Business India, September 1-14, 2003
Reinventing a jewel
Can we fix something that isn’t broken? Director Shobo Bhattacharya and his colleagues are setting an ambitious agenda for TIFR in the 21st century
Shivanand Kanavi
Can we build a world-class scientific research institution in India? The question was posed nearly 60 years ago by Homi Bhabha in 1943, in a letter to J.R.D. Tata. He himself answered it in the affirmative and demonstrated it by building Tata Institute of Fundamental Research.
Today we have several world-class institutions: Indian Institute of Science, Bangalore; National Chemical Laboratory, Pune; Central Leather Research Institute, Chennai; National Aerospace Laboratories, Bangalore; Central Food Technology Research Institute, Mysore; Centre for Cellular and Molecular Biology, Hyderabad; Inter-University Centre for Astronomy and Astrophysics, Pune; Physical Research Laboratory, Ahmedabad; National Geophysical Research Institute, Hyderabad; Indian Agricultural Research Institute, Pusa; National Institute of Immunology, Delhi; Bhabha Atomic Research Centre, Mumbai; and a few others. As for undergraduate education, in engineering and science the IITs and the University Institute of Chemical Technology, Mumbai, are among a dozen élite institutions renowned the world over.
And where does TIFR stand today, we asked R.A. Mashelkar, directorgeneral of CSIR and India’s most eloquent scientist- manager. “TIFR is already the best centre of excellence in scientific research that we have in the country. I monitor average impact factor per research paper as an indicator of quality within CSIR and the data show (see table below) sustained quality as well as leadership from TIFR,” he said.
The ‘impact factor’ is calculated based on number of times a particular paper is referred to by peers.
Mashelkar adds, “But our expectations from TIFR are higher. We would expect Nobel Prizewinners, FRSs and Foreign Associates of US National Academy of Sciences to emerge from TIFR”
What needs to be done for this? “Ambience and ambition are two essential ingredients for excellence of an institution. TIFR has the ambience, like no other institute in India has. Raising the ambition to a much higher level is what is required,” he adds.
Clearly the situation has changed a lot in the 1990s. Ambition and confidence are not lacking in the new generation of scientists that TIFR continues to attract. This correspondent spoke to several young scientists at TIFR like neurobiologist Vidita Vaidya, optoelectronics expert Arnab Bhattacharya, laser physicist Ravindra Kumar, and mathematician Arvind Nair, and found a confident ‘can-do’ attitude.
“The success of Indian IT and the changes in the Indian and global economy seem to have impacted us too. There is definitely impatience and a new spring in the step of youngsters here”, says Ravindra Kumar.
“In a sense we are thrown in at the deep end of the pool quite early in the day — we must get external funding for our research proposals. Today more than 50 per cent of biology funding comes from external agencies. This naturally makes us highly competitive in framing our proposals and delivering results,” says Vaidya.
Is TIFR well funded or does it face the same lack of equipment that most Indian universities and institutions find? “Of course money is never ‘enough’. But frankly speaking we have one of the best-equipped laboratories in several areas of investigation,” says Shobo Bhattacharya, the new director.
“We want TIFR to be a major centre for optoelectronics in India. We have an aggressive purchasing policy for equipment. In a few months we are getting state-of-the-art vapour deposition equipment costing almost a million dollars which will allow us to produce materials for researchers elsewhere in India, as well as work in cutting-edge areas like nitrides,” says Arnab Bhattacharya.
Stargazers
TIFR attracted first-rate astronomers and astrophysicists in the 1960s. Govind Swarup, now a Fellow of the Royal Society and retired, was invited by Bhabha to come from Stanford University and establish a group in radio astronomy in the early ’60s. Swarup and his team built an equatorial radio telescope near Ooty using a highly innovative design that used the local geography of hills and valleys. Their crowning triumph has been the very powerful Giant Metrewave Radio Telescope (GMRT) at Narayangaon near Pune. The facility is now fully functional and has also become available for international experiments.
TIFR has also done experiments in Xray astronomy and is today designing experiments to be sent up a special astronomical satellite by Isro in 2006 called Astrosat.
A strong theoretical astrophysics group is also active, though it was depleted when Jayant Narlikar left TIFR to establish the Inter-University Centre for Astronomy and Astrophysics at Pune.
Shobo Bhattacharya, a condensed matter physicist, has extensive experience in the US, having spent almost 30 years in R & D with Exxon and NEC. “In fact, being under the umbrella of DAE, we don’t have to struggle for funds as at the top US universities. Today senior scientists in the world are scrambling for funds and spend most of their time with funding agencies. Our scientists don’t have to face that,” says Bhattacharya. Having come from a different environment, Bhattacharya brings a fresh perspective.
“At times it is our impatience with some procedures that leads to complaints, but once you get to know the system you find that it runs slowly, but smoothly. Of course if one thinks of an experiment in the middle of the night and wants to do it the next day, there is a problem. In such cases our competitors elsewhere have an edge. We need to plan things much more in advance,” says Vaidya.
Ternary convergence: Bhabha, JRD and Nehru
On his return from Cambridge in 1943 Homi Bhabha, who had done first-rate work in theoretical physics and had become a Fellow of the Royal Society at an astonishingly young age of 32, had a vision he systematically set forth to realise. He sounded J.R.D. Tata out for financial support from the Tata Trusts to execute his plans. JRD needed very little convincing and he advised him, “If you and some of your colleagues in the scientific world will put up a concrete proposal backed by a sound case, I think there is a very good chance that the Sir Dorabji Tata Trust and perhaps also the Sir Ratan Tata Trust will respond. After all, the advancement of science is one of the fundamental objects with which most of the Tata Trusts were founded, and they have already rendered useful service in that field.”
Thus Bhabha wrote a four-page letter on 12 March 1944 to Sir Sorab Saklatvala, a trustee of Dorab Tata Trust. It began, “I have for some time past nurtured the idea of founding a first-class school of research in the most advanced branches of physics in Bombay.”
The letter cogently put forward his vision and ended with, “I have come more and more to the view that provided proper appreciation and financial support are forthcoming, (emphasis his) it is one’s duty to stay in one’s own country and build up schools comparable with those that other countries are fortunate in possessing. If Tatas would decide to sponsor an institute such as I propose through their Trusts, I am sure that they would be taking the initiative in a move which will be supported soon from many directions and be of lasting benefit to India.”
The Government of Bombay also came forward to back the proposal and thus, with modest support from Dorab Tata Trust and a total budget of Rs80,000 for the year 1945–46, the Tata Institute of Fundamental Research came into being at Kenilworth, a bungalow on Pedder Road in Mumbai, where Bhabha was in fact born. CSIR, then headed by S.S. Bhatnagar, gave a generous grant of Rs75,000 as it was interested in fostering research in nuclear physics. In 1948 Jawaharlal Nehru was convinced of Bhabha’s vision of the strategic importance of atomic energy to newly independent India and the Atomic Energy Commission was set up. Soon, with growing collaboration between AEC and TIFR, the needs of the institute grew and in 1949 it was shifted from Kenilworth to the Old Yacht Club near the Gateway of India. In 1956, with the growing importance of T I F R in the atomic energy programme, the Government of
India entered into a tripartite agreement with Dorab Tata Trust and the Government
of Bombay (now Maharashtra) and slowly took it entirely under the wings of the Department of Atomic Energy. However, the institute is still run by a management council with representatives from all three parties and with considerable autonomy, unlike any government body.
Till 1961, when the institute’s tastefully designed Colaba campus was built, T I F R was housed in the Yacht Club. The land at Colaba belonged to the defence ministry and was still littered with old barracks, and it was in those barracks that the controls for Apsara, the first nuclear reactor in entire Asia, and TIFRAC, the first digital computer, were designed and built. Bhabha was of the firm view that great institutes are built around people, not buildings.
Bhattacharya has a tough job. He has to lead his team in reinventing TIFR to suit the environment in the 21st century. There is a popular American saying: “Don’t fix something that isn’t broken” — and we need to keep that in mind. TIFR continues to be a great place to work. But it also needs to reinvent itself. The changes needed might seem incremental, but when added up they might look formidable.
Bhattacharya is aware of the complexity of his task and is proceeding cautiously. Being an ‘outsider’, he suffers from the fact that he does not know the micro details of problems or their history, but he also enjoys the advantage that he does not carry the baggage of history and brings a fresh point of view. His experience in corporate research must have also impressed the search committee.
What is the agenda that he has set himself? “My immediate agenda is simple: recruit the best faculty and students. Here we need to adopt active search by targeting individuals,” he says. He does not call it poaching, but having worked in corporate environments at Exxon and NEC he clearly is familiar with the expression. As for attracting the best students, he faces a tough problem. TIFR has started an undergraduate internship programme, which is hugely popular and entry is highly competitive. But most of those students want TIFR on their CVs and want to go abroad for PhDs. The only consolation is that many of them might want to come back as young faculty. “We need to develop an overall outreach strategy that will enhance our profile among the public, which in turn will attract the best young students to us,” he says. In fact the recent public lectures by visiting scientists Stephen Hawking and Roger Penrose were part of that outreach.
While on ‘marketing’ TIFR, Bhattacharya is embarrassed by TIFR’s Website. The institute might have been the cradle of Indian computer science, but it still sports a totally obsolete Website. The institute, despite a budget of close to Rs150 crore, also does not use much of IT in its procurement or administration or HR, something the new director is keen to change soon.
The fruit fly community
“We are known as the fruit fly group,” said Vidita Vaidya, a young neurobiologist at TIFR. When we want to study the nervous system we would like to tinker with it and see the effects not only on the creature but also on the future generations of that creature. Thus we need systems that multiply fast and show the effects on future generations quickly. The small fruit flies are ideal, since they multiply rapidly. More than a quarter-century of work on fruit flies, much of that here in TIFR, has led to tremendous depth in understanding the system thoroughly. So when one of us comes up with a bright new hypothesis, we naturally turn to fruit flies to prove it,” adds Vidita. Pioneering work done in the 1960s and ’70s by Obaid Siddiqui, which earned him accolades and a fellowship of the Royal Society, and his students like Veronica Rodrigues, on Drosophila, the common fruit fly, has created the scientific infrastructure for the same.
The T I F R biology group, strong in neurobiology, is now split into a large group in Mumbai and an even bigger group at the National Centre for Biological Sciences at
Bangalore. The two work in tandem. There is intense activity at both and both have achieved international acclaim for their work. The areas studied include: how are signals transmitted between neurons (brain cells); the secret of smell and taste; why proteins fold the way they do (the way a protein folds determines to a large extent the function of each protein); how muscles develop; the immune system; learning and memory; emotional coding of stress and fear; whether stress leads to changes inside the brain; and so on.
A whole bunch of interesting questions no doubt. Naturally the world is following their work closely. In a recent public lecture Siddiqui recounted that when he joined TIFR in the 1960s “you were limited by your own capabilities”. Many of the younger lot would agree with that despite the highly competitive world of global research they live in today.
Bhattacharya is also carefully reviewing all existing programmes along with the senior faculty so that nothing is taken for granted and every project is justified competitively. If necessary some projects might get closed down.
Even though most Indian scientists like Mashelkar would be envious of the environment, and lack of bureaucratic procedures, in TIFR, Bhattacharya would like to simplify them further. He would also like to delegate authority. Today the director has to get involved even in leave applications and so on. “We would also like to get out of governmental accounting procedures and establish alternative acceptable ones.”
Nation - building
It is improper to talk about spin-offs from TIFR. After all the founding of TIFR was part of a nation-building exercise. Bhabha clearly looked at it as a mother institution. Hence, when India embarked on its nuclear programme, TIFR provided the initial manpower and expertise. The very first reactor Apsara’s controls were designed and built at TIFR.
Over 46 scientists were loaned to the Atomic Energy Establishment at Trombay. Today’s highly profitable Nuclear Power Corporation, whose net profits crossed Rs1,000 crore two years ago, by generating electricity using nuclear reactors, can be considered as a grandchild of TIFR.
The expertise in building digital computers at TIFR later helped the Electronic Corporation of India build the TDC (Trombay Digital Computers) series for real-time computing. Similarly, the radio astronomy group helped in building the first satellite earth station at Arvi for Overseas Communication Service (now V S N L). This was later commercialized by ECIL into a healthy microwave antenna business. The defence electronics work at TIFR led to the formation of SAMEER (Society for the Advancement of Microwave Engineering and Electronics Research). It is also not so well known that the experiments in digital switching at TIFR formed the core of C-DOT’s technology, which revolutionized telecom in India with its inexpensive and robust digital switches.
A major complaint heard in the corridors of TIFR is of course the lack of travel facilities. After all, scientists grow with international exposure and the current finances are structured in such a way that travel to conferences becomes very difficult. In fact many scientists do believe that here the new chairman of the management council, Ratan Tata, would be able to help them out with his perspective. “We need to collect endowments so that we get flexibility, especially in travel. We are well supported by government, but need some flexibility. We plan to reach out to the community and friends of TIFR” Efforts in this direction, which started before Bhattacharya took over as director, have already yielded some results. Kanwal and Ann Rekhi, S.D. Shibulal, Sudha and Narayan Murthy, Harish Chandra’s family, Sasken Technologies, and others have come forward with contributions.
However, as Mashelkar points out, the difficulty with science is often not with the new ideas, but in escaping the old ones. A certain amount of irreverence is essential for creative pursuit in science. “I believe that if we promote that irreverence in Indian science, by change of personal attitudes, change of funding patterns, creating new organisational values, creating that extra space for risk-taking, respecting the occasional mavericks, and rewarding the risk-takers, then not only will the fun and joy of doing science increase, but Indian science will also make that much awaited difference,” he adds.
A new development that might bring that irreverence to TIFR is the deemed university status it has newly acquired. This might eventually lead to TIFR getting involved in undergraduate education. This will be welcomed by all Indian students and TIFR is sure to benefit by having bright young minds around. Bhattacharya is thrilled by the opportunity he has in being part of reinventing TIFR.
Parallel worlds
As biologists and physicists dirty their hands with fruit flies, semiconductors, zapping lasers, and high-energy accelerators, the mathematicians at T I F R form a different breed. They live in a parallel world of extreme abstraction, which even most natural scientists do not understand. It is the world of strange shapes of algebraic geometry that do not look or sound like anything that we learnt in geometry — remember those cones, cylinders, spheres, and the rest? Or number theory, which doesn’t sound like the arithmetic we all learnt, or Lie (pronounced ‘lee’) groups, which even quantum physicists who use similar names do not understand.
But higher mathematicians the world over highly respect the group at TIFR. The International Congress of Mathematicians, which meets once in four years, is the very élite of global mathematics. According to M.S. Raghunathan, a Fellow of the Royal Society renowned for his work in Lie groups, invited talks are given at the congress by a select group of about 150 mathematicians from all over the world. It is remarkable that in almost every congress since 1970 there has been an invited talk by at least one TIFR mathematician .
Though Bhabha was a practical scientist who wanted to build capability in nuclear physics in India, he also saw the need for building a strong group of abstract mathematicians.
Similar culture at the Institute of Advanced Studies, Princeton, must have influenced him and appropriately he persuaded K. Chandrasekharan to come from Princeton to work at TIFR. Chandrasekharan, a high-profile mathematician himself, is credited with building a first-rate mathematics group here. He brought top-notch mathematicians from all over the world to visit the then unknown TIFR and lecture there. TIFR’s lecture notes of those days are sought after all over the world even today.
TIFR over the last five decades has been one of the top places to do research in abstract mathematics.
In a parallel track, TIFR is also involved in organising science Olympiads in Physics, Chemistry, Biology and Mathematics. Indian students are regularly winning Gold and Silver medals in these fiercely competitive Olympiads. These competitions are playing a highly motivational role in drawing bright young minds to science. M.S. Raghunathan who is also involved in organising the Maths Olympiad was recently pleasantly surprised when he sent a congratulatory message to Manindra Agarwal, and his students Neeraj Kayal and Nitin Saxena of IIT Kanpur. The trio had hit international headlines by cracking a three hundred year old problem in number theory. In turn Kayal and Saxena thanked Raghunathan for encouraging them as school students in the Maths Olympiad!
Nehru believed that science and technology were tools to pull India into modernity. Increasingly weighed down by the vagaries of national and international politics, he found refuge in the company of scientists. Inaugurating the campus on 15 January1962, he said, “It has been a great pleasure to me, and something like an exhilarating experience, to come here from time to time and to see the growth in our scientific work, whether on the other side at Trombay or here. This takes me out of the normal rut in which I live, which is often depressing.”
It is a testimony to the vitality of this institution that 40 years after Nehru’s observation TIFR still has the same exhilarating effect on its visitors.
Art of the matter
Bhabha’s love was quantum physics. He encouraged investigations into the structure of matter, both from the experimental angle as well as the theoretical one. As a result TIFR built up one of the finest groups in the study of cosmic rays. Cosmic rays are naturally available high-energy particles entering our atmosphere from far corners of the universe. In the absence of large particle accelerators, cosmic rays provided a natural source of investigations into particle physics. Today scientists at TIFR participate in experiments with other international scientists at the European Centre for Nuclear Research (CERN),
Geneva, and Fermi National Accelerator Laboratory, Chicago. In the mad, mad world of high-energy physics, large multinational and multidisciplinary groups have become a must for conducting and analysing experiments. Today it is not uncommon to see a two-page paper written in the Physical Review Letters authored by over a hundred scientists (a few of them from TIFR)!
Theoretical physicists too had remarkable successes in the 1960s and early ’70s.
Today TIFR has a very strong group in String Theory, which walks the thin line between mathematics and physics.
In the case of materials TIFR had early success with semiconductors and microelectronics with the group led by K. Ramanathan. The group did cuttingedge work in microelectronics in those days. Unfortunately this early expertise could not be capitalised later. However, in the 1980s, TIFR shot into the limelight again when L.C. Gupta and R. Nagarajan gave the world a new class of materials called boro-carbides, which exhibited high-temperature superconductivity —the holy grail of electrical engineering, where materials conduct electricity with practically zero loss during transmission.
Pioneering computer science in India
Modern digital computers came into being at the end of World War II. The first one built was E N I A C at the University of Pennsylvania in 1946. John von Neumann played a leading role in conceptualising it and a more refined version of the same at Princeton later. In fact, von Neumann’s report on the Princeton computer EDVAC can be considered as the beginning of computer science. It is interesting to find that computer science did not take very long to come to India. R. Narasimhan was probably the first Indian to study computer science in the US back in the late 1940s and early ’50s.
After his PhD in mathematics he returned in 1954 and joined Tata Institute of Fundamental Research, being built by Homi Bhabha.
In the early 1950s it was audacious, to say the least. Comparing these efforts with those of contemporaries, Narasimhan says, “Looking at the Princeton computer, IBM 701, and the two T I F R machines, it emerges that except for its size, the TIFR pilot machine was quite in pace with the state of the art in 1954. TIFRA too was not very much behind the attempts elsewhere in 1957.”
The pioneering work at T I F R in the 1950s and ’60s is being now extended to new limits. Narendra Karmarkar, who won the prestigious Fulkerson Prize for the work he did in efficient algorithms at Bell Labs in the ’80s, is trying to build a group of young computational mathematicians under the aegis of T I F R at Pune to test the frontiers of the science of algorithms.
Tuesday, August 21, 2007
Shinsei Bank
Business India, Januray 19-February 1, 2004
Karma in Japan
Indian executives of Shinsei Bank and Indian software companies have played a significant role in a great turnaround story in Japan
Shivanand Kanavi
Dhananjaya Dvivedi, corporate executive officer (banking infrastructure group) of Shinsei, is a driven man. He was recruited from Citibank, where he had headed many an IT innovation globally. “When we took over LTCB the challenge was dealing with the unknown. The bank was not visible to anybody. Internal workings, business, people’s capability, products that were sold and were part of the warehouse, everything was an unknown. Meanwhile, Yashiro-san (‘san’ in Japanese is a respectful address like ‘ji’ in Hindi) had a very sharp definition of what he wanted. He wanted the company to be profitable, and he did not want a short-term solution that involved social trauma to customers, depositors, or employees. Moreover, we had a timeline of only one year. We also had revenue targets defined in the very first year. These became our engineering design criteria and we had to work backwards, says Dvivedi.”
Today Shinsei’s IT infrastructure, built by Indian software companies like Nucleus, i-flex, and Polaris under Dvivedi’s direction, has become the standardsetter in Japan. The bank has turned around and is now the most profitable bank in Japan. Wall Street is eagerly awaiting its $2 billion IPO expected in the next few weeks.
However, to understand the change wrought by Yashiro and his team one needs to understand the bank’s previous Karma.
Birth of LTCB
To understand the change wrought by Yashiro and his team in Shinsei Bank one needs to understand its history. Long Term Credit Bank is what we in India would call a development finance institution. As the Americans handed over power to the Japanese in 1952, the new Japanese administration decided to discuss the nature of the financial system needed to fund Japan’s revival. “Will it be stocks, bonds, or banks?” asked the then finance minister Ikeda. The answer he gave later, with America’s tacit support, was: “Banks, not capital markets.” The Tokyo Stock Exchange was reopened, but it only played the role of tying up industrial families, the keiretsu, through crossholdings.
LTCB was started to fund the industry by issuing debentures, which were like bearer bonds. It was directed to lend to core sectors and later to automotive, etc. In fact a young car manufacturer with global ambitions called Toyota came up owing to support from LTCB. However, soon lending was not based on cashflow projections but on the fact that only companies with a web of social contacts would survive, while those without allies would naturally die. The interest rates did not reflect risk, since the government set the price of money. Money was not an end but a means to an end — and the end was the revival of Japan.
Over three decades LTCB funded a large number of companies like Kawasaki Steel, Bridgestone, Toshiba, Tokyo Electric Power, and so on. It was highly successful in its mission. But that created a problem. The successful manufacturing companies in the 1970s and ’80s with strong cashflows no longer needed loans from LTCB; if need be they could directly access global finance. This led to some experiments in learning merchant banking skills from foreign markets, but these activities were marginal. Then came the real estate and stock market bubble of the ’80s. LTCB, like others, grabbed this opportunity for high profits immediately. However, the collateral for these loans was suspect. But the LTCB culture did not allow for serious financial appraisal.
Death
And then the stock and real estate bubble burst in 1991–92. Since then the economy has stagnated. The financial system is burdened with bad loans that have been estimated to be as high as $1 trillion! The government, however, has continued to muddle along without taking hard decisions, riding on the still very high domestic savings of over $14 trillion.
After meandering along for six long years, with over $40 billion as bad loans and its capital base totally eroded, and carrying a capital deficit of $3 billion, LTCB declared bankruptcy on 23 October 1998 and the government nationalised it. R.I.P.
Rebirth as Shinsei
Then came a group of US investors led by Tim Collins of Ripplewood Ventures.
Collins, along with Chris Flowers, a former Goldman Sachs dealmaker, put together a consortium of investors including Citigroup, AIG, GE Capital, Mellon, Paine Webber, and David Rockefeller personally. It was as high-powered a slice of Wall Street as you could get. Moreover, Collins took on board powerful individuals like Vernon Jordan (close to Bill Clinton), Paul Volcker (former chief of the US Federal Reserve), and John Reed (former Citibank chief and currently chairman of NYSE) as advisors, while co-opting Mitsubishi and Nippon Steel bigwigs on the governing board.
This group eventually won the bid. They bought the bank for a total capital of about $1.2 billion. Since the quality of the loan portfolio was opaque to the new investors, the Japanese government allowed a put option for any ‘bad loan’ discovered later.
It was path breaking and not smooth, to say the least. It was the first ever foreign entry into mainstream Japanese banking and was perceived by many in Japan as another invasion of the gaijin (aliens) and that too by a detestable ‘vulture fund’ from Wall Street. For the protagonists, however, the deal became the proverbial pudding to test Japanese commitment for globalisation and deregulation and led to some highpowered lobbying in Washington and Tokyo.
Tim Collins persuaded Masamoto Yoshiro, former head of Exxon in Japan and Citibank Japan, to be the chairman and CEO (see interview with Yashiro) to execute the turnaround. He recruited a team of investment bankers to start that line of business and a host of senior executives like Dvivedi, Sajeeve Thomas, and Janak Raj from Citibank to execute his plans for a total remake of the bank.
“Japanese do not like abstractions like software, they excel in manufacturing the concrete”-- Masamoto Yashiro
A great believer in harnessing the skills of Indian software companies, Masamoto Yashiro chairman & CEO, Shinsei Bank, explained the issues in Japanese banking, in a candid interview with Shivanand Kanavi
Q You were an outsider to banking. So how do you look at banking in Japan?
A I spent many years with the oil industry, 30 years with Exxon. Both oil and banks were regulated in this country. Japan does not have oil resources, so they let the oil companies operate much more freely than banking, especially in the 1980s. In the case of banking, till recently banks were not free to offer new products. So like the CIO, CFO, etc, they had one ‘Chief Ministry of Finance Contact’. These officials used to go every day to the MoF and sit around in the corridor and see who was coming and going. It was that bad. There was no initiative.
Q When Tim Collins invited you to join him in Ripplewood you had already retired. So what made you take his offer?
A He was very insistent. He thought there were many business opportunities in Japan. I thought I must help in restructuring Japanese companies. But initially it was outside of financial services. But very soon the banks that were nationalized were available for investment even for foreign interests, and that came about very quickly. So I had to divert my energies to the banks. That is how I ended up here. But I continue to be a limited partner of Ripplewood.
Q When you took up the assignment at Shinsei did you think it would be a model for ot her Japanese banks?
A Yes and no. LTCB had only sold debentures and given corporate loans, so I thought we should change the business model completely. But to do all these things you needed to change the infrastructure. Infrastructure as it existed was antiquated and was 20 years old. We had mainframe computers, we were using Cobol! Everything was old. The story of Jay’s (Dhananjaya Dvivedi’s) contribution is very well known. Anything we want can now be supplied by Jay’s group. The product is à la carte.
Q Is this unusual for a Japanese bank? Are others acknowledging your success?
A Yes, it is unusual. Others do not want to acknowledge it openly, but IT people know that we are doing the right thing.
Q Japan is the second-largest software market. Who is servicing it?
A It may be in terms of money. If you have to pay five times more than elsewhere, you can even be number one very quickly.
Q What is your advice to Indian software companies?
A Strangely, Indian banks seem to go to Australia for software! Japanese companies focused on manufacturing and brought their costs down, but they did not touch non-engineering parts of overhead. They keep spending more, year after year. They are worried about visible products, which they can improve. Abstraction is the last thing we attach value to. India has many philosophers; we don’t have any.
Q Would Shinsei bank be interested in emerging markets like India?
A We are looking at Korea and Taiwan, but India is too far for us. But since we have many Indians working in the bank, maybe we should take a look at it.
“We had no management information systems here when we came in. Reports were produced once in six months, but top management could not monitor on a monthly basis which products were doing well, which customer groups were behaving in interesting ways, and so on. We also wanted to launch the retail bank with a whole new way of banking access. For example, ATMs here closed at 3 pm. It was not the law, more an industry practice, but everyone followed it. Also people were being charged for using ATMs. But a retail bank with very few branches like us had to invite people to use ATMs and the Internet more and more to do normal banking. So all these equired a new infrastructure, which at the same time had a low total cost of ownership. Jay’s team, with the help of Indian software vendors, has delivered that. Jay is like a cook — if we want caviar added to a product he can do it, if someone wants garlic removed from something else, he can do it,” says Yashiro with a twinkle in his eyes.
“I have known Yashiro-san from my Citibank days,” says Jerry Rao, CEO of MphasiS-BFL, which did a lot of preliminary groundwork for the IT roadmap at Shinsei. “In fact we both retired from Citi at the same time in 1998. I invited him to be the advisor to MphasiS, which I had just started. Yashiro-san and Jay had to cut costs, implement a retail banking solution in a 100 per cent wholesale bank and migrate from an old system to a new one, while retaining the old people. Strangely, Japan, which is very advanced in automobiles, electronics, and so on, is very backward in banking and insurance. Yashiro promised 100 per cent improvement. Executing five different meshed projects simultaneously isn’t trivial, even though the technology was known in global banking,” adds Rao.
“We had to choose a design that would allow flexibility for our business plan. Customer self-service was the first point of our system, not labour saving. When the customer comes in he should have full power to service himself. Flexcube gave us the first generation packaged software to run retail banking. It is an extremely well engineered product if you work within its limitations, but if you want to add something in there like a credit card, or any other complex product, then it has a problem coexisting in this package. The new-generation product is from Polaris. We use three or four products from Nucleus, collection systems, general ledger, etc, but the more important thing about them is tenacity. If something does not work, they make it work. Complex engineering pieces have been developed by Nucleus,” adds Dvivedi.
Hitting the headlines
What would have cost $500–600 million for any other bank in Japan using traditional mainframes and customized software has cost Shinsei just $60 million. Naturally the engagement is continuing and expanding. This has led to headlines in Japanese newspapers like: “If you want to learn about software, learn from India”— Nikkei Sangyo Shimbun (17 September 2001); “Not enough IT engineers, foreigners save in software development” — Nihon Keizai Shimbun (22 September 2002); “Two secrets of ‘Cruel’ Shinsei Bank: open computer systems, Indian companies” — Nikkei Sangyo Shimbun (26 October 2001); and so on.
The robustness of the system, besides its low cost, was also highlighted in early 2002 when two major banks – UFJ and Mizuho (the largest bank in the world) – had crashes in their mainframe-based IT systems. Now grudgingly other banks are trying to copy what was done at Shinsei. Thus, Shinsei is becoming an agent of creative disruption within Japanese banking circles in more ways than one. Bill Gates takes a keen interest in Shinsei and has visited it. After all, it is the largest installation of Windows based banking software.
But the change did not go smoothly. There was a definite culture clash. “Even now only about half the old employees appreciate the change. The other half might still want the placid old days of LTCB. But change is a one-way street,” says deputy GM (IT) Michiyuki Okano.
Culture clash
What were the roots of culture clash? “Firstly, Japanese believe in a consensus approach (namewashi). Any change has to be discussed and only after a consensus has been achieved things move. But here change was happening through orders from the top, and at a furious pace. Of course change could only come this way, otherwise we would be debating endlessly,” adds Okano.
“The other was the Japanese obsession with perfection. Europeans and Americans may accept some imperfections, but Japanese do not. Now this can take an inordinately long time,” says Okano insightfully. “In the beginning we might have been a little cocky too. We had installed Flexcube at 60 sites and Shinsei was the 61st. But soon we learnt a lot. The drive towards zero defects was unprecedented. We improved greatly through this experience,” says i-flex CEO Rajesh Hukku.
Nucleus had the tough job of supporting the migration from legacy mainframe systems to new Intel servers and a PC-based system. “We built a reconciliation engine to show the equivalence of both the systems. It was crucial to migration. However, many times we had people holding two printouts from the two systems to a light and pointing out a font difference or a change in the position of a column!” says Vishnu Dusad.
“Indian companies have good engineering skills, but to make an impression in Japan they do need to realise also that time in Japan is of utmost importance. A Friday morning deadline means that the client expects it at 9 am Friday Tokyo time, not Friday afternoon, evening, or Monday or Tuesday. In fact a familiar ‘no problem’ response always scares me unless a detailed road map is given to show how the problem will be solved,” says GM (IT) Peter Franken, another former Citibanker.
Already Dvivedi and Yashiro are thinking of leveraging the IT skills developed in-house in conjunction with Indian software engineers. There is a plan to start a Shinsei Bank support centre in Pune. Nucleus already has 100 engineers at a centre in Pune. “We are creating a pan-Asian banking model. The Pune centre will be a big step for us,” says Dvivedi.
The results are there for all to see. Shinsei ATMs are working 24 hours, and the retail bank has attracted over half a million customers starting from zero less than three years ago. Customers can access their accounts at railway stations and even through 52,000 third-party ATMs at no cost. Deposits by new customers have crossed $14 billion.
Of course technology is not the only thing that has brought this in. A brand new retail banking culture brought into Japan by the Shinsei team headed by another Indian, Sajeeve Thomas, is responsible for that. Every branch of Shinsei looks like a modern showroom of an upmarket store rather than the congested paper-laden office it used to be. Earlier each transaction used to take forever. It was assumed that the customer had infinite time. To count the money half a dozen or more officers used to be involved before handing it over to the customer! Today Internet kiosks at every branch take care of that.
In fact the impressive headquarters of Shinsei had a 100- foot-high glass entrance with not a soul there. “I could not believe it in the beginning. How can the lobby of a bank be empty and forbidding?” asks Thomas. He quickly changed it by starting a retail branch there with a Yahoo! Internet café and a Starbucks coffee shop thrown in. “We did a survey among our own employees on what should a retail bank look like. The names that popped up were Starbucks, Seven Eleven, Uniqlo (a Japanese clothing store), and Sony. We called in designers to remake all our retail branches to give a customer-friendly experience. The elimination of enormous amount of paperwork and centralised data processing created a lot of space in each branch. Shinsei had a brand recognition of 4 per cent when it started. Today it is 87 per cent,” says Thomas.
The self-effacing Thomas has brought in more than an exterior change. The culture has changed —the stiff old manager hidden behind paper in a forbidding room inside the branch has been replaced by a smiling one, right at the reception to direct any customer to the appropriate kiosk.
But what about the basic corporate lending business that Shinsei inherited? “Well that too has changed,” says Janak Raj another ex-Citibanker who heads risk management group.
“When I was in Citi Japan in the early 1990s we wanted to sell a building and there was no problem getting an offer of $500 million for it, by just walking around and visiting a few nearby offices! That was the nature of the bubble economy those days. Obviously these assets shrunk to 10 per cent of their value after the bubble burst,” adds Raj.
However, Shinsei broke the mould of zombie lending (bankrupt banks lending to bankrupt firms to keep them afloat), a term coined by Anil Kashyap of the University of Chicago’s Business School. Immediately it was declared a “cruel bank” and a representative of Wall Street’s greed. But Yashiro stood firm, in not lending to bankrupt firms just to keep the “relationship” going, while being sympathetic to viable ones. However, now the recovery has become smoother and many old borrowers have paid up, thereby reducing the bad loan portfolio — by $27 billion in three years. Out of those only $10 billion were reduced by exercising the put option and returning them to the government as agreed in the contract of sale, while $17 billion were actually recovered. “Now other Japanese banks are also collecting a lot of money. Otherwise
no-one can survive,” says Okano. Considerable progress has also been made by Janak Raj’s team in securitizing loans by issuing new bonds, adding another stream of revenue to the balance sheet.
As a result Shinsei has become the most profitable bank in Japan today— it declared over $440 million in net profit in March 2003. GM (management accounting) Sanjeev Gupta, another former Citibanker, and his team are happily preparing the balance- sheet for the much-awaited IPO. Investment bankers expect the offer, slated for mid-February, to fetch close to $10 billion for the bank. The investors plan to raise $2 billion through this issue. Considering that they bought the bank for $1.2 billion, the ‘vulture fund’ attribute of Ripplewood might change to ‘venture fund’.
Will Shinsei change the Japanese financial sector, as Tim Collins and David Rockefeller suggested? The jury is still out. Change anywhere, and more so in Japan, is painfully slow. When it does come, as in the Meji restoration at the turn of the century, it can be amazing. A mixture of angst about change and pride in being Japanese drives Yashiro at 74. But he can claim modest success – by the grudging imitations that are happening in other banks – and retire a satisfied man. Obviously he has absorbed global best practices and rebelled against inefficiencies and irrationalities in the Japanese system. But he has handled the change with firmness and sensitivity. Not an employee was fired in all this process and many more customers have been added. He put a stop to zombie lending and took his fiduciary responsibilities towards his depositors seriously, combining them with sympathy (not loyalty) towards his corporate borrowers. Shinsei Bank rose out of the ashes of Long Term Credit Bank of Japan, which went under in 1998 with $40 billion in bad debts
Yashiro loyalists, like Jay Dvivedi, Sajeeve Thomas, and Janak Raj, might move on once Yashiro retires. In fact Dvivedi might eventually even set up his own software consulting firm. The Indian software companies are using Shinsei as the edge of the wedge into Japanese market. Already Nucleus is finding new customers like Honda, and more banks. I-flex has installed its products in six more banks in Japan. And so on.
As for the 2,000-odd Indian software engineers in Tokyo, it is not really ‘Jaapaan, love in Tokyo’ à la Shammi Kapoor. Very few learn Japanese or study the Japanese culture. Most yearn for home food, for which there are over 200 Indian restaurants in Tokyo alone!
Shinsei has been good karma.
Karma in Japan
Indian executives of Shinsei Bank and Indian software companies have played a significant role in a great turnaround story in Japan
Shivanand Kanavi
Dhananjaya Dvivedi, corporate executive officer (banking infrastructure group) of Shinsei, is a driven man. He was recruited from Citibank, where he had headed many an IT innovation globally. “When we took over LTCB the challenge was dealing with the unknown. The bank was not visible to anybody. Internal workings, business, people’s capability, products that were sold and were part of the warehouse, everything was an unknown. Meanwhile, Yashiro-san (‘san’ in Japanese is a respectful address like ‘ji’ in Hindi) had a very sharp definition of what he wanted. He wanted the company to be profitable, and he did not want a short-term solution that involved social trauma to customers, depositors, or employees. Moreover, we had a timeline of only one year. We also had revenue targets defined in the very first year. These became our engineering design criteria and we had to work backwards, says Dvivedi.”
Today Shinsei’s IT infrastructure, built by Indian software companies like Nucleus, i-flex, and Polaris under Dvivedi’s direction, has become the standardsetter in Japan. The bank has turned around and is now the most profitable bank in Japan. Wall Street is eagerly awaiting its $2 billion IPO expected in the next few weeks.
However, to understand the change wrought by Yashiro and his team one needs to understand the bank’s previous Karma.
Birth of LTCB
To understand the change wrought by Yashiro and his team in Shinsei Bank one needs to understand its history. Long Term Credit Bank is what we in India would call a development finance institution. As the Americans handed over power to the Japanese in 1952, the new Japanese administration decided to discuss the nature of the financial system needed to fund Japan’s revival. “Will it be stocks, bonds, or banks?” asked the then finance minister Ikeda. The answer he gave later, with America’s tacit support, was: “Banks, not capital markets.” The Tokyo Stock Exchange was reopened, but it only played the role of tying up industrial families, the keiretsu, through crossholdings.
LTCB was started to fund the industry by issuing debentures, which were like bearer bonds. It was directed to lend to core sectors and later to automotive, etc. In fact a young car manufacturer with global ambitions called Toyota came up owing to support from LTCB. However, soon lending was not based on cashflow projections but on the fact that only companies with a web of social contacts would survive, while those without allies would naturally die. The interest rates did not reflect risk, since the government set the price of money. Money was not an end but a means to an end — and the end was the revival of Japan.
Over three decades LTCB funded a large number of companies like Kawasaki Steel, Bridgestone, Toshiba, Tokyo Electric Power, and so on. It was highly successful in its mission. But that created a problem. The successful manufacturing companies in the 1970s and ’80s with strong cashflows no longer needed loans from LTCB; if need be they could directly access global finance. This led to some experiments in learning merchant banking skills from foreign markets, but these activities were marginal. Then came the real estate and stock market bubble of the ’80s. LTCB, like others, grabbed this opportunity for high profits immediately. However, the collateral for these loans was suspect. But the LTCB culture did not allow for serious financial appraisal.
Death
And then the stock and real estate bubble burst in 1991–92. Since then the economy has stagnated. The financial system is burdened with bad loans that have been estimated to be as high as $1 trillion! The government, however, has continued to muddle along without taking hard decisions, riding on the still very high domestic savings of over $14 trillion.
After meandering along for six long years, with over $40 billion as bad loans and its capital base totally eroded, and carrying a capital deficit of $3 billion, LTCB declared bankruptcy on 23 October 1998 and the government nationalised it. R.I.P.
Rebirth as Shinsei
Then came a group of US investors led by Tim Collins of Ripplewood Ventures.
Collins, along with Chris Flowers, a former Goldman Sachs dealmaker, put together a consortium of investors including Citigroup, AIG, GE Capital, Mellon, Paine Webber, and David Rockefeller personally. It was as high-powered a slice of Wall Street as you could get. Moreover, Collins took on board powerful individuals like Vernon Jordan (close to Bill Clinton), Paul Volcker (former chief of the US Federal Reserve), and John Reed (former Citibank chief and currently chairman of NYSE) as advisors, while co-opting Mitsubishi and Nippon Steel bigwigs on the governing board.
This group eventually won the bid. They bought the bank for a total capital of about $1.2 billion. Since the quality of the loan portfolio was opaque to the new investors, the Japanese government allowed a put option for any ‘bad loan’ discovered later.
It was path breaking and not smooth, to say the least. It was the first ever foreign entry into mainstream Japanese banking and was perceived by many in Japan as another invasion of the gaijin (aliens) and that too by a detestable ‘vulture fund’ from Wall Street. For the protagonists, however, the deal became the proverbial pudding to test Japanese commitment for globalisation and deregulation and led to some highpowered lobbying in Washington and Tokyo.
Tim Collins persuaded Masamoto Yoshiro, former head of Exxon in Japan and Citibank Japan, to be the chairman and CEO (see interview with Yashiro) to execute the turnaround. He recruited a team of investment bankers to start that line of business and a host of senior executives like Dvivedi, Sajeeve Thomas, and Janak Raj from Citibank to execute his plans for a total remake of the bank.
“Japanese do not like abstractions like software, they excel in manufacturing the concrete”-- Masamoto Yashiro
A great believer in harnessing the skills of Indian software companies, Masamoto Yashiro chairman & CEO, Shinsei Bank, explained the issues in Japanese banking, in a candid interview with Shivanand Kanavi
Q You were an outsider to banking. So how do you look at banking in Japan?
A I spent many years with the oil industry, 30 years with Exxon. Both oil and banks were regulated in this country. Japan does not have oil resources, so they let the oil companies operate much more freely than banking, especially in the 1980s. In the case of banking, till recently banks were not free to offer new products. So like the CIO, CFO, etc, they had one ‘Chief Ministry of Finance Contact’. These officials used to go every day to the MoF and sit around in the corridor and see who was coming and going. It was that bad. There was no initiative.
Q When Tim Collins invited you to join him in Ripplewood you had already retired. So what made you take his offer?
A He was very insistent. He thought there were many business opportunities in Japan. I thought I must help in restructuring Japanese companies. But initially it was outside of financial services. But very soon the banks that were nationalized were available for investment even for foreign interests, and that came about very quickly. So I had to divert my energies to the banks. That is how I ended up here. But I continue to be a limited partner of Ripplewood.
Q When you took up the assignment at Shinsei did you think it would be a model for ot her Japanese banks?
A Yes and no. LTCB had only sold debentures and given corporate loans, so I thought we should change the business model completely. But to do all these things you needed to change the infrastructure. Infrastructure as it existed was antiquated and was 20 years old. We had mainframe computers, we were using Cobol! Everything was old. The story of Jay’s (Dhananjaya Dvivedi’s) contribution is very well known. Anything we want can now be supplied by Jay’s group. The product is à la carte.
Q Is this unusual for a Japanese bank? Are others acknowledging your success?
A Yes, it is unusual. Others do not want to acknowledge it openly, but IT people know that we are doing the right thing.
Q Japan is the second-largest software market. Who is servicing it?
A It may be in terms of money. If you have to pay five times more than elsewhere, you can even be number one very quickly.
Q What is your advice to Indian software companies?
A Strangely, Indian banks seem to go to Australia for software! Japanese companies focused on manufacturing and brought their costs down, but they did not touch non-engineering parts of overhead. They keep spending more, year after year. They are worried about visible products, which they can improve. Abstraction is the last thing we attach value to. India has many philosophers; we don’t have any.
Q Would Shinsei bank be interested in emerging markets like India?
A We are looking at Korea and Taiwan, but India is too far for us. But since we have many Indians working in the bank, maybe we should take a look at it.
“We had no management information systems here when we came in. Reports were produced once in six months, but top management could not monitor on a monthly basis which products were doing well, which customer groups were behaving in interesting ways, and so on. We also wanted to launch the retail bank with a whole new way of banking access. For example, ATMs here closed at 3 pm. It was not the law, more an industry practice, but everyone followed it. Also people were being charged for using ATMs. But a retail bank with very few branches like us had to invite people to use ATMs and the Internet more and more to do normal banking. So all these equired a new infrastructure, which at the same time had a low total cost of ownership. Jay’s team, with the help of Indian software vendors, has delivered that. Jay is like a cook — if we want caviar added to a product he can do it, if someone wants garlic removed from something else, he can do it,” says Yashiro with a twinkle in his eyes.
“I have known Yashiro-san from my Citibank days,” says Jerry Rao, CEO of MphasiS-BFL, which did a lot of preliminary groundwork for the IT roadmap at Shinsei. “In fact we both retired from Citi at the same time in 1998. I invited him to be the advisor to MphasiS, which I had just started. Yashiro-san and Jay had to cut costs, implement a retail banking solution in a 100 per cent wholesale bank and migrate from an old system to a new one, while retaining the old people. Strangely, Japan, which is very advanced in automobiles, electronics, and so on, is very backward in banking and insurance. Yashiro promised 100 per cent improvement. Executing five different meshed projects simultaneously isn’t trivial, even though the technology was known in global banking,” adds Rao.
“We had to choose a design that would allow flexibility for our business plan. Customer self-service was the first point of our system, not labour saving. When the customer comes in he should have full power to service himself. Flexcube gave us the first generation packaged software to run retail banking. It is an extremely well engineered product if you work within its limitations, but if you want to add something in there like a credit card, or any other complex product, then it has a problem coexisting in this package. The new-generation product is from Polaris. We use three or four products from Nucleus, collection systems, general ledger, etc, but the more important thing about them is tenacity. If something does not work, they make it work. Complex engineering pieces have been developed by Nucleus,” adds Dvivedi.
Hitting the headlines
What would have cost $500–600 million for any other bank in Japan using traditional mainframes and customized software has cost Shinsei just $60 million. Naturally the engagement is continuing and expanding. This has led to headlines in Japanese newspapers like: “If you want to learn about software, learn from India”— Nikkei Sangyo Shimbun (17 September 2001); “Not enough IT engineers, foreigners save in software development” — Nihon Keizai Shimbun (22 September 2002); “Two secrets of ‘Cruel’ Shinsei Bank: open computer systems, Indian companies” — Nikkei Sangyo Shimbun (26 October 2001); and so on.
The robustness of the system, besides its low cost, was also highlighted in early 2002 when two major banks – UFJ and Mizuho (the largest bank in the world) – had crashes in their mainframe-based IT systems. Now grudgingly other banks are trying to copy what was done at Shinsei. Thus, Shinsei is becoming an agent of creative disruption within Japanese banking circles in more ways than one. Bill Gates takes a keen interest in Shinsei and has visited it. After all, it is the largest installation of Windows based banking software.
But the change did not go smoothly. There was a definite culture clash. “Even now only about half the old employees appreciate the change. The other half might still want the placid old days of LTCB. But change is a one-way street,” says deputy GM (IT) Michiyuki Okano.
Culture clash
What were the roots of culture clash? “Firstly, Japanese believe in a consensus approach (namewashi). Any change has to be discussed and only after a consensus has been achieved things move. But here change was happening through orders from the top, and at a furious pace. Of course change could only come this way, otherwise we would be debating endlessly,” adds Okano.
“The other was the Japanese obsession with perfection. Europeans and Americans may accept some imperfections, but Japanese do not. Now this can take an inordinately long time,” says Okano insightfully. “In the beginning we might have been a little cocky too. We had installed Flexcube at 60 sites and Shinsei was the 61st. But soon we learnt a lot. The drive towards zero defects was unprecedented. We improved greatly through this experience,” says i-flex CEO Rajesh Hukku.
Nucleus had the tough job of supporting the migration from legacy mainframe systems to new Intel servers and a PC-based system. “We built a reconciliation engine to show the equivalence of both the systems. It was crucial to migration. However, many times we had people holding two printouts from the two systems to a light and pointing out a font difference or a change in the position of a column!” says Vishnu Dusad.
“Indian companies have good engineering skills, but to make an impression in Japan they do need to realise also that time in Japan is of utmost importance. A Friday morning deadline means that the client expects it at 9 am Friday Tokyo time, not Friday afternoon, evening, or Monday or Tuesday. In fact a familiar ‘no problem’ response always scares me unless a detailed road map is given to show how the problem will be solved,” says GM (IT) Peter Franken, another former Citibanker.
Already Dvivedi and Yashiro are thinking of leveraging the IT skills developed in-house in conjunction with Indian software engineers. There is a plan to start a Shinsei Bank support centre in Pune. Nucleus already has 100 engineers at a centre in Pune. “We are creating a pan-Asian banking model. The Pune centre will be a big step for us,” says Dvivedi.
The results are there for all to see. Shinsei ATMs are working 24 hours, and the retail bank has attracted over half a million customers starting from zero less than three years ago. Customers can access their accounts at railway stations and even through 52,000 third-party ATMs at no cost. Deposits by new customers have crossed $14 billion.
Of course technology is not the only thing that has brought this in. A brand new retail banking culture brought into Japan by the Shinsei team headed by another Indian, Sajeeve Thomas, is responsible for that. Every branch of Shinsei looks like a modern showroom of an upmarket store rather than the congested paper-laden office it used to be. Earlier each transaction used to take forever. It was assumed that the customer had infinite time. To count the money half a dozen or more officers used to be involved before handing it over to the customer! Today Internet kiosks at every branch take care of that.
In fact the impressive headquarters of Shinsei had a 100- foot-high glass entrance with not a soul there. “I could not believe it in the beginning. How can the lobby of a bank be empty and forbidding?” asks Thomas. He quickly changed it by starting a retail branch there with a Yahoo! Internet café and a Starbucks coffee shop thrown in. “We did a survey among our own employees on what should a retail bank look like. The names that popped up were Starbucks, Seven Eleven, Uniqlo (a Japanese clothing store), and Sony. We called in designers to remake all our retail branches to give a customer-friendly experience. The elimination of enormous amount of paperwork and centralised data processing created a lot of space in each branch. Shinsei had a brand recognition of 4 per cent when it started. Today it is 87 per cent,” says Thomas.
The self-effacing Thomas has brought in more than an exterior change. The culture has changed —the stiff old manager hidden behind paper in a forbidding room inside the branch has been replaced by a smiling one, right at the reception to direct any customer to the appropriate kiosk.
But what about the basic corporate lending business that Shinsei inherited? “Well that too has changed,” says Janak Raj another ex-Citibanker who heads risk management group.
“When I was in Citi Japan in the early 1990s we wanted to sell a building and there was no problem getting an offer of $500 million for it, by just walking around and visiting a few nearby offices! That was the nature of the bubble economy those days. Obviously these assets shrunk to 10 per cent of their value after the bubble burst,” adds Raj.
However, Shinsei broke the mould of zombie lending (bankrupt banks lending to bankrupt firms to keep them afloat), a term coined by Anil Kashyap of the University of Chicago’s Business School. Immediately it was declared a “cruel bank” and a representative of Wall Street’s greed. But Yashiro stood firm, in not lending to bankrupt firms just to keep the “relationship” going, while being sympathetic to viable ones. However, now the recovery has become smoother and many old borrowers have paid up, thereby reducing the bad loan portfolio — by $27 billion in three years. Out of those only $10 billion were reduced by exercising the put option and returning them to the government as agreed in the contract of sale, while $17 billion were actually recovered. “Now other Japanese banks are also collecting a lot of money. Otherwise
no-one can survive,” says Okano. Considerable progress has also been made by Janak Raj’s team in securitizing loans by issuing new bonds, adding another stream of revenue to the balance sheet.
As a result Shinsei has become the most profitable bank in Japan today— it declared over $440 million in net profit in March 2003. GM (management accounting) Sanjeev Gupta, another former Citibanker, and his team are happily preparing the balance- sheet for the much-awaited IPO. Investment bankers expect the offer, slated for mid-February, to fetch close to $10 billion for the bank. The investors plan to raise $2 billion through this issue. Considering that they bought the bank for $1.2 billion, the ‘vulture fund’ attribute of Ripplewood might change to ‘venture fund’.
Will Shinsei change the Japanese financial sector, as Tim Collins and David Rockefeller suggested? The jury is still out. Change anywhere, and more so in Japan, is painfully slow. When it does come, as in the Meji restoration at the turn of the century, it can be amazing. A mixture of angst about change and pride in being Japanese drives Yashiro at 74. But he can claim modest success – by the grudging imitations that are happening in other banks – and retire a satisfied man. Obviously he has absorbed global best practices and rebelled against inefficiencies and irrationalities in the Japanese system. But he has handled the change with firmness and sensitivity. Not an employee was fired in all this process and many more customers have been added. He put a stop to zombie lending and took his fiduciary responsibilities towards his depositors seriously, combining them with sympathy (not loyalty) towards his corporate borrowers. Shinsei Bank rose out of the ashes of Long Term Credit Bank of Japan, which went under in 1998 with $40 billion in bad debts
Yashiro loyalists, like Jay Dvivedi, Sajeeve Thomas, and Janak Raj, might move on once Yashiro retires. In fact Dvivedi might eventually even set up his own software consulting firm. The Indian software companies are using Shinsei as the edge of the wedge into Japanese market. Already Nucleus is finding new customers like Honda, and more banks. I-flex has installed its products in six more banks in Japan. And so on.
As for the 2,000-odd Indian software engineers in Tokyo, it is not really ‘Jaapaan, love in Tokyo’ à la Shammi Kapoor. Very few learn Japanese or study the Japanese culture. Most yearn for home food, for which there are over 200 Indian restaurants in Tokyo alone!
Shinsei has been good karma.
Tata Steel - Renaissance
Business India, July 23-August 5, 2001
New steel
Tata Steel, the 90-year-old pioneer in steel making, has absorbed the shocks of liberalisation and turned from Tata’s ugly duckling into a swan
Shivanand Kanavi
“The treasury has its source in the mines; from the treasury the army comes into being. With the treasury and the army, the earth is obtained with the treasury as its ornament.”
— Arthashastra, by Kautilya, Chapter 2, Section12
The mother of all Indian tomes on statecraft and political economy, Arthashastra, was written not too far from the village of Sakchi (renamed Jamshedpur in 1919) over two millennia ago. Tata Steel confirms this ancient wisdom in many ways. During 2000-1, Tisco had the most profits within the House of Tata, after TCS.
Today, J.J. Irani the outgoing MD of Tisco, under whose leadership the company has undergone a remarkable transformation in the last decade, proudly points out that World Steel Dynamics (WSD), a US-based research firm, has placed Tata Steel on top of 12 world-class steel-makers (see table). The peer list includes such global giants as Nippon Steel, Usinor, Posco and Nucor. The 17 parameters compared for grading included operating costs, ownership of iron ore and coking coal, location, skills of manpower, power cost, on-going cost-cutting efforts, downstream business, borrowing costs and quality of management. Though such surveys were not done earlier, one can say that Tata Steel has not been in this elite club, far less has it topped it. A few years back, the public sector SAIL did better than Tisco, leading several people to question Tatas’ wisdom in continuing with the steel business. Some even said the group should focus on I T, perhaps even automobiles, and exit steel. But the Tatas abhor the idea of exiting a business when it is in trouble. (See Ratan Tata interview:“Given the right incentives, India can be a steel supplier to the world”) i
It has taken nearly 10 years of dogged effort to trim costs, improve operational efficiency, spend large sums to modernise the plant, develop a high-margin downstream product mix and increase labour productivity – all of which has turned this ugly duckling into a swan.
The company, which came into being in 1907, started production of pig iron from its blast furnace 90 years ago in 1911. Which is why many people even now, react to Tisco’s profits by saying: “Oh they have a depreciated plant”. The truth is, Tisco today has one of the most modern plants. As far as cold rolling, it is the most modern plant, not only in India but in the world. Except for the seven blast furnaces, which range from probably the oldest working blast furnace in the world – BFA, built in 1911 and a modern one B F-G, built in the ’90s – the rest of the integrated plant has undergone a total revamp. “In the early ’80s, I told JRD that if we do not modernize the plant, we might soon turn it into a steel industry museum and stand at the gates selling tickets,” reminisces Jamshed Irani, the out-going managing director who led the transformation in Jamshedpur in the last decade.
The steel shop was also transformed, from an open hearth process to the modern basic oxygen furnace (also called LD shop). Then came continuous casting. However, the product mix of Tisco was still primarily ‘longs’ used in construction. So, first of all, a shift was made to a modern wire rod mill and when ‘flats’ consumption increased in the country, a hot rolled coil mill was built. The last element, recently added, in this modernizing effort was the cold rolling mill along with galvanising lines.
Cold rolled coils are used in the automotive industry and the white goods industry, in refrigerators, air conditioners and washing machines. The galvanised sheets are used for mundane applications such as roofing to outer skin panels of cars. Thus, Tisco today has the most complete product mix as an integrated steel maker. One of the reasons for it staying afloat and even making profits in an industrial slump, is this product mix, which other steel makers in India lack. So, today when the flats are not fetching a good margin, the better margins in longs are helping the bottom-line.
Sajjan Jindal, vice-chairman and managing director of Jindal Vijaynagar Steel, points out, “The strengths of Tisco are: control over raw materials, a highly-skilled operating team, fully integrated plant including rolling mill, Tata brand equity, mixed product profile (flats and longs), cheaper access to capital being an AAA company. While we pay an average of 17 per cent, they pay 12 per cent — which is even below PLR.”
The planning and commissioning of the 1.2 MTPA cold rolling mill has been an important achievement for Tisco in many ways. It has not only added high-value products, which can fetch three times the price of hot rolled coil, but seems to have energized huge segments of management. The project managers felt it important enough to chronicle the saga in a hardbound book The Lotus and the Chrysanthemum. Besides the intrinsic importance of the project, what comes out clearly is the enthusiasm that the project generated in the company and the H R fallout. The project was completed at a rock bottom price of Rs1,600 crore and in a world record time of 26 months. Whereas, a similar cold rolling project took 38 months for Baoshan in China, 37 months for Siam United Steel in Thailand, 31months for Bethleheim Steel in the US and 29 months for Posco in South Korea. The phase of “modernisation of the mind” as Irani calls it, has clearly begun.
“It is an issue of leadership and motivating people. Rigorous followup – we used I T tools for project management – a lot of weekly meetings etc. We had a lot of problems from local vendors, but we made them come every month and make presentations with photographs on progress achieved. When we started, I had not seen a cold rolling mill (CRM), so we created a technology team, which went all around the world to see the CRM,” says B.D. Muthuraman, the new managing director who was in charge of the CRM project.
“Given right incentives, India can be a steel supplier to the world”--Ratan Tata
In a free-wheeling hour-long interview, Tata group chairman Ratan Tata
spoke to Shivanand Kanavi about the challenges faced at Tisco. Excerpts:
How do you look at your nine years as chairman of Tata Steel?
When I became the chairman, Tata Steel had just come out of the administered price regime where price increases were simply passed on to the consumer. The month I took over there was a crisis because freight equalisation had been discontinued and we were adversely affected since the major markets were in the south and the west. Tata Steel had come out of a seller’s market and hadn’t really oriented itself to the customer.
We set up two task forces, one to look at realisation and the other to look at costs, both of which were headed by Jamshed Irani. They went about looking at issues in a real hard way. We made some progress on both those scores. We started benchmarking ourselves with the best of the breed in the world. That really paid off, in terms of keeping great pressure on the level of our costs.
We also made a decision not to expand but modernise our facilities, and to move into flat products, which we saw as the growth area. We went through some difficult years in terms of cash flow and liquidity as we increased our levels of borrowings to see the various phases of modernisation through. Finally, the hot rolled mill and subsequently the cold rolled mill came into being. For a period of time, Tata Steel did not look hot to investors and analysts until we moved to the last phase of what we were doing.
The leadership in Jamshedpur has had a tremendous role to play in what was achieved. Jamshed Irani and his team have resolutely gone about making this transition, with no pulls and pressures that it should have been done in another way.
I think the only distraction would have been the view that Tata Steel should grow to 15 million tonnes, that it should be a volume producer as against a company that would be the best in its class. And perhaps, the period when one thought that Gopalpur would be the focal point of growth. I felt that growth in steel is going to be a difficult one and that we should consolidate ourselves and improve our operations before we looked at expansion.
What stops India from becoming the steel supplier to the world?
There are several issues. Koreans operate at 9:1 debt equity ratio, their interest rates are close to 1-2 per cent, whereas it is 18 per cent here. Tisco has had the benefit of the
Steel Development Fund, which is softer but which does not cover everything. The social costs in India and Tisco are a part of our baggage. Posco, for example, will bulldoze a plant that is obsolete and build another one in its place that is newer. We can’t do that in India. We need a MITI like approach to become supplier to the world. Here the steel industry has never been given the required incentives.
To build a modern company in Bihar must have been quite a challenge.
The credit has to go to a very strong community spirit in Jamshedpur. The people of
Jamshedpur have a very strong sense of pride, and there is a sense of fear that it should not become like the rest. When I lived there, in the ’60s, there was a time when for Rs15,000 somebody could get killed. Finally, we had a good SP who cleaned up the place. So the rot can happen in Jamshedpur also. Tata Steel has been a fair corporate citizen, it has given a lot to the community. It has administered not in its own self -interest, but in the broader interest of the community.
Don’t investors question why you give away Rs100 crore every year to Jamshedpur and surroundings?
In particular, foreign shareholders think that this is baggage we are carrying and, in a manner of speaking, it is. But if you look at the industrial harmony and so on, I don’t think you can ascribe a value to it. This is a cost you have and despite that if you are still going to be the lowest cost steel producer, then no one should mind.
Instead of investing in ferrochrome and titanium why don’t you acquire steel?
Within India Tata Steel has looked at some options. But we recognized that, regrettably, the steel industry does not cover the cost of capital — and this is the global situation. Therefore, you do see reductions in capacities in various parts of the world. If you have to invest thousands of crores, as we did in the modernisation of the plant, and if it doesn’t give us a return that is equal to the cost of capital, then we have destroyed shareholder value. Moreover, just because you are Tata Steel does not mean that steel can be your only growth area. In the world you have companies that started in fertilizers and now are in pharmaceuticals. Companies like Mannesman that were in steel are now in telecom.
There are other group companies operating in the area of telecom, then why Tata Steel?
Tata Steel has not decided to get into telecom. We said let’s parcel out various parts of the telecom activity and look at the Group as a whole being in telecom. Ideally, you would have got one consolidated telecom company in the Group. But again, shareholders say: ‘This is my money and all I have is dividend returns from the company’. So, another way to do it is, you parcel it out even though that is a less efficient way of doing it. The bits are not in competition but complement each other. Maybe one day we will merge those into one.
Are you looking at acquiring steel plants abroad?
We are looking at plants abroad. However, we should be sure that we can manage that extra capacity on a global basis also. You could get a huge asset at a very good price, but you might end up having surplus capacity, which will be outside India. You then have to support it in terms of foreign exchange and we do not have a foreign base to do it. So we may be cautious in looking at these plants. Our ethic also prevents us from walking away from an acquisition when it sours.
Did McKinsey’s advise you to dump steel?
McKinsey’s did not tell us to dump this or dump that. McKinsey’s just gave us discussion notes in various industries. They raised some serious questions regarding the steel industry and whether it destroyed shareholder value. And I must say they awakened us to the fact that we had to do much more in steel to make it an investor-attractive area of business.
Last year Tata Steel made the most profits in the Group after TCS.
We need to be a little circumspect. Tisco has now got two high margin plants on line. It has shed its old processes. Crucial to producing and sustaining these results is growth in demand in its user industries, like auto, white goods and construction. Even if domestic demand picks up but there is over capacity in the world then you will be faced with low cost imports.
However, there are two pluses; one is that steel is a commodity. Hence, Tata Steel has been able to go all-out in production, covering its cost and dropping its price. The other advantage is, if the Indian market got bad you could export it. In product markets like trucks or refrigerators you can’t do both these things.
“The language in the project changed as well. We call our workers ‘associates’. They used to make presentations regularly. In any project, the operating manuals come from the suppliers, in our case Standard Operating Practice Instructions was written by our workers. It has been used as a training document. Our operators kept redrafting it. Thus, they have ownership now. We look at the manual and make additions based on experience,” adds Muthuraman.
“We were operating the steel melting plant for 90 years in a particular way, whereas here things had to be done differently. So we segregated the project. We gave everybody a uniform. Even I have to wear it when I go into C R M. We selected a higher class of people, all of who know how to use computers, and used a different salary structure — a large part of the salary is variable (performance linked). The union also agreed to it. That experiment has succeeded and we are now moving for this type of organizational structure and salaries in other departments also. There are only three levels there, whereas in the rest of the plant there are 11 levels. Instead of forcing this model on others, we wanted them to feel that they want it themselves — and it is working,” says Irani.
A major factor, which led to a record low cost for the C R M, has been the optimum usage of in-house capabilities. “Our principle for the last 20 years has been to build as much as possible ourselves. We have a Growth Shop in Jamshedpur built by Sumant Moolgaonkar 30 years back for the express purpose of building steel plant equipment. So we naturally used it for the hot strip mill, LD project. For the wire and rod mill project we negotiated with our ultimate suppliers to give us the drawings to be used only by us and not to be exported — and we have maintained our word. Similarly, we did use Hitachi’s drawings for CRM but we do not then make it for others unethically,” explains Irani.
Sajjan Jindal was most impressed on his recent Jamshedpur visit. He told Business India: “It is a world-class facility. The highly skilled team at Tisco will make a winner out of it. Quality and marketing the automotive grade is a problem since it is a new product. It will take a little time, but they will do it. Tisco also got the cold rolling mill at a very good price, since nobody else was building a mill at that time.”
Along with modernising the plant came the emphasis on customers. “You have to see the change in our marketing offices in Kolkata and throughout the country to understand the change in the mindset,” says Firdaus Vandrewala, deputy managing director, international projects, who was till recently in charge of marketing. “From a totally sellers’ market during the control regime, we have moved into a highly customer friendly attitude with a very high usage and ERP tools and IT in general. We are constantly monitoring customer satisfaction and one of the most important programmes in the plant is the ‘Customer Week’, which we hold regularly. During the week, we invite our customers to see the plant and make suggestions and register any complaints which will be immediately addressed,” adds Vandrewala. Business India visited Jamshedpur during one such Customer Week programme. The importance attached to the programme was very clear, since all the top executives, including Irani and Muthuraman, excused themselves from interviews and photo-shoots to attend to the customers.
As far as manufacturing practices are concerned, Tisco has a long tradition of benchmarking with the First World even a century ago. In his endeavour to usher in a modern steel age in India, visionary Jamsetji Tata travelled extensively across the world and saw the best steel plants in Great Britain, Germany and the US and consulted with the best geologists and mining engineers, before he raised the money from the Indian public. The tradition was carried forward by Dorab Tata, who implemented his father’s vision in the jungles of Chota Nagpur near the village of Sakchi. He had the blast furnace set up by the Americans, the steel shop by the Germans, the coke ovens by the Welsh.
The control regime in independent India, of course, greatly reduced the opportunities to grow into a global giant. At the same time, by providing administered prices and other protection, it removed the edge from the steel business. However, Malay Mukherjee, COO, Ispat International, remembers his days in Bhilai: “During my time in S A I L, I had visited Tisco a number of times. Each time I learnt something from them and introduced many good practices in our SAIL plants. I got great satisfaction when, during my time in Bhilai, we won the first Prime Minister’s award as the best steel plant. Tata Steel was second. The satisfaction came from the fact that on many of the subjects we were judged on, I had implemented what I had learned during my visits to Tisco. I have maintained contacts over the years and I have been impressed by the progress they have made in modernizing the plant and putting in proper technology for quality improvements.”
Today Tisco is being hailed as one of the lowest-cost producers of steel in the world. A fact reiterated by a report by Consumer Research Unit of the UK. Incidentally, the report does not consider L.N. Mittal’s plant in Kazakhstan, which claims to be almost 30 per cent lower in cost than Tisco. This controversy aside, the cost consciousness in Tisco warms the cockles of Ishaat Hussain’s heart. “Everywhere you go in Tisco you will find an obsession with cost,” says Hussain, who is director, Tata Sons, and an old Tisco hand.
What did Tisco actually do to achieve the low-cost producer status? Answers Tridib Mukherjee, deputy managing director, who is in charge of operations and marketing: “We concentrated on four to five areas. First of all, we looked at our strengths. We have captive raw materials like coal, iron ore and lime stone so we can be the cheapest hot metal producers. When we looked at that part, we found that we were using up to 30 per cent of imported scrap as feedstock. This was totally unnecessary and we reduced it over a period of time to 5 per cent. Secondly, we increased the output of hot metal by increasing what we could get out of existing assets like blast furnaces. We used to produce 2,800 tonnes per day with our B F-G, which we gradually took up to 4,000 tpd. We benchmarked with the best practices of leaders like Nippon, CST (Brazil) and Posco in this regard. We fine-tuned our sinter plant and increased production from 2.4 MT of sinter to 3.9 MT, which is as good as having one sinter plant free. Similarly, we were using imported coal for coke ovens and found that by changing the way we charge the ovens to Stamp Charging, we could produce high-quality coke with our own pulverised coal. Now our mix is 70:30 for Indian and imported coke. We were also able to develop highquality low phosphorous steel with our own technology. This was necessary since our ore contains high phosphorous. For this we had to develop a dolomite-free process. We reduced the labour from 72,000 to 48,000. A major factor for cost reduction is, of course, employee involvement. We received literally thousands of suggestions. Our estimate is that the suggestions have saved us Rs250 crore last year,” says Mukherjee.
The stamp charging technology for coke ovens was seen by Irani in a power plant in Germany in the ’80s. He then convinced his colleagues to invest in redoing the coke ovens for this new method, which has proven a great success. But Irani explains that cost consciousness is more mindset than a specific project. “We attacked energy consumption. The use of liquid fuel has been eliminated by generating enough gas from coke oven and blast furnace. That gas is used to heat up steel before rolling it out. We have a material in India, called Blue Dust, which is grey in colour, very rich in iron but as fine as talcum powder. It cannot be used in the blast furnace in a powder form. So we put up a new sinter plant and developed the appropriate technology with Lurgi, which saved us money since we used to throw the Blue Dust away earlier. It has also extended the life of our mines. We improved the yields in our mills by benchmarking. There must be at least 500 items in each department for cost reduction. Cost consciousness is an attitude. It is not just one single project. For example, now that we are all on e-mail, our STD spend comes down,” he adds.
Today, prominent bill boards at the plant and in Jamshedpur city no longer say: ‘We also make steel’ Instead they say: ‘Cost, Customer and Code’. While the exhortation about cost and customer is as clear as daylight in today’s competitive market place, one wonders what the code is all about. The insistence on boy scout like adherence to the Tata code of conduct and good corporate practice in yesterday’s Bihar or today’s Jharkhand, sounds impractical to pragmatists, leave alone the cynics.
How do Tatas run a First World company in a Fourth World environment? The articulate A.N. Singh, director in charge of township services, is an authority of sorts on the subject. He served in the I P S for 22 years in Bihar before he took voluntary retirement and joined Tata Steel. “The moment you play according to their rules, you will remain in the Fourth World. Of course, delays will take place. There is a great amount of poverty and lack of will to administer the laws of the country. But Tata Steel has been doing business for 90 years and there are others also doing reasonably well. If we can do it with our code of conduct, I do see a future. For example, we are in an island of peace in West Bokaro, surrounded by extremists. One of the reasons is our sense of corporate responsibility and being able to vibe with the community. For example, in West Bokaro we have open cast coal mines. The community living around us has realized for decades that they are flourishing because this coal mine is being run by the Tatas,” says Singh.
Irani adds: “Laloo Prasad Yadav is my friend, and right in the beginning I made it clear what friendship stood for. I said to him: ‘You have your rules and we have ours. We will do everything by your rules. We will not ask you to give a sales tax benefit here, or some short cut there. In return, don’t ask us for any underhand thing and break our value system.’ And to his credit, he has never made an indecent proposal. He asked us to clean up Patna, which we do as our social responsibility. He wanted a college to be built in Samastipur. We did that since we encourage education. He asked us to build a Tata ward for children in Patna hospital, which was in a very pitiable condition and we did that. Now we are doing a hospital in Hazaribagh. Laloo told somebody: ‘Going for anything illegal to the Tatas is like going to an Udupi restaurant and asking for a tandoori chicken’. Sometimes people come to Jamshedpur with expectations and then find in a week or longer that the Tatas won’t give money and they give up. If I find any of our officers has done underhand things, then I sack him instantly,” says Irani. No wonder Irani has earned the sobriquet from some leading politicians of Jharkhand— “the prime minister of Jharkhand.
When we enquired as to the truth of these assertions from a prominent businessman in Jamshedpur, who is not “burdened” by any code of conduct, he said: “Of course, it is true. That is why Tisco takes three months to get something done from the government in matters which take me three telephone calls.”
The emphasis on quality in Tisco has been recognised by Indian industry and several awards are pouring in. But the one that makes Tisco people walk a little taller within the Tata group is the J.R.D. Tata award for excellence in quality, which has been fashioned on the Malcolm Baldridge award. It makes them proud that this 90-year-old company, which many people thought stood for stodginess in the group, has made it to the top, while other companies in the group have not even reached the qualifying mark.
Irani, however, is not carried away by the hype about being the lowest cost producer in the world. He admits that if the advantage of coal and iron ore mines – which Posco and Nippon Steel do not have – is taken away, then Tisco will be one of the efficient producers and not necessarily the lowestcost producer. He points out that the World Steel Dynamics report clearly gives the same number of points to all the top 12 steel makers regarding ongoing cost-cutting programmes and the proactive quality of the management. So, Tisco’s position at the top can be temporary. “Living in today’s world means running to stand still,” is the advice he gives to Muthuraman.
The wily Kautilya seems to have hit the nail on its head about Tisco by stating: “The treasury has its source in the mines....”
New steel
Tata Steel, the 90-year-old pioneer in steel making, has absorbed the shocks of liberalisation and turned from Tata’s ugly duckling into a swan
Shivanand Kanavi
“The treasury has its source in the mines; from the treasury the army comes into being. With the treasury and the army, the earth is obtained with the treasury as its ornament.”
— Arthashastra, by Kautilya, Chapter 2, Section12
The mother of all Indian tomes on statecraft and political economy, Arthashastra, was written not too far from the village of Sakchi (renamed Jamshedpur in 1919) over two millennia ago. Tata Steel confirms this ancient wisdom in many ways. During 2000-1, Tisco had the most profits within the House of Tata, after TCS.
Today, J.J. Irani the outgoing MD of Tisco, under whose leadership the company has undergone a remarkable transformation in the last decade, proudly points out that World Steel Dynamics (WSD), a US-based research firm, has placed Tata Steel on top of 12 world-class steel-makers (see table). The peer list includes such global giants as Nippon Steel, Usinor, Posco and Nucor. The 17 parameters compared for grading included operating costs, ownership of iron ore and coking coal, location, skills of manpower, power cost, on-going cost-cutting efforts, downstream business, borrowing costs and quality of management. Though such surveys were not done earlier, one can say that Tata Steel has not been in this elite club, far less has it topped it. A few years back, the public sector SAIL did better than Tisco, leading several people to question Tatas’ wisdom in continuing with the steel business. Some even said the group should focus on I T, perhaps even automobiles, and exit steel. But the Tatas abhor the idea of exiting a business when it is in trouble. (See Ratan Tata interview:“Given the right incentives, India can be a steel supplier to the world”) i
It has taken nearly 10 years of dogged effort to trim costs, improve operational efficiency, spend large sums to modernise the plant, develop a high-margin downstream product mix and increase labour productivity – all of which has turned this ugly duckling into a swan.
The company, which came into being in 1907, started production of pig iron from its blast furnace 90 years ago in 1911. Which is why many people even now, react to Tisco’s profits by saying: “Oh they have a depreciated plant”. The truth is, Tisco today has one of the most modern plants. As far as cold rolling, it is the most modern plant, not only in India but in the world. Except for the seven blast furnaces, which range from probably the oldest working blast furnace in the world – BFA, built in 1911 and a modern one B F-G, built in the ’90s – the rest of the integrated plant has undergone a total revamp. “In the early ’80s, I told JRD that if we do not modernize the plant, we might soon turn it into a steel industry museum and stand at the gates selling tickets,” reminisces Jamshed Irani, the out-going managing director who led the transformation in Jamshedpur in the last decade.
The steel shop was also transformed, from an open hearth process to the modern basic oxygen furnace (also called LD shop). Then came continuous casting. However, the product mix of Tisco was still primarily ‘longs’ used in construction. So, first of all, a shift was made to a modern wire rod mill and when ‘flats’ consumption increased in the country, a hot rolled coil mill was built. The last element, recently added, in this modernizing effort was the cold rolling mill along with galvanising lines.
Cold rolled coils are used in the automotive industry and the white goods industry, in refrigerators, air conditioners and washing machines. The galvanised sheets are used for mundane applications such as roofing to outer skin panels of cars. Thus, Tisco today has the most complete product mix as an integrated steel maker. One of the reasons for it staying afloat and even making profits in an industrial slump, is this product mix, which other steel makers in India lack. So, today when the flats are not fetching a good margin, the better margins in longs are helping the bottom-line.
Sajjan Jindal, vice-chairman and managing director of Jindal Vijaynagar Steel, points out, “The strengths of Tisco are: control over raw materials, a highly-skilled operating team, fully integrated plant including rolling mill, Tata brand equity, mixed product profile (flats and longs), cheaper access to capital being an AAA company. While we pay an average of 17 per cent, they pay 12 per cent — which is even below PLR.”
The planning and commissioning of the 1.2 MTPA cold rolling mill has been an important achievement for Tisco in many ways. It has not only added high-value products, which can fetch three times the price of hot rolled coil, but seems to have energized huge segments of management. The project managers felt it important enough to chronicle the saga in a hardbound book The Lotus and the Chrysanthemum. Besides the intrinsic importance of the project, what comes out clearly is the enthusiasm that the project generated in the company and the H R fallout. The project was completed at a rock bottom price of Rs1,600 crore and in a world record time of 26 months. Whereas, a similar cold rolling project took 38 months for Baoshan in China, 37 months for Siam United Steel in Thailand, 31months for Bethleheim Steel in the US and 29 months for Posco in South Korea. The phase of “modernisation of the mind” as Irani calls it, has clearly begun.
“It is an issue of leadership and motivating people. Rigorous followup – we used I T tools for project management – a lot of weekly meetings etc. We had a lot of problems from local vendors, but we made them come every month and make presentations with photographs on progress achieved. When we started, I had not seen a cold rolling mill (CRM), so we created a technology team, which went all around the world to see the CRM,” says B.D. Muthuraman, the new managing director who was in charge of the CRM project.
“Given right incentives, India can be a steel supplier to the world”--Ratan Tata
In a free-wheeling hour-long interview, Tata group chairman Ratan Tata
spoke to Shivanand Kanavi about the challenges faced at Tisco. Excerpts:
How do you look at your nine years as chairman of Tata Steel?
When I became the chairman, Tata Steel had just come out of the administered price regime where price increases were simply passed on to the consumer. The month I took over there was a crisis because freight equalisation had been discontinued and we were adversely affected since the major markets were in the south and the west. Tata Steel had come out of a seller’s market and hadn’t really oriented itself to the customer.
We set up two task forces, one to look at realisation and the other to look at costs, both of which were headed by Jamshed Irani. They went about looking at issues in a real hard way. We made some progress on both those scores. We started benchmarking ourselves with the best of the breed in the world. That really paid off, in terms of keeping great pressure on the level of our costs.
We also made a decision not to expand but modernise our facilities, and to move into flat products, which we saw as the growth area. We went through some difficult years in terms of cash flow and liquidity as we increased our levels of borrowings to see the various phases of modernisation through. Finally, the hot rolled mill and subsequently the cold rolled mill came into being. For a period of time, Tata Steel did not look hot to investors and analysts until we moved to the last phase of what we were doing.
The leadership in Jamshedpur has had a tremendous role to play in what was achieved. Jamshed Irani and his team have resolutely gone about making this transition, with no pulls and pressures that it should have been done in another way.
I think the only distraction would have been the view that Tata Steel should grow to 15 million tonnes, that it should be a volume producer as against a company that would be the best in its class. And perhaps, the period when one thought that Gopalpur would be the focal point of growth. I felt that growth in steel is going to be a difficult one and that we should consolidate ourselves and improve our operations before we looked at expansion.
What stops India from becoming the steel supplier to the world?
There are several issues. Koreans operate at 9:1 debt equity ratio, their interest rates are close to 1-2 per cent, whereas it is 18 per cent here. Tisco has had the benefit of the
Steel Development Fund, which is softer but which does not cover everything. The social costs in India and Tisco are a part of our baggage. Posco, for example, will bulldoze a plant that is obsolete and build another one in its place that is newer. We can’t do that in India. We need a MITI like approach to become supplier to the world. Here the steel industry has never been given the required incentives.
To build a modern company in Bihar must have been quite a challenge.
The credit has to go to a very strong community spirit in Jamshedpur. The people of
Jamshedpur have a very strong sense of pride, and there is a sense of fear that it should not become like the rest. When I lived there, in the ’60s, there was a time when for Rs15,000 somebody could get killed. Finally, we had a good SP who cleaned up the place. So the rot can happen in Jamshedpur also. Tata Steel has been a fair corporate citizen, it has given a lot to the community. It has administered not in its own self -interest, but in the broader interest of the community.
Don’t investors question why you give away Rs100 crore every year to Jamshedpur and surroundings?
In particular, foreign shareholders think that this is baggage we are carrying and, in a manner of speaking, it is. But if you look at the industrial harmony and so on, I don’t think you can ascribe a value to it. This is a cost you have and despite that if you are still going to be the lowest cost steel producer, then no one should mind.
Instead of investing in ferrochrome and titanium why don’t you acquire steel?
Within India Tata Steel has looked at some options. But we recognized that, regrettably, the steel industry does not cover the cost of capital — and this is the global situation. Therefore, you do see reductions in capacities in various parts of the world. If you have to invest thousands of crores, as we did in the modernisation of the plant, and if it doesn’t give us a return that is equal to the cost of capital, then we have destroyed shareholder value. Moreover, just because you are Tata Steel does not mean that steel can be your only growth area. In the world you have companies that started in fertilizers and now are in pharmaceuticals. Companies like Mannesman that were in steel are now in telecom.
There are other group companies operating in the area of telecom, then why Tata Steel?
Tata Steel has not decided to get into telecom. We said let’s parcel out various parts of the telecom activity and look at the Group as a whole being in telecom. Ideally, you would have got one consolidated telecom company in the Group. But again, shareholders say: ‘This is my money and all I have is dividend returns from the company’. So, another way to do it is, you parcel it out even though that is a less efficient way of doing it. The bits are not in competition but complement each other. Maybe one day we will merge those into one.
Are you looking at acquiring steel plants abroad?
We are looking at plants abroad. However, we should be sure that we can manage that extra capacity on a global basis also. You could get a huge asset at a very good price, but you might end up having surplus capacity, which will be outside India. You then have to support it in terms of foreign exchange and we do not have a foreign base to do it. So we may be cautious in looking at these plants. Our ethic also prevents us from walking away from an acquisition when it sours.
Did McKinsey’s advise you to dump steel?
McKinsey’s did not tell us to dump this or dump that. McKinsey’s just gave us discussion notes in various industries. They raised some serious questions regarding the steel industry and whether it destroyed shareholder value. And I must say they awakened us to the fact that we had to do much more in steel to make it an investor-attractive area of business.
Last year Tata Steel made the most profits in the Group after TCS.
We need to be a little circumspect. Tisco has now got two high margin plants on line. It has shed its old processes. Crucial to producing and sustaining these results is growth in demand in its user industries, like auto, white goods and construction. Even if domestic demand picks up but there is over capacity in the world then you will be faced with low cost imports.
However, there are two pluses; one is that steel is a commodity. Hence, Tata Steel has been able to go all-out in production, covering its cost and dropping its price. The other advantage is, if the Indian market got bad you could export it. In product markets like trucks or refrigerators you can’t do both these things.
“The language in the project changed as well. We call our workers ‘associates’. They used to make presentations regularly. In any project, the operating manuals come from the suppliers, in our case Standard Operating Practice Instructions was written by our workers. It has been used as a training document. Our operators kept redrafting it. Thus, they have ownership now. We look at the manual and make additions based on experience,” adds Muthuraman.
“We were operating the steel melting plant for 90 years in a particular way, whereas here things had to be done differently. So we segregated the project. We gave everybody a uniform. Even I have to wear it when I go into C R M. We selected a higher class of people, all of who know how to use computers, and used a different salary structure — a large part of the salary is variable (performance linked). The union also agreed to it. That experiment has succeeded and we are now moving for this type of organizational structure and salaries in other departments also. There are only three levels there, whereas in the rest of the plant there are 11 levels. Instead of forcing this model on others, we wanted them to feel that they want it themselves — and it is working,” says Irani.
A major factor, which led to a record low cost for the C R M, has been the optimum usage of in-house capabilities. “Our principle for the last 20 years has been to build as much as possible ourselves. We have a Growth Shop in Jamshedpur built by Sumant Moolgaonkar 30 years back for the express purpose of building steel plant equipment. So we naturally used it for the hot strip mill, LD project. For the wire and rod mill project we negotiated with our ultimate suppliers to give us the drawings to be used only by us and not to be exported — and we have maintained our word. Similarly, we did use Hitachi’s drawings for CRM but we do not then make it for others unethically,” explains Irani.
Sajjan Jindal was most impressed on his recent Jamshedpur visit. He told Business India: “It is a world-class facility. The highly skilled team at Tisco will make a winner out of it. Quality and marketing the automotive grade is a problem since it is a new product. It will take a little time, but they will do it. Tisco also got the cold rolling mill at a very good price, since nobody else was building a mill at that time.”
Along with modernising the plant came the emphasis on customers. “You have to see the change in our marketing offices in Kolkata and throughout the country to understand the change in the mindset,” says Firdaus Vandrewala, deputy managing director, international projects, who was till recently in charge of marketing. “From a totally sellers’ market during the control regime, we have moved into a highly customer friendly attitude with a very high usage and ERP tools and IT in general. We are constantly monitoring customer satisfaction and one of the most important programmes in the plant is the ‘Customer Week’, which we hold regularly. During the week, we invite our customers to see the plant and make suggestions and register any complaints which will be immediately addressed,” adds Vandrewala. Business India visited Jamshedpur during one such Customer Week programme. The importance attached to the programme was very clear, since all the top executives, including Irani and Muthuraman, excused themselves from interviews and photo-shoots to attend to the customers.
As far as manufacturing practices are concerned, Tisco has a long tradition of benchmarking with the First World even a century ago. In his endeavour to usher in a modern steel age in India, visionary Jamsetji Tata travelled extensively across the world and saw the best steel plants in Great Britain, Germany and the US and consulted with the best geologists and mining engineers, before he raised the money from the Indian public. The tradition was carried forward by Dorab Tata, who implemented his father’s vision in the jungles of Chota Nagpur near the village of Sakchi. He had the blast furnace set up by the Americans, the steel shop by the Germans, the coke ovens by the Welsh.
The control regime in independent India, of course, greatly reduced the opportunities to grow into a global giant. At the same time, by providing administered prices and other protection, it removed the edge from the steel business. However, Malay Mukherjee, COO, Ispat International, remembers his days in Bhilai: “During my time in S A I L, I had visited Tisco a number of times. Each time I learnt something from them and introduced many good practices in our SAIL plants. I got great satisfaction when, during my time in Bhilai, we won the first Prime Minister’s award as the best steel plant. Tata Steel was second. The satisfaction came from the fact that on many of the subjects we were judged on, I had implemented what I had learned during my visits to Tisco. I have maintained contacts over the years and I have been impressed by the progress they have made in modernizing the plant and putting in proper technology for quality improvements.”
Today Tisco is being hailed as one of the lowest-cost producers of steel in the world. A fact reiterated by a report by Consumer Research Unit of the UK. Incidentally, the report does not consider L.N. Mittal’s plant in Kazakhstan, which claims to be almost 30 per cent lower in cost than Tisco. This controversy aside, the cost consciousness in Tisco warms the cockles of Ishaat Hussain’s heart. “Everywhere you go in Tisco you will find an obsession with cost,” says Hussain, who is director, Tata Sons, and an old Tisco hand.
What did Tisco actually do to achieve the low-cost producer status? Answers Tridib Mukherjee, deputy managing director, who is in charge of operations and marketing: “We concentrated on four to five areas. First of all, we looked at our strengths. We have captive raw materials like coal, iron ore and lime stone so we can be the cheapest hot metal producers. When we looked at that part, we found that we were using up to 30 per cent of imported scrap as feedstock. This was totally unnecessary and we reduced it over a period of time to 5 per cent. Secondly, we increased the output of hot metal by increasing what we could get out of existing assets like blast furnaces. We used to produce 2,800 tonnes per day with our B F-G, which we gradually took up to 4,000 tpd. We benchmarked with the best practices of leaders like Nippon, CST (Brazil) and Posco in this regard. We fine-tuned our sinter plant and increased production from 2.4 MT of sinter to 3.9 MT, which is as good as having one sinter plant free. Similarly, we were using imported coal for coke ovens and found that by changing the way we charge the ovens to Stamp Charging, we could produce high-quality coke with our own pulverised coal. Now our mix is 70:30 for Indian and imported coke. We were also able to develop highquality low phosphorous steel with our own technology. This was necessary since our ore contains high phosphorous. For this we had to develop a dolomite-free process. We reduced the labour from 72,000 to 48,000. A major factor for cost reduction is, of course, employee involvement. We received literally thousands of suggestions. Our estimate is that the suggestions have saved us Rs250 crore last year,” says Mukherjee.
The stamp charging technology for coke ovens was seen by Irani in a power plant in Germany in the ’80s. He then convinced his colleagues to invest in redoing the coke ovens for this new method, which has proven a great success. But Irani explains that cost consciousness is more mindset than a specific project. “We attacked energy consumption. The use of liquid fuel has been eliminated by generating enough gas from coke oven and blast furnace. That gas is used to heat up steel before rolling it out. We have a material in India, called Blue Dust, which is grey in colour, very rich in iron but as fine as talcum powder. It cannot be used in the blast furnace in a powder form. So we put up a new sinter plant and developed the appropriate technology with Lurgi, which saved us money since we used to throw the Blue Dust away earlier. It has also extended the life of our mines. We improved the yields in our mills by benchmarking. There must be at least 500 items in each department for cost reduction. Cost consciousness is an attitude. It is not just one single project. For example, now that we are all on e-mail, our STD spend comes down,” he adds.
Today, prominent bill boards at the plant and in Jamshedpur city no longer say: ‘We also make steel’ Instead they say: ‘Cost, Customer and Code’. While the exhortation about cost and customer is as clear as daylight in today’s competitive market place, one wonders what the code is all about. The insistence on boy scout like adherence to the Tata code of conduct and good corporate practice in yesterday’s Bihar or today’s Jharkhand, sounds impractical to pragmatists, leave alone the cynics.
How do Tatas run a First World company in a Fourth World environment? The articulate A.N. Singh, director in charge of township services, is an authority of sorts on the subject. He served in the I P S for 22 years in Bihar before he took voluntary retirement and joined Tata Steel. “The moment you play according to their rules, you will remain in the Fourth World. Of course, delays will take place. There is a great amount of poverty and lack of will to administer the laws of the country. But Tata Steel has been doing business for 90 years and there are others also doing reasonably well. If we can do it with our code of conduct, I do see a future. For example, we are in an island of peace in West Bokaro, surrounded by extremists. One of the reasons is our sense of corporate responsibility and being able to vibe with the community. For example, in West Bokaro we have open cast coal mines. The community living around us has realized for decades that they are flourishing because this coal mine is being run by the Tatas,” says Singh.
Irani adds: “Laloo Prasad Yadav is my friend, and right in the beginning I made it clear what friendship stood for. I said to him: ‘You have your rules and we have ours. We will do everything by your rules. We will not ask you to give a sales tax benefit here, or some short cut there. In return, don’t ask us for any underhand thing and break our value system.’ And to his credit, he has never made an indecent proposal. He asked us to clean up Patna, which we do as our social responsibility. He wanted a college to be built in Samastipur. We did that since we encourage education. He asked us to build a Tata ward for children in Patna hospital, which was in a very pitiable condition and we did that. Now we are doing a hospital in Hazaribagh. Laloo told somebody: ‘Going for anything illegal to the Tatas is like going to an Udupi restaurant and asking for a tandoori chicken’. Sometimes people come to Jamshedpur with expectations and then find in a week or longer that the Tatas won’t give money and they give up. If I find any of our officers has done underhand things, then I sack him instantly,” says Irani. No wonder Irani has earned the sobriquet from some leading politicians of Jharkhand— “the prime minister of Jharkhand.
When we enquired as to the truth of these assertions from a prominent businessman in Jamshedpur, who is not “burdened” by any code of conduct, he said: “Of course, it is true. That is why Tisco takes three months to get something done from the government in matters which take me three telephone calls.”
The emphasis on quality in Tisco has been recognised by Indian industry and several awards are pouring in. But the one that makes Tisco people walk a little taller within the Tata group is the J.R.D. Tata award for excellence in quality, which has been fashioned on the Malcolm Baldridge award. It makes them proud that this 90-year-old company, which many people thought stood for stodginess in the group, has made it to the top, while other companies in the group have not even reached the qualifying mark.
Irani, however, is not carried away by the hype about being the lowest cost producer in the world. He admits that if the advantage of coal and iron ore mines – which Posco and Nippon Steel do not have – is taken away, then Tisco will be one of the efficient producers and not necessarily the lowestcost producer. He points out that the World Steel Dynamics report clearly gives the same number of points to all the top 12 steel makers regarding ongoing cost-cutting programmes and the proactive quality of the management. So, Tisco’s position at the top can be temporary. “Living in today’s world means running to stand still,” is the advice he gives to Muthuraman.
The wily Kautilya seems to have hit the nail on its head about Tisco by stating: “The treasury has its source in the mines....”
Tuesday, August 14, 2007
E-commerce--IRCTC
Business India, September 15 – 28, 2003
E-com on the rails
A subsidiary of the railways serves up reservations on the Net
Shivanand Kanavi
Have you heard of Aluva, Allapuzha, Haldwani, Kollam, Palakkad, or Thrissur? Even if you had, definitely not as hot beds of ecommerce. Well, the data that Amitabh Pandey, GM (IT services) at IRCTC (Indian Railways Catering and Tourism Corporation) dishes out from his desktop would teach a thing or two to many Internet gurus.
IRCTC has been providing online ticketing for Indian Railways for the last year. In this short time it has come to be the largest e-commerce site in India, booking over 50,000 tickets per month. Some might say that Railways sell over 500,000 tickets a day, and hence this is “just peanuts”. Sure it is.But what’s important is the trend. The convenience of booking a ticket online using a credit card without standing in any queue, and then having the tickets delivered home by courier, is drawing people by the droves into it.
“It’s not just the metros which have been active but as soon as we add a new town on our system, they start getting active with hardly any advertisement,” adds Pandey. “You can see from the July 2003 data that clearly Mumbai (11,107), Delhi (7,504), Chennai (6,141), and Bangalore (4,430) lead. But a fairly large number of bookings are coming from Anand, Allahabad, Baroda, Bhopal, Bhubaneswar, Coimbatore, Dehradun, Faridabad, Ghaziabad, Guwahati, Indore, Jaipur, Jabalpur, Kanpur, Kochi, Kozhikode, Ludhiana, Nagpur, Patna, Rajkot, Silvassa, Surat, Vapi, Varanasi, and Visakhapatnam as well,” he adds.
Pandey has become an evangelist for e-commerce. “Despite the fact that Internet spread is very limited, it is spreading very fast. I just came from Kumaon last week — in a tahsil town like Ranikhet there is Internet access. The telecom revolution has come to India. I remember when I was in Jhansi the only reliable telephone was the railway’s telephone at the station. Today I see my parents in their 1970s chatting on AOL. In fact a majority of users of online booking are above 30, breaking another myth that Internet commerce is basically a youth phenomenon.
The middle class is conscious of the Internet and its possibilities. It may be small compared to the volumes in India, but it has come to stay and is growing very fast. The opportunities are immense.
This is not rocket science; the idea has been around for a long time even in the Railways. After IRCTC was set up to mainly improve catering and hospitality associated with Railways, we went to the Railways and said this too could be done quickly by us. The ministry was totally with us. It took us only one presentation to convince the board. It was a simple presentation and the board asked us some questions. We assured them that the existing passenger reservation system would not be disturbed and they said, go ahead.”
With his enthusiasm for technology one would think Pandey is a techie. But he is not. A product of the Delhi School of Economics, Pandey taught in Delhi University colleges for a few years before joining Railway Traffic Services in 1982. Traffic services involve operations (train planning, running, traffic planning, etc), associated commercial activities, and safety monitoring.
Pandey’s 15 years in operations took him to Bombay,Nagpur, Bhusawal, Jhansi, etc. Then the Railways started to corporatise catering and set up IRCTC, which started operations in 2001.
Historically, the Indian Railways have played a major role in popularising computers in India. Reservations were computerised in the 1980s by CMC and immediately brought relief to consumers in terms of efficiency and time saved. The Railways set up the Centre of Railway Information Systems (CRIS) in 1986 to be an umbrella for all computer activities of Indian
Railways so that different divisions did not carry on incompatible IT activities. They also entrusted it with the task of design, development, and implementation of the Freight Operations Information Systems, along with its associated communications infrastructure.
CRIS improved the reservation system and also networked it so that any one could book any ticket from any terminal in India and improved the system further. This service, enjoyed by millions, contributed greatly to changing the image of computers as job-stealers into enhancers of productivity.
Of the 11 million passengers who travel in 8,520 trains each day, about 550,000 have reserved accommodations. The challenge is to provide a reservation system that can support such a huge scale of operations — regardless of whether it’s measured by kilometers, passenger numbers, routing complexity, or simply the sheer scale of India. The Passenger Reservation System (PRS) started in 1985 as a pilot project in New Delhi. It has distributed databases at Mumbai, Delhi, Kolkata, Chennai, and Secunderabad. These five centres are networked with leased lines and different towns are connected in turn to one of these centres. It is a robust system, selling nearly 200 million tickets a year, and no one wants to disturb it even if its technology is obviously two decades old. That is the reason the IRCTC team went to great lengths to assure the Railway Board that they would not touch the existing system in any way. IRCTC would need just an entry point into PRS, where the queries coming from its Internet customers would be converted into an appropriate form understandable to PRS. The Railways treated IRCTC as any other ticket window, hence IRCTC had to pay them in advance and collect the money later from its customers through credit card payments.
“Though we have secure servers, people are still hesitant to give credit card information on the net. Hence we are increasingly connecting it to the payment gateways of banks providing Net banking so that the money can be deducted from their bank accounts directly,” says Pandey. The number of banks joining in this direct debit is increasing by the day — ICICI Bank, HDFC Bank, IDBI Bank, Citibank, Bank of Punjab, Global Trust Bank, UTI Bank, and Centurion Bank are already on board. The recent addition of State Bank of India is expected to increase the reach of this system.
“Direct debit transactions have increased greatly after we hooked up with IRCTC,” says C.N. Ram, IT head at HDFC Bank. But Pandey continues to innovate. “We are looking at bookings on the phone through call centres as well as through mobile commerce, where service providers take up the collection risk.” The volumes of online booking are still small. In the last year they have amounted to only Rs57 crore, but as the number cities and towns serviced by IRCTC increases and as payment options increase, the volumes are also bound to rise. Why should towns be added to an Internet booking service? After all, the Net is accessible from anywhere in the globe. Well, the limitation comes from the courier service since the tickets can be booked from anywhere but the delivery is still physical. Of course, one way to sort this out is to take the e-ticket route, where the ticket is sent by email to the customers as many airlines do in the US.
Pandey and his team are of course ironing out any wrinkles in the system for example a common complaint from customers in Mumbai is that when a customer books a return ticket, inexplicably he gets a ticket terminating at Kalyan or Borivli, which are outlying stations. The reason is that Mumbai is not one station. Several fall in the area: Kalyan, Kurla, Dadar (Central), Dadar (Western), Borivli, Bandra, and Mumbai Central. When the customer does not give the right station code understood by PRS, the system assumes the outermost station in the cluster and goes ahead. “This is in fact the challenge in our system. PRS is an interactive system, which is operated by trained railway personnel the way airline reservations are done by travel agents, whereas Internet bookings are done by customers who are not accustomed to codes, etc, and need a self-help portal. We are working constantly to improve it,” says Pandey.
Clearly the “death of distance” vision of the dot.com era had substance which got buried in the hype. Now with greater Internet and PC penetration, along with improved telecom infrastructure, some glimpses of that future are here.
E-com on the rails
A subsidiary of the railways serves up reservations on the Net
Shivanand Kanavi
Have you heard of Aluva, Allapuzha, Haldwani, Kollam, Palakkad, or Thrissur? Even if you had, definitely not as hot beds of ecommerce. Well, the data that Amitabh Pandey, GM (IT services) at IRCTC (Indian Railways Catering and Tourism Corporation) dishes out from his desktop would teach a thing or two to many Internet gurus.
IRCTC has been providing online ticketing for Indian Railways for the last year. In this short time it has come to be the largest e-commerce site in India, booking over 50,000 tickets per month. Some might say that Railways sell over 500,000 tickets a day, and hence this is “just peanuts”. Sure it is.But what’s important is the trend. The convenience of booking a ticket online using a credit card without standing in any queue, and then having the tickets delivered home by courier, is drawing people by the droves into it.
“It’s not just the metros which have been active but as soon as we add a new town on our system, they start getting active with hardly any advertisement,” adds Pandey. “You can see from the July 2003 data that clearly Mumbai (11,107), Delhi (7,504), Chennai (6,141), and Bangalore (4,430) lead. But a fairly large number of bookings are coming from Anand, Allahabad, Baroda, Bhopal, Bhubaneswar, Coimbatore, Dehradun, Faridabad, Ghaziabad, Guwahati, Indore, Jaipur, Jabalpur, Kanpur, Kochi, Kozhikode, Ludhiana, Nagpur, Patna, Rajkot, Silvassa, Surat, Vapi, Varanasi, and Visakhapatnam as well,” he adds.
Pandey has become an evangelist for e-commerce. “Despite the fact that Internet spread is very limited, it is spreading very fast. I just came from Kumaon last week — in a tahsil town like Ranikhet there is Internet access. The telecom revolution has come to India. I remember when I was in Jhansi the only reliable telephone was the railway’s telephone at the station. Today I see my parents in their 1970s chatting on AOL. In fact a majority of users of online booking are above 30, breaking another myth that Internet commerce is basically a youth phenomenon.
The middle class is conscious of the Internet and its possibilities. It may be small compared to the volumes in India, but it has come to stay and is growing very fast. The opportunities are immense.
This is not rocket science; the idea has been around for a long time even in the Railways. After IRCTC was set up to mainly improve catering and hospitality associated with Railways, we went to the Railways and said this too could be done quickly by us. The ministry was totally with us. It took us only one presentation to convince the board. It was a simple presentation and the board asked us some questions. We assured them that the existing passenger reservation system would not be disturbed and they said, go ahead.”
With his enthusiasm for technology one would think Pandey is a techie. But he is not. A product of the Delhi School of Economics, Pandey taught in Delhi University colleges for a few years before joining Railway Traffic Services in 1982. Traffic services involve operations (train planning, running, traffic planning, etc), associated commercial activities, and safety monitoring.
Pandey’s 15 years in operations took him to Bombay,Nagpur, Bhusawal, Jhansi, etc. Then the Railways started to corporatise catering and set up IRCTC, which started operations in 2001.
Historically, the Indian Railways have played a major role in popularising computers in India. Reservations were computerised in the 1980s by CMC and immediately brought relief to consumers in terms of efficiency and time saved. The Railways set up the Centre of Railway Information Systems (CRIS) in 1986 to be an umbrella for all computer activities of Indian
Railways so that different divisions did not carry on incompatible IT activities. They also entrusted it with the task of design, development, and implementation of the Freight Operations Information Systems, along with its associated communications infrastructure.
CRIS improved the reservation system and also networked it so that any one could book any ticket from any terminal in India and improved the system further. This service, enjoyed by millions, contributed greatly to changing the image of computers as job-stealers into enhancers of productivity.
Of the 11 million passengers who travel in 8,520 trains each day, about 550,000 have reserved accommodations. The challenge is to provide a reservation system that can support such a huge scale of operations — regardless of whether it’s measured by kilometers, passenger numbers, routing complexity, or simply the sheer scale of India. The Passenger Reservation System (PRS) started in 1985 as a pilot project in New Delhi. It has distributed databases at Mumbai, Delhi, Kolkata, Chennai, and Secunderabad. These five centres are networked with leased lines and different towns are connected in turn to one of these centres. It is a robust system, selling nearly 200 million tickets a year, and no one wants to disturb it even if its technology is obviously two decades old. That is the reason the IRCTC team went to great lengths to assure the Railway Board that they would not touch the existing system in any way. IRCTC would need just an entry point into PRS, where the queries coming from its Internet customers would be converted into an appropriate form understandable to PRS. The Railways treated IRCTC as any other ticket window, hence IRCTC had to pay them in advance and collect the money later from its customers through credit card payments.
“Though we have secure servers, people are still hesitant to give credit card information on the net. Hence we are increasingly connecting it to the payment gateways of banks providing Net banking so that the money can be deducted from their bank accounts directly,” says Pandey. The number of banks joining in this direct debit is increasing by the day — ICICI Bank, HDFC Bank, IDBI Bank, Citibank, Bank of Punjab, Global Trust Bank, UTI Bank, and Centurion Bank are already on board. The recent addition of State Bank of India is expected to increase the reach of this system.
“Direct debit transactions have increased greatly after we hooked up with IRCTC,” says C.N. Ram, IT head at HDFC Bank. But Pandey continues to innovate. “We are looking at bookings on the phone through call centres as well as through mobile commerce, where service providers take up the collection risk.” The volumes of online booking are still small. In the last year they have amounted to only Rs57 crore, but as the number cities and towns serviced by IRCTC increases and as payment options increase, the volumes are also bound to rise. Why should towns be added to an Internet booking service? After all, the Net is accessible from anywhere in the globe. Well, the limitation comes from the courier service since the tickets can be booked from anywhere but the delivery is still physical. Of course, one way to sort this out is to take the e-ticket route, where the ticket is sent by email to the customers as many airlines do in the US.
Pandey and his team are of course ironing out any wrinkles in the system for example a common complaint from customers in Mumbai is that when a customer books a return ticket, inexplicably he gets a ticket terminating at Kalyan or Borivli, which are outlying stations. The reason is that Mumbai is not one station. Several fall in the area: Kalyan, Kurla, Dadar (Central), Dadar (Western), Borivli, Bandra, and Mumbai Central. When the customer does not give the right station code understood by PRS, the system assumes the outermost station in the cluster and goes ahead. “This is in fact the challenge in our system. PRS is an interactive system, which is operated by trained railway personnel the way airline reservations are done by travel agents, whereas Internet bookings are done by customers who are not accustomed to codes, etc, and need a self-help portal. We are working constantly to improve it,” says Pandey.
Clearly the “death of distance” vision of the dot.com era had substance which got buried in the hype. Now with greater Internet and PC penetration, along with improved telecom infrastructure, some glimpses of that future are here.
Rajeev Motwani
Business India, May 24-June 6, 2004
Mathematician at heart
Rajeev Motwani is eagerly waiting for the Google IPO
Shivanand Kanavi
Rajeev Motwani has done it all. A Godel Prize winner, one of the most prestigious awards in theoretical computer science, one of the youngest professors at Stanford. Author of several papers in esoteric subjects like randomised algorithms and data streaming, Motwani is now eagerly waiting. No, not about another award or a theoretical conference, but for the Google I P O. As a former technical advisor to Google and a mentor to the founders in their student days at Stanford, where the search engine took shape, Motwani owns an undisclosed amount of stock in Google.
Motwani’s father was in the Indian Army, which meant growing up all over India. Young Motwani wanted to be a mathematician, like Gauss. “This was partly shaped by the books I had at home. My parents for some reason had a lot of these books – 10 great scientists or five famous mathematicians – their life story and so on. As a child, whatever heroes you read about you want to become,” adds he.
After St. Columbus in Delhi, Motwani joined I I T Kanpur, which at that time had just started the undergraduate programme in computer science. “I truly wanted to be a mathematician, and my parents were hesitant because how do you make money as a mathematician, how do you support a family, what is this all a b o u t .
“I was basically forced into going into computer science even though I did not want to, but it turned out to my wonderful surprise that computer science is actually quite mathematical as a field. One of the shaping influences was actually Kesav Nori – he was there for a while and, in fact, I I T Kanpur at that time had a outstanding computer science department. It was an amazing confluence of people and p e r s o n a l i t i e s .
“Again Berkeley was a very positive influence, very politically oriented; it’s like the J N U of the US. I was so thoroughly enjoying the new environment I was in. My advisor, Richard Karp, was a Turing Award winner, which is sort of like the Nobel Prize in computer science. At that point it occurred to me that I am letting down this great man, not producing anything and the last two years I was tremendously productive.”
Motwani has worked in many different areas in Stanford, like robotics and drug design. “I credit Stanford for creating an environment where people in different areas can work with each other and do things where the whole is greater than the sum of the parts,” he says.
“Meanwhile the World Wide Web was coming around at that time and I just got sucked into that. Sergey Brin and Larry Page were running a search engine out of Stanford. These 21- year-olds would come in and make demands on me – we need more disk space because we are crawling the Web and its getting bigger, we need to buy more disk... I’d give them more money and they’d go buy more disks. At some point these guys said, we want to go do a company. Everybody said you must be out of your minds. There are like 37 search engines out there and what are you guys going to do? And how are you going to raise money, how will you build a company, and these two guys said, we’ll just do it and they went off and did it. And there are some big names who supported the company in its early stages. And then they took over the world. And right now, you know, other search engines do not even compare. It is just amazing. Just feels like a part of a little bit of history and I contributed a little bit to that history. Now I have become a start-up
j u n k i e . ”
How does Google’s technology work? He explains, “Let us say that you wanted information on ‘bread yeast’ and put those two words in Google. Then it not only sees which documents have these as words mentioned but also whether these documents are linked to other documents. An important page for ‘bread yeast’ must be having all other pages on the Web dealing in any way with ‘bread yeast’ also linking to it. In our example there may be a Bakers’ Association of America, which is hyper-linked by most documents containing ‘bread yeast’, then it implies that most people involved with ‘bread’ and ‘yeast’ think that the Bakers Association’s Web site is an important source of information. So Google will rate that Web site very high and put it on top of its list. Irrelevant documents which just mention ‘bread’ and ‘yeast’ will not be given any priority in the results.
“By the way, you might have noticed that the job of the search engine is nothing more than what a humble Librarian does all the time and more intelligently! However, the automation in the software comes to our rescue in coping with the exponential rise in information.”
Rajeev Motwani is eagerly waiting for the Google IPO
Shivanand Kanavi
Rajeev Motwani has done it all. A Godel Prize winner, one of the most prestigious awards in theoretical computer science, one of the youngest professors at Stanford. Author of several papers in esoteric subjects like randomised algorithms and data streaming, Motwani is now eagerly waiting. No, not about another award or a theoretical conference, but for the Google I P O. As a former technical advisor to Google and a mentor to the founders in their student days at Stanford, where the search engine took shape, Motwani owns an undisclosed amount of stock in Google.
Motwani’s father was in the Indian Army, which meant growing up all over India. Young Motwani wanted to be a mathematician, like Gauss. “This was partly shaped by the books I had at home. My parents for some reason had a lot of these books – 10 great scientists or five famous mathematicians – their life story and so on. As a child, whatever heroes you read about you want to become,” adds he.
After St. Columbus in Delhi, Motwani joined I I T Kanpur, which at that time had just started the undergraduate programme in computer science. “I truly wanted to be a mathematician, and my parents were hesitant because how do you make money as a mathematician, how do you support a family, what is this all a b o u t .
“I was basically forced into going into computer science even though I did not want to, but it turned out to my wonderful surprise that computer science is actually quite mathematical as a field. One of the shaping influences was actually Kesav Nori – he was there for a while and, in fact, I I T Kanpur at that time had a outstanding computer science department. It was an amazing confluence of people and p e r s o n a l i t i e s .
“Again Berkeley was a very positive influence, very politically oriented; it’s like the J N U of the US. I was so thoroughly enjoying the new environment I was in. My advisor, Richard Karp, was a Turing Award winner, which is sort of like the Nobel Prize in computer science. At that point it occurred to me that I am letting down this great man, not producing anything and the last two years I was tremendously productive.”
Motwani has worked in many different areas in Stanford, like robotics and drug design. “I credit Stanford for creating an environment where people in different areas can work with each other and do things where the whole is greater than the sum of the parts,” he says.
“Meanwhile the World Wide Web was coming around at that time and I just got sucked into that. Sergey Brin and Larry Page were running a search engine out of Stanford. These 21- year-olds would come in and make demands on me – we need more disk space because we are crawling the Web and its getting bigger, we need to buy more disk... I’d give them more money and they’d go buy more disks. At some point these guys said, we want to go do a company. Everybody said you must be out of your minds. There are like 37 search engines out there and what are you guys going to do? And how are you going to raise money, how will you build a company, and these two guys said, we’ll just do it and they went off and did it. And there are some big names who supported the company in its early stages. And then they took over the world. And right now, you know, other search engines do not even compare. It is just amazing. Just feels like a part of a little bit of history and I contributed a little bit to that history. Now I have become a start-up
j u n k i e . ”
How does Google’s technology work? He explains, “Let us say that you wanted information on ‘bread yeast’ and put those two words in Google. Then it not only sees which documents have these as words mentioned but also whether these documents are linked to other documents. An important page for ‘bread yeast’ must be having all other pages on the Web dealing in any way with ‘bread yeast’ also linking to it. In our example there may be a Bakers’ Association of America, which is hyper-linked by most documents containing ‘bread yeast’, then it implies that most people involved with ‘bread’ and ‘yeast’ think that the Bakers Association’s Web site is an important source of information. So Google will rate that Web site very high and put it on top of its list. Irrelevant documents which just mention ‘bread’ and ‘yeast’ will not be given any priority in the results.
“By the way, you might have noticed that the job of the search engine is nothing more than what a humble Librarian does all the time and more intelligently! However, the automation in the software comes to our rescue in coping with the exponential rise in information.”
Monday, August 13, 2007
The Essar Story
Business India, July 26-August 8, 1999
Tempering Essar
A group that became one of the icons os entrepreneurship in the early 1990s has suffered a setback. Will it learn from its mistakes and fight its way out of the corner?
Shivanand Kanavi
It is a great view from the top of Essar House, an ornate structure bordering on the opulent. The Ruias manage their conglomerate, the Essar Group, encompassing steel, power, oil, telecommunications, and shipping, from their offices on the 19th and 20th storeys. From the glass-and-marble tower you have a bird’s eye view of the famous Royal Western India Turf Club, commonly known as Mahalaxmi Race Course, where fortunes are sometimes made but most often lost. Turning left, you see businessmen and executives sharpening their swings and putts with their irons on the golf course at Willingdon Club. Straight ahead is the panoramic expanse of the Arabian Sea and, if the weather's good, a clear horizon. Today, however, the monsoon has made the seas choppy. In the midst of their packed schedules with international bankers, as the Ruias cast glances at the turbulent waters, they must find the sight rather symbolic.
They have had many firsts in several businesses, of which they are proud of, but today they don't relish the new first: they became the first Indian corporate group to have defaulted on a foreign financial obligation by failing to redeem their floating rate notes (FRNS) worth $250 million on 20 July 1999.
What has gone wrong?
What will they do next? Are they going under? Will they survive this setback and bounce back? Do they have a credible plan for the same? These are several questions that Business India investigated. To put things in perspective and not be carried away by the down cycles in commodities, the more appropriate question to start with is: What did they do right?
If there was any proof needed that liberalisation would unleash true entrepreneurship in India, then Essar's growth in the last 10 years could be cited as one of the handful of examples. From successful medium-sized businesses in marine and port construction, oil-drilling, and shipping, Essar first took the opportunity provided by the gas pipeline to start a very successful sponge iron business and then, with the gradual opening up of the steel sector, had the vision to set up a world-class integrated steel plant.
For Indians used to outdated steel technology in public sector mills, and the old works at Jamshedpur, Essar provided the first glimpse of world-class steel manufacturing, setting up a mill that produces two million tonnes of steel and hot-rolled coils with less than 2,000 employees. When many thought that India could be competitive because of cheap labour, Essar thought otherwise. Today its labour costs (according to Paribas Asia Equity) are $5 per tonne as compared to $49 per tonne for SAIL and $ 76 per tonne for Tisco, and its energy costs per tonne are half that of SAIL and Tisco.
Since an assured and cheap power supply is essential, they first went in for a 215 MW captive power plant and then, when the opportunity arose for independent power producers, expanded it to 515 MW. This power plant is run by a total of 38 people.
It is well known that Bailadila in Orissa produces the best iron ore in the world. However, lumps of iron ore are exported, while the fines or tailings mount up into ugly mountains at the rate of 8-9 million tonnes per year. In the monsoons a large part of these fines actually flow into the rivers, polluting the water. So Essar came up with a plan to convert them into pellets that can be fed directly into sponge iron plants as feedstock. Until now the South Americans had a monopoly over this product (DR-grade pellets). So Essar set up a modern pellet plant at Visakhapatnam (run by 75 people, including administration) producing 3.5 Mtpy of pellets. Since rail transport of fines costs about Rs400 per tonne, it planned a beneficiation plant that would upgrade the fines, and a slurry pipeline that would reduce the cost of transportation to Rsl00 per tonne. Essar designed it to carry 7 million tonnes, giving themselves enough scope to double capacity whenever required.
Essar had already built up expertise in shipping and port construction, thus building the required infrastructure at Hazira and Vizag was no problem. In fact, it actually gave them the flexibility to use pellets internally as well as export pellets from Vizag and steel or sponge iron from Hazira.
Similarly, when the government allowed the private sector to exploit developed minor oilfields and explore new ones, Essar, by then one of the largest drilling contractors in the Gulf, was quick to bid. When government took great time to carryon in this direction but opened up oil refining, Essar was one of the first out with a proposal to build a refinery. Since then, even though dozens of proposals were submitted by various industrial houses and public sector oil companies, the only ones under implementation are Reliance Petroleum (27 Mtpy) and Essar Oil (10.5 Mtpy with a provision to reach 24 Mtpy later). Reliance has announced the commissioning of its refinery, while Essar's is in an advanced stage awaiting commissioning in the second half of next year.
Restructuring a reputation
While financially restructuring the conglomerate, the Essar group is faced with an even more difficult task of changing public perception about itself. The problems with refinancing its floating rate notes (FRNS) leading to default have been accompanied by a large number of negative reporting in the media, which Essar claims is based on fiction rather than the facts. As a result, while Shashi and Ravi Ruia are talking to bankers, young Prashant Ruia is taking time off from hectic debottlenecking activities in the steel plant at Hazira. Important improvements are being made in manufacturing technology at Hazira which might soon take Essar Steel into the elite top tenth percentile of lowest-cost steel producers in the world. After all, with his costs down, if signs of another upcycle in steel prove to be true he might just start making some 24-carat gold at Hazira rather than "24carat steel" as the ad campaign says.
But today Prashant is courting the fourth estate. He has already met senior editorial teams of several newspapers and magazines and is telling others that he can meet them any time on their turf. The format of these meetings has varied from formal presentations and Q&A to free for all "court-martial". Prashant is not expecting remarkable immediate benefits from this communication exercise, but acknowledges that, if he had done enough of this earlier, maybe the media's perception would have been different by now. Nevertheless, armed with tons of documents, and his informal, amiable nature, he is chugging on. Clearly, he's hoping that, like the commodity cycles that he speaks so much about, there is also a cycle of a non-commodity called public perception.
However, Prashant Ruia also claims that negative public perception is not only a result of bad communication but also downright disinformation. One such example, he points out, is a forged document being circulated in media circles as 'Highlights of Heads of Financial institutions Meeting held in Delhi on 24 June'. Among other things the 'document' says, "The heads of financial institutions unanimously decided that the Ruias should be replaced from the management of the following companies at the earliest to ensure viability of any attempt to revive these companies: Essar Steel, Essar Oil, Essar Mineral, and Essar Telecom." When Business India tried to verify the authenticity of this document, we were told by a spokesman of IDBI, “Please be advised that the purported copy of the minutes of HIM (officialese for heads-of-institutions meeting) is not true and does not reflect the discussion held at the HIM."
In this atmosphere, some common allegations the Ruias are trying to refute are:
•’’Essar has diverted funds from publicly listed companies into family-owned ones. For example, from steel, oil, shipping, and power into telecom”
Essar Steel, Essar Power, Essar Shipping, and Essar Oil have not invested in Essar's telecom business as inter-corporate deposits, as secured or unsecured debt, or as equity. Ruias are ready to provide certificates from the elite top six audit firms, some of which have been vetting every financial move in Essar group as a part of implementing a code of corporate governance.
• "By floating a family owned entity 'Prime Hazira' and taking a minority stake in Essar Power, the family will make money in the current sale of Essar Power to Marathon”
Prime Hazira was set up as a special purpose vehicle in Mauritius to channel international funds into an independent power project. Accordingly, UBS lent it $75 million, which was used to bring equity into Essar Power. Prime Hazira's entry was with the knowledge and approval of the FIS and an undertaking that any future profit made by Prime Hazira by selling its stake would flow back to Essar Steel. JM Morgan stanley and Donaldson, Luffkins &: Jernette (DLJ) have structured the deal with Marathon for the 100 per cent sale of Essar Power. They were mandated to not only consult the lenders while maximising value for existing shareholders, but also make sure that the sale of Prime Hazira's holding was not to the detriment of Essar Steel and Essar Oil.
• "Funds from listed companies were diverted for the building of Essar House as a family property”
Essar House was built with family funds from the sale of real estate owned by the family in Maker Towers, Nariman Point, and elsewhere, and borrowings from HDFC. No funds from any of the listed companies were utilised in any manner for the same. Even now the listed companies pay rents and deposits to Essar House based on rates fixed by an independent real estate valuer.
• "Cost overruns and project padding are used by Ruias to siphon funds from projects”
Essar's capex per tonne of manufacturing capacity created in steel, oil, and power (per MW) are among the lowest not only in India but in the rest of Asia as well (see tables). These comparative figures are available in project appraisals done by financial institutions and other documents as well.
• "The FRNs have been bought by the Ruias at a discount and they are waiting for the FIs to refinance the notes so that they can make money”
According to a letter written by Chase Securities Inc on 18 June 1999, "to our knowledge, neither the Ruia family nor other affiliates of Essar own any material amount of the notes."
• "The Ruia family's international holdings are a mystery"
These are transparent and strategic investments. Acquiring the holding in ILVA Italy (one of the largest integrated steel producers in Europe) was financed by Essar Global, a family-owned company, with the full knowledge of the Government of India. Actually, Essar Steel wanted to pick up the stake in ILVA but RBI rules did not permit the same. The required money was raised as acquisition financing by Essar Global and repaid after partial divestment in favour of the Riva family. "The investment has bought considerable technological support for Essar Steel during its start-up phase (nearly 50 ILVA personnel were at Hazira), as a result of which we were able to achieve quality and ramp up capacity very fast. Now it provides a good source of understanding of the European steel market." With regard to P.T. Essar Dhananjaya in Indonesia, the promoters are Essar Steel, Essar Global, and the local Dhananjaya group. This cold-rolling unit is a major importer of Essar Steel's hotrolled coils and has done well even during the Southeast Asian crisis. Essar Global has also invested $23 million in the AfroAsian Satellite project - the first by the Indian private sector - promoted by Subhash Chandra.
The fact that such questions are being asked of this group are testimony to one of its weaknesses - the lack of an aggressive communication policy that is both reactive and proactive, a must for all modern corporations. But it is to be admitted that we as a nation are not known for objectivity. One day we hail them - "They can do no wrong" - and the next we condemn them - "They can do no right". Reliance, another business group which has risen fast, periodically suffers the same plunges in public perception. We can appropriately name this the "Azharuddin syndrome" after our cricket captain, who must know this phenomenon better than anybody else.
Jamnagar was the natural choice for both Essar and Reliance, because the Gulf of Kutch allows for all-season import of crude and is the shortest distance away from wells in the Middle East. Not only that - since refinery products are in great demand in north and central India and since a product pipeline already exists between Kandla and Bhatinda, a small extension from Vadinar to Kandla can evacuate the products to the north, while a central Indian pipeline is being planned by Petronet from J amnagar to Itarsi and Gwalior. Essar's own project engineers, who number about 800, are playing an important role in building, debottlenecking, and detail-engineering many of their projects.
When the government liberalised shipping, Essar expanded furiously and is today the second largest in terms of capacity (38 vessels, 1.42 million tonnes dwt). It owns six of the most modern double-hull, doublebottomed Suezmax tankers, which operate in international waters. It also owns several bulk carriers which operate in both Indian and international waters. The fleet is the youngest in India, with an average age of seven years. A majority of the vessels are employed on long- and medium-term time charters, enabling stability of revenue generation even during the shipping down cycle. Essar Shipping has negotiated a $97-million loan from GE capital corporation (GECC), USA, one of the largest and with the longest maturity periods ever raised in the Indian shipping industry. In fact, the second tranche of the loan was disbursed recently after Essar Steel defaulted on its FRNS, testifying to the soundness of its shipping business. Essar makes a considerable amount of money by buying ships when the prices are low and selling them when they are in demand following standard international practices.
Get connected
When the government opened up telecommunication Essar, like 23 other business groups in India, saw a great opportunity and bid for various circles. With an astute plan it acquired the licences for basic services in Punjab and cellular services in Delhi, Punjab, Haryana, Rajasthan, and eastern UP through vendor and acquisition financing. "Big vendors like Nokia, Motorola, Ericsson, Siemens, and others have built huge capacities to supply telecom equipment and are facing a downturn in their business, so besides investment bankers, vendors too are aggressively funding acquisitions. The idea is that one pledges the shares to these companies and either borrows from them or gives them a certain equity stake with a clause to buy back later with a certain mark-up. Then, once the service is rolled out and a subscriber base built up, that is value is built into the business, one sells the whole or part of one's equity and repays the loans," explains Ravi Ruia. In effect, the licence-holder puts in very little of his own money.
This has become a standard method of funding telecom projects the world over. In fact, the entire telecom financing in China has been done this way. Though Essar faced problems in paying its licence fees to DoT recently, the new telecom policy has encouraged several banks and institutions to come forward with funds now. "The key fact is that we own cellular licences to most of north India and, with appropriate strategic alliances in Gujarat and Mumbai, we can harness the long-distance traffic between Delhi and Mumbai, where the cream of STD traffic lies," says Hemanth Luthra, CEO of Essar Telecom. Now that Swisscom, its foreign partner, wants to exit from its Asian businesses and focus on the new action in European telecoms, and Shivasankaran, the other minority partner, also wants an exit, Essar is seriously engaged in raising funds for acquiring the remaining 49 per cent in Sterling Cellular. It is also keen on bringing in a new strategic partner.
If it is such a rah-rah story, then what went wrong? The Jamnagar refinery is literally lying in pieces at various points on a massive 15-sq km plot, making for a truly tragic sight. Over Rs5,000 crore worth of equipment has already been purchased and Rs4,219 crore been paid to suppliers and contractors. But 15,000 labourers who were working day and night to finish the work have been sent home since March 1999. Many ABB Lummus crest engineers who had the responsibility to execute the project within the stipulated time and budget have gone home on a "short vacation". The damage and delay caused by the cyclone to the refinery's seawater intake and tank farm were being set right after filing for insurance claims, but all that is at a standstill. The reason for this paralysis: institutions are not disbursing sanctioned loans worth about Rs800 crore, ostensibly because Essar has not brought in Rs585 crore as additional equity through the Euro Convertible Bond route. For that, however, the present market conditions are entirely to blame.
Meanwhile, the Ruias are diluting their equity in the refinery project through fresh infusion of equity by a strategic partner. In the process they will reduce their own holdings to 26 per cent from the present 44 per cent, the partner will hold another 26 per cent, and the public the rest - the pattern adopted by MRPL. In this regard two oil companies - BPCL and Oman Oil- are carrying on simultaneous due diligence of the project, which is an attractive potential strategic acquisition for both - the former is short of refining capacity and the latter, an oil producer, is looking for capacity. The process, however, will take several months. Meanwhile ABB Lummus crest is putting in Rs200 crore as subordinate debt (treated as quasiequity) to keep the work going. But will the FIS now relent and release the already sanctioned loans and stop this colossal waste? It has been reported that MRPL is in a similar bind and has been unable to bring in Rs671 crore as equity because of the adverse market conditions. However, in its case, the FIS have been "sympathetic" and offered to take up Rs400 crore as equity while MRPL brings in another Rs271 crore thraugh internal accruals. When Business India asked ICICI whether this report was true and, if it was, why the discrimination, we received no reply. Similar was the official response from lOBI. Asked about the FRNS, everybody was either" too busy or travelling".
Whose money is it anyway? If the institutions have come to the conclusion that the Ruias are incompetent, they should remove them from management and take over the project instead of paralysing it. The point is not that the Essar Group has not made mistakes, but that it is well on the way to restructuring its finances with the full knowledge of its bankers and institutional lenders. The group is not asking for a "bailout" either, but simply disbursal of sanctioned loans to complete the project while the restructuring is on. Everybody who is trying to buy or sell a small house knows that it cannot be done in a jiffy, leave alone deals involving assets worth thousands of crores of rupees.
The Essar Group is selling its power plant to Marathon of the US, however painful it may be to part with a moneyspinner. The sale will reduce its debt exposure by Rs1,550 crore and return Rs 130 crore worth of unsecured loans to Essar Steel. The sale of equity will bring in $ 71.4 million into Essar Steel's and $15.3 million into Essar Oil's reserves.
It has spun off its pelletisation plant in Vizag as a separate company Essar Minerals on the advice of institutions. The FIS have assessed its Vizag assets at Rs1,OOO crore - about Rs400 crore in equity and Rs600 crare in debt. Stemcor, a large international trading house, wants to acquire 51 per cent of the equity in Essar Minerals. Essar Steel is diluting its holding by issuing fresh equity worth Rs180 crore to Stemcor, thereby giving it about 30 per cent. This fresh equity infusion will go into the completion of the pipeline and beneficiation project. Whatever stock Stemcor buys from Essar Steel later to gain a majority within the Rs580-crore total equity will go to Essar Steel. This divestment will also lead to the transfer of Rs500 crore in debt from Essar Steel to Essar Minerals.
By acquiring a majority stake in Essar Minerals, Stem cor will get an assured source of DR-grade pellets for supply to China, Southeast Asia, Iran, Qatar, etc. "The slurry pipeline has already been bought. The beneficiation plant has also been bought and both are lying in Vizag. Stemcor's money will help us complete it.
We have decided that we are not going to invest any more in the project. Whatever more money is required to complete the pipeline and later build the second plant will be brought in by Stemcor,” says Prashant Ruia. “However, as in the sale of Essar power, we have made sure that Essar Steel will get an assured supply, in this case of DR-grade pellets,“ adds Ravi Ruia. The total equity of the project as it stands will be about Rs600 crore and debt Rs900 crore. The additional Rs300 odd-crore in debt will be arranged by Stemcor. Trading houses Internationally are acquiring assets like this for assured supplied. Instead of doing spot trading they want long-term supplied, which helps them moderate the cyclicals. Similarly, another trading house called Deferco has bought steel mills in Russia and the US, and is emerging as a large investor.
Riding out of death valley
These two moves themselves will remove over Rs2,l 00 crore in debt from Essar Steel's books, since Rs1,550 crore is being taken over by Marathon and Rs600 crore transferred to Essar Minerals, in which Essar Steel will have a minority stake. This will reduce the debt-equity ratio from the current 2:1 to 1.34:1. It should be noted that the debt-equity ratios for two other major steel projects - Ispat and Jindal- stand at 3.51:1 and 2.88:1 respectively. Already Essar's cost of production is $230 per tonne and hectic efforts are on at Hazira to reduce this by another $ 7-10 using hot sponge iron for steel, a pioneering effort in many ways. Phase II of debottlenecking is in progress to increase the capacity of the plant to 2.4 Mt with no new investments. In short, Essar Steel will be raring to go in the expected upcycle in steel. A 22 June report by World Steel Dynamics Inc predicts that the international steel market has crossed the "death valley" of $185-240 a tonne - the lowest in the last 20 years. In fact, Essar has already started booking orders at $250-260 a tonne for exports," says]. Mehra, managing director of Essar Steel. "It is clear that commodities need branding as well, and that is why we are on a major marketing and market development campaign to highlight the quality of our product, for which people are ready to pay a premium,” says Prashant Ruia.
The default by Essar Steel on the redemption of its FRNs worth $250 million also has an interesting backgroungd. The FRNS were raised in the international market in 1994 with a maturity period o five years. The event itself was a first for an Indian company. The steel sector internationally has access to long-term loans extending anywhere from 12-15 years. However, at that time, such long-term mony was not available for Indian steel compnies. Today, steel manufacturers can raise money which will mature after 12 years. Since this debt was part of the project as appraised by financial institutions and not outside of it, Essar Steel assumed that the FIS would refinance it to meet the new 12-year norm. Meanwhile, not willing to rely on them, since the PIS were already heavily exposed to the group (though within their prudential norms), Essar tried to raise the money to refinance the FRNS in the international market more than a year before redemption. In fact, lead manager Lehman Brothers Securities Asia Ltd had prepared a prospectus for an issue of $200 million notes due AD 2008 and $200 million notes due AD 2018 in early 1998. However, Pokhran-II buried all hopes for the issue. Since the finance minister had promised in Parliament that no Indian company would suffer as a result of the sanctions, and so on, Essar assumed that Indian banks and financial institutions would now refinance the FRNS and that too on merit and not as a favour. However, these hopes were belied when they advised them to seek a roll-over from the noteholders. Rollover is a euphemism for default. Essar hoped against hope till the last moment and finally wrote a letter to all the noteholders through Chase Securities, trustee to the issue. "The company is currently examining the possibility of refinancing the notes or seeking an extension of the maturity of the notes. The company intends to present a comprehensive plan within 90 days of the scheduled redemption date. The company proposes to pay the interest due on the FRNS shortly," the letter said.
"They are not Real Value (remember the Vacumizer?). After all, how many business groups in India have built up assets of about Rs15,000 crore in the last 10 or even 20 years?" asks R. Sankaran, chairman of IndGlobal Trust, the only banker who was willing to go on record, which points to the prevailing atmosphere. "They have my sympathy. They started the project when there was 140 per cent duty protection on imports of steel and interest rates were 17-18 percent. By the time they came up with the project, duties were down to 25-30 per cent. Under these circumstances, how do you put up global capacities and be competitive?" Warming up to the subject, Sankaran says, "As far as the fRNS are concerned, the issue is very simple. IDBI and other institutions should be asked what they were doing all this time. SBI had also said it would finance it. Where are they? Everybody knew that the notes were coming to maturity. Six months back they were quoted at a 40 per cent discount. The institutions could have saved the country $100 million by buying the notes from the market at that time and extinguishing them, and then asking Essar to pay up the $250-million loan.
A top SBI official acknowledged, "The rolling-over of the FRNS is viewed as a technical default in India. But in the international markets it is done quite often even by reputed corporates and MNCS. There is nothing wrong with the Essar Group. It miscalculated its strategy and the current imbroglio is the price it had had to pay. But the group still has steam left in it and is restructuring its businesses. Indian banks and DFIS will not increase their support to Essar because they have reached their lending limits and because it has become a politically sensitive issue. But I am sure Essar will raise the money from some bank overseas." A large number of people we met in the financial community expressed similar views and were similarly averse to going on record.
The attitude, however understandable, cannot be justified. After all, a banker is a trustee of public money. Other than matters that govern fiduciary confidentiality, his opinion on an important corporate issue, whether it is favourable to the company or not, is a matter of public interest. Remember, it is these very gentlemen who, in endless streams of appraisal notes, assure their boards that, in the present globalising economy, these mega projects are not only viable but, indeed, desirable. Of course, if a promoter, however well intentioned, has proved to be incompetent, the bankers who have put public money into the company have every right to remove him from management control and bring in their own team, which is the international practice.
"In the last 15 days I have learnt what I couldn't have in 15 years," says young Prashant Ruia. The major mistake Essar made is that, while launching its global-sized projects in steel and oil, it did not fully comprehend the ramifications of the term 'financial closure'. But that is all in hindsight. After all, till Enron made the term popular, how many of us knew it or how many companies understood it? Today, of course, it is as sacred as "motherhood" in Essar House. "By nature I am loath to borrowing money. After nearly 20 years as a successful entrepreneur I raised my first loan for the sponge iron plant," says Shashi Ruia. Who knows, after the shock of default wears off, he might still come up with some surprises and remove this blemish.
Today, looking out of his office at Essar House towards Mahalaxmi race course, he hasn't the stomach for further financial gambles of any sort. "Financial closure first," he says. A bit uncharacteristic for a man who became a legend for his risk-taking in Indian ports from Kakinada to Tuticorin, from Goa to Mangalore and Chennai to Mumbai, and succeeding when he was barely in his 20s. But that is what tempering is all about - it means moderation and steeling. He could retire, handing the business over to the younger ones, and take to golf at Willing don and improve his present handicap. But he will have none of it - his eyes are set on the choppy Arabian Sea and, like a true shipper, he assures you that the rough seas will pass. He would rather engage in an animated discussion about the latest telecom technologies than wallow in the memories of the good old days in the docks. With that kind of determination, it should surprise nobody if the tempered Ruias bounce back in the not-too-distant future. After all another group, Reliance, went through similar rough seas in the 1980s and fought their way back.
Tempering Essar
A group that became one of the icons os entrepreneurship in the early 1990s has suffered a setback. Will it learn from its mistakes and fight its way out of the corner?
Shivanand Kanavi
It is a great view from the top of Essar House, an ornate structure bordering on the opulent. The Ruias manage their conglomerate, the Essar Group, encompassing steel, power, oil, telecommunications, and shipping, from their offices on the 19th and 20th storeys. From the glass-and-marble tower you have a bird’s eye view of the famous Royal Western India Turf Club, commonly known as Mahalaxmi Race Course, where fortunes are sometimes made but most often lost. Turning left, you see businessmen and executives sharpening their swings and putts with their irons on the golf course at Willingdon Club. Straight ahead is the panoramic expanse of the Arabian Sea and, if the weather's good, a clear horizon. Today, however, the monsoon has made the seas choppy. In the midst of their packed schedules with international bankers, as the Ruias cast glances at the turbulent waters, they must find the sight rather symbolic.
They have had many firsts in several businesses, of which they are proud of, but today they don't relish the new first: they became the first Indian corporate group to have defaulted on a foreign financial obligation by failing to redeem their floating rate notes (FRNS) worth $250 million on 20 July 1999.
What has gone wrong?
What will they do next? Are they going under? Will they survive this setback and bounce back? Do they have a credible plan for the same? These are several questions that Business India investigated. To put things in perspective and not be carried away by the down cycles in commodities, the more appropriate question to start with is: What did they do right?
If there was any proof needed that liberalisation would unleash true entrepreneurship in India, then Essar's growth in the last 10 years could be cited as one of the handful of examples. From successful medium-sized businesses in marine and port construction, oil-drilling, and shipping, Essar first took the opportunity provided by the gas pipeline to start a very successful sponge iron business and then, with the gradual opening up of the steel sector, had the vision to set up a world-class integrated steel plant.
For Indians used to outdated steel technology in public sector mills, and the old works at Jamshedpur, Essar provided the first glimpse of world-class steel manufacturing, setting up a mill that produces two million tonnes of steel and hot-rolled coils with less than 2,000 employees. When many thought that India could be competitive because of cheap labour, Essar thought otherwise. Today its labour costs (according to Paribas Asia Equity) are $5 per tonne as compared to $49 per tonne for SAIL and $ 76 per tonne for Tisco, and its energy costs per tonne are half that of SAIL and Tisco.
Since an assured and cheap power supply is essential, they first went in for a 215 MW captive power plant and then, when the opportunity arose for independent power producers, expanded it to 515 MW. This power plant is run by a total of 38 people.
It is well known that Bailadila in Orissa produces the best iron ore in the world. However, lumps of iron ore are exported, while the fines or tailings mount up into ugly mountains at the rate of 8-9 million tonnes per year. In the monsoons a large part of these fines actually flow into the rivers, polluting the water. So Essar came up with a plan to convert them into pellets that can be fed directly into sponge iron plants as feedstock. Until now the South Americans had a monopoly over this product (DR-grade pellets). So Essar set up a modern pellet plant at Visakhapatnam (run by 75 people, including administration) producing 3.5 Mtpy of pellets. Since rail transport of fines costs about Rs400 per tonne, it planned a beneficiation plant that would upgrade the fines, and a slurry pipeline that would reduce the cost of transportation to Rsl00 per tonne. Essar designed it to carry 7 million tonnes, giving themselves enough scope to double capacity whenever required.
Essar had already built up expertise in shipping and port construction, thus building the required infrastructure at Hazira and Vizag was no problem. In fact, it actually gave them the flexibility to use pellets internally as well as export pellets from Vizag and steel or sponge iron from Hazira.
Similarly, when the government allowed the private sector to exploit developed minor oilfields and explore new ones, Essar, by then one of the largest drilling contractors in the Gulf, was quick to bid. When government took great time to carryon in this direction but opened up oil refining, Essar was one of the first out with a proposal to build a refinery. Since then, even though dozens of proposals were submitted by various industrial houses and public sector oil companies, the only ones under implementation are Reliance Petroleum (27 Mtpy) and Essar Oil (10.5 Mtpy with a provision to reach 24 Mtpy later). Reliance has announced the commissioning of its refinery, while Essar's is in an advanced stage awaiting commissioning in the second half of next year.
Restructuring a reputation
While financially restructuring the conglomerate, the Essar group is faced with an even more difficult task of changing public perception about itself. The problems with refinancing its floating rate notes (FRNS) leading to default have been accompanied by a large number of negative reporting in the media, which Essar claims is based on fiction rather than the facts. As a result, while Shashi and Ravi Ruia are talking to bankers, young Prashant Ruia is taking time off from hectic debottlenecking activities in the steel plant at Hazira. Important improvements are being made in manufacturing technology at Hazira which might soon take Essar Steel into the elite top tenth percentile of lowest-cost steel producers in the world. After all, with his costs down, if signs of another upcycle in steel prove to be true he might just start making some 24-carat gold at Hazira rather than "24carat steel" as the ad campaign says.
But today Prashant is courting the fourth estate. He has already met senior editorial teams of several newspapers and magazines and is telling others that he can meet them any time on their turf. The format of these meetings has varied from formal presentations and Q&A to free for all "court-martial". Prashant is not expecting remarkable immediate benefits from this communication exercise, but acknowledges that, if he had done enough of this earlier, maybe the media's perception would have been different by now. Nevertheless, armed with tons of documents, and his informal, amiable nature, he is chugging on. Clearly, he's hoping that, like the commodity cycles that he speaks so much about, there is also a cycle of a non-commodity called public perception.
However, Prashant Ruia also claims that negative public perception is not only a result of bad communication but also downright disinformation. One such example, he points out, is a forged document being circulated in media circles as 'Highlights of Heads of Financial institutions Meeting held in Delhi on 24 June'. Among other things the 'document' says, "The heads of financial institutions unanimously decided that the Ruias should be replaced from the management of the following companies at the earliest to ensure viability of any attempt to revive these companies: Essar Steel, Essar Oil, Essar Mineral, and Essar Telecom." When Business India tried to verify the authenticity of this document, we were told by a spokesman of IDBI, “Please be advised that the purported copy of the minutes of HIM (officialese for heads-of-institutions meeting) is not true and does not reflect the discussion held at the HIM."
In this atmosphere, some common allegations the Ruias are trying to refute are:
•’’Essar has diverted funds from publicly listed companies into family-owned ones. For example, from steel, oil, shipping, and power into telecom”
Essar Steel, Essar Power, Essar Shipping, and Essar Oil have not invested in Essar's telecom business as inter-corporate deposits, as secured or unsecured debt, or as equity. Ruias are ready to provide certificates from the elite top six audit firms, some of which have been vetting every financial move in Essar group as a part of implementing a code of corporate governance.
• "By floating a family owned entity 'Prime Hazira' and taking a minority stake in Essar Power, the family will make money in the current sale of Essar Power to Marathon”
Prime Hazira was set up as a special purpose vehicle in Mauritius to channel international funds into an independent power project. Accordingly, UBS lent it $75 million, which was used to bring equity into Essar Power. Prime Hazira's entry was with the knowledge and approval of the FIS and an undertaking that any future profit made by Prime Hazira by selling its stake would flow back to Essar Steel. JM Morgan stanley and Donaldson, Luffkins &: Jernette (DLJ) have structured the deal with Marathon for the 100 per cent sale of Essar Power. They were mandated to not only consult the lenders while maximising value for existing shareholders, but also make sure that the sale of Prime Hazira's holding was not to the detriment of Essar Steel and Essar Oil.
• "Funds from listed companies were diverted for the building of Essar House as a family property”
Essar House was built with family funds from the sale of real estate owned by the family in Maker Towers, Nariman Point, and elsewhere, and borrowings from HDFC. No funds from any of the listed companies were utilised in any manner for the same. Even now the listed companies pay rents and deposits to Essar House based on rates fixed by an independent real estate valuer.
• "Cost overruns and project padding are used by Ruias to siphon funds from projects”
Essar's capex per tonne of manufacturing capacity created in steel, oil, and power (per MW) are among the lowest not only in India but in the rest of Asia as well (see tables). These comparative figures are available in project appraisals done by financial institutions and other documents as well.
• "The FRNs have been bought by the Ruias at a discount and they are waiting for the FIs to refinance the notes so that they can make money”
According to a letter written by Chase Securities Inc on 18 June 1999, "to our knowledge, neither the Ruia family nor other affiliates of Essar own any material amount of the notes."
• "The Ruia family's international holdings are a mystery"
These are transparent and strategic investments. Acquiring the holding in ILVA Italy (one of the largest integrated steel producers in Europe) was financed by Essar Global, a family-owned company, with the full knowledge of the Government of India. Actually, Essar Steel wanted to pick up the stake in ILVA but RBI rules did not permit the same. The required money was raised as acquisition financing by Essar Global and repaid after partial divestment in favour of the Riva family. "The investment has bought considerable technological support for Essar Steel during its start-up phase (nearly 50 ILVA personnel were at Hazira), as a result of which we were able to achieve quality and ramp up capacity very fast. Now it provides a good source of understanding of the European steel market." With regard to P.T. Essar Dhananjaya in Indonesia, the promoters are Essar Steel, Essar Global, and the local Dhananjaya group. This cold-rolling unit is a major importer of Essar Steel's hotrolled coils and has done well even during the Southeast Asian crisis. Essar Global has also invested $23 million in the AfroAsian Satellite project - the first by the Indian private sector - promoted by Subhash Chandra.
The fact that such questions are being asked of this group are testimony to one of its weaknesses - the lack of an aggressive communication policy that is both reactive and proactive, a must for all modern corporations. But it is to be admitted that we as a nation are not known for objectivity. One day we hail them - "They can do no wrong" - and the next we condemn them - "They can do no right". Reliance, another business group which has risen fast, periodically suffers the same plunges in public perception. We can appropriately name this the "Azharuddin syndrome" after our cricket captain, who must know this phenomenon better than anybody else.
Jamnagar was the natural choice for both Essar and Reliance, because the Gulf of Kutch allows for all-season import of crude and is the shortest distance away from wells in the Middle East. Not only that - since refinery products are in great demand in north and central India and since a product pipeline already exists between Kandla and Bhatinda, a small extension from Vadinar to Kandla can evacuate the products to the north, while a central Indian pipeline is being planned by Petronet from J amnagar to Itarsi and Gwalior. Essar's own project engineers, who number about 800, are playing an important role in building, debottlenecking, and detail-engineering many of their projects.
When the government liberalised shipping, Essar expanded furiously and is today the second largest in terms of capacity (38 vessels, 1.42 million tonnes dwt). It owns six of the most modern double-hull, doublebottomed Suezmax tankers, which operate in international waters. It also owns several bulk carriers which operate in both Indian and international waters. The fleet is the youngest in India, with an average age of seven years. A majority of the vessels are employed on long- and medium-term time charters, enabling stability of revenue generation even during the shipping down cycle. Essar Shipping has negotiated a $97-million loan from GE capital corporation (GECC), USA, one of the largest and with the longest maturity periods ever raised in the Indian shipping industry. In fact, the second tranche of the loan was disbursed recently after Essar Steel defaulted on its FRNS, testifying to the soundness of its shipping business. Essar makes a considerable amount of money by buying ships when the prices are low and selling them when they are in demand following standard international practices.
Get connected
When the government opened up telecommunication Essar, like 23 other business groups in India, saw a great opportunity and bid for various circles. With an astute plan it acquired the licences for basic services in Punjab and cellular services in Delhi, Punjab, Haryana, Rajasthan, and eastern UP through vendor and acquisition financing. "Big vendors like Nokia, Motorola, Ericsson, Siemens, and others have built huge capacities to supply telecom equipment and are facing a downturn in their business, so besides investment bankers, vendors too are aggressively funding acquisitions. The idea is that one pledges the shares to these companies and either borrows from them or gives them a certain equity stake with a clause to buy back later with a certain mark-up. Then, once the service is rolled out and a subscriber base built up, that is value is built into the business, one sells the whole or part of one's equity and repays the loans," explains Ravi Ruia. In effect, the licence-holder puts in very little of his own money.
This has become a standard method of funding telecom projects the world over. In fact, the entire telecom financing in China has been done this way. Though Essar faced problems in paying its licence fees to DoT recently, the new telecom policy has encouraged several banks and institutions to come forward with funds now. "The key fact is that we own cellular licences to most of north India and, with appropriate strategic alliances in Gujarat and Mumbai, we can harness the long-distance traffic between Delhi and Mumbai, where the cream of STD traffic lies," says Hemanth Luthra, CEO of Essar Telecom. Now that Swisscom, its foreign partner, wants to exit from its Asian businesses and focus on the new action in European telecoms, and Shivasankaran, the other minority partner, also wants an exit, Essar is seriously engaged in raising funds for acquiring the remaining 49 per cent in Sterling Cellular. It is also keen on bringing in a new strategic partner.
If it is such a rah-rah story, then what went wrong? The Jamnagar refinery is literally lying in pieces at various points on a massive 15-sq km plot, making for a truly tragic sight. Over Rs5,000 crore worth of equipment has already been purchased and Rs4,219 crore been paid to suppliers and contractors. But 15,000 labourers who were working day and night to finish the work have been sent home since March 1999. Many ABB Lummus crest engineers who had the responsibility to execute the project within the stipulated time and budget have gone home on a "short vacation". The damage and delay caused by the cyclone to the refinery's seawater intake and tank farm were being set right after filing for insurance claims, but all that is at a standstill. The reason for this paralysis: institutions are not disbursing sanctioned loans worth about Rs800 crore, ostensibly because Essar has not brought in Rs585 crore as additional equity through the Euro Convertible Bond route. For that, however, the present market conditions are entirely to blame.
Meanwhile, the Ruias are diluting their equity in the refinery project through fresh infusion of equity by a strategic partner. In the process they will reduce their own holdings to 26 per cent from the present 44 per cent, the partner will hold another 26 per cent, and the public the rest - the pattern adopted by MRPL. In this regard two oil companies - BPCL and Oman Oil- are carrying on simultaneous due diligence of the project, which is an attractive potential strategic acquisition for both - the former is short of refining capacity and the latter, an oil producer, is looking for capacity. The process, however, will take several months. Meanwhile ABB Lummus crest is putting in Rs200 crore as subordinate debt (treated as quasiequity) to keep the work going. But will the FIS now relent and release the already sanctioned loans and stop this colossal waste? It has been reported that MRPL is in a similar bind and has been unable to bring in Rs671 crore as equity because of the adverse market conditions. However, in its case, the FIS have been "sympathetic" and offered to take up Rs400 crore as equity while MRPL brings in another Rs271 crore thraugh internal accruals. When Business India asked ICICI whether this report was true and, if it was, why the discrimination, we received no reply. Similar was the official response from lOBI. Asked about the FRNS, everybody was either" too busy or travelling".
Whose money is it anyway? If the institutions have come to the conclusion that the Ruias are incompetent, they should remove them from management and take over the project instead of paralysing it. The point is not that the Essar Group has not made mistakes, but that it is well on the way to restructuring its finances with the full knowledge of its bankers and institutional lenders. The group is not asking for a "bailout" either, but simply disbursal of sanctioned loans to complete the project while the restructuring is on. Everybody who is trying to buy or sell a small house knows that it cannot be done in a jiffy, leave alone deals involving assets worth thousands of crores of rupees.
The Essar Group is selling its power plant to Marathon of the US, however painful it may be to part with a moneyspinner. The sale will reduce its debt exposure by Rs1,550 crore and return Rs 130 crore worth of unsecured loans to Essar Steel. The sale of equity will bring in $ 71.4 million into Essar Steel's and $15.3 million into Essar Oil's reserves.
It has spun off its pelletisation plant in Vizag as a separate company Essar Minerals on the advice of institutions. The FIS have assessed its Vizag assets at Rs1,OOO crore - about Rs400 crore in equity and Rs600 crare in debt. Stemcor, a large international trading house, wants to acquire 51 per cent of the equity in Essar Minerals. Essar Steel is diluting its holding by issuing fresh equity worth Rs180 crore to Stemcor, thereby giving it about 30 per cent. This fresh equity infusion will go into the completion of the pipeline and beneficiation project. Whatever stock Stemcor buys from Essar Steel later to gain a majority within the Rs580-crore total equity will go to Essar Steel. This divestment will also lead to the transfer of Rs500 crore in debt from Essar Steel to Essar Minerals.
By acquiring a majority stake in Essar Minerals, Stem cor will get an assured source of DR-grade pellets for supply to China, Southeast Asia, Iran, Qatar, etc. "The slurry pipeline has already been bought. The beneficiation plant has also been bought and both are lying in Vizag. Stemcor's money will help us complete it.
We have decided that we are not going to invest any more in the project. Whatever more money is required to complete the pipeline and later build the second plant will be brought in by Stemcor,” says Prashant Ruia. “However, as in the sale of Essar power, we have made sure that Essar Steel will get an assured supply, in this case of DR-grade pellets,“ adds Ravi Ruia. The total equity of the project as it stands will be about Rs600 crore and debt Rs900 crore. The additional Rs300 odd-crore in debt will be arranged by Stemcor. Trading houses Internationally are acquiring assets like this for assured supplied. Instead of doing spot trading they want long-term supplied, which helps them moderate the cyclicals. Similarly, another trading house called Deferco has bought steel mills in Russia and the US, and is emerging as a large investor.
Riding out of death valley
These two moves themselves will remove over Rs2,l 00 crore in debt from Essar Steel's books, since Rs1,550 crore is being taken over by Marathon and Rs600 crore transferred to Essar Minerals, in which Essar Steel will have a minority stake. This will reduce the debt-equity ratio from the current 2:1 to 1.34:1. It should be noted that the debt-equity ratios for two other major steel projects - Ispat and Jindal- stand at 3.51:1 and 2.88:1 respectively. Already Essar's cost of production is $230 per tonne and hectic efforts are on at Hazira to reduce this by another $ 7-10 using hot sponge iron for steel, a pioneering effort in many ways. Phase II of debottlenecking is in progress to increase the capacity of the plant to 2.4 Mt with no new investments. In short, Essar Steel will be raring to go in the expected upcycle in steel. A 22 June report by World Steel Dynamics Inc predicts that the international steel market has crossed the "death valley" of $185-240 a tonne - the lowest in the last 20 years. In fact, Essar has already started booking orders at $250-260 a tonne for exports," says]. Mehra, managing director of Essar Steel. "It is clear that commodities need branding as well, and that is why we are on a major marketing and market development campaign to highlight the quality of our product, for which people are ready to pay a premium,” says Prashant Ruia.
The default by Essar Steel on the redemption of its FRNs worth $250 million also has an interesting backgroungd. The FRNS were raised in the international market in 1994 with a maturity period o five years. The event itself was a first for an Indian company. The steel sector internationally has access to long-term loans extending anywhere from 12-15 years. However, at that time, such long-term mony was not available for Indian steel compnies. Today, steel manufacturers can raise money which will mature after 12 years. Since this debt was part of the project as appraised by financial institutions and not outside of it, Essar Steel assumed that the FIS would refinance it to meet the new 12-year norm. Meanwhile, not willing to rely on them, since the PIS were already heavily exposed to the group (though within their prudential norms), Essar tried to raise the money to refinance the FRNS in the international market more than a year before redemption. In fact, lead manager Lehman Brothers Securities Asia Ltd had prepared a prospectus for an issue of $200 million notes due AD 2008 and $200 million notes due AD 2018 in early 1998. However, Pokhran-II buried all hopes for the issue. Since the finance minister had promised in Parliament that no Indian company would suffer as a result of the sanctions, and so on, Essar assumed that Indian banks and financial institutions would now refinance the FRNS and that too on merit and not as a favour. However, these hopes were belied when they advised them to seek a roll-over from the noteholders. Rollover is a euphemism for default. Essar hoped against hope till the last moment and finally wrote a letter to all the noteholders through Chase Securities, trustee to the issue. "The company is currently examining the possibility of refinancing the notes or seeking an extension of the maturity of the notes. The company intends to present a comprehensive plan within 90 days of the scheduled redemption date. The company proposes to pay the interest due on the FRNS shortly," the letter said.
"They are not Real Value (remember the Vacumizer?). After all, how many business groups in India have built up assets of about Rs15,000 crore in the last 10 or even 20 years?" asks R. Sankaran, chairman of IndGlobal Trust, the only banker who was willing to go on record, which points to the prevailing atmosphere. "They have my sympathy. They started the project when there was 140 per cent duty protection on imports of steel and interest rates were 17-18 percent. By the time they came up with the project, duties were down to 25-30 per cent. Under these circumstances, how do you put up global capacities and be competitive?" Warming up to the subject, Sankaran says, "As far as the fRNS are concerned, the issue is very simple. IDBI and other institutions should be asked what they were doing all this time. SBI had also said it would finance it. Where are they? Everybody knew that the notes were coming to maturity. Six months back they were quoted at a 40 per cent discount. The institutions could have saved the country $100 million by buying the notes from the market at that time and extinguishing them, and then asking Essar to pay up the $250-million loan.
A top SBI official acknowledged, "The rolling-over of the FRNS is viewed as a technical default in India. But in the international markets it is done quite often even by reputed corporates and MNCS. There is nothing wrong with the Essar Group. It miscalculated its strategy and the current imbroglio is the price it had had to pay. But the group still has steam left in it and is restructuring its businesses. Indian banks and DFIS will not increase their support to Essar because they have reached their lending limits and because it has become a politically sensitive issue. But I am sure Essar will raise the money from some bank overseas." A large number of people we met in the financial community expressed similar views and were similarly averse to going on record.
The attitude, however understandable, cannot be justified. After all, a banker is a trustee of public money. Other than matters that govern fiduciary confidentiality, his opinion on an important corporate issue, whether it is favourable to the company or not, is a matter of public interest. Remember, it is these very gentlemen who, in endless streams of appraisal notes, assure their boards that, in the present globalising economy, these mega projects are not only viable but, indeed, desirable. Of course, if a promoter, however well intentioned, has proved to be incompetent, the bankers who have put public money into the company have every right to remove him from management control and bring in their own team, which is the international practice.
"In the last 15 days I have learnt what I couldn't have in 15 years," says young Prashant Ruia. The major mistake Essar made is that, while launching its global-sized projects in steel and oil, it did not fully comprehend the ramifications of the term 'financial closure'. But that is all in hindsight. After all, till Enron made the term popular, how many of us knew it or how many companies understood it? Today, of course, it is as sacred as "motherhood" in Essar House. "By nature I am loath to borrowing money. After nearly 20 years as a successful entrepreneur I raised my first loan for the sponge iron plant," says Shashi Ruia. Who knows, after the shock of default wears off, he might still come up with some surprises and remove this blemish.
Today, looking out of his office at Essar House towards Mahalaxmi race course, he hasn't the stomach for further financial gambles of any sort. "Financial closure first," he says. A bit uncharacteristic for a man who became a legend for his risk-taking in Indian ports from Kakinada to Tuticorin, from Goa to Mangalore and Chennai to Mumbai, and succeeding when he was barely in his 20s. But that is what tempering is all about - it means moderation and steeling. He could retire, handing the business over to the younger ones, and take to golf at Willing don and improve his present handicap. But he will have none of it - his eyes are set on the choppy Arabian Sea and, like a true shipper, he assures you that the rough seas will pass. He would rather engage in an animated discussion about the latest telecom technologies than wallow in the memories of the good old days in the docks. With that kind of determination, it should surprise nobody if the tempered Ruias bounce back in the not-too-distant future. After all another group, Reliance, went through similar rough seas in the 1980s and fought their way back.
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