BackIndian companies need to see what they are really good at
Local business groups will have to rationalize their portfolios to have a focused approach, says Mark A. Gottfredson
Premium(Ramesh Pathania.)
Gurgaon: Mark A. Gottfredson, partner at Bain & Co. Inc., a management consultancy, has visited India frequently since the country started easing restrictions on foreign investment. After more than two decades, Gottfredson now says the Indian economy is still in transition and, with a slowdown in growth, local business groups will have to rationalize their portfolios to have a focused approach. An expert in performance management, Gottfredson also spoke in an interview on the need for India to ramp up its infrastructure and for the government to pursue consistent economic policies. Edited excerpts:
You have been coming to India since 1989. A lot has changed, companies have grown fast. How do you think they are managing costs because India has seen growth at a rapid pace and there is still a lot of potential left? Have there been some excesses?
I have some observations. First of all, there is no such thing as Indian companies. I think every company is different, some are better than the others. As a country, I think that the success of the past decade has caused some things to creep in the economy that could become barriers over time. Again, when you are doing well, government tends to do things which may impact competitiveness over time on supply chain costs, on trade, and one of things that came out during discussions was emphasis on manufacturing, need for infrastructure. Some people felt that there needs to be on higher priority. And ultimately, that's going to hurt the ability of the economy to grow. I know that’s true because I know many companies that are thinking about setting up manufacturing capabilities in other countries, and it is true that they usually don’t think about India.
The economy is in the phase of evolution right now, where these large conglomerates in India really need to think about rationalising their portfolio of investments and start asking themselves — what are we really good at, what are we better at than anybody else in the world — lets invest in that. And in areas where we are not, lets divest things. I think there is a time now that there should be more buying and selling, and rationalising portfolios.
In countries like India, you see a lot of conglomerates. In developed economies like the US, you don’t see so many conglomerates, they basically much more focused on the things that they are really good at. And they have to due to the competitive reasons. As India begins to see some slow growth, which is already started happening now, those pressures are going to come on and companies need to pay attention to that and really determine, what are we really the best at and invest in that and get out from the things that we are not really good at.
So you are saying that a focussed approach is the way to go, rather than having your fingers in every pie.
Yes. If you are in cosmetics, steel, chemicals and food, it’s pretty diverse. It’s hard to imagine that in a long-term, developed economy that somebody could succeed in all of that.
Don’t you think that its a good strategy to be in multiple things so that if something goes wrong in one area, others could provide a buffer.
The theory was used in the United States for many decades. It turns out that most companies are owned by investors, and they can do the diversification, they don’t need you to do it. And by you being involved in many different things it is very difficult to focus. We have looked at the top 1,500 publicly traded firms in the world from 1988 to now, and we have tracked who does well. Who is able to exceed their cost of capital in 10 years, there are only 10% of companies that are able to succeed at that. Eighty percent of them are in only one or two core businesses. Those that have lots to do they don’t do well. It’s based on data and analytical fact across the world over 30 years now.
India has recently opened retail and aviation for foreign direct investment and we are trying to build up our own manufacturing capability. How do you look it from private equity point of view?
These are positive points and it will end up doing good for India, for the world and the companies who come and make investments. Any time you do something like these, it creates change. So, whenever there is a change, people will benefit more and some people will benefit less. But the net impact of this is going to be positive for India’s economy and well being of consumers.
I have been reading these things in the papers and people talk about what it means for the competition and other mom-and-pop retailers and will they be able to cope up with that. The answer is that the net effect will be real positive because this is going to give lower prices for the consumers and they will have higher standard of living. When they have lower prices, they will spend the extra money on something else and that will create jobs somewhere else. It’s just simple economics theory that these things create greater well being. So, yes, X mom-and-pop store might close. They might have to find another job but there will be more jobs to find.
Change is the one thing that is constant and if you try to stop that you create a whole kind of dysfunctionalities that actually end being being worse than what you want to protect.
How do you look at aviation because domestic airlines such as Kingfisher is struggling and, despite overseas investment norms being eased, we are not seeing the interest that we thought we would get?
Does it make a sense for any private equity firm to invest in a company like Kingfisher?
It could and certainly private equity firms have made those kind of investments. But it needs to be structured in a way. There have to be a workout of the debts. There have to be a way to bring debt levels down. There is a lot of room for low-cost carriers in the airlines industry and it could potentially be a good industry. The problems with the airlines are because they are so cyclical in terms of the profits they make. They are very very sensitive to the growth of the economy.
So, private equity firms have invested in TPG Continental Airlines, which had gone into bankruptcy and ended up making out very, very, very well. But you can argue that they are making out very well because the fundamental improvement in the industry. I think the private equity firms have been a little bit shy about when they get in and what's the timing that they get in?
What do PE firms look at before making investments?
Some of the things that would interest private equity firms are they want to look for underperforming leaders. So you can create values by buying the company. What that means is that they are not going to buy the Tatas of the world. So, they need to look for regional players. Players that are of the reasonable size and they are going to look for more businesses that are not multinational in scope but they are more focused and protected by being local. When you get into these kind of companies then you have to get some sense that the governments are going to interfere with your ability to buy and sell. So, policies are going to make a difference as you think about different sectors together. I suspect that's little bit why there has not been a lot going on right now. That's just because of the lack of trust. Start-ups are much easier because there is not much of interfere from governments.
When you talk about trust, is it from the government point of view?
Yes, its inconsistency in policies.
How can governments correct the damage already done?
India is a democracy and when you go for an election, there is a possibility that a new government gets elected. So, what you can do is to create institutions that would last longer than one regime. There are some ways to do that. For example, in Mexico, every six years they have a new president. Typically, a new president wipe off what the previous one has done. But they have certain things that have worked up really well. They have done a lot of things which are really bad but a couple of things have end up working up really well. For example, they set up free trade zones in the northern Mexico closer to the border. They set up a set of rules for those, which would require a change in constitution, if anything is going to change. So, there was a consistency in approach and companies invested like crazy in that area.
We haven’t seen a lot of PE firms invested in the automobile companies. Why is that?
It’s been very hard to make private equity deal work in the component businesses over the last 7-8 years. Some of the PE firms have said that they are going to make investments in automotive sector. They have set up groups and put a a managing director on them but five years hence, they have not made any investment at all. The reasons are PE firms are typically looking for internal rate of return like 30%. The way you can get those kind of returns is either you got be a significant improvement in operating opportunities or significant growth opportunities. The problem here is suppliers to the auto industry is really really squeezed pretty hard. On the customer side, the nature of relationship is that its very hard to actually gain shares.
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