Experience is the best teacher: That is one proverb that generations of students have been told to expand into an essay. Today, as the world’s corporate landscape is scorched by the economic downturn, BT asked itself: why not check out some veterans who have survived severe crises? Never mind that the current downturn is being projected as the most serious in living memory, greater, perhaps, than the Great Depression. For yesterdays’ MBAs at the CEO’s helm, or the grizzled captain who wants to hand over a ship in good condition, any anecdote can come in handy in uncharted waters. So, we heard Jagdish Khattar recount his bumpy ride at Maruti’s wheel, N. Srinivasan of India Cements re-live an acquisition spree gone awry, V.G. Raghavan of Essar talk on integration, D.D. Rathi of Grasim stress the basics, Ajit Balakrishnan of Rediff.com talk about hoarding cash and R. Rajendran of Lakshmi Machine Works speak on how too much money can derail you. Each of them had an interesting tale.
MD, Maruti Udyog, from 1999-2008
His crisis period (2000-01)
- Industrial slowdown
- Increased competition
- Slump in market share
- First and only loss
What he did
- Cut jobs in some areas
- Created new businesses to straddle market
- Helped dealers, focussed on prices
- Communicate clearly with all stakeholders
- Stand by employees, vendors and dealers
- Link incentives to things that matter
'We reinvented ourselves'
The last economic slowdown, at the turn of this century, was a multiple whammy for Maruti Udyog. It was not merely the industrial slowdown, but also the new reality of rampant competition, resulting in a slump in our market share to 45 per cent and a Rs 269-crore loss in 2000-01.
We had to save the company… build on the successes of our past, pay the price for our shortcomings, venture into new areas of business like finance, insurance, accessories and find new ways of doing things. Above all, we had to persuade thousands of employees who had grown up in the belief that they were the best, as well as hundreds of managers and workers who had earlier been commended for being pioneers, leaders and path-breakers that they had to reinvent themselves to survive.
We took the call that the Indian car market was destined for rapid growth, and whenever that happened, Maruti should be ready to harvest it. New businesses, two voluntary retirement schemes, drastic measures to increase worker productivity, and cutting costs sharply were just a few of the various new initiatives. But it was not easy getting the organisation to share the vision. For some time, management’s actions seemed confused. Case in point is the VRS scheme which conveyed that we needed fewer people and lean operations. Yet at the same time, we were recruiting in service, sales and R&D.
The existing incentive schemes were designed to reward workers who made more cars. With competition, the waiting periods disappeared and customers now had a choice. It was no longer how many cars one produced— rather, a variety of parameters influenced this decision. Incentives were now linked to sales, quality, productivity, etc.
A large number of the senior people in the company, wellmeaning as they were, wondered why a manufacturing company was venturing into services like finance, insurance, accessories, preowned cars, etc. We set up two groups consisting of middle and senior managers from various divisions. The Vistaar team, an internal team to spearhead the new forays, and AT Kearney, engaged by us, were told that before they brought up the business plans to directors, they would have to get them cleared by these two groups. It worked. When the plan was eventually presented to directors, it was defended not so much by the Vistaar team as by the managers in those groups.
For our dealers, the change from being a dominant player to one that was struggling in a flat market was shocking. From being distributors they now had to sell. There was a sharp fall in profits. Some were incurring losses. We met them, individually and in groups, and heard them vent their anger. We said the cycle would turn and business would look up. We did workshops on how to improve profitability, showed them the huge opportunity in new services, offered to train their sales force, and supported them with sales promotions.
The rules of the game had changed drastically for component suppliers. Earlier, when we launched a model, the prices of its components were fixed according to their import price. As we tried to keep the final price of the car on a tight leash, we moved to “target pricing”. For instance, we would decide that a 1,000cc car could not be sold for more than Rs 3.4 lakh. Then we worked backwards—to sell it at that price, what should be the price of each component. We had two or three vendors for each component and asked them to match the target price. The nearest quote was selected.
We used the last downturn as an opportunity. Our objective, now redefined, was clear to us. However, the task ahead of aligning any issues that the stakeholders may face due to this redefinition was addressed by effective communication and a buy-in from every affected stakeholder—perhaps the reason why Maruti has not reported another loss, and its market share has stayed above 50 per cent.
—As told to Kushan Mitra
'We multiplied cash reserves'
Nobody living has actually experienced the Great Depression of 1929-30, so the current economic crisis can be termed as unprecedented and far greater than what happened in the 1990s, says D.D Rathi, Director & CFO of Grasim Industries. “We at Grasim are currently in a much favourable situation and all thanks to what we have been doing over the years,” says the veteran.
“In the late ’90s, the first thing that we did was to multiply our cash reserves position. We did ordinary things but in an extraordinary way,” he recalls. So, we increased cash flows and restructured debt. “We started restructuring… to concentrate on the two core businesses of cement and viscose staple fibre (VSF) to attain global size, global competitiveness and leadership position,” he says. Grasim also shut down units that were not viable and exited businesses that did not make sense for it.
Director & CFO, Grasim
His crisis period (Late 1990s)
- Mounting costs
- Several unviable units
- Review of business strategy
What he did
- Brought focus into capital allocation
- Restructured debts, buttressed
- Adopt organic and inorganic growth
- Avoid excessive leveraging and
- Focus on profitable growth, not
growth at any cost
- Build capacity for the future
“While we invested in acquiring business, we also divested to generate additional cashflows,” Rathi says. Grasim emerged as the fastest-growing cement company in India, and is now among the world’s top 10. In 1999, its cement capacity was 6 million tonnes; by the end of 2008-09, it will have close to 49 million tonnes.
Grasim also rationalised its manpower in those tough times and cracked down on costs, the aim being to become globally competitive. The company also brought focus into its capital allocation strategy, and adopted a mix of organic and inorganic growth along with a good risk management strategy.
For the present, Rathi says: “The company has a strong cash reserve position and very low leveraging”. So it can raise large resources to spend on any growth opportunity coming its way.
“We are also currently focussing on increasing capacity use, cutting costs and managing cash flows better, to continuously enhance capital and manpower productivity,” he says.
'We conserved cash, put it to good uses'
In October last year, Ajit Balakrishnan, Founder, Chairman & CEO of rediff.com, one of India’s leading news websites and Internet companies, was in his New York office. He recalls looking out at the mayhem on the New York Stock Exchange. Back in India, the first thing he did was to address the 250-odd employees at rediff.com’s Mumbai office. He told them a tidal wave could be headed for Indian shores and trigger an economic slowdown.
Founder, Chairman & CEO, rediff.com
His crisis period (2000-01)
- Recession in Internet business within weeks of listing on NYSE
- Standing up to more resourceful competitors like Google and Yahoo
- Innovating in difficult times
What he did
- Invest in new services when bigger rivals wouldn’t
- This helped the company build an edge
- Shut down unviable projects
- Conserve cash and be patient
- Shed staff hired at bloated salaries
- Appraise even pet projects critically
“Everybody was skeptical. I simply told them: Nothing to worry. This is the seventh recession I am witnessing in my work life. But it’s not the end of the world as it would seem to all of you who are witnessing a recession for the first time,” Balakrishnan recalls. Stay calm, he said, and do the right things.
Rediff.com was listed on the NYSE in 2000, five years after it was founded and just when the “Tech Wreck” began. Balakrishnan, then based in the US to understand the listing rules, could see it was a bad time for Internet companies, many of which had to fold up. Although he was confident about the Net’s future, he could “sense the disbelief about the Internet and business on the Net.”
“What we did was to be careful in conserving cash. We were sitting on a pile of cash… $60-70 million… which we got after listing. We decided to use this money carefully. And 18 months later things turned around,” Balakrishnan says.
He feels a recession is a great time in which to innovate. At that time, the marketplace had only international players such as Google, Yahoo and MSN. But they were not investing in their business. Rediff decided to put its money to good use.
“We thought we should do something that will give us an edge. We first invested in building the news site, which became a leader, and also invested in rediffmail, which later went on to become one of the leading Indian e-mail service providers,” he says.
So, what should companies do now? Be patient, for one. “One cannot say how long this recession is going to last. One has to wait and watch patiently,” says Balakrishnan.
Then, adjust cost structures a lot. “If you have committed the sin of employing people at bloated salaries, this is the time to correct it,” he says. At the same time, CEOs should shut down pet projects that are just pipe dreams.
His message to youngsters: “I see this recession as a midwife between one era and other… you experience pain just like a woman does in her pregnancy. But, eventually, there is a happy ending.”
'Use resources well, even in boom'
For the Coimbatore-based textile machinery manufacturer, Lakshmi Machine Works, the early ’90s (especially 1995-96) was, indeed, a golden period. Order books were full and buyers had to sometimes wait for a year. LMW had no debt on its books—customers actually paid an advance when placing an order. It appeared that nothing could go wrong.
R. Rajendran CFO, Lakshmi Machine Works
His crisis period (1997-2003)
- The longest slump in the textile industry
- Fallout of a failed diversification
- Shrinking sales and orders
What he did
- Helped divest SISCOL and made LMW debt-free again
- Managed inventory aggressively
- Cut fixed costs
- Use resources optimally even during good times
- Inventory management is critical
- Control fixed costs
So, the cashrich LMW diversified into steelmaking and set up SISCOL, an integrated steel plant. Its share of the investment was Rs 145 crore, part of it funded through borrowings. In 1997, things went horribly wrong. The textiles industry slumped into a recession, the longest in its history. Orders dried up, sales fell and the interest burden (on account of SISCOL investment) pulled down the bottom line, leaving it with marginal profits.
“An organisation should use its resources optimally even during a boom,” says R. Rajendran, CFO, LMW. In a downturn, there is very little one can do on the market front. Some internal measures can be resorted to. “Inventory management, for instance, saves the day in a bad market as it aids better cash flow and reduces inventory carrying costs,” he adds.
LMW managed to shore up its finances during the revival in domestic demand in 2004-08 that followed a government initiative: the Textile Upgradation Fund to modernise the textiles industry. In fact, it sold its stake in SISCOL to the Jindals in 2004 and is a zero-debt company again. “We are today better prepared to face the current downturn,” Rajendran says.
'Expand but fund it right'
For India cements, size and crisis came in short succession. Fuelled by acquisitions, mostly hostile, its capacity shot up from just 2.80 million tonnes in 1997 to 10 million tonnes by 2001. This Rs 1,600-crore acquisition spree was funded mainly by debt. Meanwhile, the government’s decision to do away with sales tax exemption with effect from the year 2000 triggered a sudden mad rush to add capacity before the incentive ended. Result: ICL suddenly faced a glut in capacity and not enough demand. Prices crashed. ICL’s losses piled up, crippling its capacity to service debt. In just one year (2003-04), it posted a loss of Rs 307 crore.
Vice Chairman & MD, ICL
His crisis period (2002-05)
- Capacity glut and diving demand
- Managing the consequences of a debt-funded acquisition
What he did
- Cut costs and shed excess labour
- Sold the shipping division
- Ensured that leadership retained confidence of key executives
- Never expand in a fractured market using debt
- Leadership should always inspire confidence in employees
- An element of paranoia helps
“Our decision to increase market share (through acquisitions) in a fragmented market through debt turned out to be a mistake. When the prices fell we were caught in a mess. We had to cut costs, reduce staff, sell our ships… fortunately, the market turned favourable soon,” says N. Srinivasan, Vice Chairman & Managing Director, ICL. Also people must have faith in the leadership. Only then will key people stay on during a crisis. “When a ship is caught in a storm, all hands must be on the deck,” he says. Most importantly, an element of paranoia helps. “The level of competition is such these days that you cannot afford to relax. Your antenna must be on alert always. This helps to get the best out of everyone, including yourself,” he adds.
—N. Madhavan'We drew up a threepronged strategy'
Steel companies had a harrowing time in the late ’90s when steel prices crashed at a time when they were setting up big projects. Essar Steel, part of Essar Global, managed to emerge in one piece. V.G. Raghavan, CFO, Essar Global, recalls: “We had drawn up a three-pronged strategy to survive the downturn.” Essar integrated operations from iron ore to ready-to-market products, cut costs, including interest, stepped up production by improving processes, and began making value-added products that it retailed through its own hypermarts.
V. G. Raghavan
CFO, Essar Global
His crisis period (Late 1990s)
- Steel prices crashed just when big projects were being set up
What he did
- Integrate end to end
- Got mines, set up retail for value addition
- Squeeze out savings from production processes
- An intermediate producer cannot control raw material costs or set retail prices
- Raw material sources should be diversified
- Borrowings should be reduced
The lessons he learnt? “The industry is cyclical and we have to equip ourselves to face the downturns with conservative leverages,” says Raghavan.
Raghavan explains: “In order to survive the downturn, we have to become an efficient producer in terms of cost and keep leverage low.”
“The measures that we have taken earlier are holding us in good stead now,” says Raghavan. “We are still seeing a 5-6 per cent growth in consumption and the situation as of now is not bad as it was then. We are in a more controllable situation,” he adds.