Posted by: John Elliott | July 3, 2007

Booming Mumbai floods, lacking ‘political will’

“Political will” is a curious phrase. It is most often deployed in India – and elsewhere – by foreign countries (frequently America but sometimes Europe), and by newspaper columnists, to berate a government for not introducing policies that they favor.

So it was no surprise to find Richard Lambert, director general of the Confederation of British Industry (CBI) – and my old boss at the Financial Times where he was editor in the 1990s – using those words a short time ago to call for India’s financial market reforms to be speeded up. “The only question is whether India has the political will to drive through the changes needed to turn Mumbai into one of the world’s great financial centers,” he wrote in an FT column.

Lambert’s words have come back to me over the past few days because Mumbai’s business is booming – the key Bombay Stock Exchange (BSES)  Sensex hit an all-time high of over 14,600 on Monday and banks are reporting record business. But the mood over the weekend was dramatically different. “Mumbai Sinks, Again” thundered Sunday’s Times of India on top of a picture of people standing on the roofs of cars stranded deep in water, while others paddled rubber dinghies.

Five people were killed in the city’s floods on Saturday. There have of course been floods across southern India and elsewhere in the region during the past week, with numerous deaths – over 40 people were killed over the weekend in the state of Maharashtra where Mumbai is the capital.

But the repeated inability of Mumbai’s dilapidated infrastructure to cope with heavy monsoons is not just the result of changing weather patterns: it is also the result of state governments that have not had the political will to build a city that works.

Mumbai is in a perfect location geographically to become one of Asia’s leading international financial centers, but to see how far it has to travel, first compare its dismal airport (where a boundary wall was washed away yesterday for the second time in two years), its clogged highways, slow port facilities, unreliable power supplies and badly organized property developments, with the efficiency of Hong Kong – which marked the 10th anniversary of its return to Chinese sovereignty over the weekend.

Mumbai needs to transform its infrastructure so that it begins to look and function like the sort of modern city that will attract people who work in international financial centers. In parallel, the central government should begin reforms that were recommended earlier this year by a grandly-titled “High-Powered Committee on Making Mumbai an International Centre,” headed by Percy Mistry, a former World Bank economist and Hong Kong banker who now runs a consultancy in the UK.

The report’s recommendations included the creation of an overall financial regulator to replace a growing number of independent authorities, plus partial privatization of public sector banks and insurance companies, the formation of active bond and derivative markets and the introduction of full capital account convertibility.

Mistry mysteriously resigned from his High Powered Committee just before the report was published, apparently because he disagreed with public sector bankers on the committee who were insisting that the report’s criticisms of their operations should be watered down. And that brings us to the flip side of “political will” – “political compulsions,” which are cited by politicians to explain why they cannot carry out reforms.

Sadly, political compulsions usually defeat political will, especially in the sort of coalition governments that India will have for years to come because potentially reformist parties are pulled back by the compulsions of their partners. Some of those partners, like the Left in the current coalition, are ideologically opposed to many reforms. Other parties are encouraged to block change by vested interests – in this case the huge public sector financial establishment of banks and insurance companies that watered down Mistry’s report and which, backed by their powerful trade unions, are slowing down its reforms.

So while the political will desired by my old FT boss may be lurking somewhere in the minds of the government’s reformers, it is constantly defeated by political compulsions generated by opponents. Doing something about Mumbai’s floods might even be easier – with luck before the next monsoon.

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Posted by: John Elliott | June 29, 2007

Politics in India is big business !

It’s one of those weeks in India when stories keep tumbling out that show how life is really lived by many of those who run the country – and how business is politics, and politics is business. Judging by comments that have been posted on my blogs since I began Riding the Elephant, few people will be surprised, but it’s worth spotlighting the coincidence of three stories.

First, a banking row. R.P.Singh, the chairman and managing director of government-owned Punjab & Sind Bank, has publicly asked for Congress Party-nominated directors to be removed from the bank’s board of directors. He alleges they have been resisting arrangements for recovery of bad loans from customers close to them.

“They are in league with defaulters of the bank and they want settlements of debt to be done on very paltry terms,” he told me yesterday. He said that the bank had been reducing its high levels of non-performing assets, but some defaulters had been “upset with the recovery process” and had approached the bank through the nominated directors for concessionary settlements. The bank had refused special arrangements and this had led the nominated directors to launch complaints against Mr Singh and his colleagues in a tv program on June 19, alleging they were flouting rules – which Mr Singh denies.

Such political pressure on public sector banks is nothing new in India, nor in some other Asian countries. The Economic Times, a leading business daily, commented yesterday morning that the issue “brings to the fore the tendency of the government of the day to pack PSU (public sector company) boards with ill-qualified political nominees”, adding: “The fact is ministers have long regarded PSUs (public sector companies) under their watch as personal fiefdoms”. But it is rare for a bank chairman to come out in the open about the sort of pressures he and his executives face –and to receive support from the Ministry of Finance, which Mr Singh says has happened in this case.

Next, India’s new presidential candidate. After a long period of indecision, the Congress Party, which heads the current coalition, government, selected Pratibha Patil, the low profile 72-year old governor of the state of Rajasthan, to be its candidate in indirect presidential elections. As well as being a regional politician, she used to practice law and has a reputation for socially valuable works. She seems set to win and become India’s first woman president because Congress and its supporting parties have the votes required, and she has the personal backing of Sonia Gandhi, the Congress leader.

But that initial good news has been followed by other reports about her past that include allegations that a women’s co-operative bank she set up in her Maharashtra home town of Jalgaon was closed in 2003 by the Reserve Bank of India because of a series of irregularities, including Patil’s relatives receiving favorable loans. There have also been reports of irregularities at a sugar mill that she promoted and other stories.

The Congress Party has said that Patil will respond to the charges after the June 30 closing date for presidential nominations. Meanwhile, prime minister Manmohan Singh has been reported saying that she had “done nothing wrong”, and that many Maharashtra sugar mills had failed for environmental reasons. A party spokesman said the loan allegations were “just stories”.

Finally, a very rich chief minister. Mayawati, the leader of the low caste Bahujan Samaj Party was last month elected to power for the fourth time as chief minister of Uttar Pradesh, India’s largest state. This week she has declared assets totaling 52 cores of rupees – that’s $12.68 million – five times the amount she declared in 2004 elections. Included is property worth nearly $10 million, mostly in Delhi, and jewelry worth $122,000.

This is a huge amount for someone who began life as the daughter of a poor government clerk. Mayawati has said that the assets were “accumulated through donations and gifts from party workers across the country” after she had been “framed” in 2003 with legal cases that alleged she possessed undue wealth and that she was involved in corruption on a Taj Corridor tourism infrastructure project linked to the famous Taj Mahal mausoleum in Agra.

She denied the charges at the time and the cases have yet to be heard – soon after Mayawati regained the chief minister’s job, the UP governor refused permission for police authorities to proceed with the Taj Corridor case. This week Mayawati denied she had done anything wrong and said the donations had been made to her personally as well as the party. It must be nice to have such generous supporters!

The $12.68 million became public because Mayawati has had to declare her wealth in nomination papers for election to the UP state assembly. (She did not stand in the recent state assembly elections, so must now win a seat to remain chief minister).

She seems not to worry about such publicity. In 2003 she threw a mind-boggling 47th birthday party in a film-set type location with over 100,000 sweet cakes, 5,000 bouquets of flowers, and a massive 50kg birthday cake. What an interesting and rewarding life these politicos lead!

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Posted by: John Elliott | June 22, 2007

Family succession and bonding, Infosys style

“Choose partners you can grow old with” – Nandan Nilekani

Is Infosys, one of India’s top three IT giants, really a family company, controlled not by blood relations but by the bonding of five of its seven founders who still work there, own 16.5% of its stock, and are taking turns running the show?

The mischievous thought was put to me by an executive in another more obviously family-controlled IT major, because S. Gopalakrishnan, the COO, has taken over this afternoon as CEO from Nandan Nilekani, who has moved slightly upstairs as executive chairman alongside Narayana Murthy, the first CEO and now non-executive chairman and chief mentor.

That leaves two other founder-directors – S.D. Shibulal, who has stepped up today as COO, and K. Dinesh – waiting in the wings. Shibulal looks like a shoe-in when Gopalakrishnan (always known as Kris) decides to join the elders – though they are all much of an age, between 52 and 55, apart from Murthy who is 60. But no one, of course, is saying Shibulal is next in line, and all stress that the decisions are based on ability and potential.

“We have said many times we are a professionally managed company,” says Nilekani, adding that leadership at Infosys has been exercised, since it was founded in 1981 in Murthy’s Pune home, on the basis of “being first among equals.” Gopalakrishnan had been chosen “not on the basis of the job being passed to another founder but as the best person for the job”.

No-one quite believes that of course – Gopalakrishnan was the only candidate considered for the promotion when the Infosys board decided late last summer that it needed an executive chairman, and Nilekani said that he wanted to broaden his beat to focus on big client relationships, large-scale initiatives, and other client work.

A nominations committee of non-executive directors, headed by Claude Smadja, a former managing director of the World Economic Forum who runs an advisory firm, then took three months to confirm Gopalakrishnan’s appointment. Nilekani will now be a very executive chairman, so it remains to be seen how effectively Gopalakrishnan, who is a much lower profile character than either of his predecessors, emerges alongside him as the public face of Infosys.

In addition to being COO, Gopalakrishnan has been Infosys’s president and a joint managing director since 2006. Known for his technological strengths, he has been responsible for customer services, technology, investments and acquisitions, and heads the Infosys consulting activities.

On the broader blood relations issue Nilekani says that “family members of the founders can’t work here.” Murthy told me that neither his son nor daughter, now both in their 20s, will join the company.

That must be a relief, given the dynasty that is beginning to emerge at Wipro, one of India’s other top IT giants. Azim Premji, the 62-year old chairman, controls over 80% of the stock and his 30-year old son, Rishad, is joining at the end of this month from the London consultancy office of Bain & Co, to work initially on financial services.

Family-controlled companies have dominated India’s business scene for generations and, though some of the top names have changed over the years, they remain a major force, controlling more than 15 of the top 20 businesses (excluding banks and public sector corporations).

Many of these family groups become embroiled in serious rifts and splits, most recently Reliance Industries (the Ambani brothers) and the Bajaj scooter-to-sugar group.

But the close-knit team of people at the top of Infosys seem to share their roles in the $3 billion company with no such animosity, jealousies, or infighting – despite their varying stakes that range (curiously in the order of the succession so far) from Murthy’s family with 5%, to the Nilekanis with 3.46%, the Gopalakrishnans with 3.36%, Dineshs with 2.51% and Shibulals with 2.21%.

As he walked into the annual shareholders’ meeting this afternoon where the changeover was approved, I asked Nilekani (over the phone) how they all manage to get on so well – or were there fights that their personal public relations skills managed to bury.

“No,” he said laughing, “we all have the same values…. we are all from the same simple middle class backgrounds…. and we have enormous bonding.” His last line capped it all: “The important thing as an entrepreneur is to choose partners you can grow old with.”

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Posted by: John Elliott | June 20, 2007

Mukesh Ambani builds a monument to his wealth

Mukesh Ambani, chairman of Reliance Industries (RIL), one of India’s two largest business groups, has been wowing people with his drive and ability for many years, especially since his father died five years ago and he and his brother Anil split the family business empire in 2005. Now he has amazed his peers, competitors, and observers again, but this time less laudably, by building a gigantic 570-foot high home in one of the plush areas of Mumbai.

According to a recent article in the Mumbai Mirror, a local daily, the 570-foot tower will cost $500 million and comprise 27 floors with car parks and maintenance areas, entertainment spaces including a small theatre, health and exercise rooms with pools, guest rooms, gardens, helicopter pads – oh yes, and four floors of family accommodation for him, his wife, three children and his mother. It is rumored there will be a staff of 600 (or maybe just 400, say some!) and it will be called Antillia after a phantom Atlantic island.Mukesh's Tower

Even for the world’s 14th richest businessman, that is an appalling display of conspicuous consumption. And it is especially so when his estimated $20 billion of wealth makes him the richest businessman in a basically poor country, with people living in slums not far from the Antillia construction site.

The tower rises above Peddar Road April 2009

The tower rises above Peddar Road April 2009

Outrageous displays of wealth are of course nothing new here. Many of the old maharajahs who ruled much of the country before independence (some continue to live as if they still do) deserved ridicule for their sumptuous lifestyles in massive palaces, with hordes of servants, women, cars and elephants to care for their every need. ut business people have usually been more discreet, and their homes, while extravagant, have been relatively modest in scale.

When I first came to India in the 1980s, I was always told – and saw for myself – that the rich usually avoided public displays of wealth because they did not want to attract the attention of the tax authorities. That no longer seems to apply.

Lakshmi Mittal, Indian-born but with wealth acquired abroad as the world’s largest steelmaker, broke normal bounds in 2004 when he bought a vast and not very pretty $110 million pile in London’s exclusive Kensington Palace Gardens. In Delhi, he bought an old bungalow in the exclusive Aurangzeb Road and rebuilt it, though within the two-or-three story height required in that road.

Sunil Mittal (no relation), who runs India’s largest mobile telecom business, also kept within normal bounds when he built a house in the even more exclusive Amrita Shergil Marg, which is slightly bulkier and more stately than most of its neighbors, but not outrageously so. Others have built sumptuous homes on the outskirts of Delhi, as have families like Hinduja and Godrej on Mumbai’s Juhu beach.

But none of these is anywhere near as publicly extravagant as the Ambani tower. Bankers and business people are puzzled as to why he did it, because his public image is that of a hard-working and modest – though ruthlessly ambitious – company boss. Most are highly critical but will not speak on record – and a Reliance spokesman declined to comment. Some suggest it is part of his determination to outshine his younger brother Anil. It is also said, more practically, that land is so scarce in Mumbai that one has to build upwards rather than across a large plot – but that does not justify 27 floors for a family of six!

Whatever the reason, it puts into perspective a speech made by Manmohan Singh, the prime minister, on May 24. He attacked corruption and asked businessmen to discourage “vulgar displays of wealth.”

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Posted in Hinduja, India, Lakshmi Mittal, Manmohan Singh, Mukesh Ambani, Sunil Mittal | Tags: , , , , , , , , , , , , , , , , , , , ,

Posted by: John Elliott | June 14, 2007

India’s defense R&D lacks talent

There could probably be no more telling indictment of an organization than the fact that people are not willing to work for it, and it therefore lacks the talent needed to perform. That is partly what seems to have happened to the Defence Research and Development Organisation, India’s leading scientific defense body, which has gained a reputation over many years for failing on research and development and for being more focused on organizing its own perpetuity.

This morning’s Indian Express, a leading Indian daily, has a headline that makes the point – “More quit DRDO than join, applications fall by 70% in three years” with a sub-head “DRDO’s brainwave – hike salaries six-fold, need more benefits, perks, including sabbatical, royalty.”

Reporting information given to a government pay review body, the newspaper said that there were only 31,810 job applications last year compared with 110,224 in 2003, mainly because there were better career opportunities and professional challenges elsewhere. That is scarcely surprising. Entry level salaries are only $200-$325 a month – a fraction of the levels that are easily available in the private sector.

It is also symptomatic of the changes in attitudes that have swept through India, as economic reforms have dramatically boosted job and pay aspirations. No longer do university graduates seek safe lifetime job havens in the public sector, but rather go for instantly higher pay in private companies, often not bothering to study first for the PhD and other higher degrees that marked out top scientists and engineers in earlier generations.

But it is also the DRDO’s poor image that deters graduates, when India’s booming information technology industry offers high flying jobs and success stories in India and abroad. Headed for many years by Abdul Kalam, now India’s President, the DRDO has some 50 laboratories that are involved in projects ranging from combat vehicles and armaments to submarines and aircraft. But instead of being a center of excellence, it frequently fails in both technical and financial terms to meet the needs of the military which then buys abroad.

DRDO’s main successes have been surface-to-surface missiles called Agni and Prithvi, but it has failed to produce smaller missiles for the army and navy, which have been bought instead from Israel.

After more than 20 years of work, it has also failed (partly because of U.S. sanctions blocking component deliveries) to produce India’s planned light combat aircraft (LCA) that would replace Russian MiG21s. Other failures have included a main battle tank, called the Arjun, which is still undergoing trials after 30 years’ development – so Russian tanks are filling the gaps.

Defense production reforms that are now being introduced will enable private sector companies, both foreign and Indian, to link up with the DRDO on equal terms to develop and produce defense equipment. That might help revive the DRDO, though it seems more likely that firms will use their access to spot and hire the brightest talents, making the current situation worse.

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Posted by: John Elliott | June 10, 2007

Mallya challenges Gopinath’s low-price Deccan dreams

 

G.R. Gopinath, a former Indian army captain, has earned a place in India’s aviation history for founding cut-price Air Deccan, which since 2003 has introduced air travel to tens of thousands of railway passengers unable to afford full fares. But Deccan, which has grown into India’s second largest airline, has had heavy losses – as well as chaotic flight delays and cancellations – and it now looks as if Gopinath’s trailblazing will soon end.

The trigger for the change came on June 1 when Vijay Mallaya, who founded full-price Kingfisher Airlines in 2005 and is one of India’s most egocentric and charismatic businessmen, bought a 26% stake in Deccan for $137 million, defeating Anil Ambani of the Reliance-ADA Group, which had been negotiating a take-over.

Mallya now hopes to gain control by buying up to 20% more with an open stock market offer (in line with stock exchange rules). He then plans to start rationalizing the two airlines’ operations that together have a 30% market share and 71 aircraft, challenging Jet Airways, the much-admired market leader that has 60 planes.

That might shock Gopinath, who told me that Mallya’s arrival was as a “strategic investor” and was “not a take-over.” Mallya had said, “let me invest and you run the airline,” so Gopinath expected Deccan’s “existing values” to continue.

But when I asked Mallya during a telephone interview (he was in Miami) whether he’d be “in charge,” he laughed and replied: “With a majority stake that’s pretty inevitable isn’t it?” He repeated his known view that “the low cost model doesn’t work in India,” and added:

“There is no question of cut prices continuing in India – everyone wants to raise fares. Deccan is widely regarded as a market spoiler and that will stop!”

India’s domestic carriers have been plunged into a downward price spiral, driven initially by Gopinath’s passion to fly people who had never been in the air to destinations never before served by an airline.

There has also been a massive growth in capacity, which rose 50% last year. New airlines such as SpiceJet and Indigo have joined the no-frills league and others like Jet (which recently took over Air Sahara) and government-owned Indian (formerly Indian Airlines, now merging with Air India, an international carrier) have plunged into the cut-price war.

Kapil Kaul, regional CEO of the Centre for Asia Pacific Aviation, estimates annual losses at $500 million, based on an average deficit of around $15 for each of 33 million passengers carried last year. Deccan recently lost $50 million in just three months.

“Fares are half the levels of five years ago, while fuel is up three times and manpower costs have doubled,” says Ravi Nedungadi, president and chief financial officer of United Breweries Holdings (UB), a leading liquor and beer company that is Mallya’s main business. That is unsustainable and the general industry view is that prices should go up. Several airline operators talk about at least covering the $15 losses, though few think bigger increases are possible quickly. “We hope for a greater rationality of pricing,” says Saroj Datta, an executive director of Jet.

Gopinath agrees that “whatever we need to do to be in profit, we will do it” but adds: “we will still have a low fare policy.” He and Mallya hope to make savings of $75 million in the coming year by rationalizing routes and other operations – both their airlines fly the same Airbus and smaller aircraft. They will also delay some aircraft purchases, though Mallya plans to grab headlines at the Paris Air Show later this month with a big Airbus order.

Mallya will also want to make more Deccan changes, ending uneconomic rock-bottom fares aimed at attracting poorer passengers, and raising fares on less popular routes. That is where a clash with Gopinath could start. There is already speculation about how long the two men can work together. Mallya is famed for his domineering though informal management style and likes the limelight.

Gopinath also likes to be in the news, though in a more low-key fashion. Gopinath even said recently (correctly, most people thought): “We are from different planets – he is from Venus, I am from Mars.”

Mallya’s 26% stake in Deccan Aviation, which owns Air Deccan, has been bought by UB, which last month acquired Scotland’s Whyte & Mackay whisky company for $595 million. Executed through an issue of new shares, the 26% makes him the largest single shareholder, but Gopinath says he can call on about 35% with the support of two co-promoters and friends. Two venture capital firms have about 22%, and the rest is public. So Mallya needs to increase his stake by about at least 10% through the open offer or later open market purchases.

Nedungadi says UB has a “muscular presence” on the board of its group companies “to give direction and energize synergies.” A new professional CEO is to be appointed at Deccan, to replace one who left recently. He will report to the board headed by Gopinath as executive chairman and Mallya as deputy chairman, but not to Gopinath directly.

The industry betting on a full merger of the two airlines within a couple of years and Mallya is already talking publicly about the “Kingfisher-Air Deccan group” – not Gopinath’s dream at all!

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Posted by: John Elliott | June 7, 2007

Doors to open for India’s defense industry jewels

The Indian government will soon make defense production history by naming a small number of leading Indian private sector companies as raksha udyog ratnas – literally defense industry jewels – that will be allowed to compete for big research, development and production projects on equal terms with the public sector.

A Ministry of Defence (MoD) committee headed by Prabir Sengupta, a former secretary for defense production, yesterday (June 6) presented its report on the subject to A.K. Antony, the minister of defense. The names will be published soon, when they have been cleared by a co-ordination committee. They will include parts of the Tata group, Larsen & Toubro (L&T), Godrej, and Mahindra & Mahindra, plus a handful of others. A few are already involved in very limited sub-assembly work ranging from parts for rockets to a nuclear submarine hull.

The ratnas will be allowed to design and manufacture major weapons platforms and systems including equipment developed by the DRDO, the country’s leading but unproductive research establishment which has previously worked with the public sector. They will also be allowed to manufacture foreign defense systems and to carry out government-funded research and development. This is a big step forward, though it remains to be seen how quickly and effectively India’s massive and powerful public sector defense establishment mobilizes to obstruct progress and protect its jobs and booty.

The country has a huge defense budget, including an allocation of $10.5 billion this year for capital expenditure on military equipment – $4 billion for the air force, $2.8 billion for the army and $2.5 billion for the navy. About 70% of the budget is spent abroad because the Indian public sector cannot deliver in terms of quality or speed on either research or production. And only about 30% of the orders placed in India – or 9% of the total – goes to the private sector. Indian companies have consequently been wary of undertaking large-scale investment programs because they have been uncertain about what the MoD would actually let them do.

Only two primary contracts have been awarded so far. They went last year to Tata Power and L&T, when each company won a $20 million rocket launcher order for the army’s Pinaka defense missile system. Till then, primary integration work had been done by the public sector with some components supplied by the private sector. Russia is India’s biggest foreign supplier followed by Israel, then other European countries, with the U.S. having only a tiny role because of restrictions on what it can sell. A major effort is now being mounted by the U.S. to replace Russia as the lead supplier, especially if current talks between the U.S. and India on a nuclear pact lead to restrictions being relaxed. More than 20 U.S. companies exhibited four months ago at the biennial Aero India air show in Bangalore. Names such as Boeing (BA), Lockheed (LMT), Honeywell (HON), General Electric (GE), Raytheon (RTN), Northrop Grumman (NOC), Pratt & Whitney, United Technologies, Bell Helicopter Textron, and General Dynamics are among the most active. Some have already tied up with Indian companies such as Tata and L&T, or are talking about doing so – and the new ratnas will be prime targets, because of their privileged roles.

India’s defense private sector has been left behind by the wave of liberalization and deregulation that has affected virtually every other area of manufacturing in the past 15 years. Moves to change that began in 2002, when it was announced that the private sector would be allowed to do more work, and that foreign investment stakes of up to 26% would be allowed in joint ventures.

But only about 30 private-sector manufacturing licenses have been issued to around 20 companies and little work has been awarded. And only a handful of small foreign joint ventures have been signed. Foreign companies are not prepared to hand over new technology when they are only allowed 26% stakes – though one joint venture for aero engine components, between Snecma of France and government-owned Hindustan Aeronautics (HAL), has been allowed as a 50-50 split. The MoD now has a chance to introduce real reforms, though opposition from trade unions and leftist political parties is beginning to appear. Whatever happens, those vested interests will have to be appeased, and that will slow the pace of reform – as always.

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Posted in GE, India, India defence, India defence industry, India manufacturing, Tata | Tags: , , , , , , , , , , , , , , , , , , ,

Posted by: John Elliott | May 31, 2007

GE India’s chief retires

Jeff Immelt, GE’s chairman and CEO, is in India on one of his regular mid-summer visits, braving as he has done before, 40oC-plus pre-monsoon temperatures. This time though it’s not just the usual round of government ministers and officials, businessmen and journalists because tonight (June 1) he will be hosting a dinner in Delhi to mark the retirement of Scott Bayman, India’s longest-serving expatriate company boss. Bayman has headed GE here for 14 years, starting in 1993 with $100 million turnover and a few hundred employees, and reaching $3 billion and over 13,000 employees this year, with all GE’s global businesses present in the country. He’s handing over to Tejpreet Chopra, who currently heads GE Commercial Finance in India. Last night Immelt said that GE is on track to reach targets of $8 billion for both turnover and assets by 2010.

scott_bayman2.jpg

The story began in 1992 when Jack Welch, Immelt’s predecessor, declared India, along with China and Mexico, a priority GE country. Bayman arrived a year later and says he has “survived two GE Chairmen; six (Indian) governments and five prime ministers.” Through it all, he has remained an optimist. Fourteen years is a long spell for anyone, and it is especially remarkable (if I may say so as a Brit) for American businessmen, whose patience with what Bayman tactfully describes as a “confusing and difficult place to quickly enact change and make rapid progress” usually runs out quickly. But instead of bemoaning the struggles with successive government policies, Bayman says: “You know what? In those years no one – not one prime minister, not one government – has turned its back on liberalization. Sure, each has its own priorities or its own spin, but the general direction and the commitment has not changed.” He’s had great successes and some setbacks. He was in at the start of India’s massive call center and business processing wave with the creation in 1998 of GECIS – “a roaring success from the beginning”. The business was hived off in 2004 and now, known as Genpact, has 27,000 employees in ten countries and has filed for an IPO on the New York stock exchange. In 1993, GE Capital was set up as a non-banking finance company but the government’s unbending banking regulators have prevented it from becoming a full bank. He’s especially proud of GE’s Jack F. Welch Technology Center that was opened in Bangalore in 2004, where 5,000 people are now employed plus another 1,200 in Hyderabad. That has been built, he says, with “great engineers and scientists and people with great capacity for work”. His “greatest disappointment” was GE’s withdrawal from the household appliance market eight years ago when he had to face up to the fact that its products were uncompetitive.

Bayman also had to sort out (with Bechtel) the future of a famously blighted power project at Dabhol in Maharashtra after the collapse of Enron, the lead partner. He negotiated a deal with the Indian government that enabled GE to recover its $150 million equity investment, which may make it easier for him to see the bright side of India’s biggest inward investment disaster. He admits, in a neat under-statement, that Enron “did too good a job at negotiating a contract that was going to be difficult to live with,” but says that the compensation “could not have happened in other countries, where we wouldn’t have got any dollars back.”

Speaking at a business conference last week, Bayman remembered how difficult it was working in India when he arrived. “You never knew if you would have a dial tone when you picked up a telephone receiver. If you had a dial tone, there was a question of whether the connection would be made to the number dialed. If connected, you never knew how long you would stay connected.” Cars were in scarce supply and required a full down payment nine months before delivery. Color televisions had to be purchased on the gray market and were not available in any significant quantity or variety. Computers and laptops attracted high duties and had to be registered in a traveler’s passport when taken in and out of the country.

Now he rates India’s ”telecom revolution” as one of four “big events” that have happened in his 14 years – “a poster child for privatization and deregulation”. His second “big event” is the creation of a new class of consumers, driven by the emergence and growth of software, backroom processing, technology and financial services industries. “Employees in these industries are highly educated and relatively younger than the workers in other industries. Ten years ago, this group likely would have lived in their parents’ homes and been under-employed or unemployed. Today, this group earns a good wage and has a propensity to spend. And, with the opening up of the economy, now has a wide choice of products and services to buy.” Third, he picks Indian industrialists’ massive growth in self confidence about their ability to compete on the global stage. Fourth is civil aviation. “Today, we are experiencing the benefits of open skies agreements with increased non-stop flights from more Indian cities to more cities around the world. Choice has brought competition and the consumer is benefiting.” Here his overwhelming optimism that all is – or quickly will be – well gets the better of his judgment, and he dodges the chaos and massive delays at most of India’s airports, saying: “Watch the impact as public-private partnership goes to work. This is India. We wait for the demand, for the crisis before we respond. Once we strike out on a course of action, we know how to get it done,” he says. Perhaps his optimism comes from the fact that GE plans to invest in consortiums developing the airports.

He hasn’t always been so optimistic. In 2002, he slammed India’s manufacturing industry saying: “Manufacturing is not India’s core competency. Can it be? Probably not, at least in the short run. Let’s face it, there are just too many barriers that all of us cannot control. Don’t get hung up in thinking manufacturing can be a core competence of India. It isn’t going to happen.” He now admits he “was wrong – dead wrong.” Indian industrialists “no longer worry about multinational companies; they are or want to be MNCs…..They no longer talk of level playing fields. They argue for open markets, free trade and view the globe as their marketplace. Indian companies now think globally.” His main lesson? “You need patience and persistence. This is a difficult place to get things done quickly”.


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Posted by: John Elliott | May 25, 2007

India’s Prime Minister warns business about the “cancer of corruption”

The completion of the Indian government’s first three years in office seems to have galvanized the Prime Minister, Manmohan Singh, into some critical reflections about what is wrong with Indian society. Three weeks ago he spoke about India’s crony capitalism, and this week he has been unusually outspoken about growing corruption in government and business. Addressing a conference about rural roads on May 23, he said that corruption on construction projects had “spread like cancer to every corner of our vast country” and was a major reason for poor quality roads. Today he returned to the subject on a broader canvas when he told a Confederation of Indian Industry (CII) conference “the cancer of corruption is eating into the vitals of our body politic,” adding that “corruption need not be the grease that oils the wheels of progress.”
 
As with crony capitalism, this is unusual territory for prime ministerial speeches. But Manmohan Singh is an unusual prime minister. He has been an academic economist, a top bureaucrat (finance secretary and governor of the reserve bank), and a minister (finance) ,and he is known to be shocked by the corruption and sloth in government and by the way ministers are oiled by business on the crony circuit. He shares power with Sonia Gandhi, the leader of the Congress Party and of the governing United Progressive Alliance coalition, who picked him for his job. That severely limits his opportunities to implement ideas and policies that are opposed by other ministers.
 
So he sensibly chose a business audience to underline worries he has voiced in the past because, in the supply and demand economics of corruption, they supply the money and other favors demanded by politicians and bureaucrats. He may not be able to do much about the demand, but he can, and did, try to persuade the supply side to curb its activities. “There are many successful companies today that have refused to yield to the temptation – others must follow,” he told his audience. And in a dig at businessmen who enter politics, he said that they should “erect a Chinese wall between their political activities and their businesses” – which, of course, they rarely do.
 
The subject of his speech was making India’s booming economy more equitable so as to increase support for economic change. He launched a ten-point program which included a plea to businessmen to “resist excessive remuneration” and discourage “vulgar displays of wealth.”

After the speech, stories were recounted by businesspeople of how impossible it is to work without paying bribes – especially where land acquisition, construction projects and occupancy of buildings are concerned. “Lakhs of rupees have to be shelled out for the most minor approval,” said one businessman involved in setting up a new office building – a lakh is 100,000 so that translates into thousands (or maybe tens of thousands) of dollars.

Corruption is rife on big defense contracts as elsewhere in the world. Other cases – which rarely if ever lead to convictions – range from illicit allocations of petrol station licenses and army meat contracts to large scale diversion of public funds and bribing to influence government decisions at all levels. These often involve politicians holding high office in the states and in central government. On public construction contracts, huge amounts of money are siphoned off by officials and contractors, and poor quality materials are used to cut the contractors’ costs and generate more work when repairs are needed. In a subsequent speech at the conference, Palaniappan Chidambaram, India’s Finance Minister, said that in the past five years $5.5 billion funding on a roads program had been 93% committed, but only 55% of the designated road works had been completed because of corruption, plus some uncompleted works.

This clashes with the findings of some opinion surveys, such as Transparency International, which suggest that the impact of Indian corruption is declining. That is probably because the surveys usually cover foreign companies, who find that demands for bribes have decreased as government controls on businesses have reduced over the past 15 years. But corruption is rife, as the prime minister said, wherever the private and public sectors meet (and sometimes within the private sector on contracts between companies).
 
Coincidentally, a report published today by Transparency International on judicial systems internationally said that, while India’s upper judiciary was “relatively clean” (with some exceptions), corruption is “systemic” in the broader justice institutions because of a “high level of discretion in the processing of paperwork during a trial, and multiple points where court clerks, prosecutors and police investigators can misuse their power without discovery.” The primary causes of corruption were found to be delays in the disposal of cases, shortage of judges, and complex procedures, all exacerbated by a preponderance of new laws.

Sunil Mittal, the CII’s new president and founder and chairman of the Bharti group that runs India’s largest mobile phone business, welcomed Singh’s speech, but called on him to “simplify regulations so that the need for such practices reduces and vanishes within our lifetime.”

The use of the words “the need for” was significant. The sentence would been satisfactory without them, but by using them Mittal was instinctively underlining the fact that businessmen feel compelled to pay politicians and bureaucrats in order for their companies to operate and grow. Until the Prime Minister can deal with the demand side, there seems little chance therefore of the supply being cut much. 
 

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Posted by: John Elliott | May 23, 2007

Manufacturing success in Nokia’s India SEZ

While the government dithers about how to solve a crisis that has developed over India’s controversial Special Economic Zones (SEZs), a few companies are showing how small zones can spread development and attract foreign direct investment (FDI), without falling into the clutches of politicians, bureaucrats, and protestors (see Blog – Special Economic Zones Are About People, Not Just Development).

In southern India, Nokia, the Finnish mobile handset company, is leading the development of an electronics hardware zone where, along with eight of its suppliers, it will mop up more than $200m investment and employ some 20,000 people within two years. Located an hour’s drive outside the Tamil Nadu state capital of Chennai on the  highway to Bangalore, one factory is already being run by Nokia, and Foxconn of Taiwan, one of its suppliers, has another one nearby. Both have shown in less than a year that India is capable of manufacturing precision goods economically and to international standards.

the Nokia factory

the Nokia factory

Nokia chose the 200-acre SEZ site in 2005 in preference to others elsewhere in India, and some abroad, because the state of Tamil Nadu offered it an SEZ location that would free it from some government hassle. The site is near the coast with seaport and airport connections, though these often cause more hassle than they solve for importing components by sea and air – especially Chennai airport, which cannot cope efficiently with its passengers, let along cargo. Such infrastructure problems, plus high power costs, make it difficult for India to compete with China, though the problems are offset by exemption from import duties and some corporate tax holidays.

A  key advantage is that there will be a cluster of companies in what is known as  the Nokia Telecom SEZ, with suppliers such as Foxconn located next to Nokia, supplying the domestic market as well as exporting.

As the developer, Nokia has a 99-year lease from SIPCOT, Tamil Nadu’s industrial investment agency that acquired the land some years ago, thus avoiding the sort of clashes with farmers that are now happening elsewhere when agricultural land is needed for industry. In addition to Foxconn, which  makes printed circuit boards and other components, the companies include Salcomp, Aspocomp and Perlos from Finland, and Jabil Circuit, Laird Technologies, Wintek from the U.S.

A report published today by ICRIER, a Delhi-based economics think-tank which is working on SEZ policies for the government, says that companies like Nokia and Foxconn had previously been “reluctant to come to India” because they “work on thin margins and manage operations on scale and efficiency” – so SEZs did generate investment and provide jobs that would not have otherwise happened.

While its factory is being built, Foxconn started  production a year ago in a nearbyformer Panasonic building making components and mobile phones, mostly for Nokia, plus networks. This is in a sort of semi-SEZ, called an export-oriented unit, where 50% of output has to be sent abroad (or into an SEZ).

Proud of its virtual anonymity as a supplier to internationally known brands, Foxconn has found the transition from Taiwan to India far less difficult that one might expect for a company from that super-efficient high-tech country. It has found that its Taiwanese-style  uniformed employees perform both manual and highly automated tasks well once  they have been trained, consistently maintaining international standards that  were rare in India’s manufacturing industry a few years  ago.

Next year Foxconn will move into the Nokia SEZ and will also have another factory in a separate zone a few kilometers away where it is a co-developer with SIPCOT and Motorola. Singapore-based Flextronics also has a similar operation nearby, already in operation. These are graphic examples of how India can sometimes make manufacturing work well, especially when there is an enthusiastic state government involved.

The only blot on the landscape is that the Finance Ministry would like to impose a precise export requirement, as a percentage of production, in addition to a current requirement that SEZ companies should become net foreign exchange earners by 2009, exporting more than they import. Goods passed within the SEZ, or from an outside export oriented unit into an SEZ, count as exports for this foreign exchange calculation, but in a highly bureaucratic tweak of policy, they do earn tax exemptions applicable to exports.

The Ministry suspects (rightly) that there will be little exporting from many of the  mammoth zones elsewhere that are attracting land-grab developers, so a primary aim of an SEZ will not be met. SIPCOT companies argue that any new export requirements should not affect their year-old agreements with the Tamil Nadu government. They have told the government that their ability to compete with operations in China could be jeopardised.

Meanwhile farmers’ protests are continuing against large SEZs, especially in West Bengal where there were clashes between police and protestors last Sunday at an SEZ site called Nandigram. The government has not yet come up with any major policy initiative, which means that the other main advantage of SEZs – the development of private-sector funded large-scale infrastructure – has yet to materialize.

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