From cost effectiveness to innovation

Updated: Apr 1 2007, 05:58am hrs
Talent rich India now has a global mindset, and is finding new opportunities on its way to exploring corporate alliances to improve cost-effectiveness in manufacturing and other areas that require specialised skill. India has a comparative advantage here, as its IT sector has already developed a global mindset, with a successful network in almost all continents of the world.

But what is a global mindset It is about thinking of the whole world as arena for business play. About leveraging talent from all cultures. About being comfortable in interaction with people of diverse origin. And about assessing various markets while making strategy.

On all these, Indian companies are in a transformational phase. Thankfully, the country has a lot going for it in terms of entrepreneurial spirit and managerial leadership. As a result of the confidence of Indian corporates, there are some guiding examples for others to follow. The Tata-Corus deal is one, among a few others, and if a deal between Reliance Industries and the US-based Dow Chemicals takes place, it would also be looked up to.

It is helpful that the rest of the world is watching Indias emergence closely. It has not gone unnoticed that labour productivity has grown significantly faster in India and China during the last ten years than other markets. William J Amelio, president and CEO of Lenovo, has recently said that few countries offer the same advantages as India. Among these is the markets projected size. Over the next 10 years, according to some projections, about 540 million Indians would move into the middle class. The Goldman Sachs BRIC Report points out that India and China would achieve the status of the biggest economies in the world by 2050, just behind the US.

Accordingly, Indian companies have shown global ambition in manufacturing, especially in the auto sector, pharmaceuticals and commodities. The Tata-Corus deal has changed the perception of Indians being masters of just services. The deal has drawn attention to cost advantages arising from captive raw material sources. Tata Steel has iron-ore mines that provide raw material at less than a third of international prices. However, a successful merger involves issues like cultural adjustment, devoted management, workforce commitment and market flexibility.

And what of Reliance The possibility of global joint venture between it and Dow Chemicals in petrochemicals could prove equally significant. According to media reports, Reliance is keen on a major stake in Dows assets valued at $20 billion. These are assets related to the manufacture of basic chemicals and plastics (the former make up about 24% and latter about 11% of Dows $49 billion turnover). With its Jamnagar facility, Reliance has major cost advantages in petrochemical raw materials. There is also its huge gas reserves, estimated at 14 trillion cubic feet, in the KG Basin. Dow as facing high raw material and energy costs. Reliance therefore is a well suited partner. A strategic shift of a part of Dows production base to cost-efficient India would be a good idea. At the same time, Reliance also has advantages of specialisation, and this gives it a comparative advantage in specific market segments.

If the alliance works out, more deals involving such globe-spanning arrangements of mutual benefit may take place. Of course, very few Indian companies would have what it takes. Reliances importance as a hydrocarbons company, and one with gas and oil exploration interests too, cannot be understated in a world whether cost competitiveness is crucial to success.

Yet, global ambition of such breathtaking proportions can bring about much change in the region. Analysts expect a spate of joint ventures and acquisitions as world dynamics shift the potential for future business towards Asia. Many West Asian investors have started investing on a much larger scale in the rest of Asia, particularly India and China, and this trend could gain force in the years to come.

There are, of course, always some risks in ambitious ventures. The majority of cross-border deals do not work successfully, as the cost of capital is too high, and the production and market supply do not improve well and fast enough to return more than the cost of capital. Ineffective post-merger management is the main reason for the failure of cross-border deals. Cultural acclimatisation and work environment harmonisation often get left out of the big numerical calculations, to later regret.

It is important, therefore, for a sharing of experiences and learnings as India Inc globalises. In this respect, Indian IT companies have already gained much experience by serving customers at global locations. Their skilled workers have displayed the competence needed to adjust to different cultures. If the quality of service rendered stays high and costs of manpower remain in control (despite wage increases, India is cheap), the IT sector can establish all the leading globalisation practices for others to follow.

The country must leverage its language proficiency and demographic dividend to ensure that the advantages are not lost. Innovation, eventually, has to become a significant part of the growth story. This calls for new ideas and thinking acquired in different ways to bring about change. Innovation is necessary in redesigning business models, for example, and the IT sector can play an integral role in minimising the cost of manufacture and ensuring a smooth business transformation.

If all that happens, it will also have positive impact on industrial and agricultural production. Innovation is effective in minimising the cost of production and also improving the quality of goods. Thus India has not only a raw material cost advantage and efficient managerial skills, but potentially a wider set of capabilities. If infrastructure improves, India will continue to be a favourite destination for business enterprises worldwide.

These are authors own views.