A direct sales model works only if you are innovative: Hilti’s Pius Baschera
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New Delhi: Pius Baschera, chairman of the board of directors at construction-industry giant Hilti Corporation, speaks about how corporate governance works in the $4.4 billion, Liechenstein-based family owned-business. Edited excerpts from an interview:
The company is a family-owned business, so what are the difficulties or issues when you look at corporate governance? One of India’s oldest companies seems to be going through a lot of issues, you might be aware...
With Hilti, the founder made a very important decision in 1980. He asked his kids and his wife to sign a document to never inherit the shares of the company, and he put all these shares into a family trust. Therefore, the group is owned by the trust and not the family directly.
The key issues before the trust are two-fold. One, the trust has to do everything so the company is doing well long-term. Second, the trust has to do everything so that the family is doing well financially. That means you do not need family members in the business because there is a clear qualification statement that any member of the trust or board needs to have both high professional and personal qualifications. So if there is no family member with such qualifications, there are no family members in the leadership. Thus we have a professional group of people responsible for the company in the board of directors, executive board and also in the trust. And the family is represented by one member of the second-generation—Michael Hilti—who is on the board and on the trust, representing the trust on the board. So corporate governance is at a very good level, as it is all professionally managed and we look at the long-term view, and not quarter-by-quarter.
Does the family-owned trust have any dealings with day-to-day activities or big decisions?
No, the day-to-day activities are looked at by the executive board, then there is the supervisory board or the board of directors supervising the executive board. The trust is basically involved in developing a strategy in the sense that they set some sense of expectations as a shareholder.
They are also involved in electing the board members, the executive board members and defining the culture of the company. But they are not at all involved in the operations, there is a clear split—they are representing the shareholders and they are represented in the board of directors by having three members sitting on the board.
How important is innovation and research and development (R&D) for Hilti?
It is a key issue. A direct sales model only works if you provide the sales force with products and services that are differentiated and innovative. We invest more than $200 million year after year in research and development and bring close to 60-70 new products in the market every year.
Innovation is the motto of Hilti’s success—in products, services, software, business models.
Your company has an interesting model of having no distributors and directly selling to customers. Is there a particular reason for direct sales?
The reason is very clear—through direct contact, we are close to our customers and we know what their problems are. When organized the right way, their inputs come to the company and go into R&D so we can develop products, services, software that address problems with these applications. This system provides us with the opportunity to out-innovate our customers because we know and understand them.
How do you view India right now?
Well, the country’s got huge potential. There’s a lot of infrastructure needs here that desperately needs to come (be addressed). I think the present government has, through this demonetization and the GST (Goods & Services Tax), taken steps and is going in the right direction of having a country that is more on a modern level than it is today. For us, India means huge potential but it is not so easy to do business here because we have some values at Hilti that we clearly follow— and integirty is one of the values and for that we have a zero tolerance policy and that does not always make it very easy to do business. For our company here, we are very happy with the development and are growing strongly in the country. We expect to grow significantly and we will add more people and continue to invest in the country because as an emerging country, it is one of the most important ones.
About infrastructure, do you think it’s significantly harder to develop it in a democracy like India where there are so many different opinions and viewpoints?
It’s a challenge, yes of course. I’m coming from Switzerland and we have, in Zurich— for years—not built a soccer stadium. People would like it but a project comes up and people are against it because it is creating too much shadow or too much traffic. But such problems are very inherent in a democratic system.
While you are growing in emerging economies, Europe and US happen to be your strongest markets. Over the last couple of years, debate across the globe has grown about income inequality and people being unhappy with status quo. The UK’s referendum over leaving the European Union, US voting in Donald Trump—how do you see these developments impacting Hilti?
We don’t really know, it depends—will the UK still be member of the European market, or are they playing it so extreme that they will not be able to even use the EU market? Well, I cannot imagine that that happens, but let’s see. The US, let’s see what Trump is really doing (when he gets in the White House). This trend of having nationalistic, closed policies is not just in the US or UK but everywhere. This is also a reflection of globalization having created a lot of wealth but not for all people. And we have to make sure that more people benefit from globalization effort. But what it means short-term or mid-term—if you have to pay more taxes or if the world trade is going down—then it’s certainly not a positive thing for us.
On the other hand, I’m not so sure that the US can just get out of all these treaties and trade deals. I just cannot imagine it happening. But we have to realize and have to listen to people why they voted in this direction. Sometimes the elite in the country simply assume that globalization will mean benefits for everyone but we have to realize what it really means for the people and correct these assumptions.
But again, if EU’s playing hardball with Britain and the British economy suffers, and there is less infrastructure development, then it obviously means potential problems for us. So we have to wait and see how these things unfold.
PM Narendra Modi has withdrawn Rs500 and Rs1000 notes. Real estate project and construction deals in India see significant volumes of cash exchanging hands and the immediate fallout of the note-scrapping is subdued demand. What are your views on the demonetization and how do you expect it to affect your business?
From our perspective, it’s a bold move that intends to address doing business the right way and cleaning up the system. For us as a company, we do a very small amount of business in cash so the impact on us that way is very small. Now, what it may do in the construction and real estate economy is slow down projects but I also think segments of the real estate business have operated in cash in certain geographical areas of the country. In sum, there definitely is a short-term impact but in the mid or long-term, it completely benefits the people, companies and economy.