taken tough decisions to cope with the recessionary scenario." Gupta made a list
of over 50 heads of expenditure that needed to be attended to. These included bringing
down wages and administrative costs from Rs 54 crore to Rs 30 crore, slashing office space
from 65,000 sq ft to 22,000 sq ft, and saving Rs 2.5 crore in communication costs by using
e-mail and v-sat facilities. An employee-led idea, Operation Pragati, has brought about
savings of Rs 65 lakh in power bills. Says Gupta: "Our operating costs have come
down, bringing down our losses."
Whether they are big or small, corporates are now realising that cost management is the first step to competitiveness. And that employee involvement is vital. Even at Maruti Udyog Limited (MUL), where cost management is really online, there has been a special thrust in this area over the past two years. Employees are given incentives to help out. An employee suggestion scheme and a quality circle concept helped MUL save Rs 78.5 crore in 1997-98. This year the company has set a target of Rs 85 crore. RPG Group Vice-Chairman Harsh Goenka is wrestling with problems that need slashing of a different kind. The group employs over 65,000 people and is into everything from tea gardens to tyres. Goenka has been working on a restructuring plan for over two years now. The aim is simple: to get out of businesses where RPG is not a leader and concentrate on core areas. "Earlier it was macho to say I am going to set up seven or 10 projects. The whole mantra has changed to leadership and value building." So, the group has sold out or divested in 12 units and already collected some Rs 400 crore. This will be invested in power, tyres, retail and agri business, besides the telecom sector. Almost every corporate is benchmarking costs: from freight to travel and communication to inputs with global players. The strategic planning cell of the RPG Group monitors the monthly meetings of group executives and helps improve internal productivity. For example, it found that a Korean competitor used 40 per cent less of tangential oil compared to RPG's Carbon Black. They figured out how and saved Rs 3.5 crore per year. In its plantations, it benchmarked productivity with the best called Suryanillai and saved Rs 30 lakh in rubber tapping costs. Cost curtailment is almost a religion. Says Vinod Mittal, managing director of the Ispat Group: "We are bulk users of services like railways. So we are negotiating for better rates." And they are not stopping at freight. Ispat, along with other steel manufacturers, is petitioning MMTC for rates that are comparable with landed costs of imported ore. Pruning costs is not the endgame though. Mahindra puts it
succinctly: "The idea is to use this to create a mindset to get people to think
laterally about costs and you may get a sixer." Rajeev Chandrashekar, director of the
BPL Group, agrees. "It is not enough to smartsize. More important is to have
imagination, vision, access to technology and the will to configure yourself to be truly
globally competitive." So when BPL sensed an opportunity to improve input costs, it
set up purchase shops in Singapore and Hong Kong to buy cheap semi-conductors at the
"fire sales" in recession-hit Malaysia. Result: the savings in costs help BPL
fight competitors on the home turf with better products and pricing. Mittal believes technology is vital. "It is important to use information both on the shop floor and off it to optimise customer satisfaction," he says. Indeed, the use of information systems is spreading with most companies installing intranets, V-SATs and other communication systems. And it pays. A few weeks back -- soon after the cyclone in Gujarat -- Ispat got a query from Reliance for a certain type of steel for its refinery. Mittal tapped the query on his terminal, worked with his CEO Vivek Sett and executives to deliver the steel that Reliance wanted. In record time. The customer could be Reliance or the man on the street putting his money on two wheels. Two-wheeler badshah Rahul Bajaj believes that "quality and service is the key to growth. We are placing emphasis on 100 per cent error free quality of production and better after-sales service." Service is not restricted to the company's 1,400 authorised stations. Bajaj Auto is sponsoring a programme on Zee TV that trains mechanics across the country. This way it plans to take after-sales service beyond the dealerships and service stations. Interestingly, planning -- till now in the shadows -- has assumed greater significance. Group Chairman Subodh Bhargava admits Eicher has gained much by paying greater attention to planning. "We plan with different possible scenarios in mind and review it monthly. It helps in retaining profitability. Take trucks for instance. Though volumes dropped from 6,500 to 5,200 last year, we managed to avoid touching red ink." Although it seems like India Inc has come a long way, a key factor is still missing: anticipation. Says Uday Kotak, vice-chairman of Kotak Mahindra Finance Ltd (KMFL): "When we cut down on the number of tea cups, they joked. But we saw trouble early enough to avoid the pitfalls." KMFL focussed on wholesale investment banking, retail distribution and consumer finance. It cut costs and flab, created internal synergy and infused equity through tie-ups with Goldman Sachs and Ford to raise its net worth from Rs 200 crore to Rs 700 crore. The benefit: KMFL has survived the storm that has ravaged the financial sector and is primed to capitalise when turnaround happens. "The key," Kotak emphasises, "is anticipation." Interestingly, some corporates have anticipated. BPL's effort to centralise TV production in one plant and achieve a capacity of 1.5 million sets or Videocon's acquisition of the Philips plant in West Bengal are some examples. It is anticipation finally that separates the winners from the others. Consider Reliance's success. When petrochemical prices are at historic lows, it has turned in astounding results. Mukesh Ambani, vice-chairman, reveals the secret: "We benchmarked for the worst case scenarios and inculcated responsibility for earning a minimum return of 25 per cent on capital employed and creating shareholder value at the business units level." In simple terms, Reliance encouraged ownership thinking. And anticipated. It had dollar denominated costs as early as 1991, it sweated out its plants for optimum output at minimal costs, pushed new product categories like pet, cut poy prices and created an export market much ahead of time and improved cash flows through well-timed borrowings. This year, Reliance has -- through cost-cutting and better revenue realisation -- targeted an improved cash flow of over Rs 1,000 crore. Its net profits for 1998-99 are expected to cross Rs 1,850 crore. "The key," adds Ambani, "is pegging all efforts to generate shareholder value." Obviously, Indian corporates, so far insular to "shareholder value", will have to chant the globally-recognised mantra. Or else the light at the end of the tunnel could well be an oncoming train. |
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