Sunil Mittal on Bharti Airtel's telecom entry, Africa business and more
Josey Puliyenthuruthel January 17, 2012Sunil Mittal's first reaction when he is briefed on the BT-INSEAD-HBR Best CEOs ranking is that measuring a CEO's performance just by how his company's shares have performed may not be comprehensive enough.
"The Best CEO's job is not just shareholder return. There are many, many other things that he does."
But, he is quick to provide the answer himself when he is told that the study covers the years between 1996 and 2011. The authors of the study "must have felt that in a 15-year period everything would be covered: better organisation, better brand, better product, better innovation... it would have been counted," he concludes.
Such sharp thinking and his ability to see the big picture comes through time and again in a recent one-hour interview he gave Josey Puliyenthuruthel. Edited excerpts:
Q. Take a 30,000-feet perspective to your journey. India is the world's fourth-largest economy, the second fastest growing, telecom an unmet need... Is Sunil Mittal a product of the era he grew big in or is there more to it in his enterprise?
A: Well, you can never deny that the fact India was growing at a fast pace and industries that would have been set up at the time would have benefitted. The last 15 years have been very good to the nation and all boats had to rise; nobody can discount that. The second part, I would say, is that the telecom sector also had a great run. Being in India at that time, being in the sector at that time certainly was a great help. The third part is that many in the sector fell away. So, that's where the questions come: did you build a great enterprise, did you build a great brand, did you innovate, did you build a great team, did you do anything that the customer saw more value in you than others? I think that's where Bharti Airtel scored well.
Q: You are the only independent company left standing.
Q: But that is more part of the Ambani enterprise.
A: That is true. More importantly, in a business that is heavily capital intensive like telecom, most (companies) are from large stables or big enterprises. An AT&T will reorganise itself through big mergers or demergers, Verizon will come out from Baby Bells, NTT was state owned as also BT, Vodafone was an amalgamation of three companies.
Very few companies in a capital intensive environment come from an entrepreneurial background. McCaw was one of those, Softbank in Japan, and Carlos Slim in Mexico... There are just a handful of examples and this makes Bharti a unique story. Taking advantage of India's and the sector's growth, we created an enterprise which is the fifth largest telecom company in the world.
We did some right things at the right time. Our outsourcing innovation was very important. We would not have been able to handle the scale without that massive path-breaking partnership we did with IBM, Ericsson, Nokia. That was first in the world and that held us in good stead.
Q: Today it looks it was the obvious thing to do. What was then the genesis of that idea? Were there any other proxies in any other industry or elsewhere in the world?
A: None. I vividly remember that. We were at around three or four million customers and the discussion between Akhil (Gupta, joint managing director of the group) and me was that we would get to 25 million customers in the next four or five years. And, then we mapped all the companies in the world that had more than 20 million customers. There was BT, there was Vodafone, Verizon, Deutsche Telekom, Telefonica... there were not very many of them. And, we asked, "What are these companies resourced with?" Then, we went through company by company and looked at their balance sheets. And, it was a no-brainer that we couldn't do it. You would need 10,000-20,000 people to get to even halfway the size of those companies. We didn't have the resources to draw the people. It was clear we will not be able to do it. We would collapse.
So, we were faced with adversity. We would either sell out like many others or our costs will grow up. Or we do something crazy. That was the starting point of the discussion. I was very clear that for an IT professional coming into the market, we would never be the first choice. His first choice would be Infosys, TCS, Wipro and the HPs or IBMs etc. We would be a second choice and after learning the telecom business, he would became valuable and would go away. Same for a telecom engineer.
And, then, when a problem came up, the people who we were with could not fix it. There were several nights when we would be sitting at Okhla [where Bharti Airtel had one of its exchanges], sleeves rolled up, logged up with Sweden with Ericsson engineers trying to fix it via a remote log-in. They know the technology, we didn't.
The second part was that we were always in conflict with our suppliers on equipment. I want less tower sites, they wanted to supply us more sites. As far I was concerned, I want a great network, Akhil wants to pay less money, someone wanted more equipment... all this was in inherent conflict. So, Akhil, who is not an engineer, broke through this by saying, "I want to buy minutes. I don't want to buy boxes." That is when we started this process on how to buy telecom traffic, not boxes.
To give you an example, in Delhi, instead of putting a tender to set up 1,000 sites, six switches, one IN (intelligent network) platform, we said we don't care if you want to do it with one site, what do we care. We need quality of service, SLAs (service level agreements), uptime and we will build rewards and penalty. So, for the first time in the world the dollar-per-erlang model came up, which many companies have started to follow.
This was put together by Akhil in 2002 or 2003. Akhil sat down with my networks guy Viresh Dayal, who was my first IIT-IIM hire, to understand what Erlangs mean in minutes. I still remember their arguments where Viresh would say, "Why are you wasting my time? You won't understand this; this is too technical for you." And, Akhil would say, "Everything technical has some logic. Sit down with me." Finally, they cracked it and came up with Erlangs per minute. Today, we have what is called a DPE model, dollars per erlang.
Today, it takes five-10 minutes to wrap up buying budgets; it is not something technical. For the first time, suppliers and we have a confluence of interests.
Q: This took the load off capex...
A: No. It gives us a lead time of nine-ten months on capex. Essentially, deferred capex. We still spend $3 to $4 billion a year. The equipment vendor bills me right then. I pay him as traffic comes out of the boxes. If after nine months traffic was still coming out of it, we pay. It gave us a $1 billion to $1.5 billion of float for us. It became our property eventually, and we got advantage of depreciation etc. There was a second contract also done: managed services to run the network etc. We pay vendors a fee per site etc.
Q: What else worked for you?
A: People. On that, I'd say we did extremely well. Most of our competitors were industrial houses not necessarily service providers. And their approach towards people was more industrial. We didn't have that legacy or baggage. We were trained in the service industry. And, my manic obsession of looking at best practices elsewhere gave me a good insight into how companies dealt with people issues. We were able to get the best people and truly empower them. People were moving in the company very fast as the company was growing.
There was a time when the company was in the deepest trouble when the share price had gone to half after the IPO and the question was not if but when we would collapse. That was the time our people showed immense resilience. I used to travel every few days to different states, meet people, talk to them, reviews all day, dancing with them in the evening. I could see that we were moving up on customer market share etc. I could see the difference.
Once, I still remember when there were offers to 80 people of our top people from a rival company. Two moved, 78 stayed. That will tell you how well people were connected.
Q: Has that changed now?
A: Now, in this last round we have had some exits that is painful personally for me because they served the enterprise well but we have to make changes and move on. But, we have a funny situation in that today when we pay better than market rates, people leave us. It says something about peoples' minds. It is not just about money, it is about engagement. It is about attaching to a cause. I think we created a cause.
Q: But the cause is easier to have when you are a younger and fast growing company. How do you sell the cause today?
A: I debate this in my mind. Large companies can still do it and we need to figure it out. I feel we are losing a bit of the touch. Earlier, we used to do townhalls and I would know people. Today, I see people [Airtel employees] on the plane who I don't recognise and they come and introduce themselves. Sometimes these are senior people. I expect the next line of leadership to fill the gap.
Earlier, it was like a rebel's case. Also, I am no longer young. And, the pressures on my time are different not. I can no longer shrug away things and just be connected to the company and people.
But I see IBM, people are very engaged. Look at Apple, people are doing things. Google.... So, we have to do things in a very very organised and structured basis. You cannot do it the old way... put your arms around someone after a terrible meeting and say come on we will do it together. And, in the five seconds, they knew everything would be fine.
Q: What were the key influences in your life that made you what you are?
A: Hard to say but when you come from a political family you learn how to connect with people. When you wake up to 500-1,000 people in your home. Somebody with one problem, somebody with something else. You begin appreciating people's problems and how you can help. I didn't get any HR training but picked it up from there. The other thing that I picked up intuitively is how do you treat people. How do you respect people? For me, there has not been a single day where I have not been grateful for people for working with me because they have options elsewhere. That is really deep in me. As opposed to many of my family-owned business peers, who think they are giving people jobs. I never felt that way.
Q: What were the mistakes you made?
A: Lousy regulatory environment management. This is not an area we like to engage in.Despite my political background --- this is again, a DNA thing - and even today when we are a large company, we don't have more than three or four corporate affairs people. We are weak on that part and we suffer badly because of that. The only thing is that regulation goes across the industry. We have so much scale and we have said that we should make a virtue of it and move ahead of such changes. Today, we handle three billion minutes a day, no one is even close. So, when tariff drops or silly competition is ushered in, you can still make sense.
Almost every time we have capitulated to regulatory changes. Look at our success rate here. It has almost always been zero. In terms of lobbying at the DoT (department of telecom) or TRAI (Telecom Regulatory Authority of India). Or, before the courts, we have lost cases that we felt were slam-dunk cases in out favour.
We refunded six licences when the UASL (Unified Access Services Licence) came through and we didn't get a penny back. We were granted licences for long distance and international long distance for Rs 125 crore a year. Later, they moved it down to Rs 25 crore and Rs 5 crore. We said we will surrender these licences and take new licences, and at least for the balance period we must get our refund. No. Anybody else would have got it. Then, look at the issue of Punjab arbitration where we acquired JT Mobiles; we went all the way through the courts and lost. There is a litany of such cases.
Q: You don't want to fix this weakness?
A: I have always been hopeful that regulation will cease to matter as much as it did in the past. Maybe, we have been wrong.
Q: Tell us about the road ahead. How is Africa doing?
A: Africa is stabilizing. We crossed $1 billion a quarter revenues last quarter. That was the target. Manoj (Kohli) had put out a 5/2 target for 2013 financial year [making $2 billion operating profits on $5 billion revenues]. It may not be 5/2, it may end up being be 6/2. So you may not earn $2 billion on $5 billion revenues because costs are higher there than we had earlier anticipated.
Q: Tell us more. Why are costs high?
A: On everything. Infrastructure is weak so for every tower, you need fuel. Diesel has to be carried long distances. The cost of anything you buy in Africa is higher because they have to come from outside because nothing is locally produced. Manpower is much more expensive because skill sets are limited. People who are skilled go out to Europe. For example, salaries are much higher than India across levels. So too with real estate. You touch anything it is more expensive. That was at odds with our understanding.
Q: This is despite transplanting your outsourcing model to Africa?
A: It is better than our competitors in Africa. I think our model is working but it is more expensive than in India. But the tariffs are also higher. We have one cent (per minute) here in India, we have six cents there.
Q: When do you expect Africa operations to come around?
A: Well, it is making Ebitda (earnings before interest, tax, depreciation and amortisation). We showed about $275 million of Ebitda last quarter. It is slightly shy of net profit. In the not so distant future, we should be breaking even because there are three or four entities (of the 14 networks Bharti Airtel has in Africa) that were behind... Ghana, which is moving up. Kenya and a bit of Uganda... These are three markets where we were in negative Ebitda. We should have lift-up there soon and they should become (cash) neutral very soon.
In the not too distant future, it (Africa operations) should stop making cash losses. With the Ebitda that is there, if feeding the capital expenditure there. We spend about $1 billion annually; that is being generated there. We also need to generate about $250 million to service interest, that will getting start serviced from there. So, it is self-sufficient. And, once we get to the 5/2 or 6/2, it will be flying. I think the heavy lifting has been done.
Q: You have been personally driving a lot of the change there.
A: I have been travelling there a lot. I am engaged with it a lot more. I go there every two months, if not every month.
Q: Sunil, one of the observations about you is that your mojo has not worked in other businesses that you have stepped into. How do you read it?
A: It's a good question. But the point is that very few business houses in today's time have been able to create a next bigger peak than their previous peaks. I can't think of many. Leave the old days of the licence raj when you picked up a licence and made sense of a business. I sit on the board of Unilever. I have been on the board of Stanchart. Almost none of these companies despite all the brand, depth and breadth of management and money can think of doing a start-up ever. Ever. The only discussion that happens is, "Buy this, acquire this." The same is true of IBM or anybody in the world. It will be freak case if this happens.
Lesson one: when you are big and trying to start a new business, it can be very tough. The question that comes back to you is whether you should try and up the peak of the existing business or should you try to create your next peak. I am convinced that in my lifetime, I will not be able to create a bigger peak than telecommunications.
Now, can you go and buy a business and build it up. That possibility remains. But I would rather do that through an additive to my existing business. Therefore, go to Africa and bring it in. So, today, my peak is $16 billion (revenues) from $10 billion. Tomorrow, if something comes up, can I take it to $30 billion?
In other businesses, have we been successful? I wouldn't hesitate to say that it's been a mixed bag. Areas that we have not put our mind and thrust despite the finest partners, we have not been able to make an impact. We as a group do not have a finance mindset. I don't connect with it, (younger brother) Rajan doesn't connect with it, (elder brother) Rakesh doesn't connect with it. Only Akhil understands it. He is also busy with the towers business etc. And, that's where the business is where it is.
In retail, we are participating a lot more. Rajan has been fully involved. Reviews continuously happen. It is a consumer business. Plus, our partner (Walmart) is very engaged as well. They are keen to be very big in this country and that business will get to a very big scale; I have no doubt about that. The franchise model of cash and carry will be a $1 billion business next year. That is a declared success. The reason we caught up in the early stage; we were one of the earliest in organised retail. In insurance, we were the fourteenth or fifteenth in the business and it didn't work there.
FeildFresh is still a struggle because agriculture is still very, very tough. That, I agree, is a business that will take a very long time (to grow) unless there are structure changes in agriculture. Other businesses are very small: Comviva, Beetel... which have been given to the CEOs to run as entrepreneurial businesses. We are more like venture capitalists, in that sense.
Q: Real estate?
A: Real estate is serious but we are not trying to build a DLF. Our idea is to build a nice, solid lease rental earning company with a target to get to a very high number. That company continues to slowly chug along. There will be several marquee building coming up at the (Delhi) airport, Gurgaon. They are not into apartments etc. Just commercial buildings to be let out to quality companies. We would like it to get to Rs 1,200 crore revenues, from about Rs 300 crore run-rate today. That, itself, will be a multi-billion dollar company in value but it is not a DLF. The model is very different.