What is the cost for a business of tripping up on quality standards? For Welspun India Ltd, that number could be in excess of the ₹ 6,000 crore that it lost in market value after its second largest customer, the US-based discount retailer Target Corp., pulled the plug on $90 million of business from its Indian supplier. Welspun’s crime was that the sheets and pillows it sold to Target were labelled as made of premium Egyptian cotton but were actually made with another type of cotton.
Just a month ago, the Singapore International Arbitration Centre, adjudicating in the case between Ranbaxy Laboratories and Daiichi Sankyo, passed severe strictures on the way the Indian company had hoodwinked its Japanese buyer which paid ₹ 19,804 crore in 2008 to buy a majority stake in the company. The court noted that Ranbaxy “deliberately" buried information that allegedly implicated its owners and top management in a host of irregularities, from fraud to falsehood, to dupe its new owners. The details of the order tantamount to one of the most searing indictment of an Indian company for fraudulent practices.
Significantly, both Welspun and Ranbaxy have been market leaders in their businesses of bed sheets and generics, respectively. And both companies led in a space where India’s factor advantages had made it a global leader; Indian manufacturers have a 47% share of the worldwide bed sheets market, while the country is the largest provider of generic drugs globally with Indian generics accounting for 20% of global exports in terms of volume.
The trouble, of course, is that Indian companies don’t know how to slow down when they have a good thing going.
For almost 10 years now, home furnishing has been good business for Indian companies with high margins and assured sales to global buyers like Target, Wal-Mart and J.C. Penney ensuring steady profits.
Margins in the business have always been better than in garments.
The problem is that along the way companies like Welspun got some basics wrong.
Instead of focusing on building value they went after valuation, taking on higher debt to meet the growing order book.
Also Read: Welspun India hires EY to probe US export lapses
International buyers who sell their products have their own reputations on the line and tend to be extremely demanding.
People in the business say that they have had consignments rejected merely because the thread count differed. It isn’t just about adhering to quality standards one time, but about doing it each and every time a product is manufactured for shipment. Staying in the business is then akin to being on a treadmill. At the first sign of a slowdown, and in the case of Welspun that seems to have happened when Egyptian cotton went off the markets, companies start cutting corners. In this case, Welspun, or its vendor, chose to substitute the promised Egyptian cotton with a lower quality one.
Therein lies the nub of the problem—the lack of a corporate culture which has quality built into its DNA. We have seen that in the automobile space, where earlier this year many of the most popular Indian cars failed crash tests by Global NCAP, while the repeated FDA (Food and Drug Administration) bans on the plants of Indian pharma companies point to how poorly some of them have been run.
Around 1998-2000, a number of Indian companies did realize that if they wanted to compete at the international level they needed to adhere to strict quality standards. The result was many of them moved to adopting quality management processes like total quality management (TQM) or Six Sigma. In 1998, Sundaram-Clayton Ltd, Brakes Division, was the first Indian company to win the Deming Prize, the global gold standard for quality processes, and three years later Sundaram Brake Linings Ltd became the second company of the group to win the prize. Since then, another 21 Indian companies have won the prize.
The benefits of a sustained quality program can be seen in how Delhi-based SRF Ltd, which won the prize in 2004 for its Industrial Synthetics Business, has now implemented the same standards in its much more complex chemicals business which entails custom synthesis, a highly precision-driven activity. This business won the prize in 2012.
A September 2015 report, titled “Make in India: How Manufacturing in India Can Become Globally Competitive", by management consultant A.T. Kearney recommends: “In the medium term, OEMs (original equipment manufacturers) should invest in building quality into their designs, so that it is easier for lower-skilled suppliers to ensure quality. This can be further improved by investing in fixtures and poka-yoke (mistake-proofing) for suppliers to reduce quality issues. However, the best results will come from a long-term approach, focused on suppliers and supply relationships. These relationships should have built-in incentives and mandates for lean improvements that will result in quality and cost improvements across the entire value chain."
If we are to avoid more spectacular blowouts of the kind we have seen in Welspun this month, Indian companies will have to look at investments in quality processes as an integral part of their businesses.
Also Read: Target said to consider Welspun contract shift to rival Trident
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider will look at current issues and trends in the corporate sector every week.