Seeing light, steering for recovery

Team FE

The dawn of 2002 brought in rays of hope for corporate India. With war clouds receding—at least for the moment—into the background, the silver linings which had started dotting the horizon are becoming clearer now. The Financial Express first recognised this trend a few weeks back. At that time, there were many emerging factors that pointed to this.

One, the agriculture sector was projected to show a 6.9 per cent growth in the current year, which in turn would mean a higher than expected growth in GDP. According to current reckoning, GDP growth is expected to touch 5.5 per cent as against 5.2 recorded in 2000-01.

Further, a few of the sectors like fast moving consumer goods have continued to register higher growth rates in the last two months. Finally, from the marketplace, both during Diwali and recently during the Christmas and New Year days, consumer companies did brisk sales. Says Satish Kaura, chief executive, Samtel Electronics, “The markets seem to have bottomed out for now.

The economy has already faced the worst shocks that it could possibly have with the 11 September and 13 December events.” Adds R Ramaraj, CEO, Satyam Infoway, “Several old and new economy companies continue to meet targets. There has been no negative impact on foreign exchange reserves.”

It was in this backdrop that The Financial Express team across the various bureaux in the country, did a detailed survey of chief
executives. The above trend of silver linings which were seen some weeks back was re-emphasised by corporate India. And how did this reflect in the survey results?

First, a majority of them felt that silver linings were clearly there on the horizon. Second, a large number of them believed that a clear recovery would be evident sometime this year, possibly by the middle of the year. Indeed, some of them even said that the beginning of a recovery is evident even as of today.

Third, it was felt that a few sectors like the consumer goods and information technology will lead the recovery. Says Chirayu Amin, chairman and managing director, Alembic Ltd, “ The silver linings are there, both in the domestic economy and the external sector.”

Clearly, if this is the gist of the first indications from corporate India, then, equally most of them had another equally important message
to convey. There is a quiet change in their mood. From a sense of fear and despondency, there is now a feeling of relief. It is in this
background, that the survey revealed that a large number of CEOs felt that this was not the time to sit back and relax, but to take proactive steps to manage this critical phase between slowdown and recovery.

Says Siddharth Verma, managing director, Reebok India, “ We must look at taking calculated risks to maximise the possible gains of recovery.” Adds Rajiv Gulati, chairman and managing director, Eli Lilly in India, “ Early indicators of silver linings will mean that corporates are convinced about the future demand and are investing to meet that demand.”

Most of the chief executive also felt that this phase of the economy required dramatically different strategies from their companies. If in the past, they talked about cost cutting, today they are talking about cost innovation. If till a few months back, they talked of conserving cash, now their attitude is to shop for bargains
in the M&A market.

If till recently, a major focus of their attention went into managing low employee morale, currently they feel that this is a time to heal the wounds of the past.

Clearly, companies also feel that it is also a time for discovering their innate strengths. They believe that if take the tide now, they
can transform these into huge opportunities. Says K N Memani, chairman, Ernst & Young India, “ One must now look out for opportunities and should start new ventures or enter virgin areas.”

CEOs crucially also believe that navigating this turn in the corporate life cycle is very critical. Smart chief executives feel that that
they now need to plan for recovery. And how will they do it?

Cost cutting to cost innovation
In the past few months, with a major focus on cost cutting, managers have opted to look for quick fixes. One thing that most of them resorted to was to cut costs. They slashed the budgets and people across various divisions. They cut administrative and travel costs. They chopped sales and earnings targets.

Finally, a large number of them also reduced capital expenditures and dropped many services particularly in the area of marketing and customer service.

But today, a large number of them are talking a different language. What are smart CEOs planning to do? Seeing beyond the bad times, they are actually trying to build longer term relationships with all the stakeholders involved in the game. They have realised that if their companies is getting squeezed, then others in the same chain are also in the same position. And they are looking at building bridges with these various people in the chain: from employees, business partners, customers and vendors. Says Vivek Burman, chairman, Dabur India, “ We have worked on reaping the benefits from operational efficiency at all stages in the supply chain. The period of downtrend will lead to lean and efficient Indian companies to reap the benefits of uptrend when it emerges.”

For example, they realise that forcing a relative cost cut on suppliers is typically far less valuable than working with them in eliminating duplication of operations and costs. They look at joint innovations. Also, they understand that even though employee lay-offs will reduce some costs, in the long term the severance costs and the loss of the knowledge will have far reaching implications.

Adds Markus Muecke, chairman and managing director Panalpina India, “ Companies should take a perspective of twelve months and then decide on the cost of training, recruitment and total employee costs.”

Managing the makeover
The past year had been a period of pain for many companies. They had cut down on people, cut down on marketing expenses, looked at core strengths and botomlines went in for a squeeze.

Take the marketing front. In the past, too many companies had turned off the tap. The typical response from companies when they see better days in the far horizon is to swing to the opposite end, by which they get on to the spending mode. But the survey revealed that while a large number of companies will not turn off the marketing and advertising spends like what they possibly did last year, a large number of them will look for market innovations.

Says S S Lee, managing director, Samsung India, “ We are planning to beat the current phase with our consistent marketing efforts. We plan to continue with our brand building efforts and new product launches in order to promote growth now.”

This thrust on marketing is there for Philips India too. One way that it plans to do is to look at technologically superior products which give better realisation. On the other hand, Coca Cola India believes that their three major strategies for 2002 will be affordability, availability and cost management. Clearly, there will be some innovations on the product and market front. Cadbury India on the other hand is looking at focusing on internal R&D so that they it can now take this to the market. Says Naishadh Parikh of Hitachi, “Customer focused product innovation will continue to be Hitachi’s main differentiator in the marketplace in 2002.”

Internally, also, many of them went in for small management changes rather than any big structural changes. But today, companies are also saying that rather than trying to make small changes, they will look at a complete changes if needed. The chief executives are getting back the courage to make major changes. Such retooling may require a mix of approaches ranging from jettisoning core businesses to slashing costs. They feel that difference now is the changing business climate and only if companies take charge of themselves, will they able to ride the upswing.

Importantly, there are critical communication exercise that a lot of them are looking at. Communicating to the employees, communicating to the customers and suppliers. That even though, they may not have turned off the tap, there is a fresh perspective and boldness in the companies. Says Harshvardhan Neotia of Gujarat Ambuja, “ HRD initiatives will be a key component of my activities in 2002.”

M&A as an opportunity
Conventional wisdom suggests that acquisitions are too risky to undertake during a slowdown or recovery phase. Traditionally, there are two types of thinking in this field. One, that companies must conserve cash. Second, that if a company which is in a downturn phase looks at an acquisition, then it will hamper both the companies. But today, some of the CEOs are saying they will look for opportunities in this recovery phase, when they could possibly acquire companies for consoldiation that are cheap in the market. Along with that a large number of them also feel that, the coming few months will also be a period of intense consolidation. Says Manav Thadani, managing director, HVS International, “ I strongly believe that cash is king. We expect M&A at a much higher pace in 2002.” Adds K R Kim, managing director, LG Electronics India, “ I see a lot of consolidation in the market place. I do feel that the bigger and stronger players will survive and the smaller and fundamentally weak organisations will be shaken out. Only the best will survive.”

Adds R V Kanoria, managing director, Kanoria Chemicals, “ Mergers and consolidations will continue. There will be in particular, a shakeout at the small and medium level of companies.” Adds Arun Kaul, managing director, PNB Gilts, “ There is world-wide trend towards consolidation. The Indian corporate sectors seems to have taken a lead from these global developments. Further, the current slowdown has also given ample opportunities of consolidation to large players to join hands with other market players to derive benefits of mutual synergies.”

The final analysis
The best laid plans and optimism can sometimes go awry. One critical issue will be the continuing tensions in the region, politically and militarily. even though pressures have subsided for the moment, if they do escalate in the future, it could dampen the current
optimism. Says Mahendra Nahata, chairman, HFCL Ltd, “ Any escalation of political tensions can create a warlike situation which will upset the government’s plans for public expenditure in the infrastructure sector.” Crucially, the corporate sector has also laid a lot of emphasis on the coming budget. Almost all of them feel that many steps that the government takes or do not take will actually determine to an important extent the final direction in which the companies can plan for recovery. Says Bharat Patel, chairman, Procter & Gamble Hygiene and Healthcare, “ The government must help in reducing indirect taxes.” For corporate India and the government then, 2002 may well be a water-shed year.