Business Today

"Don't push profits at the cost of stability"

Keep business operations simple and nimble in a world where companies have diversified across geographies and currencies.

N. Madhavan | Print Edition: January 10, 2010

This downturn was not just a blip in the world economy but a structural shift in the centre of gravity from the West to the East. It does not mean that America and Europe will not be economically powerful anymore; but their relative scale to China and India has changed permanently.

China, in the next few years, will be as powerful—economically—as the US or Europe; India will reach that scale in about 20 years. You will have the US, Europe, Japan, China, Korea and India as four or five major powerful blocks.

Currencies will also re-align. In short, the global economy has just undergone a seismic change. We need to learn our lessons from this change and strategise our operations accordingly.

First, we need to diversify risks across geographies and currencies. You cannot be completely dependent on any particular market. What if three of your key customers go bankrupt in a global meltdown? What if you have to tackle volatility in currencies, in raw material and political risks associated with key markets?

The world is much more complex today, but at the same time, if you disaggregate the risks, it is not as complex as it appears to be. The best thing to do is to identify the risks and make sure that mitigation measures are in place.

Second, volatility in currencies will continue to remain high. Companies should be financially more stable in terms of their debt-equity ratio in order to handle it. Ideally, companies should keep their debt lower than what the market would normally accept. That will offer them the much-needed headroom in case of a major crash. On the contrary, if there is a sudden upswing in the business, a lower gearing will allow you to borrow and capitalise on the development.

Also, it is time to realise that profits cannot be maximised at the cost of stability. For instance, if a company can make 35 per cent return on capital by being vertically integrated and 25 per cent by being dependent on a supply chain. Then, it is prudent to share the risks with the supply chain and settle for a slightly lower return. That way, even if the worst happens, the company survives. Today's business conditions call for the companies to be agile with a less complex structure.

Despite your best efforts if you still get stuck in a crisis, any knee-jerk reaction can prove counterproductive in the long term. Last year, many companies cut back on supplier schedules, arm-twisted their vendors to drop prices and even threatened to hold back payments when the crisis hit hard.

But when the market improved this year, some of these companies began facing shortage of inputs, as a few of the badlyaffected vendors took their time to turn around. After 20 years of prosperity, companies have forgotten human relations. The recent spurt in problems involving industrial relations across the country is a pointer to that fact. India is a humane society and we should be humane even in a crisis.

— Venu Srinivasan , 57, President, CII & Chairman, TVS Motor Company

(As told to N. Madhavan)

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