Page 111 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes

Case Study Productivity Side of Indian Industries
ompanies that attend to productivity and growth simultaneously manage cost
reductions very differently from companies that focus on cost cutting alone and
Cthey drive growth very differently from companies that are obsessed with growth
alone. It is the ability to cook sweet and sour that undergrids the remarkable performance
of companies like Intel, GE, ABB and Canon.
In the slow growth electro-technical business, ABB has doubled its revenues from
$17 billions to $35 billions, largely by exploiting new opportunities in emerging markets.
For example, it has built up a 46,000 employee organisation in the Asia Pacifi c region,
almost from scratch. But it has also reduced employment in North America and Western
Europe by 54,000 people. It is the hard squeeze in the north and the west that generated the
resources to support ABB’s massive investments in the east and the south.
Everyone knows about the staggering ambition of the Ambanis, which has fuelled Reliance’s
evolution into the largest private company in India. Reliance has built its spectacular rise
on a similar ability to cook sweet and sour. What people may not be equally familiar
with is the relentless focus on cost reduction and productivity growth that pervades the
company.
Reliance’s employee cost is 4 per cent of revenues, against 15-20 per cent of its competitors.
Its sales and distribution cost, at 3 per cent of revenues, is about a third of global standards.
It has continuously pushed down its cost for energy and utilities to 3 per cent of revenues,
largely through 100 per cent captive power generation that costs the company 4.5 cents per
kilowatt-hour; well below Indian utility costs, and about 30 per cent lower than the global
average.
Similarly, its capital cost is 25-30 per cent lower than its international peers due to its
legendary speed in plant commissioning and its relentless focus on reducing the Weighted
Average Cost of Capital (WACC) that, at 13 per cent, is the lowest of any major Indian
fi rm.
A Bias for Growth
Comparing major Indian companies in key industries with their global competitors shows
that Indian companies are running a major risk. They suffer from a profound bias for
growth. There is nothing wrong with this bias, as Reliance has shown. The problem is most
look more like Essar than Reliance. While they love the sweet of growth, they are unwilling
to face the sour of productivity improvement.
Nowhere is this more amply borne out than in the consumer goods industry where the
Indian giant Hindustan Lever has consolidated to grow at over 50 per cent while its labour
productivity declined by around 6 per cent per annum in the same period. Its strongest
competitor, Nirma, also grew at over 25 per cent per annum in revenues but maintained
its labour productivity relatively stable. Unfortunately, however, its Return on Capital
Employed (ROCE) suffered by over 17 per cent. In contrast, Coca Cola, worldwide, grew at
around 7 per cent, improved its labour productivity by 20 per cent and its return on capital
employed by 6.7 per cent.

The story is very similar in the information technology sector where Infosys, NIIT and HCL
achieve rates of growth of over 50 per cent which compares favourably with the world’s
best companies that grew at around 30 per cent between 1994-95. NIIT, for example,
strongly believes that growth is an impetus in itself. Its focus on growth has helped it
Contd...

106 LOVELY PROFESSIONAL UNIVERSITY