Keeping alive the good, old family business
Family businesses post 1991 were shored up by the arrival of the next generation, many of whom were educated and had worked outside India
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Corporate presentations of Voltas Ltd today trumpet its landmark early years. In 1956, the company installed eight air conditioners (ACs) at the Mumbai home of chief minister Morarji Desai. And in the early 70s, India’s first high-speed train, the Rajdhani Express, was air-conditioned by Voltas.
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The company, however, sold more than just cooling solutions. In the decades preceding economic liberalization, Voltas was a distributor for Amul, Pepsi and Rasna. It sold tomato ketchup and developed milk vending machines for the National Dairy Development Board. The company lost its mojo as an AC maker in the mid-90s when multinationals launched an array of good-looking products.
Broadly, this is the story of most Indian companies, big and small. In the licence-permit raj era, pre-1991, manufacturers were given licences to make products but the capacities allotted were limited. Businesses couldn’t expand beyond a point in one product category; they went horizontal, trying to play in many industries.
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Take the example of ELGi Equipments Ltd, a Coimbatore-based mid-tier compressor maker. Pre-1991, the company sold compressors, automotive equipment, braking systems for trucks, pasteurizers and washers for breweries and drip irrigation systems, among others. As the licensing system was dismantled, new market entrants with more capital and superior technology ate into the company’s share.
Nonetheless, both Voltas and ELGi bounced back. This is the tale of two Indian companies—a large consumer-facing company and a smaller business-to-business manufacturer—that learnt crucial life lessons after liberalization, adapted and eventually thrived.
While Voltas started in 1954, ELGi was established in 1960. Both the firms had a lean 10 years after the economy opened up. Voltas slipped in the pecking order, from being No. 1 in the AC market to No. 7 between 1993 and 2005. ELGi’s growth declined. Between 1995-96 and 2005-06, the company grew by about 6% every year while the economy jumped 7-8% in seven of the 10 years.
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Voltas is back to being the No.1 AC maker today; ELGi, which mostly sold in the domestic market and Russia before 1991, is now a global player in compressors, selling in 120 countries.
How did the two companies turn around? Turns out, most companies that survived and thrived in the post-liberalization era did things that seem commonsensical today. For instance, focus on a few products they could compete in rather than be a marginal player in many. Yet that period of adjustment took several years.
“Indian companies ran on relationships rather than processes. Because of the shift towards cost competitiveness, companies adopted process-improvement techniques like Six Digma," said R. Gopalakrishnan, author and a former director at Tata Sons Ltd. “The realization was that companies should run irrespective of who was the boss," he added. “Consumer goods companies would manufacture everything internally before 1991. They started shifting to outsourcing over a period of time."
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THE VOLTAS TALE
Before India opened up, the consumer electronics landscape in India had fewer players. Voltas dominated the AC market; BPL was known for televisions; Videocon for washing machines and refrigerators. Around 2000-01, the competitive landscape changed with LG, Samsung and Sony aggressively marketing its products.
The multinationals came not just with deep pockets but with superior manufacturing processes. Indian manufacturers, like Gopalakrishnan mentioned, had high fixed costs. In the AC market, the multinationals started introducing spiffier indoor units. Consumers, all of a sudden, were flooded with choice.
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“With the entry of multinationals in India, we realized that our products were getting irrelevant and that we had to create a differentiation," said Pradeep Bakshi, managing director and chief executive officer of Voltas. “In 2006-07, we set up a new factory at Pantnagar in Uttarakhand and differentiated our ACs by introducing energy efficient and technologically advanced products at an affordable price. That is how we started clawing back a lead over our competition and regained our market leadership."
Before the new factory came up, Voltas had manufacturing plants scattered across the country because of the fragmented nature of its business. From a vast array of products and services, the firm decided to focus on ACs and commercial refrigeration products. It hived off cost-heavy plants in cities like Hyderabad.
The Pantnagar plant was a lean unit—just like carmakers, Voltas encouraged suppliers to set up ancillary factories around its plant. Instead of Voltas investing in components, the company’s suppliers invested in return for promised business volumes. This turned around Voltas’ cost structure. Profit after tax stood at ₹22 crore in 1995. Profits doubled in 2004-05 to ₹50 crore but spectacularly shot up to ₹385 crore in 2009-10.
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The second phase of the company’s turnaround started in 2010-11 with the launch of an ‘all-weather AC’. The all-weather positioning, backed by aggressive marketing, firmly established the brand in the consumer’s mind. Voltas also opened up many more distribution channels in modern retail, regional retail and multi-brand outlets. “We have been the market leader with a huge lead over our immediate competitor for the last 10 years. Today, we have a 27% market share in the AC category," Bakshi said. In 2019-20, LG, the No. 2 player, had a market share of about 14%, according to market research reports. In 2011, LG led the market with a share of 28%.
ElGi’s JOURNEY
ELGi grew its revenues 28% between 1981 and 1990. The revenue growth nosedived to 10% in the next decade, between 1991 and 2000, because of its reliance on domestic sales and weaker products. ELGi’s revenue growth consequently picked up; between 2001 and 2010 the firm clocked a CAGR of 16%.
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“We had to either sell or shut down most of our businesses. We shrunk it down to two—compressors and automotive equipment," said Jairam Varadaraj, ELGi managing director.
Some of the businesses the company sold were profitable in the 90s. Nevertheless, Varadaraj realized that market share and profits would be “illusionary" in the future because his company didn’t have the technology required to sustain many of the products it manufactured, given the growing competition. The divestment took seven to eight years.
The company then invested heavily in the businesses it retained, particularly compressors. It built stronger manufacturing systems, quality processes and developed its own technology while focussing on productivity.
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“The Indian market size was not big enough to justify the investment we were making. Our aspiration had to be global. It was a long haul. We now sell in over 100 countries but strategic markets are Australia, Indonesia, Thailand, Europe and America," Varadaraj said. From 2011, international sales for compressors got a boost as ELGi made acquisitions in Europe and the US. In 2019-20, 45% of the company’s income of ₹1,829 crore came from international sales.
Professor Kavil Ramachandran, executive director of the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business, said family businesses in the 90s were shored up by the arrival of the next generation. “The manufacturing sector needed more competitiveness, technology, professionalism and working with non-family professionals. That was enabled by the arrival of the next generation, many of whom were educated outside India," he said.
This certainly appears to be true in the case of ELGi and other family concerns that have thrived. They managed to do this by shifting the basis of competitiveness from managing Delhi and getting licences to making products that are globally competitive.
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