The Southern Surge

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What’s common between IT majors Infosys, Wipro, Satyam, pharma gaints Dr Reddy’s, Aurobindo Pharma, private airlines Air Deccan, Kingfisher and Paramount and GVK, GMR? Well, they are all from south India. While some of them are better known, many have been and still are a faint blip on the national business radar. But as they are making an impact in diverse sectors like aviation, auto industry, IT and ITeS, pharma and biotech and infrastructure, they are demanding their rightful place. Satya Naagesh Ayyagary traces the growth and spread of this new phenomenon

For long, Indian business was primarily Bombay-centric and then some in Gujarat and the North. The South as a region was hardly on the national radar. However, there seems to be a Southern Surge — especially post liberalisation — with more and more south-based companies going really aggressive and attracting national and even international attention (media included) in various verticals. “Though established businesses existed in the south in areas like textiles, automotive and pharmaceuticals, to name a few, certainly there is a southern surge. I would consider the 1980s as the turning point in this change, and with liberalisation there has been a bigger change,” points out Raman Mahadevan, business historian and a keen observer and researcher of business in south India. Most of the new generation businesses have come up in areas like pharmaceuticals, IT and ITeS, infrastructure, and aviation. Consider this. In the IT and ITeS space, it is Infosys, Wipro and Satyam who rank among the top. Similarly, in the pharma space, Dr Reddy’s, Aurobindo, Orchid, Matrix Labs, Hetero Drugs are a few prominent names. What explains the rise of the rise of these companies? Pure entrepreneurial zeal, gumption and drive, policy driven opportunities? Or more?

Seeds of growth

First, to facilitate the growth of such enterprises, there was a knowledge ecosystem that was in place. Today, in the era of free market enterprise, it is more than fashionable to indulge in public sector bashing. However, it was the collection of these institutions that sowed the early seeds of private entrepreneurship. “Major public sector investment in Karnataka and Andhra was a critical factor in unleashing certain local capital,” cites Mahadevan. “Southern states have definitely taken the lead when it comes to knowledge-based industries, be it pharma, biotech or IT. Knowledge-based industry in the south was primarily born out of entrepreneurial zeal and drive. Availability of good infrastructure and connectivity contributed to the growth. They also took the lead in policy issues like unveiling the biotech policy etc. It is logical that the industry takes a bigger shape in the region where it was born,” says Satish Reddy, MD and COO, Dr Reddy’s Labs. Reddy is the son of the eponymous founder Dr Anji Reddy, and one of the most respected names in the pharma industry in the country. Historians say that the Indian Drugs and Pharmaceuticals Ltd (IDPL) and later the Regional Research Laboratories (now the Indian Institute of Chemical Technology) were the crucibles for spawning enterprises. “Most pharma companies here have a direct or indirect connection to IDPL. And, almost all of them are first-generation entrepreneurs,” says Amitabha Guha, managing director, State Bank of Hyderabad.

Says SS Varaprasad, senior advisor, Bulk Drug Manufacturers Association (BDMA) and a pharma industry veteran: “Today, Andhra Pradesh occupies the leading position in the country in bulk drugs manufacture and third in manufacture of formulations. The turnover for 2006-07 is estimated to be about Rs 11,808 crore (Rs 9,840 crore) and exports to the tune of Rs 7,084 crore (Rs 5,904 crore),” he says. No wonder then that it has earned the epithet of ‘bulk drug capital of India’.

“The market cap of Dr Reddy's, Aurobindo, Divi’s Labs and Matrix put together do compare very well with that of Ranbaxy, Cipla and Wockhardt,” points out C Krishna Prasad, managing director of the Rs 170-crore Granules India Ltd, a pharmaceutical formulations intermediates manufacturer. Prasad himself is a first-generation entrepreneur. “There is definitely an attitude change shedding their earlier conservatism and leading to confidence among business people in the south. Their risk appetite is also changing. The knowledge-driven software and pharma sectors have shown the way. Today, there is healthy respect for business,” concurs M Rammohan Rao, dean, Indian School of Business (ISB).

Interestingly, the pharma sector growth also led to an offshoot growth in the biotech area. And the same factors have facilitated this growth. Today, biotech companies from the region like Biocon, Shantha Biotech and Bharat Biotech are hungry and raring to grow. With these, an ecosystem is emerging with the setting up of the ICICI Knowledge Park and Shapoorji Pallonji Biotech Park in Hyderabad to culture and spawn more successful enterprises.

Brick and mortar isn’t dead

Until recently who would have heard names like GMR, GVK which have won the bids to modernise and operate the New Delhi and Mumbai airports outside their small sphere? The former has just announced that it is part of the consortium building Turkey’s second international airport. Add to that Lanco which won a bid for the Rs 16,000-crore, 4,000 MW Sasan ultra mega power project astounding big names like Reliance (though currently it’s in a legal limbo). In just a few years, these companies have become big names in the country's infrastructure arena, having pipped old and established names to the post.

Another amazing fact: more than half the Rs 52,000-crore contracts of the National Highways Authority of India have contractors from Andhra Pradesh involved in them either directly or through joint ventures. Nearly a third of all government construction projects like roads and power projects — both central and state-sponsored — in the country have an Andhra connection. Companies such as IVRCL Infrastructures and Nagarjuna Construction Company too are on the fast track of growth.

What is surprising is that unlike IT, ITeS and pharma, there is neither a traditional knowledge base nor a competitive advantage that has been the fertile womb for companies to take birth there. “Andhra has traditionally been a land of contractors and construction a significant part of the state economy,” explains a senior executive of an old infrastructure major. By 2020, says a UN report, construction will contribute a tenth of the state’s GDP. A peek into history appears to have a logical explanation for this. Large irrigation projects that came up in the 1960s and 1970s, say business historians, was the breeding ground for contractors who grew into infrastructure companies. For instance, GVK Industries and Gayatri Constructions first cut their teeth at the Nagarjunasagar multipurpose dam in the late 1960s. Founders of both families — as also most of Andhra Pradesh’s other construction firms — have an agricultural background. However, unlike its pharma and IT bretheren, it is the second generation which is driving the growth.

Moreover, if the ability to get large worker pools to stick to project milestones was an acquired competitive advantage, it was the entrepreneurial zeal of the contractors that saw them scaling up. Unlike counterparts elsewhere who stuck to doing business at home, Telugu contractors headed wherever projects beckoned. “They displayed a complete lack of inhibition as seen among other entrepreneurial classes like the Naidus of Coimbatore,” says business historian Mahadevan.

“Political connections did matter in those days as there were hardly any entry barriers in terms of stringent grading or pre-qualification. So, there was room for manipulation,” admits E Sudheer Reddy, vice chairman and managing director, IVRCL Infrastructures. The metamorphosis from small-time, family-run construction businesses into professional, project-driven entities has seen Andhra’s infrastructure companies adopting new operating structures. Some are even taking a leaf from sectors like the automobile industry where manufacturers focus just on core operations and assembly, outsourcing ancillary functions. The Rs 300-crore Indu Projects is an example. “We give smaller companies assured business for say, five years as well as the necessary finances, thus enabling them to focus on quality and timely construction,” says I Syamprasad Reddy, the company’s managing director. “Now we are working on a model of even taking equity in those companies.” Such is the interest that Indu funded a first-of-its kind chair for research in real estate studies at ISB.

As for the road ahead, for every GVK or GMR, there are at least a dozen others with ambitions of making it big. “The demonstration effect has worked powerfully,” says Mahadevan.

Aviation: taking wings

Unlike the above three sectors, there is no imaginable reason for aviation to grow big in the south, which is home base for India's first no-frill low cost carrier Air Deccan, full-service Kingfisher Airlines and all business class Paramount Airways. Of course, Bangalore has the PSU Hindustan Aeronautics Ltd and is also a major base for the Indian Air Force. But unlike IDPL, it has not been much of a reason for the birth of the three private airlines. Then, what explains this rise? Again, its simply seizing an opportunity and cashing in on it. “What I feel, as far as aviation is concerned, is that the entry barriers are high. However, it is a function of a new drive of entrepreneurship with an ability to take risks. For me it is the passion for the aviation business. It is a rare opportunity to convert your passion into a meaningful and profitable business,” says Thiagarajan, managing director, Paramount Airways, and himself a qualified pilot. But Paramount is old money with interests in textiles, manufacturing, banking and finance. Thiagarajan’s grandfather Karumuthu Thiagarajan was known as the textile tycoon of the south. Similarly, Kingfisher has entered the fray with all the backing of Vijay Mallya’s liquor cash from the UB group. However, Air Deccan is an exception to the rule: a pure, unadulterated case of entrepreneurship with founder managing director Gopinath being an ex-Army captain.

Paramount, which is primarily servicing the southern sectors, claims to be a market leader with 26% share of the southern market. Now it is setting its eyes on western India and “eventually by 2010-11 we would have a national presence with 40 more aircraft,” says Thiagarajan. In fact, his risk-taking ability is reflected in the fact that he chose to employ Brazilian Embraer aircraft unlike the usual Airbus or Boeing planes.

Auto: driving the wheels

Not many would know that Tamil Nadu is known as the Detroit of South Asia. Many would also not know that almost 49% of India’s automotive industry (including vehicle and component manufacturing) is based in the south, most of it in the Tamil Nadu-Karnataka corridor. India’s second largest truck maker Ashok Leyland is Chennai-based. New entrant Volvo too preferred to house its manufacturing in neighbouring Karnataka. Ashok Leyland and the old TVS group which entered auto component making more than half-a-century ago and was joined by many others later on has created the self propelling automotive cluster. This is precisely what attracted the Fords and Hyundais to head there.

Healthcare: the prescription for growth

It would not be an exaggeration to say that the south is emerging as the healthcare destination of the country and is also home to some first-generation healthcare players. Take the case of Apollo Hospitals. The country’s private hospital chain founded by Dr Prathap C Reddy now has a national and even international footprint. There are many smaller hospital chains like Care Hospitals and many super-speciality hospitals including those catering exclusively to children like Rainbow Hospitals and Lotus. Some of them are also into pharma retailing, an interesting but logical offshoot.

Finally, the emerging trend will be that there will be more players in the fray from the south in many verticals, believes Prasad. Paramount’s Thiagarajan is even more confident. “South India,” he asserts, “will be the engine for India’s growth.”

Education, the foundation of the knowledge industry

While it is not uncommon for first-generation business leaders in most businesses to be partially literate or semi-literate, all the successful enterprises in the knowledge industry have a direct correlation to higher levels of education. In fact, much of the south's growth can be ascribed to higher levels of education. Even on basic literacy counts, all the four southern states rank far higher than the national average.

Ironically, there is a traditional Indian dictum that education and business are antithetical to each other. However, proving it wrong is the knowledge industry — where education and knowledge are good, basic ingredients to start with for an entrepreneur to succeed. Whether it is Narayana Murthy of Infosys, Ramalinga Raju of Satyam, Dr Anji Reddy of Dr Reddy's or Raghavendra Rao of Orchid, all carry prestigious degrees. “People in the south in general place a higher premium on education than elsewhere,” points out Prasad of Granules. “Good educational institutes, PSU infrastructure and research institutions acted as a resource bank for the supply of skilled manpower, which the knowledge industry thrives on. Southern states have the highest concentration of technology and research institutions in the country. Knowledge is a function of human resource and is the raw material for these industries. Hence such industries are more likely to be here,” adds DRL’s Reddy.

Keeping up the momentum, it was the south which took the lead in setting up professional colleges in the private sector decades ago. Look at the picture today. There are over 700 engineering colleges with a capacity of 1,76,545 seats in the four southern states and Union Territory Pondicherry. That’s way ahead of any other region.