Indian firms should invest in innovation, R&D

Indian firms should invest in innovation, R&D
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First Published: Sun, Aug 02 2009. 09 49 PM IST

Optimistic outlook: Singh says an important lesson from the Satyam incident is that roles of governance and management cannot be mixed.
Optimistic outlook: Singh says an important lesson from the Satyam incident is that roles of governance and management cannot be mixed.
Updated: Sun, Aug 02 2009. 09 49 PM IST
Mumbai: Signs of a turnaround in the global economy are becoming visible, according to Manoj Singh, global managing partner, operations, at the consulting and auditing firm Deloitte Touche Tohmatsu. In an interview, Singh cited an increase in shipping orders, of commodity prices rising and the rate of unemployment decreasing in the US, as signs of a recovery... Singh, a Deloitte veteran who has been with the firm since 1979, is also a member of the India-US business council headed by Indra Nooyi, chief executive officer of PepsiCo Inc. Edited excerpts:
Optimistic outlook: Singh says an important lesson from the Satyam incident is that roles of governance and management cannot be mixed.
How can Indian companies grow in a slowing global economy?
In the Western world, such scenarios go hand in hand. A lot depends on the industry a company is in. If you are in a high technology, high intellectual property content kind of market, then you can grow and also be highly profitable. Examples are the iPhone or the iPod.
In typical pricing strategies, you have high growth and very high margins. You can have high margins until other competitive products come in. Then you can keep that market share by lowering your cost and price and by that time you amortize a lot of your technology cost. Then you can afford lower prices and can keep your margins intact. This will apply to Indian companies if they sell products or services with high intellectual property content. Strategy for Indian companies is to invest in innovation and R&D (research and development) because that helps protect margins.
Do you see Indian firms doing it?
Companies in the technology-intensive markets are doing it. For instance, look at how Tata Motors Ltd devised Tata Nano. There are many aspects of Tata Nano that enables them to sell it for the price it’s being sold. They had to actually invest in the Indian market, so those are some examples of the products that are competitive with decent margins.
There are some other businesses that are going to grow much more rapidly but are already in a semi-saturated market. So one of the key differentiators is cost in addition to pricing and quality as margins get thinner in a growing market. Then you have to make up for it through value-added products and value-added services. So it may not be a good analogy, but like building a basic car in the US. The basic car is not where the car companies make money but they make money in the options. And the options are essentially the values they offer with the basic car.
Do you think Indian companies, after making big-ticket overseas acquisitions, have exposed themselves to more risks?
Indian companies have expanded in mature and developed markets abroad (and) some Indian companies have focused on the emerging markets. In mature markets, the company would be selling products based on some assumptions about pricing and margins. The risks associated with such expansions are mainly economic risks, as well as political and social risks. You basically lay out what those risks are and you quantify each one of those and essentially assess what the impact of those are on pricing and on margins and then accordingly you would either make a decision around the pricing, to embed more into the pricing or be able to cut your cost even further or have a contingency.
Do you think now is a good time to acquire companies?
Yes. Today talent, product and capital are more mobile than before. Every Indian business leader has to think globally and the reason to do that is because while you might be very secure operating in the Indian market, there could be someone who could come and under-price you with better technology. The answer is yes and the best part of the economy is that it’s coming out of the recession. You may not need everything that you have so there must be a disposition of assets.
Some of the companies that have acquired companies overseas are finding it very difficult to run their plants in view of demand slowdown. Is diversifying into different products a way out like Bharat Forge, primarily an auto parts maker, diversifying to make parts for nuclear power plants?
In business terminology it is called flexible manufacturing. One can use certain facilities with some minor investments to make different kinds of products in different levels. And that basically is the way that one could diversify one product into two different things and the margins are very different between the nuclear industry-related products and the automotive products. It will have a different margin picture. The key issue to facilitate such restructuring is the training of workers. It is not as advanced as one would like to see, to be able to switch and change skill sets, it’s not so flexible.
What about the Indian companies from the manufacturing sector?
One of the attractive things about Tata acquiring Jaguar and Land Rover is the intellectual property and engineering skills in the two entities and how those skills can be used over here. So, is that happening? Absolutely, and an obvious result to that is basically taking that intellectual property and applying it to the flexible manufacturing facility over here. So yes, it is happening.
How can Indian companies avoid a repetition of the kind of scam at Satyam Computers Services Ltd?
Governance in India is quite advanced compared with some other countries. India is better compared with China because you have a history of family-run organizations and they have absorbed inputs from other sectors. Most boards of Indian companies today have a lot more independent board members and in many instances board members are outside India and that’s very positive. I don’t believe that only numbers are discussed in the boardrooms in Indian companies. Talking about MNCs (multinational companies), they do discuss the strategies of the company. The most important thing is to learn that governance has a role and the management has a role, the two cannot be mixed, such as the board managing the company. You cannot have management using their own governance either. I think in India it’s done quite well. You always advise people to bring in as many external board members as possible, independent board members, and have committees that have basically independently challenged management... The best boards essentially are the ones which are monitored well.
Questions have been raised about the role of auditors after the Satyam controversy...
I cannot speak specifically about Satyam, because I don’t know all the details. Just because there are auditors it doesn’t mean business failures will not happen. One of the hardest things to catch as an auditor is when collusive fraud takes place. By and large, auditors perform an independent job and do their best. In spite of this there will be business failures, whether it’s because of collusive frauds or other reasons. On the positive side of this, look at the large number of businesses and organizations across the world and look at how many failures have occurred in a year. Failures get magnified because they are important to the shareholders. The role of the auditor essentially is to work with the facts and ask the right questions and if the right questions are not asked or the facts not analysed, then it’s a different matter. Most of the time that is the reason of failure.
Do you sense that the worst is behind us now?
I think the feeling here today is much more optimistic. The view is in some ways the worst is behind us; it doesn’t mean that the things are going to ramp up as steeply but they are going to get better, and the reason for this is because the US is going to come out of the recession and things are picking up in China. So there are business opportunities for Indian business—the mood is much more optimistic.
What are these indicators that make you so optimistic?
Dramatic increase in shipping orders, commodity prices are going up, the spread in the credit is at its lowest since September and the rate of employment is increasing here and the rate of the unemployment is decreasing in the US. The stock market is a predictor of what’s going to happen—at least in the US, the stock market starts to correct itself well before the recession is over.
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First Published: Sun, Aug 02 2009. 09 49 PM IST