Public Sector in India: Diamonds are Forever!

India celebrated Public Sector Day on April 11, 2016. This blog post pays a tribute to the role played by the public sector in India, and discusses a few directions for an even greater role in future.

In India’s post-independence industrial development, evolution of government owned industrial enterprises, commonly called Public Sector Undertakings (PSUs), has been a major high point. While PSUs are generally maligned for the governmental ownership and control as well as the rather bureaucratic approaches of the PSUs themselves, the criticism is misplaced. Anyone who is privy to the huge problem of non-performing assets (NPAs) in the Indian private enterprise sector would agree that performance of enterprises has little to do with the ownership structure, private or public, but probably more to do with a host of factors related to comparative advantage of nations and firms, firm level competitive strategy and, more importantly ownership by leadership. While PSUs comprise central and state governmental ownership profiles, central PSUs are considered to a greater degree in this blog post. Departmental undertakings like Indian Railways as well as public sector banking and financial institutions are not considered either.

In order to differentiate the central government undertakings from the other government owned entities, this blog post refers to them as Central Public Sector Enterprises (CPSEs). The idea of setting up CPSEs was mooted by the visionary planners of young Independent India, notably Pandit Jawaharlal Nehru, the first Prime Minister and P C Mahalanobis, leading statistician and member of the Indian Planning Commission. Over the last several decades, CPSEs have grown to play a stellar role in many technology and capital intensive sectors of India’s industrial economy such as steel, oil and gas, capital goods, power, metals and mining, shipping, aviation, design and engineering, refineries, defence equipment and so on. In several domains, CPSEs remain as leaders to date, despite opening up of all the sectors of the Indian economy to private and foreign participation from 1992. Although used in a different context, the CPSEs have been instrumental in aspiring for and achieving “commanding heights” of India’s Industrial economy.

Navratna concept

CPSEs come under the administrative ambit of the Ministry of Heavy Industries and Public Enterprises. In the early years, emphasis was on organizational and administrative enablers like Standing Conference of Public Enterprises (SCOPE), Public Enterprises Selection Board (PSEB) and dedicated department like Department of Public Enterprises (DPE). While the public sector is criticised for governmental controls, successive governments have also been trying to provide autonomy linked to scale and stature of the CPSEs. The concept was initially started in 1997 as Navratna (Nine Diamonds) system (Navratnas have a mystique and positive significance in Indian mythology), acknowledging the stature of nine large high-performing CPSEs. The Navratna concept over the years was expanded both ways, adding Maharatna and Miniratna status to the both sides of spectrum. Each CPSE was expected to have a Memorandum of Understanding (MoU) with the Ministry based on which performance would be assessed.

CPSEs with an average annual turnover of more than Rs 25,000 crore (USD 3.8 billion), an average annual net worth of more than Rs 15,000 crore (USD 2.3 billion) and an annual net profit of more than Rs 5,000 crore (USD 770 million) over the last three years along with listing on stock exchanges and significant global presence/international operations qualified to be Maharatnas (Great Diamonds). CPSEs which had ‘excellent’ or ‘very good’ rating in the MoU system over the last five years and had achieved a composite score of 60 or above in the six selected parameters of net profit to net worth, manpower cost to total cost of production/services, profit before depreciation, interest and taxes to capital employed, profit before interest and taxes to turnover, earnings per share, and inter-sectoral performance were granted Navratna status. CPSEs which made profits in the last three years continuously and had positive net worth were considered for grant of Miniratna status. Presently, there are 7 Maharatna, 17 Navratna and 73 Miniratna CPSEs. These Ratnas span every conceivable segment of core industry and infrastructure operations, and bring global stature to India’s industrial capabilities. While the core of Navratna concept was financial autonomy in terms of investments, it also became a benchmark for CPSEs to develop and accomplish performance goals.

Shining in the dark

The relevance of CPSEs to India was that they singularly shone during the dark nights of India’s industrial weakness. The 7 Maharatnas, BHEL, Coal India, GAIL, IOC, NTPC, ONGC and SAIL are leaders in capital goods, coal mining, gas exploration and distribution, oil refining, thermal power, oil exploration and steel.  The 17 Navratnas are leaders in defence electronics (BEL), oil refining (BPCL and HPCL), defence aeronautics (HAL), design and engineering (EIL), telecommunications (MTNL), metals, minerals and mining (NALCO, NMDC, RINL, NLC), construction (NBCC), oil (OIL), power (PFC, PGC, REC), logistics (CCI) and shipping (SCI). The 71 other CPSEs which are Miniratnas are in similar and allied domains, with some being in direct consumer and retail services as well (for example, IRCTC). While the preponderant presence in core sectors of the economy is a hallmark of the CPSEs, it has been a natural evolution as well given that private sector had neither the resources nor the inclination to go on such long haul and politically sensitive sectors.

While it may be easy to say today that government has no business to be in the business of industry, the contributions of the CPSEs to India’s equitable economic development cannot be overemphasized. A CPSE like HUDCO brought in a much needed revolution in the financing of affordable housing and housing refinance on a massive scale while another CPSE like Rural Electrification Corporation gave the much needed thrust for electrification of villages. Both the tasks would not have been accomplished on the scale and affordability parameters as done by these two entities. Engineers India, IRCON. PDIL, MECON, Railtel, RITES, EPIL, TCIL and such other corporations developed India’s engineering and design capabilities as a national competitive advantage. More recently, Indian Renewable Energy Development Agency has stood out as a contemporary example of CPSEs continuing to chart into sunrise territories. While not a subject of this blog post, the public sector banking system has contributed to socio-economic development in a manner that a pure private sector banking system would have been hard put to deliver.

Polishing the diamonds

CPSEs thus promoted, and continue to promote, self-reliance in vital sectors of the economy.  The above does not mean that the best has been achieved in respect of CPSEs. Like diamonds, Maharatnas, Navratnas and Miniratnas also require polishing. The polishing of diamonds is indeed an expert job; so is polishing of CPSEs. Ideally, the leadership of CPSEs is the ideal instrument to hone the capabilities of CPSEs. More fundamentally, the MoU system may be overhauled to incorporate challenging global benchmarks and creative corporate and functional strategies to enable the Ratnas shine better. Each of the 7 Maharatnas and 17 Navratnas have, for example, the potential to be amongst Fortune 500 list of global firms. The 73 Miniratnas can be niche, boutique firms on standalone basis or become Navratnas through collaboration and/or consolidation.  The requisite scaling can be built up through more of ‘Make in India’ on one hand and ‘Grow in Globe’ on the other.

The external affairs initiatives launched by the NDA government as well as the new global stature for India and domestic growth passion, both assiduously promoted by Prime Minister Narendra Modi should be diligently followed up by the CPSEs. Given the resources at their command, the opportunities that can be explored and exploited by the CPSEs in India and abroad could be virtually limitless. A onetime global consulting study in respect of these 24 companies would be a really worthwhile investment to develop and execute such a domestic and global initiative. Some of these could involve expansion within India as well as globalization of operations, besides domestic and global joint ventures. As a first step, special efforts must be laid on having visionary leaders at the helm as well as creation of chief strategy officer posts in CPSEs with challenging ‘sky-is-the limit’ growth mandates.   

Stake dilution, value accretion

The emphasis of the CPSEs, public, economists and the governments with reference to the CPSEs seems to be only on disinvestment, and monetising the value for the government and help in the process of reining in the fiscal deficit. While this is also mandated by minimum public shareholding norms and, in some cases, straightforward privatisation goals, the ideal route for the CPSEs would be to issue additional shares to bring in public and foreign equity. This would certainly strengthen the capital structure of CPSEs and let them pursue higher scale with enhanced technological capabilities. The government should appreciate that stake dilution as per the existing methodology tends to be a constant overhang on the stock market price for the CPSEs, thus limiting capital raising at the rich valuations they deserve. It is time that the full market capitalization potential of CPSEs is understood and realized. Alongside such a new funding approach, individual CPSEs should relentlessly pursue operational excellence and value creation initiatives.

As contrasted with realization from stake sale, enhanced annual dividends from operations would be a recurring source of income from the CPSEs for the central government. This requires adoption of strategies and techniques of competitive advantage by the CPSEs. Notwithstanding the natural monopoly provided by certain segments (for example, metals, minerals and mining) and the advantage provided by scale and longevity, all CPSEs must plan and perform as if they operate in highly competitive domains. A firm such as BHEL must seek to beat L&T in market capitalization and there should be no reason why Shipping Corporation should accept a lower EPS than say, a GE Shipping. A study of successful and profitable private sector and public sector players in India and abroad could point to the exciting opportunities that await the CPSEs. The central government should start taking its ownership of CPSEs as a perpetual value enhancing asset that would pay increasing dividends, not only to state exchequer but also to the larger economy!

Posted by Dr CB Rao on April 13, 2016

     

Cascade and Cluster Strategy for Industrial Development: A Potent indigenization Prescription for the Indian Industry

India, undoubtedly, has been a leader in tablets and other kinds of pills and diverse pharmaceutical products. Pharmaceutical development and manufacturing has been one domain of manufacturing that has brought out a Made in India advantage onto the global arena. Of late, however, Indian manufacture has been demonstrating early shoots of manufacture and global challenge in another kind of tablets - the electronic tablet computers that were hitherto considered the preserve of the likes of Apples and Samsungs! In fact, the launch of an indigenous 5” tablet by an indigenous manufacturer at almost half the price of a ruling imported tablet product has led Samsung to announce posthaste a new tablet model at a dramatically reduced price. This development points to the possibility that with some concerted government-industry action electronics manufacture could be a new wave of growth for India.  

Electronics need not be seen as the only early shoot of industrial manufacture. There are several other industrial manufacturing segments, some near the maturing state and some in the emerging and growth stages. These include aeronautics, space vehicles, automobiles, heavy engineering, electrical products, white goods and consumer items, to name a few. There is, of course, the caveat that in each of these certain critical internals are based either on overseas technical designs or imported into the country from the collaborators. Examples could be engines, compressors and the like. Yet, even in these areas capability exists to build indigenously capable systems, for example cryogenic engines or ejection systems in space equipment. It is instructive that the development of Indian industry occurred when phased manufacturing programs as in the case of automobiles and national policy missions as in the case of space engineering were put in place.

Singular drive, plural participation

There are two main considerations that drive indigenous manufacture. Firstly, the Original Equipment Manufacturer (OEM) must feel and demonstrate the passion for developing a completely indigenous product as a long term goal (say of 5 years). Secondly, the OEM should be willing to spread the same passion to multiple industries to participate and support the indigenous OEM product. The national space mission, for example, became an icon of indigenous success because of its efforts to draw in as many as two hundred industries in the development of indigenous space systems and equipment. Maruti Suzuki became the most indigenized car by bringing along all of the Japanese component makers to India. There is, however, only a limited indigenization that an individual firm can prompt. An automobile OEM typically can influence its component makers to come to India but not necessarily the raw material makers, for example steel.

OEMs require more than normal procurement or vendor development activities to develop high quality, low cost indigenous activities. A complete supply chain, cascading the Bill of Materials (BOM) down to the basic materials would need to be drawn up to establish, first the plurality of participation that is required and next the suitability of the available component and materials infrastructure. A detailed gap analysis would then establish the task of development at hand. While it would be impractical and inefficient to try to develop the entire new BOM of an OEM product to new standards, a judicious mix of indigenous development and import access should be examined on a case by case basis. The strategic plan for total indigenous development has several imponderables to consider, essentially related to the technological and investment considerations.

Cascade, cluster

To establish a complete indigenous industrial infrastructure that enables an OEM product with 100 percent indigenous content, there exist two approaches. The first approach is the cascade approach discussed briefly above. In the cascade approach, the drawback or limitation is that what works at the OEM level does not necessarily apply to the steel sheet level. In a typical automobile weight of 1400 kg, approximately 75 percent is metal weight (iron, steel and aluminum). Steel by itself constitutes 60 percent at 800 kg.  Considering that most cars in India are small cars, the average weight of a car could be 1100 kg and the average weight of steel per car could be lower at 600 kg. India produces 3 million cars which is an economical volume of production. The three million per annum car output requires a steel tonnage of 1.8 million per annum. This level of steel tonnage is, however, less economical for steel plants. Moreover, the lead time for a new steel plant could be as high as 10 years and for modernization 5 years. On the other hand, changes in steel technology as a subset of automotive technology could be occurring every 5 years. The investment in a steel plant’s technological modernization could be three times that of an automobile plant’s modernization.   Such imbalances in technological, lead time and investment considerations in OEM and basic material industries make a coordinated cascade approach that seeks complete indigenization across the entire industrial spectrum more of an aspiration than a practical proposition.

In the cluster approach, several indigenous industrial infrastructural capabilities are created regardless of any coordinated pull from the OEM sector. This could be infrastructure in all kinds of metals, machine tools and plastics, for example. Early industrialization in India followed this approach. There are again two fundamental considerations in the cluster approach.  The first consideration is that of creation of islands of excellence in various industrial segments which like bubbles would grow and coalesce into larger clusters. The second is that individual industries, if developed well, provide their own push effect to overall industrialization. The cluster approach of indigenous industrialization works well in the short and medium term but does not provide spread or competitiveness in the long term. In India, for example, steel and machine tools were developed as the first islands of indigenous industrialization without giving any fillip or support of any sort to the automobile industry which is one of the most important users of these two segments, and which also sets the higher standards of technology  (in terms of machining and material tolerances). As a result, not only the automobile industry lagged behind domestic needs for decades (until Maruti Suzuki came on the scene in the 1980s) and international capabilities but also the enabling industries of steel and machine tools remained uncompetitive in both quantity and quality.

Integrated development

Integrated development of a spectrum of industries with a simultaneous approach of cascade and cluster strategies is well merited. The success of the Indian National Space Mission in accomplishing its mission with largely indigenous clusters is a great example of combining the cascade and cluster approaches. Whatever be the past considerations in not applying such a combined approach in indigenous industrial development, the move forward requires such an approach, particularly because India has achieved globally critical mass in a number of industries. India, for example, is the sixth largest producer in the world of all four wheeler automobiles with an annual output of 4 million units (nearly 6 percent, out of a global output of 70 million units). India is also the fifth largest producer of steel with an annual output of around 80 million tonnes (5 percent, out of a global output of 1600 million tonnes).  In terms of cellular phone usage, India is the second highest user in the world with cell phones in use of 1.2 billion (20 percent, out of the world’s use of cell phones being 6 billion). There are, however, a few industries like machine tools where India has the potential but is just 3 percent of the global output in dollar terms, and just 10 percent of even the Chinese machine tool output.   

India can catapult into global industrial output if it adopts an integrated strategy of cascade and cluster. For the cascade component of the integrated strategy to be successful, India must choose industries which would move in alignment with India’s population and the country’s changing demographic, employment and income profiles, all of which are a clear positive for maximizing industrial output. Electrical, electronic, computing and telecommunication devices and equipment, automobile, rolling stock, aircraft and machine tool products, and chemical, oil and gas and pharmaceutical products, for example, can define and pull the cascade. Semiconductor, chip, steel and other metal and non-metal, forging, casting, tooling, mold and die industries could be the clusters that support the cascades. The combination of cascades and clusters could together boost indigenous industrial production where consumption and usage has already reached (or will reach) critical scale. The implementation of the cascade and cluster strategy requires active collaboration between various industries on one hand, and the industry in the aggregate and the governments, central and state, on the other.

Prescriptive need

However good the concept of cascade and cluster industrial paradigm is, it cannot be proactively initiated and effectively implemented without a prescriptive approach. The prescriptive approach requires industry associations to develop strategic plans by which industries can be effective in triggering cascades and clusters. It also requires the governments to provide material support and regulatory direction to participate in the cascade and cluster strategy. If Japan could become a global industrial power by inter-industry and industry-government collaboration facilitated by the government agencies (for example, MITI), there is no reason why India cannot excel in the same manner. The fundamental transformation sought to be achieved by the Indian tablet devices could be indicative of the right prescription for the future health and vigor of Indian indigenization.

Posted by Dr CB Rao on March 3, 2013

    

    

 

 

    

India’s Global Industries: Three Horizons of Growth

There has been a time when India was unlikely to be a global player in any industry or service. From the 1980s, thanks to software services and information technology, India came to be recognized as a global software powerhouse. Still, industry was seen as an unlikely arena for global play by India. The 1990s saw the first breakthrough with the pharmaceuticals sector, led first by bulk drugs and later by formulations, becoming the global generics powerhouse. Doubts remained, however, if India would ever be player in the broader industrial spectrum. The turn of the century, however, saw India become a major producer of components and finished products in a number of industries, including electronics and telecommunication products.

Quietly, India has been undertaking certain strides in multiple industrial horizons. But for that, several developments of Indian products being in global arena would not have been feasible. For example, Nokia has its Asha range of global mobile phones manufactured out of India. Toyota, the world leader in automobiles has recently announced that India would be a new hub for certain of its global component requirements. India has today launched its 100th space mission (the Polar Satellite Launch Vehicle, PSLV, C21), with satellites from the developed world to be put in orbits on a commercial basis. Tata Motors turned around Jaguar-Land Rover operations, and began making profits and adding jobs in the developed world. Impressive as these are, they are more a result of individual initiatives in private and public sectors. There is a need to identify a concerted strategy for globalization of the broader Indian industrial spectrum.

Public-private collaboration

Given that India is yet to attain global scales in research and development, manufacture or marketing, one of the fundamental planks of gaining better global competitiveness is through the pooling of public and private resources. This could be firm level and industry level collaboration or academic and research (largely public) collaboration with private and public sector firms, or even manufacture in private sector and marketplace in the public sector (and vice versa). The disallowance of private sector into defense production, for example, has been counterintuitive and counterproductive given the maturity the Indian automobile industry has achieved. Similarly, given the huge increase in the Indian civil aviation sector should Hindustan Aeronautics not have been tapped for manufacture of India’s own dream-liners?

Public-private collaboration could take a systems approach as well. In the airports arena, the Airports Authority of India as the airports builder and maintainer, Air India as the cargo handler and various airlines including Air India (all of them except Air India being private) could view their interdependencies and mutual services in terms of enhancing user experience rather than their own transactional requirements. Academic and industrial collaboration also takes on a similar hue. Certain private sector undertakings with overseas infrastructure can help manufacturing enterprises, of both the private and public sectors. Competition need not act against collaboration. Mahindra Group, which has its own automobile franchise, for example, is the second largest financier of India’s largest automobile manufacturer, Maruti Suzuki.

Higher objectives

Diffidence needs to be replaced by optimism. It was probably never envisaged that India, given its investment constraints and poor pay scales in public sector, could have its own space program that can one day turn commercial. The truth is that the impossible has been made possible with the successful launch of PSLV today. Eventually, India would have its own missions to the Moon and Mars. The need, therefore, is for the broader industry to have higher objectives of attaining global scale and competitiveness, dreaming to make the impossible possible. The higher objectives must go beyond choice of certain firms or sectors for export competitiveness or setting up of Special Economic Zones (SEZs) or Export Oriented Units (EoUs) for export production. The objectives must be to ensure sustainability of global scale R&D, manufacture and marketing, without undue reliance on fiscal incentives.

India needs global scale and local prosperity in order to achieve the objective of economic growth with social equity. For this to happen, India needs to set up new institutional structures, turning some of the concepts borrowed from the West upside down. For example, the Planning Commission must be broad-based to provide equal participation and impetus to both public and private sectors. The Competition Commission needs to be supplemented by Collaboration Commission. Special agencies such as National Manufacturing Mission must be reinforced by new entities such as Global Competitiveness Mission. Industry bodies must transform themselves from being mere lobbying houses or advisory bodies to global policy developers and global competitiveness monitors. The industry as a whole must be responsive to indicators of adverse movements in global competitiveness for India. Against the background of such a perspective of globally oriented institutional enablers, the right horizons of growth need to be chosen.

Horizons of growth

Growth happens in horizons. The three horizons usually are the current growth makers, emerging growth drivers and future growth triggers. It is tempting to characterize the several industries in the three horizons and seek to maximize global competitiveness individually. For example, one of the more export-intensive sectors like pharmaceuticals could be placed in the current global horizon, a scale-friendly automobile industry in the emerging global horizon and a technology-intensive space industry in the future global horizon. Such an approach could have its merits and even support better globalization for the chosen industries. The disadvantage or limitation is that such classification is based on current factors of performance rather than on intrinsic enablers for the complete spectrum as a whole.

An alternate, and more systemic, approach would be to view the three horizons in terms of core competencies required. The first horizon could be one of cost-competitiveness, the second could be one of development-competitiveness and the third one could be one of innovation-competitiveness. Classifying in the three horizons enables global forays based on competencies that India possesses or can develop in a phased manner. That India could be cost-competitive in a number of industries is given; equally it is clear that India could undertake incremental developments as a matter of routine. What is not probably clear is how soon and how effectively India can transit to a paradigm of innovation; that obviously needs special focus and effort.

All industries, all horizons

The elegance of the cost-development-innovation horizon construct is that it enables a play for all the industries simultaneously in all the three horizons. For example, within the automobile industry sub-compacts, compacts and sedans may be placed in the cost horizon; luxury vehicles, sports utility vehicles, multi utility vehicles and crossovers in the development horizon; and hybrid and electric vehicles in the innovation horizon. This construct helps the automobile industry seek and achieve globalization without any lapse of time and also with utmost effectiveness. Similar examples would abound in terms of various industries. In the computer industry, desktops and laptops as well as tablets would figure in the cost horizon, supercomputers in the development horizon and the artificial intelligent computers and robots in the innovation horizon.

When the detailed paradigms of research, development, manufacture and marketing are drawn up for each industry across the three horizons, it would be evident how, rather than sector-specific tactical plans, horizon-specific strategies would be relevant and helpful for the industry as a whole for global competitive advantage. This construct has lessons for firm level strategy as well. Firms should not view globalization as a single product or convenience led effort. Rather, it should be seen as an overall competency reinforcing effort across the total product range. Although as of now clear examples do not exist of Indian firms having demonstrated the multi-horizon success organically, both Tata Motors and Mahindra & Mahindra effectively demonstrate how they could achieve multi-product, multi-horizon competencies through a fusion of organic and inorganic initiatives.

Horizons of competence

The three horizons of global competitiveness of cost, development and innovation correspond to three core competencies which successful global firms must possess. These correspondingly are operational excellence, development creativity and absolute innovation. Regardless of product differentiation, cost leadership is a good position to be in for all Indian global firms. This would be reinforced when product development capability enables the firm to also develop differentiated products. An Indian crossover vehicle is thus a first for an Indian car maker. Complete multi-horizon capability occurs when the firm makes innovation its passion and develops breakthrough products. Most Indian firms are yet to focus on the third horizon but the sunrise technologies such as nanotechnology and alternate energy provide potential for research institutions and industries to make common cause; this requires scientific and technological leadership as well as cutting edge laboratory infrastructure.

Indian experience suggests that induction of experienced professionals skilled in each of the horizons, whether from Indian industry or overseas helps the firms master the three horizons appropriately. In terms of operational excellence we have multiple examples of leadership from efficient Indian companies such as Reliance Industries. Development excellence in Tata Motors and Mahindra & Mahindra was catalyzed by Dr V Sumatran and Pawan Goenka respectively. Even in the mysterious and challenging domain of drug discovery, some Indian firms have relied on proven scientific leaders and state-of-the-art laboratories to achieve considerable traction. This is indicative of the fact that the base talent for all the three horizons is appropriately and abundantly available in India and catalytic leadership, and modern infrastructure, with the three horizon approach enunciated herein, is all that is required for India, Inc to deliver on the promise of globalization.

Posted by Dr CB Rao on September 9, 2012