Striving to expand the Pie Size

Dear Colleagues and fellow participants from the manufacturing industry space,

I am indeed honored to be part of this manufacturing colloquium and I wish that I could bring value to the discussions by sharing some of our experiences.

Running after a taxi

I am reminded of a small incident, rather allegorical, but cannot stop from recounting it. Once a CEO, who used to board a bus to go home after office found the bus leaving the stop while he was still on his way to the bus stop. He thought of continuing his run after the bus and when he was about to catch the bus, it speeded up and he had to run after it. Eventually he ran all the way home, which wasn’t that far, by the way. When he told his story to his wife (who found a rather tired husband panting for breath), ‘you know I saved a dollar today, running after the bus.’ But the wife was recalcitrant and she chirped back, “why didn’t you run after a taxi, you could have saved twenty dollars”.

The story is not too far away from the current business concerns of running after opportunities that seem more like an illusion, like the running after a taxi. We are running after new green field sites, new coal mines, setting up new businesses, envisaging new products that are not there. Doing all these new things require the passion, which is very close to the passion of running after a taxi to save twenty dollar than the possible one.

Manufacturing Competitiveness

I recall the book, ‘Competitive advantage of Nations’ by Michael Porter (1994) and he had completely forgotten to mention the name of China in that book. This year Delloitte survey on Global manufacturing competitiveness ranks China as the first and quite surprisingly India is ranked fourth. Going forward the ranking for India is further improving to second spot in the next five years. But all this euphoria about India has its limitations and it is so apt to look at competitiveness not only from the narrow prism of intrinsic potential but from the explicit goals and policies that nations are projecting; competitiveness today largely have to depend on state policies and ability to implement policies rather than just the in-firm competitiveness that we have seen so far. But first let me talk a little bit about my company Hindalco.

Hindalco in Odisha

Hindalco’s connection with Odisha starts with Indian Aluminum Company’s start up of operations in Odisha with Hirakud, which was a small smelter with just 10000T of output way back in 1958. It expanded to 30000T with a linkage with a captive power plant in 1993. The mega change happened when Hindalco took over Indian Aluminum Company and a series of upgrades started in this plant to take the Power Plant capacity eventually to 467.5 MW, the smelter capacity to 212000T, and a captive coal mine was made part of this capacity increase, which itself increased its capacity from a mere 0.45 Million ton to 3 Million ton per annum. This complex at Hirakud today has transformed the future of a small town of Hirakud where 40000 people live and Hindalco is the only industry that employs 5000 people there.

Twenty years back when we broke ground to start the Utkal Alumina project in a place near Raigarh, which was very close to a bauxite source, it was the fresh lease of life for the Aluminum industry investment space. Odisha is a natural attraction for Aluminum producers as the best of the world’s Bauxite in terms of quality resides here. It should have attracted the world’s Aluminum industry to rush to Odisha, but there was a more cautious stance from all the multi-national corporations and we did not see a rush to Odisha.  The private entrepreneurs in India, Hindalco and Vedanta after the success of Nalco are the only players who have been able to expand successfully over several decades; they have defied the logic of the international players who have stayed away.

Key Success factors

So in hindsight what have been our key ingredients of success in the Aluminum manufacturing space?

Hindalco had set out on a Vision 2015, which set very high targets, which cascaded into a series of strategic moves that saw Greenfield expansions on one hand coupled with brownfield expansions, while there was also the focus on acquisitive growth; let me cover the organic growth in particular.

In Odisha we went on an aggressive growth path to increase our smelter ar Hirakud to grow three fold in a span of five years and simultaneously increase our Power generation capacity that needed our coal mines expansion to double the capacity to 3 million tons per annum. I think if we take these three expansions as a case study then the success factors would be more than visible.

If acquiring a mine is a long process, its expansion is no less an arduous task as the same principles of government clearances are needed and it involves environment and forest clearances, ministry of coal clearances both from the center and state and all this can only be possible if every government regulation is followed in letter and spirit. Our rehabilitation program in the mines area is a model and we have special focus to see that we follow every line item that is mentioned in the consent to establish and consent to operate. A strong focus on the statutory requirements and environment is the key to our success in the mining sector as we remain the only private coal mine that has been operating and expanding in the last several years.

Land acquisition on the other hand has been also a success although it may have been a slow process with many hurdles, but we could still achieve a sizeable portion of land to be acquired through IPICOL-IDCO combine with full support of the district administration.

Moving the people, both skilled and unskilled to our sites have been a key challenge, but we have been successful there as well, with provisions of housing, and we have taken care to develop the infra-structure in the town of Hirakud. With the success of Hirakud, our next green field expansion at Aditya Aluminum, became easier.

Hindalco has over a decade retained its lowest cost producer of Aluminum status in the whole world, thanks to its successful model in Odisha.

Manufacturing as the driver of the economy

Manufacturing first of all is one of the fundamental drivers of the economy (there is a body of research that had proved the very strong correlation between manufacturing growth and GDP) and the Eastern states already have a natural advantage with certain inputs like minerals that are either related to power or related to the ore from which extraction and further downstream activities could be evolved. But the real driving force in manufacturing is getting the following related inputs to be organized in a manner that makes the productive use of capital possible.

We are talking here of productive use of capital that makes a capital to labor ratio be such that business can be made profitable and here we are also dealing with value added per worker. This is the fundamental point of business that any state which is able to make this connection between related inputs of capital and labor such that the ratios could deliver value for the business as well as the society.

I recall a similar message in the book by Reinhart and Rogoff, ‘This time is different’, where they have described the ingredients that attract capital to a place, and surprisingly the three top items are governance, institutions and absence of corruption and not capital to labor ratios; had it been otherwise Odisha would have attracted far more capital as its ratios are the highest in the world, but for the governance structures and institutions that are being built, the story is yet to take off in a great way.

Building State capacity holds the key to sustainability of manufacturing competitiveness and I refer to U.N. report ‘Combating Poverty and Inequality’, where the starting problem is building Political capacity, on which I would not dwell upon, but I would like to touch upon the two aspects:

• Institutions, policies and dynamics that have enabled some states to build up developmental and welfare-enhancing capacities. It contrasts the experiences of successful and less successful states by examining three dimensions of state capacity: political capacity (bringing together the state actors_, resource mobilization capacity, and allocative and enforcement capacity (the efficiency of the bureaucracy and the law enforcement agencies).
• The market-enhancing reforms of good governance, managerialism and decentralization.

The Supply Side

Eastern India’s fundamental problem is supply and supply is choked. To take refuge in Say’s law which states, ‘Supply finds its own demand’, the focus must shift to making the process as transparent as possible how manufacturing growth could be made faster by making all clearances move through a process that is well timed and efficient. To drive efficiency there has to be a win-win for government and private partnership to thrive, it seems that this illusive search for a win-win has taken far too long, whereas setting up the right processes should be the first step.

Manufacturing competitiveness in the States have to deal with deployment of resources to be done in a manner such that the fringe areas where the society interacts with the industry can be programmed so that it gives the optimum solution for the society as a whole to prosper, which I refer as the overall increase of the pie size.

We are dealing here with the following:

1.        Land
2.        Labor (skills and expertise)
3.        Infrastructure and other inputs
4.        Clearances and Permission
5.        Governance and transparency

Each one of these plays a decisive role in making manufacturing competitive and makes possible the productive use of capital and labor. But let me start off with the State Capacity as the fundamental building block.

It is beyond any doubt that State capacity of the eastern states is low and I define state capacity to be the ability to attract capital so that it augurs to strengthen the state economy such that growth oriented  investments can be made . Unfortunately there is a lot to be desired in terms of public investments in infrastructure, which can only happen when the collective might of public-private partnerships can be so progressed that there is a prospect for business, not just of providing service that is not sustainable. But the key problem is the lack of revenues that the State is not able to muster, while philanthropic promises that the polity keeps doling out brings in much of an employment spurt that has no economic value as a support mechanism. In this back drop I have the following suggestions to make. Some states have been able to create reserve funds that are transparent and the polity can seek to draw from that reserve fund for specific public investments (for example mineral related revenues could be placed here).

There is a rather hazy area where politics steps in and we cannot do much there, it falls in the territory of conflicts that cannot be easily solved in a colloquium like this. Where we can make some progress is in the area of finding how to make the processes that would lead to desirable outcomes and making that process unique, with as little ambiguity as possible and transparent and known to all constituencies. And the next step is to remove the bottlenecks around that process which needs not only an implementation mindset, but it also calls for a deep rooted change; bias for action is good as is the case for Bengal these days, but it must be one with a purpose.

Let me start with Government Clearances on land and factory or any starting of establishments. Do we have a laid down system, which is unambiguous, and does it have the minimum touch points and could we make multi-agency interactions as minimum as possible? Is a single window clearing system good enough, when the number of touch points still remain high? In a recent experience we found that for a file to move in a particular department there were six officers who were supposed to touch the file and give comments and the file had to be routed taking help of lower division and upper division clerks, which makes it twelve people to touch the file before it finally progresses. The file would have multiple queries to be handled and at every stage the delay would happen if the queries would be raised through postal service. The more interesting part is that with so many holidays and other involvements of the officers in other department meetings it is only once or twice in a week that the officer is able to make time for clearing files. But still we could not explain why the final movement of the file could take beyond a year. The more worrying part is the file movement for land to the district administration where at least six other people would touch the file starting with collector, sub-collector, deputy collector, Tausildar, Land acquisition officer and the Revenue Inspector would be involved. In some cases the file would move back and forth from the district to the center when further queries are raised and finally the last task is to get the land finally registered. Even after registering the land we have to deal with final Revenue Inspector’s demarcation of land and if squatters and encroachers are not there, there is still the issue of some form of compensation to the people who reside nearby. I am not raising some of the finer points which one has to go through when the land is not government land but private land.

My question is do we have common, well laid out procedure which could shorten the process by helping the acquirer know before-hand what the requirements could be and is there a way that some of the activities could be made parallel. Do we have governance procedures instituted where an acquirer is not kept waiting for a stipulated period, where additional interventions could be provided by the government? Or could we have leaner clearing structures where less number of levels exist?

Removing bottlenecks is also a related process that needs addressal, as we find that there is not only the apex authority that touches every clearance, the singular channels that exist in many government offices makes it imminent that every file is touched by almost every officer, thus creating bottlenecks.

Where there is no market clearing mechanism, like in Land, or permits, which must be obtained with very specific requirements to be met, the clearing mechanism is yet to be put as an efficient process with incentives for making the process faster. We see in the presence of discretionary powers the lack of a common structure and fabric in disbursement of clearances which can only be solved by making procedures devoid of all discretionary arrangements and only through proper communication of these processes we could make the process work faster and fairer.

The Demand Side

We cannot ignore the demand side as well and development of markets needs intervention as well.

The National Strategy for Manufacturing (2006) had highlighted the following areas for development of domestic markets in India as key focus: Higher import duties including inverted duty structure, higher incidence of indirect taxes, sub-optimal levels of operations, lower operational efficiencies, higher transaction costs, lower labor productivity, higher cost of capital & inadequate infrastructure.

While many of these have been attempted by the government, we still have a lot to be desired in terms of both the indicators: Days to start a business & days to complete insolvency proceedings; our labor laws have to improve to make these far better as compared to China we are many times longer in both the areas.

In the area of innovation and technology there are many government initiatives that have to combine with firm strategies for growth. There seems to be a missing link here.

But in all this there is still a glimmer of hope that many firms have done far better than the rest, which means it is still up to the firm to leverage the best of the available opportunities provided by the environment; in-firm competitiveness cannot be ignored.

Similarly many of the States have done better than the others, which means a lot depend on the State level governance as well and I go back to the National Strategy for Manufacturing report where the following had been highlighted as the state interventions needed: Providing the necessary investment climate for the growth of manufacturing in the states, providing infrastructure, particularly in respect of power, water, roads, etc,  development of a common format for computerization of required records, doing away with multiplicity of inspections by large number of inspectors, outsourcing various inspections to recognized private agencies.

I would like to end with a simple suggestion, may be relevant for this manufacturing enclave. If manufacturing has to grow at 10% plus growth rates, the inputs to manufacturing like land, labor and capital have to grow at a productivity growth rate that would need public debates to move to the building of political capacity of states, as it would be naïve to imagine that this will have a very amicable solution that leaves every constituency satisfied.

We have a lot to be done there.

Thank You

 

2^nd March 2013