Reliance Story

Business India, July 14-27, 1997

Playing to win

With the commissioning of the largest multi-feed cracker in the world at Hazira, Reliance catapults itself into the world of petrochemical giants

Shivanand Kanavi

Scene 1: The place: Oriental Hotel in Sin­gapore. The event: A discreet meeting of major polymer producers from Korea, Indonesia, Thailand, Malaysia, Singa­pore, Japan and Saudi Arabia, with the Americans joining later for an 'informal' dinner. The host: A senior executive of an Indian company. The agenda: Problems of the global plastics industry, falling poly­mer prices and dumping in each others' markets.

Such a get-together is taking place for the first time. Once the pleasantries are over, the Indian executive softly informs the others that if they continue to dump polyethylene into India then he will pay them back with interest in their home mar­kets. After all, the executive says, all it takes is a small, well-directed consignment to spoil a market. The words are heeded. The dumping stops soon after.

Scene 2: Another time and another place. Some European producers of linear alkyl benzene (LAB) are similarly cautioned by this company against dumping into India. This time, too, the words are heeded

The Company: Reliance


Reliance provokes extreme reactions in India. Either you are pro-Reliance or anti-Reliance. There is nothing in between. To many, God is a poor second cousin to Dhirubhai Ambani, the chairman of Reliance Industries Ltd (RIL). To oth­ers, the Ambanis typify the seamy side of big business: fixing import quotas, pre-empting licences and switching share certificates. Amidst such extremes, public drama, recrimina­tion and bitter controversies, RIL has built up huge capacities at extremely competitive costs and become a force to reckon with in petrochemicals.

This is a story of dominance. In the licence regime, RIL used every trick in the book to control competition and carve out niches in whichever market they operated. With the gradual open­ing up since the late 1980s, Reliance changed gear. Despite their formida­ble political and bureaucratic clout and their profound understanding of power, Dhirubhai and his sons, Anil and Mukesh Ambani, realised that the new globalised game would be one of scale, competitiveness, technological prowess and market dominance. Hav ing created one of India's greatest syn­thetic textile brands - Vimal - the troika decided that real power came with backward integration and huge, globally comparable scales of opera­tion. Once the strategy was decided, RiL executed it with a vengeance, even at the cost of short- and medium-term shareholder value.

With his recent dramatic announcement of the 1: 1 bonus share issue after a hiatus of 14 years, Dhirub­hai is again back to being the God of the shareholders. Divinity aside, what Business India found was a remarkable story of the emergence of a highly competitive mega-corporation with skills and vision required to compete in a globalising economy. Well on its way to hitting $8-10 billion by the year 2000, the Reliance group is possi­bly the only real global giant in India.

From cloth to cracking
RIL emerged in the early 1970s as a pioneer in branded textiles. In the early years, when RIL'S Naroda mill was in its infancy, Dhirubhai and his cousin, the late Rasikbhai Meswani, built the brand with cloth produced by thousands of powerloom weavers in Surat. Excellent production and finishing supported by a sustained media campaign that lasted for over two decades made Vimal a household word. As if that were not enough, RIL became the company that developed the equity cult. With public offers of shares and partially convertible debentures, RIL went straight to small investors to raise huge sums of money long before the phrase 'primary market' entered the Nariman Point lexicon.

In 1982, RIL honed in on backward integration. Given the polyester con­tent in Vimal fabrics, the obvious choice was to manufacture polyester staple fibre (PSF) and polyester fila­ment yarn (PFY). The PFY plant was launched in Patalganga (Maharash­tra) in 1982, which was followed by PSF capacity in 1986. The next step was to move backward into purified terephthalic acid (PTA) in 1986 and paraxylene (input for PTA) in 1988. The market for detergent input was captured by setting up a capacity to manufacture linear alkyl benzene (LAB) in 1987. Then, in 1991, the Reliance group went in for the most ambitious project of them all at Hazira. Besides housing the largest single multi-feed ethylene cracker in the world, Hazira is a complex of a dozen global-sized downstream plants producing polyethylene, polypropylene, polyvinyl chloride (PVC), PFY, PSF, polyester terapthalate (PET) and intermediates like vinyl chloride monomer (VCM), MEG and PTA. The cracker plant was commis­sioned in March this year and, with the exception of the PET and the sec ond PTA plant, the Hazira project has been completed.

"There has never been in the his­tory of chemical industry in India something as big as the Hazira com­plex.," says internationally recog­nised chemical engineer M.M. Sharma, whose effusiveness may be partly because Mukesh Ambani was his student. But, the fact remains that the combined annual cracking capac­ity of IPCL (at Baroda and Nagothane), Nocil and the smaller crackers put together is less than Hazira's capacity. An unabashed Reliance fan, Sharma says, "Knowing their capacity to debottleneck, put balancing equip­ment and expand, I will be disap­pointed if the Hazira plant does not produce a million tonnes of ethylene within two years."

The six-tenth rule
The technological key to RIL'S expan­sion in petrochemicals is increasing returns to scale. Continuous process chemical industries are characterised by cylindrical pipes and reactors. There is a simple mathematical prop­erty that the area of the cross-section of a cylinder increases as a square of the radius. This yields the famous 'six-­tenth rule' that is beloved of chemical engineers: if capacity rises from 300,000 tonnes per annum (tpa) to 750,000 tpa (i.e. 2.5 times), then the cost of production will only increase by a factor of 1.73. Of course, the mathematics makes even more sense if one adds the purely commer­cial advantage of negotiating bargain­ basement prices in bulk purchase of plant equipment and raw materials ­not to mention the ability to use giant scales to pre-empt competition.

While the advantages of econo­mies of scale are well known, there are serious obstacles in putting up glob­ally sized chemical plants in India, such as the lack of infrastructure to handle raw materials, inadequate port and jetty facilities, erratic power and water supply and non-availability of huge funds at internationally compa­rable costs. What sets Reliance apart is the manner in which it has levelled this uneven playing field by meticu­lous project planning, excellent sys­tem engineering and swift project implementation backed up by the trading savvy of three of the sharpest entrepreneurial minds in the country. To overcome infrastructure prob­lems, RIL has gone ahead to create self ­sufficient islands of in-house facilities. For example, it has built its own jetties in Hazira and a single buoy mooring 5 km off the coast for large tankers to transfer liquids directly into the stor­age space (called tank farms). All RIL sites are self-sufficient in power. The infrastructure that has put RIL on the world map is the ethylene terminal at Hazira. Since the cracker plant was to be commissioned at the very end, RIL needed large-scale imports of ethyl­ene for their downstream pvc and PET plants. So they built a cryogenic ter­minal for transferring ethylene at ­-138°C in deep seas. "That was the first time it was done in the world, " recalls Anil Ambani. "Everybody told us eth­ylene transfer is unsafe and definitely not possible in a country like India. But once we proved that we can do it, and do it safely, others in the world are copying it."

Sweating it out
“A major strength of RIL is the way they integrate their projects," says Pradeep Shah of Indocean Venture and a long-time Reliance watcher. The importance of integrating back­wards is a lesson that RIL learnt from the Patalganga project. PTA and DMT require paraxylene as feedstock, which had to be imported. Since India had hardly any infrastructure to han­dle imported chemicals, the Ambanis had no hesitation in going for a paraxylene plant with technology from the world leader, Universal Oil Products (UOP). Their next-door neighbour, Bombay Dyeing, which had put up a dimethyl terapthalate (DMT) plant, suffered because it depended on imported paraxylene.

The paraxylene plant required naphtha as feedstock. Instead of rely­ing on tanker movement by road from Mumbai to Patalganga, RIL quickly laid a pipeline to Bharat Petro­leum's refinery. When they discov­ered that the hydrogen produced in the catalytic cracking of naphtha was being flared away, RIL diverted it to the PTA plant where hydrogen is needed. Similarly, instead of wasting the nitrogen by-product in the PTA plant, RIL used it as a conveyor gas. By­products of naphtha cracking are used in gas turbines, and kerosene, from which paraffins are extracted for mak­ing LAB, are similarly burnt. Any extra heat in a process is not wasted, but used to pre-heat various feedstock.

But system and backward integra­tion are not all. According to Mukesh Ambani, one of the main reasons RIL's 1996-97 performance was better than expected by analysts is the use of 'sweat technology,' or making the plants produce more through clever chemical engineering. Teams work relentlessly to milk as much as possi­ble from the plants. For example, the engineers at Patalganga discovered that adding another compressor and supplying more air to the reactor where paraxylene gets oxidised in the PTA plant would enhance the output greatly. Immediately, the cost-benefit ratio was worked out and an expen­sive 30-tonne compressor added. Today, the engineers are not fully sat­isfied. Up to now, only 23 tonnes of air are being used. So a team is work­ing on how t0 use the remaining seven tonnes.

Clearly 'sweating' pays off. A case in point is PVC production. IPCL uses 420 cubic metres of total reactor vol­ume to produce 50,000 tpa of PVC, while Finolex uses 500 cubic metres to produce 110,000 tpa. In contrast, RIL'S first pvc plant at Hazira utilises 560 cubic metres to produce 180,000 tpa. "When our people went recently to Geon, the company which supplied the technology for our I've plant, they were told Reliance has nothing more to learn in PVC technology," says K. Ramamurthy, president of RIL's polymer division.

The Vanvas is over

RIL's triumphal return to its shareholders

People had written him off as an old man who had lost his magic touch. On 26 June, 1997, in the middle of RIL's annual general meeting, Dhirubhai Ambani announced an interruption with a board meeting to discuss bonus shares. The mar­ket began to oscillate wildly. Then Dhirub­hai came back and asked the shareholders, "What do you want?" The roar of "One is to one!" reverberated across Birla Matu­shree Hall. He grinned, paused, and said, "You have it." The market went gaga as Lord Dhirubhai returned to his throne.

With the bonus issue after 14 years, the Ambanis have outfoxed equity analysts once again. "We need to be good at psy­choanalysis to predict their results," says an analyst jocularly. According to Jal Irani of Jardine Fleming, "Petrochem analysts have difficulty in quantifying the effect of economies of scale on manufacturing costs and hence the bottomline." Read that as a confession, "We don't know."

But, corporate watchers are happy to eat crow, delighted as they are to see one of India's fastest growing companies churning out a better-than-expected per­formance. Analysts predicted net profits ranging from Rs900-1, 100 crore. Instead, RIL overcame depressed petrochemical prices to post a net profit of over Rs1 ,300 crore in 1996-97, which was 1.3 per cent higher than the previous year. It managed to buck the industry trend by pushing vol­umes. The turnover for 1996-97 (Rs9,31 0 crore, of which Rs290 crore is other income) is 12 per cent higher than the pre­vious year.

The view of analysts is that despite the controversies that have dogged Reliance, "it has
created assets for all to see." The asset growth is quite phenomenal. Between 31 March, 1992 and March, 1997, RIL's total assets have increased at? compound annual rate of almost 28 per cent for the last five years and now stand at Rs19,536 crore. Last year alone it increased by 30 per cent.

This growth has been financed through higher leveraging. At a time when India's equity market was in the bear phase, the Ambanis were the first major to tap the overseas debt market with long ­term debt, including the 100-year Yankee bond. As of March, 1997, about 62 per cent of the total debt is foreign currency denominated. However, such leveraging carries risk. RIL's overall debt/equity ratio has risen from 0.49:1 in 1995-96 to 0.83:1 in 1996-97. Consequently, the interest bill has increased by over 54 per cent from Rs110 to Rs1 70 crore. This, plus a 22 per cent jump in depreciation (to Rs 410 crore) and Rs45 crore on account of the minimum alternate tax (MAT) has con­tained RIL'S post-tax profit at Rs1 ,323 crore - up by only 1 .3 per cent over that of last year. The rise in depreciation was because RIL responded to MAT by changing the method of calculation from straight-line to written-down value.

Have the results been dressed up? Some analysts have asked how a 35 per cent increase in volume can be achieved with a less than 12 per cent rise in manu­facturing expenditure. Granted that raw material costs have come down, but labour, power and other costs, plus infla­tion, should have pushed manufacturing costs higher. The Ambanis attribute this to ruthless operational efficiencies. "We make our plants sweat and try to squeeze the maximum out of them," says Mukesh.

The fact is that RIL has successfully with­stood the pressures of 1996-97 - one of the most difficult and recessionary years for the petrochem industry. Today, the company has world-class plants, inte­grated facilities and state-of-the-art tech­nology. RIL also has one of the lowest employee costs (2.7 per cent of sales), although the capital cost of newly set-up plants would be higher when compared to depreciated facilities of major global com­petitors. While RIL is diversifying into oil, gas, power and telecom, its mainstay in next three to four years will be petro­chemicals and polyester.

According to some analysts, the cur­rent year will see RPL make full use of its capacity expansion and total integration from crude oil and cracking facilities to downstream fibres and cloth to post a phenomenal growth in sales and earnings. Mahesh Talreja of Ventura Securities places the estimated growth in earning for 1997-98 at 56 per cent and "an EPS of Rs45 on its pre-bonus issue equity." Rupa Bose of Banque Paribas differs. In her report, she predicts a 20 per cent increase in PAT to the region of Rs1 ,640 crore and a more modest 23-24 per cent growth in EPS. Jardine Fleming's latest PAT projec­tions are similar: Rs1 ,611 crore.

Even if the conservatives are right, it would be an impressive performance. But you can never tell with Dhirubhai. The old fox could stun the market yet again next year. If he does, the analysts will be seen at the Zodiac Grill ecstatically eating Crow a la Languedoc!

Calculated risks

"We can deal with the risks in petro­chemicals like the process design risk, feedstock risk, operational risk or the market risk as well as anyone else in the world," asserts Mukesh Ambani. But their record shows that it is no empty bravado.

The first attempt at risk-taking was at Patalganga, when RIL took its chances by putting up capacities that were bigger than the entire Indian market for PFY and PSF. It paid off. India's market for synthetic and blended cloth grew by leaps and bounds in the 1980s and early 1990s despite adverse excise duties vis-a-vis cotton. Soon afterwards, the decision to bet on the new technology from ICI of making PTA, a feedstock for poly­ester, was taken despite the fact that, at that time, DMT was the proven raw material. The risk was taken because the PTA route did not need an inter­mediate extraction plant and, hence, translated to a lower capital cost. Again, the risk paid off. Today the PTA-vs-DMT controversy has been globally settled in favour of PTA.

Similarly, when RIL was putting up its first pvc plant in Hazira in 1990­91, the rated output of 180,000 tpa was larger than the total Indian demand. Today, RIL has expanded their capacity in the same plant to 275,000 tpa, and the market has not only absorbed this output but that of others like Finolex and IPCL as well. And Reliance isn't satisfied. Rama­murthy of the polymer division is planning to increase the Hazira capac­ity to 310,000 tpa. As a Reliance watcher and family insider pointed out, "The hallmark of the father and sons is that after meticulous research they rely on their sharp trading instinct. It is this instinct that makes them incessantly bet on growth and virtually create the growth by generat­ing massive economies of scale."

The Jamnagar experiment

Reliance's emphasis on system inte­gration, which evolved at Patalganga, has become a way of life in project planning. While the Hazira complex has numerous examples of such inte­gration, RIL'S Jamnagar refinery might become a textbook case. When asked why the entire technology package for the ]amnagar project was awarded to UOP, Mukesh Ambani pointed out, "Large benefits are going to come from clever feedstock and heat inte­gration. That can only happen when the right hand knows what the left hand is doing."

All components of the output at Jamnagar are either end products or by-products that are to be used some­where as a feedstock for high-value petrochemicals or as fuel for generat­ing process heat. In fact, petrochemi­cal experts estimate that, when the entire system stabilises, no more than 0.2 per cent of the refinery through­put will be wasted. If that happens, it will be a world record, because the international wastage figure for refineries hovers around 5 per cent.

RIL's system planning often takes place well before the project is imple­mented. For instance, when BHEL engineers were asked four years ago by Reliance to experiment with petro­leum coke as boiler fuel, they were naturally puzzled. It is now evident that even in 1993-94, the RIL team was looking at ways to use refinery residue - six years before the complex was due for completion. The experiment worked. Now, the gameplan is to con­vert refinery residue into petroleum coke to be used for the in-house power project to generate 1,000 MW of power.

When phase one is completed in 1999, the Jamnagar refinery project will be truly mind-boggling. It will not only supply 3 million tonnes of naph­tha to Hazira but also enough propene as feedstock for another 400,OOO-tonne polypropylene plant and a 1.2-million tonne paraxylene complex in Jamna­gar. Petrochemical engineers expect that the second phase at Jamnagar (starting from 2001) will produce another 1 million tonnes of ethylene as well as high-value petrochemicals for use in drugs, dyes and paints, unleaded petrol, food additives and polystyrene foam. In fact, a senior technologist at uop said that RIL is actually driving refining technologies in new direc­tions - away from traditional refining towards high-value petrochemicals.

Jack be nimble ...

"Without flexibility in operations one cannot quickly respond to market conditions," says Mukesh Ambani. Said by many, done by few. In Reliance's case, flexibility seems to be the holy word - be it in engineering, systems design or financial deal-mak­ing. Consider just the production side. The polyethylene plant at Hazira has a swing reactor that can produce, with hardly any change, either high-density polyethylene (HDPE) or linear low-density polyeth­ylene (LLDPE) according to market requirements. The cracker at Hazira is designed to use gas, liquefied natural gas, naphtha or gas oil as feedstock. "Since feedstock prices cannot be pre­dicted, RIL has the flexibility to use whichever combination that increases our operating margins," explains Mukesh Ambani. "Consider­ing the lifecycle cost of the cracker, the extra investment on a multi-feed cracker is marginal."

This agility translates to greater value addition. Earlier, RIL was spend­ing $1,300 on ethylene to produce about $2,800 of products. Today, the cracker uses no more than $600 worth of naphtha to produce the same end value. "We hope to make a profit of Rs2,200-3,000 crore every year from Hazira alone," exults Ramamurthy. According to him, even if global petro­chemical prices fall by 10-15 per cent, the high value addition at Hazira will sufficiently insulate RIL from such downturns. "On top of it, our market­ing. costs are extremely low," says Ramamurthy. "We spend $3 per tonne for marketing $800 of plastic. Our total distribution cost of plastics to any point in India is $26 a tonne. Let anyone who wants to enter the Indian market beat that!"

New horizons
RIL has never been shy of seizing a business opportunity: Here is a peek at some of the things they're getting into
Power
Reliance Power is a separate company wholly-owned by RIL. A power purchase agreement (PPA) has been signed for the 41 0 MW Patalganga project and is now awaiting techno-economic clearance for financial closure. The Bhawana 423 MW project is waiting for PPA to be signed. Reliance is also bidding for a 2,000 MW super thermal pit head project in Bihar and a 800 MW hydel project in Himachal and 1,200 MW hydel project in Sikkim.

Telecom
Reliance Telecom, another separate com pany with 10 per cent participation from Nynex, has won cellular licences for seven circles: Madhya Pradesh, Orissa, West Bengal, Bihar,Sikkim and the seven sisters of the northeast. RIL was the first to sign the agreement with DoT to pay the required fees and is in fact well on its way to starting cellular service in 22 cities.

Oil & Gas
Oil & Gas is a division of RIL. The ONGC- Enron-RIL (40:30:30) joint venture is pump­ing out over 12,000 barrels of oil daily from Panna and Mukta. These fields were termed marginal and uneconomical by ONGC. RIL found that with their project management expertise the cost of recov­ery could be lowered 20-30 per cent and, with Enron agreeing to a lower internal rate of return, the project became viable.

They have also hit gas at Tapti. One million cubic metres of gas will soon flow daily to Hazira. Since there are problems in sharing the existing pipeline with ONGC, RIL is trying to convince its partners to go in for a separate gas pipeline. Another promising deal is being nego­tiated in Iraq between the Iraqi govern­ment and RIL-ONGC videsh. If it comes through, this field should yield in one day (about 200,000 barrels) the entire production from Bombay High.

Master builders
While RIL'S low capital and opera­tional costs are recognised globally, another factor which makes them competitive is the speed at which they erect plants. All the Hazira plants were erected in record times, with the giant cracker coming up in only 29 months. All indicators point to Jamnagar pro­ceeding at an even more frenetic pace. According to Sharma, "The main rea­son is that the Ambanis sit on every­body's head, be they contractors, sub-contractors, or employees, and put in long hours themselves. Do you know that there were a couple of CMD's of IPCL who never spent a night at Nagothane when it was com­ing up, even though it was their biggest investment at that time?" Hetal Meswani, a cousin of Mukesh and Anil and an executive director of RIL, was literally living in Hazira dur­ing construction and has now moved to Jamnagar. Engineers recall how Mukesh Ambani would spend days on end at Patalganga when it was coming up.

Today there are daily video confer­ences between Mumbai, Jamnagar and the London office of Bechtel, who are doing the engineering work for the refinery project. There is a team of RIL engineers sitting in the London office of Bechtel, while a team of Bechtel engineers is at Jamnagar. New tech­nologies are being adopted to speed up construction. "We found that 40 per cent of the time in erecting piping is taken up by welding the joints," says S.C. Malhotra, technical executive director of Reliance Industrial Infra­structure, a Reliance group company. "So we decided to spend a few crore and automate the whole thing by going for a giant induction pipe-bend­ing machine that can bend even a 2-ft diameter steel pipe into any angle."

Blurring boundaries
"Do you think a modern Rs10,000 ­crore business can be run by two brothers?" asks an executive rhetori­cally. From foremen, site supervisors and middle-level plant managers to vice-presidents and presidents, every one in RIL is given considerable auton­omy. According to Pradip Shah, that is one reason why Reliance has such a strong core group of highly talented professionals in marketing, finance, operations, projects, construction, telecom, power, oil and gas, fibre, intermediates, polymers and textiles. It is a peculiar but successful amalgam - the family makes the key decisions, which are then meticulously executed by professionals.

"In the best companies of the world the boundaries between technology, finance, and marketing have collapsed," points out Mukesh Ambani. Just as the siblings don't have any rigid compartmentalisation of responsibilities, so too do many of the top executives of RIL. "I was coming from a conference in Singa­pore and I heard about a good trading opportunity in Jakarta," says C.S. Gokhale, who runs the fibre intermediates division. "So, I rang up Mukesh and he not only agreecd with me but asked me to come via Jakarta and clinch the deal. There are no bar­riers iuch as this is a purchase func­tion and somebody else has to do it. After all, when I joined RIL, I was told that I will be an owner-manager, and I have no doubts on that." Hemant Desai, vice-president in charge of polymer plants at Hazira, also empha­sises the importance of being a well­rounded manager. "I used to be in fibre marketing; today I am in poly­mers; tomorrow if I have to go to Jam­nagar and talk to the sarpanch of Mothikavdi [the village next to RIL'S site] I will do that." The motto is if it benefits the company, go ahead and just do it.

It is that motto which has driven RIL relentlessly. In the process, it has made enemies, occasionally bent laws and liberally buttered bread on both sides. But even Reliance's worst detractor cannot ignore four simple facts: it has created a massive asset base in the fastest possible time; it has produced successful plants on truly global scales; its costs are internation­ally competitive in the truest sense of the term; and that has given it consis­tent long-term value to 2.6 million shareholders. No company can beat that. Not yet, anyway.

Sibling speak
Excerpts from interviews

We will benchmark with the top 100 companies in the world
MUKESH AMBANI

• We have always believed that we shouldn't get into anything because it was in fashion or everybody else was doing it. We must first understand it thoroughly. Then we back it up with dedicated leader­ship, which is not restricted to my father or myself and my brother.

• Our projections for the group in 1999-­2000 are assets worth Rs30,000-35,000 crore and a turnover between Rs40,000­-50,000 crore.

• If the administered pricing mechanism for petroleum is lifted and crude is decanalised, then with the way we have . configured the Jamnagar refinery, Reliance will be globally competitive.

• Refineries of the future will be fully inte­grated with petrochemicals and power. We were the first in the world to think that way and the first to build such a refinery.

• After Jamnagar, we will grow upstream into oil and gas and energy. For that we might even have to go outside India, and have already bid for Iraq sites with ONGC videsh. The new exploration policy itself will open up opportunities in India. If there is any oil in India then Reliance will defi­nitely find it.

• Right now we are having discussions with IOC about fuel distribution from the Jamnagar refinery. There is merit in India's oil majors getting together to reduce distri­bution costs.

• We won't move into a gas cracker pro­ject in Assam until it is clear what feed­stock we are going to get. Only then can we employ our knowledge and add maxi­mum value to the project. In India, people are not used to up-front rigorous analysis. Instead, they prefer foundation stone-lay­ing ceremonies. Let us first be clear about what we will get. That is better than to assume something and have problems later.

• Reliance will get listed on Wall Street because we want to benchmark ourselves with the top 100 companies of the world.

We have the lowest capital expenditure costs globally
ANIL AMBANI

• Our capex costs are the lowest because we do not look at a plant as a black box. We break it into every possible component, and optimise what we can do in India and what we can do offshore. Our aggression also comes from scale. We believe in hav­ing rate contracts. Also we buy everything with cash. If the vendor has to provide finance, he jacks up the price by say 20 per cent. Similarly we give the site contractors assured work in exchange of which they are ready to take a knock on the margins.

• The skills we built in the chemical indus­try we are repeating in telecom. Our costs are far lower than any other telecom com­pany in India. Investors are applauding our telecom strategy - to pay the lowest pos­sible licence fee and aim for the highest geographical spread. This will give us the ability to innovate in marketing and tariffs.

• We are not going to have 30 telecom operators in India. There will be a shake­out. Nearly 20 licences, including HFCL's, are up for sale. If the rules of the game change, then Reliance will be in the front­line buying some of them out.

• What's the big deal about P/E ratios? In the 1980s and 1990s, Shell was quoting at two times earnings! Isn't Shell a great com­pany? In the lifecycle of every company, there are ups and downs. Look at IPCL. They have no merger, no private place­ment, no seeming controversy, are a strong petrochemical player, have scale, integration, depreciated assets, 51 per cent owned by the government, no fear of great dilution, all accounts are certified by any number of government agencies. Then why is it quoting at four times earnings and RIL is quoting at ten times earnings? There is no rationale.

• As India integrates with the global econ­omy, people will begin to understand the value of assets. For people who are inter­ested in looking at the long term, these are very exciting times.

Book Review-- Maths-S Ramanujan

Ramanujan: Letters and Commentary (History of Mathematics, Vol 9)-- by Bruce C. Berndt, Robert A. Rankin



It is lonely at the top

Shivanand Kanavi

"I beg to introduce myself to you as a clerk in the accounts department of the Port Trust Office at Madras .... ". Thus started the most famous letter in 20th century mathematics, written by Srinivasa Ramanujan to Godfrey I-tarold Hardy.

Was Ramanujan, afraid that proofs of his theorems may be stolen by the dons at Cambridge or was he afraid of being ridiculed for his intuitionistic methods? Was he really afraid that he will be "polluted" by going to England or was he pressured into refusing to go by other orthodox Brahmins, and so on are among the many questions that are raised by this latest collection of Ramnaujan letters, edited by two mathematicians, B.C.Berndt and R.A.Rankin.

Ramanujan's method of stating an important result and providing some 'hand waving' arguments as the basis of the result rather than give rigorous proofs was unique and mathematicians like MJ.M.Hill dismissed his genius. One of the reasons for the cryptic nature of his proofs was his notation which he very much kept to himself and the other was that many a time his "proof" will involve leaps that could not be bridged by rigorous mathematics. Nevertheless G.H.Hardy recognised the genius and endeavoured successfully to get him to come to Cambridge. In fact the collection contains a letter written by Bertrand Russel to one of his women friends wherein he mentions, "I found Hardy and Littlewood in a state of wild excitement, because they believe they have discovered a second Newton, a Hindu clerk in Madras".

But actually, Hardy's close associate J.E.Littlewood thought otherwise, in a letter he told Hardy that, he placed Ramanujan on par with Jacobi (important Hungarian mathematician, but not up to the stature of Newton). He also thought Ramanujan was not disclosing his proofs because he probably feared that English mathematicians might "steal" his results! Ramanujan expressed his pain on reading the same allusion in Hardy's reply to his first letter, but surprisingly did not disclose any more information regarding his methods. Instead he wrote, "I am already a half starving man. To preserve my brains I want food and this is now my first consideration. Any sympathetic letter from you will be helpful to me here to get a scholarship either from the University or the government", and added a few more results in his famous second letter. Considering his economic plight and the craving for professional peer recognition and even critique and considering the plundering of India in the hands of Britain his unexpressed fears are understandable.

A misconception cleared by the collection under review is regarding Ramanujan's orthodoxy that. prevented him from accepting the invitation to go to Cambridge. In a letter to Hardy, Ramanujan explained that when the offer was made by C.E.Mallet of India Office, London, it was too vague and besides it brought visions of having to appear for a civil service examination. This made him hesitate and mean while, his boss, an orthodox Brahmin, who was accompanying him, intervened and categorically told mallet that Ramanujan cannot go due to religious reasons. It is clear from the letters that Ramanujan was actually looking forward to meeting the best mathematical minds of Europe.

The letters also bring out the loneliness he suffered during his illness first in England and then in India. However being extremely conscientious and grateful for the fellowship he kept sending new results despite severe illness.(The illness which was never diagnosed properly has now been diagnosed as amoebiasis of the liver according to the authors). In fact Hardy's letter to J.J.Thompson (Nobel Laureate physicist and president of the Royal Society) shows that fearing the worst and aiming to give some incentive to Ramanujan to fight the illness, Hardy lobbied for the early award of the Fellowship of the Royal Society.

Though after his death his family members engaged in a sordid exhibition of greed and propensity to cash in on respect and sympathy for Ramanujan, he himself exhibited his generosity by asking his family to actually give some money for scholarships to poor students.
The collection is a valuable addition to the growing literature about Ramanujan's life and work. The editors have taken particular pains to add fairly detailed biographical notes on all the individuals that are mentioned in the letters, thereby giving a flavour of associates and friends of Ramnaujan. They have also given extensive mathematical notes on the history and evolution of each of Ramanujan's propositions as they appeared in his letters. On the whole it is an enjoyable reading for mathematicians as well as lay public interested in the Indian genius.

Medicine-Chiral drugs

Business India, February 13-26, 1995

Molecular Jekyll and Hyde

Mirror images of the same molecule could have widely differing effects on living organisms

Shivanand Kanavi

Can the mirror image of an object differ from the original? Common sense would suggest not. But, sur­prisingly, the mirror image of a molecule may not only be different but even have opposite effects on the human body. The most dramatic example of this duality was thalidomide. Thalidomide-R is a hypnotic drug, introduced in the 1960s, which suppresses signals from the brain, giving rise to nausea and morning sick­ness in pregnant women. However, when its use resulted in the birth of a large num­ber of severely deformed children, the world was shocked. It was discovered later that the mirror image of thalido­mide-R, called thalidomide-S, was pre­sent in the dosage in equal quantities and was the culprit that led to these terato­genic, or foetal, effects.

'Chirality' , or the different behaviour of 'enantiomers' (molecular mirror images) was, in fact, discovered way back in 1848 by Louis Pasteur. He found that tartaric acid exists in two forms - which were later found to be mirror images of each other. While one form of tartaric acid polarised incident light in one direc­tion, the other did it in the opposite direc­tion. However, chirality remained little more than a curiosity till the thalidomide tragedy struck.

The last 30 years of research in chiral­ity has yielded many such startling exam­ples. But what is the difference due to? "Nature is chiral," explains A.V. Rama­rao, director of the Indian Institute of Chemical Technology, Hyderabad, and a world authority in chiral chemistry. "Amino acids, sugars, enzymes, peptides and carbohydrates found in the human body are chiral. In fact, the complexity of chirality seems to increase in plants and animals that are higher in the evolution­ary scale. Higher chirality 'shows greater selectivity in reactions arid higher specialisation in the functions of different molecules. So participants in biochemical reactions like drugs, pesticides, per­fumes, flavours, etc., have to be of the right chirality. Only the right key can open the lock. A wrong key at best might not open any lock, as in the case of non­toxic and non-therapeutic ibuprofen-R, or at worst might even open a Pandora's box as in the case of thalidomide-S," he points out.

Even if a mirror image were non­toxic, as in the case of ibuprofen, the fact that the body has to metabolise 50 per cent of the dosage given without any use­ful effect is tanta­mount to polluting the human system. This could become particularly serious in old age when pain­killers are increas­ingly used even as the body's metabolism weakens.

Nearly half the drugs that are com­mercially available in the market have chi­ral centres and hence exist as paired enan­tiomers. Many of the pure enantiomers sold today are derived from plants or micro-organisms. Only about 10 per cent of the synthetic drugs are sold as chi­ral molecules while the rest are marketed as mixtures of both enantiomers called 'racemates'. But the situation is fast changing with drug regu­latory authorities in the US, Switzerland and Japan insisting that pharmaceutical companies start introducing new drugs as chirally pure molecules, although no defi­nite deadline has been set for the same. It is expected that nearly 50 per cent of the new drugs in the next ten years will be introduced in a chirally pure form. Among the top-selling drugs today, cap­topril, enalapril, diltiazem, cefaclor and naproxen are chiral.

So the race is on to develop chiral technology for both old and new drugs. While various methods are available for chiral synthesis, the tricky part is to develop cost-effective methods. Ramarao ­believes that if we invest time and money ­in chiral chemistry now in India, we will soon be able to develop the necessary technology and join a select band. His work in the case of a new wonder drug, the immunosuppressant FK-506, has become internationally known – IICT is the only group that has been able to synthesise FK-506 outside the US.

It all began with an innocuous news item that said that a prominent politician from Tamil Nadu who had undergone an organ transplant in the US needed drugs worth Rs50,000 a year to keep him alive. The expenditure raised a storm in the Tamil Nadu assembly. Ramarao found it interesting enough to investigate what the particular drug was. It turned out to be a cyclosporin which is used as a post-operative drug. Following an organ transplant, the body normally tends to reject the new organ as the immune system is programmed to treat it as a foreign body and fight it. Cyclosporins suppress this immune sys­tem, thereby making the body co-exist with the new organ. But if the immune system as a whole is suppressed, the body becomes prone to attack by other serious infections. Thus, cyclosporin levels have to be closely monitored and the drug needs to be taken continuously.

A Japanese company introduced FK 506 as the next generation immunosuppressant which has a very high selectivity. In fact, without suppressing the immune system indiscriminately it makes the body accept the new organ. The drug has performed wonders. Recently, a patient at the Pittsburgh med­ical school needed a liver transplant but, as a human donor was not available and the patient was sure to die, the doctors transplanted a baboon's liver. They then treated him with FK-506; quite incredi­bly, the patient survived for 30 days!

FK-506 has 14 chiral centres in its structure. During chemical synthesis, one can go wrong at any of the 14 points. By contrast, thalidomide has only one chiral centre. That is why Ramarao and nCT, Hyder­abad, created waves in the world of organic synthesis when they suc­ceeded with FK-506. But, as Ramarao admits, "This is still basic research. We are far away from developing a commercially viable process for FK-506." However, BCT'S chiral technology for anti­hypertensive beta blockers, etc, has already been transferred to industry.

Chiral synthesis has three basic approaches. The first is resolving a racemic mixture of two crystals with different melting points by preferential crystallisation. The anti-typhoid chloramphenicol is separated thus. This is used widely in the industry but hardly 20 per cent of racemates appear in this form of mechanical mixture or 'conglomerates'. In many cases the enantiomers can be resolved by making the mixture react with a pure organic acid or a base of the right chirality. The racemates separate to form two diasteromeric salts, ie salts with two chiral centres where one chiral centre is identical but the other one is dif­ferent. The popular anti- TB drug etham­butol, phenyl glycine and the cardiovascular drug diltiazem are sepa­rated this way. These methods of resolution are industrially very widely used.

The second method is called asymmetric synthesis. Here one makes use of the fact that most natural products such as amino acids, carbohydrates, etc, are chiral. They are used as starting materials and as molecular templates to synthesise the required chirally pure compound. Another popular method is to use chiral catalysts, called 'chemzymes' by Nobel Laureate E.J. Corey. A large number of drugs like Vitamin C, semi-synthetic penicillins, cephalosporins, timolol, propranolol, diltiazem, thienamycin, ampicillin, dopa, naproxen, etc, are man­ufactured this way, using asymmetric synthesis.

The third method which is also creat­ing a lot of interest is enzymatic transfor­mations. Enzymes are naturally occurring chiral catalysts and are highly selective. The stages in this method involve fermen­tation to produce the required enzyme, enzymatic transformation reaction, sepa­ration of the enzyme without losing its bio-catalytic activity, and separation and purification of the product. One has to find economically viable conversions at all stages. Enzymes can be used to sepa­rate racemic mixtures as well as for bio­asymmetric synthesis.

Chiral technology will be important enough to attract funds for development in India too. Abbot Laboratories of the US, Lupin Laboratories and Cipla are funding research in this field at IICT. Ramarao is convinced that India, which has already shown its strength in organic synthesis both in academia and industry, can get into the big league in chiral tech­nology if sufficient investment is made in the field now.


Sales of chirally pure drugs crossed $35 billion in 1993


Class of Drugs 1998 world wide Sales ($ billion)

Cardiovascular 11.3
Antibiotics 10.8
Hormones 4.5
Neurological 2.0
Anti-inflammatory 1.5
Anti-cancer 1.0
Others 4.5

Total 35.6

How L N Mittal built his steel empire

Business India, May 10-23, 2004

Sultan of Steel

Lakshmi Mittal’s juggernaut rolls round the world building the most globalised steel MNC

Shivanand Kanavi

Last week a handful in India received a gold-embossed envelope from Summer Palace, Bishops Avenue, London. If the recipients surmised that it carried a summons from the British royalty, they were not quite correct. It was from a modern-day empire-builder, Lakshmi Mittal, better known as LN in India.

After jetting around the world in his Gulfstream IV, acquiring steel mills and iron ore mines, rolling mills, and coke ovens in Algeria, South Africa, Romania, the Czech Republic, Poland, Serbia, Macedonia, and so on, is Mittal inviting people for a coronation of sorts? Is the latest acquisition of a £70-million house at Kensington, next to the royals, a sign?

Perish the thought. Nothing so megalomaniacal for this very down to-earth steel magnate. A doting father, he was sending pre-invites for his daughter’s wedding this summer.
If a number of wannabes are disappointed at not receiving the letter, his own exuberance is only constrained by the size of the venue in Paris.

Despite being a hardworking and bottomline-driven businessman to the core, the family is his soft spot. He has groomed his son Aditya, 28, as an intelligent partner in building the most globalised steel company in the world. His executives, many of whom are former S A I L engineers, swear by his quick decision-making, tight control, and the management style of a benevolent patriarch.

Steel analysts round the world are going gaga at his juggernaut that has rolled insatiably through the downturn and the upturn and grown from 19 million tonnes in capacity in 2001 to 43 Mt in early 2004. However, his style and value systems are not unusual for a first-generation entrepreneur building a family-owned business in India. His distinction is that he has chosen the tough world of global steel as his playground, totally focused on it, and single-mindedly acquired an enviable group of assets round the globe. He has knitted these disparate assets together into a global and unusually nimble organisation, a creature never seen before in a flabby industry that was essentially national and inherently inert.

He might appear with boring repetition, in all sorts of ‘rich lists’ produced by newspapers, but there are always sheikhs and sultans that have fancier jets, yachts, and palaces than Mittal. To British tabloid-readers tired of the shenanigans of David and Vicky Beckham, it might provide more grist to the mill. But sooner rather than later, LN will be studied by the more serious students of business for having created a new paradigm in the steel world.

This summer LN and young Aditya Mittal will have a well-deserved break. In the last four years since we featured them on the cover of Business India, the duo have increased steel production in their group to 42 million tonnes a tad less than Arcelor, the European giant that has arisen out of the merger of Aceralia, Usinor, and Arbed, which has a capacity of 44 million tonnes. Already market sources are pointing out that this quarter the L N M Group might have produced more steel than Arcelor. But the rate at which the M&A division headed by Aditya is carrying on due diligence and putting in bids, L N M might become the largest steelmaker sooner rather than later.

When LN first popped up on the radar screens of international journalists after the acquisition of Chicago based Inland Steel in 1998, he was called “Carnegie from Calcutta” by T h e Wall Street Journal. Today the LNM Group has grown to three times Andrew Carnegie’s legacy, 103-yearold US Steel. But the king is blasé about it. “Becoming the largest producer of steel in the world is not an end in itself. That can happen now or a year later, but the vision that we have put forward of a globalised steel industry is the more important thing,” says LN. “He has been opportunistic and acquired cheap assets from the public sector wherever they were put on sale— isn’t ‘vision’ too grand a word to describe it?” asks an observer who does not want to be quoted. But if you observe how LN functions and what he has been repeatedly saying at international steel forums, it becomes clear that there is a method in his global meanderings and acquisitions.

They all fit into a grand strategy, and now his rivals have also started acknowledging it. In May 2000, when LN spoke at the American Iron and Steel Institute of the need for consolidation and globalisation of the steel industry, the industry bigwigs listened carefully. In fact too carefully. A year later the slumbering US Steel ventured out of the US and acquired a steel plant in Slovakia in a closely contested bid with Mittal. Last year a new group, International Steel Group, emerged in the US, which acquired three bankrupt steel companies. And in December 2003, in a global steel conference in Paris, Arcelor CEO Guy Dolle spoke Mittal’s language of globalization and Mittal was quick to take a bow in his keynote address later in the afternoon.

“I have seen the steel industry for over 30 years. It has become increasingly clear to me that there is too much flab, there is too much fragmentation, and too little attention to lowering the cost of production. If other industries like auto and aluminium saw the virtues of consolidation and the virtues of globalisation, why not steel?” he asks. Four years ago, when he had a capacity of 19 Mt, Mittal told Business India that he considered 35–40 Mt as a decent size. However, now that he has reached that size, he has raised the bar further to 80–100 Mt. It does not take a genius to guess who might get there first! Malay Mukherjee, president and C O O of the group, who is himself becoming a legend in the industry as Mr Fixit, is confident that in Central and Eastern Europe alone the group will add another 10–15 Mt at existing sites in the next 3–4 years.

On 1 May LN and Aditya joined in the festivities in Warsaw on the accession of Poland and Czech Republic and eight other new states to the European Union by participating in the European Economic Forum. And they were smiling. After all, the LNM Group has emerged as the largest steelmaker in Central and Eastern Europe (CEE), and sees a big upside in these countries joining the EU. First of all, access to Western Europe becomes smooth. But that’s not all; with lower costs the region might become the manufacturing hub for Europe and one expects more investments from Brussels for upgrading roads and other infrastructure in the region. Thus there is going to be considerable demand growth within C E E, which L N M is best placed to supply. The auto industry, which requires high-end steel products, is also increasingly shifting to this region.

“I consider L N M’s acquisitions in CEE very positive. These countries are likely to grow fast economically, have a growing demand for steel (e.g. in construction), and have relatively low labour costs compared to Western Europe. EU accession will affect plants in Poland and the Czech Republic. Romania is expected to join in 2007. These plants are well located to supply both C E E as well as nearby Germany and Austria,” says Roger Manser, editor of Steel Business Briefing.

“The engineering skills in Czech Republic and Slovakia can be favourably compared with those in Germany,” says K.A.P. Singh, a former managing director of the Bhilai steel plant and now COO of Ispat Nova Hut and Ispat Polska Stal. Clearly Arcelor, ThyssenKrupp, and Corus, the European steel troika, will spend many sleepless nights now that L N M has outflanked them.

In a bid to use the geographic contiguity of Czech Republic and Poland to his advantage LN announced a common senior management team for the Czech plant and four other plants in Poland. “Together they have over 10 Mt of steelmaking, common iron ore sources in Ukraine, and are literally sitting on coalbeds with excellent coking ovens. With marginal investments the steelmaking can be increased by another 5 Mt,” says Frantisek Chowaniec, former C E O of Nova Hut, who has become a key member of Mittal’s team in Central Europe. “These plants are closer to each other than Bhilai and Bokaro. So their operational amalgamation was a given, but the key is to improve quality of products and move up the value chain,” says Mittal. So Malay Mukherjee, K.A.P. Singh, and Frantisek Chowaniec are using their 100 man-years of steelmaking expertise in executing LN’s strategy in weeks, rather than months.

Was becoming the largest player in C E E fortuitous or was it really part of a grand plan? “It was part of a grand plan and we have worked hard to execute it,” says Aditya Mittal, vice-chairman of the group. Aditya came fresh out of Wharton on 1997 and was thrown in at the deep end by LN to handle the I P O of Ispat International N V on N Y S E. “I took the company public. That was my first project. That helped me in many respects. I learnt a lot about the company, I met up with all the C E Os, etc, did a lot of due diligence. It also came to be known as my project, which got me a lot of publicity and respectability. It was a smashing success and was called the ‘equity deal of the year’, etc. It was a $400 million offering and we raised $727 million. Creating Ispat International was nontrivial too. We had to satisfy Mexican G A P, Canadian G A P, and so on. It was a multifaceted project. It was followed by discussions with Inland and a year later we acquired it,” says Aditya.

“It is wrong to say that Aditya has only seven years of experience in the business. What about those 21 years prior to that, when he had steel for breakfast and lunch with his father?” asks B.C. Agarwal, C F O of Ispat International, half in jest. Agarwal is a very low-key member of the core team that runs the company and goes back 30 years with LN, starting in the paddy fields of Indonesia.

Chicago-based Inland was the most ambitious acquisition of the group. The publicly listed company was an icon of the American steel industry with a customer list that read like the who’s who of Detroit’s auto industry. It was an integrated 5 Mt plant with its own iron ore and coal mines and a large R&D and product development centre with over 120 steel technologists. The $1.4 billion deal made Mittal a major player in the US market.

Mittal’s management has turned Inland lean and mean, saving $270 million in annual costs and increasing hot metal production by another million tonnes. Today, with a 6,500- strong workforce producing 6 Mt, Inland is one of the most efficient integrated steel companies in the US.

Ironically, Mittal’s magic seems to have hurt him in Inland. Other nearby companies like Bethlehem Steel and L T V went bankrupt and were acquired by I S G after reducing the liabilities through Chapter 11 proceedings, whereas Inland remained afloat through all this turbulence and still carries a large liability in terms of workers’ pensions and benefits, thereby dragging the group’s profitability down. Will bottomline-driven Mittal get rid of Inland? “That is totally hypothetical. Inland is one of the better companies in the US and there are many intangible benefits like access to high-end product technology and an enviable customer list, he retorts.

Be that as it may, after the initial high of acquiring Inland came the downturn in the world steel market caused by excess capacity and stagnation or recession in demand. In the meantime Mittal tried his hand at buying a steel company in a collapsing, post-Soviet Kazakhstan in 1995. He thereby took over a huge human resource liability. Karmet, the third largest steel plant in the erstwhile Soviet Union, had 30,000 workers, the coal mines had another 30,000. The company had to supply hot water and electricity to Temirtau town and run a 100-room hotel, a T V station, a newspaper, a summer camp for 1,400 children of employees, a hospital, and so on. But the 5 Mt plant itself was a shambles, producing less than a million tonnes, its 300M W power plant producing less than 90MW.

“We learnt a lot about hidden costs and surprises in such acquisitions,” says Mukherjee, who was dispatched to set up camp there and bring the plant back to life. It is said that a former high official in the Soviet government had set up a shell company as a marketing consultant to Karmet and had made a fortune through dubious practices. It took some time for Mittal to discover the minefield and eliminate the leakage. Today Karmet, headed by N.K. Chaudhary, a former Hindalco executive, is reported to be one of the most profitable parts of Mittal’s empire. However detailed financial figures for plants in Kazakhstan, Indonesia and the new acquisitions in Algeria, Romania, Czech Republic and Poland are not available to be compared with other companies as Mittal does not disclose them under the guise that they are privately held by his family.

By 2000, however, it was clear that the opportunities in former socialist countries of Eastern Europe, if properly utilised, would lead to a preeminent position in emerging Europe. One of the drivers for easy political acceptance of privatisation of steel and coal in Eastern Europe was the carrot of accession to EU. Chapter 15 of the EU accession document forbids governments from subsidising their steel and coal industries. If they could not raise finance from international financial institutions like I F C or the European Bank for Reconstruction and Development (E B R D), these companies would be forced to lay off with heavy political risks to the governing dispensations. So the governments found it better to privatise. However, they stipulated strict liability criteria, which prevented asset-stripping. The new owners could not transfer other debt onto the asset.

The father-and-son duo took the risk and cast their eyes eastward. “I became the head of M&A and with a small team I started looking at various government-owned steel mills up for privatisation. The first to come up was the steel plant in Slovakia. We put in a bid that was financially sound and expected to win it, but soon found that a good financial bid is not enough. One had to win over the unions, the old management, the government of the day, and so on,” says Aditya. What he does not say is that Bill Clinton, the then US president, used his considerable charm to persuade the Slovakian government of the day to award the plant to US Steel.

“Those were tough days. The industry was in the dumps and here I was so-called head of M&A, with a failed acquisition to show at the end of the year!” says Aditya. “I learnt the most lessons in business during those days. My father’s vision and style were definitely inspiring.” To overcome the angst of failure and a business cycle, Aditya took to skiing and long distance running. His creditable performance in the London Marathon a fortnight ago, where he ran “the whole nine yards” of 42 km despite a serious knee injury suffered in a skiing accident, showed that finally the frenetic sprinter has learnt the loneliness of a long-distance runner. Today, with several successful acquisitions under his belt, Aditya surprises many a visitor with his boyish charm.

“Aditya is startlingly assured. At a recent Metal Bulletin – World Steel Dynamics conference in Paris, his answers to a series of questions were clear, concise, and cogent. The audience was obviously impressed. When his father rose to address the delegates at lunch on the same day, he was asked how he intended to top his son’s performance that morning. “I don’t intend to try,” Mittal said with disarming modesty. “I intend to follow him. He is the future.” Mittal got a round of applause, Metal Bulletin edit or Bob Jones recalls.

“My most challenging period was 2001. Steel was dead, capital was scarce, we were doing three attempts at acquisition simultaneously. In fact we were doing circuits — Monday to Wednesday I was in Romania (the cabinet would meet on Thursday), Thursday and Friday in South Africa, and over the weekend in Algeria (since they are closed on Friday). And then Annabas in Algeria happened in June, Sidex in July, and Iscor in August. Altogether it was 14 Mt! That was the most challenging and rewarding period. I also got promoted to V C,” Aditya grins.

Perhaps the most recent acquisition, of four Polish steel companies rolled into one entity for the purpose of privatisation, has been the most difficult and rewarding of all. It has added 6 Mt to the Mittal stable andfinally made Mittal the most formidableforce in Europe. But it wasn’t easy. Here too the Mittals encountered US Steel and the persuasive powers of George W. Bush. In the midst of war in Iraq, Bush made a stopover at Warsaw and not only persuaded Poland to provide troops for peacekeeping in Iraq but also did his bit for US Steel. So certain were observers of another battle lost by Mittal after Slovakia when confronted by the White House, that The Independent of London carried a bylined story on 25 May 2003 with the title ‘Bush beats Mittal at his own game’. Leaving nothing to chance, the US ambassador to Warsaw met the Polish union leaders 11 times to help them make up their minds. But all the high-pressure lobbying eventually backfired. The Mittals won the bid.

They had learnt their lessons from Slovakia well. They assembled a nine member negotiating team which included Polish American executives from Inland; Chowaniec, the C E O of the Czech plant across the southern border to reassure the Poles that the Mittal weren’t destabilisers; union leaders from other plants to show that they deliver what they promise in terms of the social package; and so on. In the final analysis, the American artillery proved counterproductive. The Poles must have thought, “If this is the pressure before privatisation, what will we have to go through afterwards, if it is sold to the Americans?”

“Poland has taken us to new levels in the corporate world. The press, unions, and the government scrutinized our organisation extensively technical competence, corporate governance, people, and so on. We came out with flying colours. Today nobody can say that L N M is a secretive group that can only take over run-down companies. We had a better financial offer and a fine track record of turning companies around in more than nine places in different cultures and societies,” says Mukherjee proudly.

However, the acquisition in Romania led to a lot of controversy. Sections of the British press went hammer-and tongs at Mittal and Tony Blair. They claimed that Mittal’s donation of £125,000 to the Labour Party was a quid pro quo for a little help from Blair in pushing the Romanian government in favour of Mittal. “Finding an opportunity to take Blair’s squeaky clean image down a notch or two, the press went haywire. With a pinch (actually more like a handful) of bigotry against Asian businessmen, they tried to dig up all kinds of dirt against him,” says a P R consultant from London. Lakshmi Mittal himself learnt about the campaign at a party in Delhi, when a well informed Atal Behari Vajpayee commented, “Lakshmiji you seem to have shaken Blair up.”

But the dirt hit the fan soon after the friendly banter. The Mittals refused to comment on the affair and remained incommunicado to the press. After all, the donation to Labour was an open affair publicised on several Websites that track such things. The letter from Blair to the Romanian P M pushing Mittal’s case too was a routine one that all western governments do for their businessmen. But the British press found fault with Blair since they alleged that Mittal was an Indian and not British, and that though he runs his empire from London the companies themselves are incorporated in Holland, and so on.

“The whole thing was nonsense. Privatisation of Sidex was one of the most transparent processes. L N M was the only one left standing at the end of it and naturally won,” says Chris Beumann, senior advisor to E B R D, an international financial institution formed with contributions from 60 governments with the express mandate to help former Eastern European economies move towards privatization and market economies. The bank has funded over 100 privatisation projects in Eastern Europe deploying 3.5 billion. Mittal has nothing more to add than a cryptic “The whole thing makes me sad.”

Be that as it may, it is one thing to acquire a company but another to successfully turn it around. Here the engineering skills of Mukherjee and his team have played a major role.
Mukherjee, an IIT Kharagpur alumnus and former general manager at Bhilai, has become a globetrotter who has fixed problems with the direct reduced iron (D R I) plant in Mexico and the whole plant in Kazakhstan, getting out of the barter system that was bleeding Sidex in Romania, getting outdated twin-hearth furnaces in Algeria up and running, and so on.

“India has a huge resource of highly skilled and knowledgeable engineers, educated and badly paid in the public sector. The Mittals pick the best managers – even ones who might appear to be past retirement age – and pay them handsomely. But these managers have to perform and perform brilliantly in some of the world’s most unpleasant and dangerous environments,” says Jones of Metal Bulletin.

“The body of technical knowledge that exists in the group is to be found nowhere else in the world,” says director (continuous improvement) Bill Scotting, a former McKinsey & Co veteran. “Blast furnace relining, D R I, Corex, billet casting, ingots and slab casters, thin-slab casters, and a variety of rolling mills... The list is endless. A veritable school of steelmaking exists here,” says Scotting. “The strength of the group is that it not only uses its global operations to purchase raw materials at the lowest cost and sell the right mix of products at the highest value but also pools its knowledge to benchmark performance and to fix technical problems in any of the plants,” he adds.

When Business India visited Ispat Nova Hut in the Czech Republic, this factor was amply evident. The Steckel mill in the plant went down, disrupting production. The mill, built at a considerable expense of over $275 million by the Czech government, has been a continuous source of problems in an otherwise well-maintained plant. The American contractor went bankrupt in the middle of commissioning and caused untold delays and problems. Having had experience with a similar mill in its Quebec plant, LNM was able to get it up and working when it took over. On the day of this writer’s visit, an electronic card responsible for communication between two parts of the mill went kaput. It was diagnosed as due to problems in the embedded software. However, no vendor was available to fix it. The top management pooled their resources and had wires burning across the globe, restoring the mill to full functioning in 24 hours — a matter that could have taken weeks in any other company, waiting for an expert from the vendor.

In fact the turnaround and successful operation of every single acquisition has been a result of using such global expertise. The Algerian plant Annabas, for example, was built by the Russians, but also had considerable French technology. The blast furnace and sinter plant were French, while the steel melt shops were Russian. It was an isolated country. External help from vendors was not available because of riots and religious fanaticism, etc. A new plant that was commissioned in 1994 ran for two days before a problem arose and the people who built the plant did not come. The plant had 400 experts from Russia. But Ispat hands who had plenty of experience dealing with Russian experts in Bhilai and Bokaro dealt with the issues appropriately. They also used their own knowledge of Russian and Russia to source spare parts. Experts from plants in France and Quebec also arrived and unraveled the problems. It all helped. A plant that produced barely 700,000 tonnes now makes 100 per cent more.
Tying up appropriate raw material supplies will soon lead to another blast furnace becoming operational here. Today the government showcases it as a successful privatization and L N M has become the dominant player in the Maghreb region comprising Tunisia, Morocco, and Algeria, where considerable developmental activity is going on.

Then came Sidex. A huge plant where the shop floor knew how to run the plant but did not have any support from the management. It was driven by the Mafia. Everybody was taking away whatever he could. It was said that there were many millionaires in Galati, while the plant lost a million dollars a day on an average. So straightening out the commercial side was important. There were operational issues like tying up iron ore, coal, electricity, and gas as well. Narendra Chaudhary, another former Bhilai hand who had earlier managed the Kazakh plant, was transferred here. The local plant management was sent to other plants in the group to learn innovations in maintenance practices, etc. The plant had 27,000 people, 9,000 of whom accepted a VRS. The better lot in the old management were empowered, while corrupt ones were sacked. When the new marketing team from L N M itself caught the virus of corruption, the whole team was sacked.

Today the government talks to LNM first when any new thing comes up for privatisation. Of course there is still competitive bidding, but L N M’s credibility is very high. In fact the group bought four more downstream plants recently in Romania, thereby becoming a very strong player in steel tubes for the global oil and gas industry. On the other hand two plants, which had been privatised to a US and an Italian group, are now closed. But Sidex has seen its stock rise 350 per cent after privatisation. No wonder that E B R D officials like Chris Beumann don’t hesitate to sing paeans to Mittal. The success in Romania has had a snowballing effect and played a major role in the acquisition of the Czech and Polish plants. The local bishop in Galati, Romania, is also happy as Mittal respected his wishes and built a church for the community near the plant.

In South Africa, apartheid and international isolation had left a good plant behind international norms of efficiency. It was part of a coal mining company and was subsidised by the mines. So the government thought it would be better off by demerging the two and bring in a strategic investor for steel. L N M bought 30 per cent of the equity from the market and was offered stock in place of a consulting fee for every rise in profitability. As a result L N M today owns 49.9 per cent of the company and is waiting for the go-ahead from the Competition Commission to acquire a majority stake. The stock of the company has gone up from six rand to 37 rand, which in dollar terms is even more impressive, considering that the rand has appreciated by 100 per cent against the dollar in the interim. Besides increasing the shareholder value of the government’s remaining holding, Mittal has further endeared himself to the ruling A N C by appointing a black African as chairman of the company for the first time in its history.

Then came the Czech Nova Hut, which was a good plant but the management had miscalculated the returns on investments on the Steckel mill. The other source of problems was the outdated twin-hearth furnaces that exist only in Bhilai, outside of Nova Hut. This technology not only takes 5–6 times longer to make steel, but also needs constant expert supervision. Tuning the plant up and replacing the old barter system with international marketing has not only led to increased profitability of over ...80 per tonne within a year, but the stock of Nova Hut has also gone up 750 per cent.

While the Poland story has yet to unfold, Mittal is proud that he is restoring the glory of a plant in whose guest book Jawaharlal Nehru wrote on 25 June 1955, “This is a magnificent enterprise which deserves a much longer visit than I have been able to give it. I wish I could see it more thoroughly. And all this has grown up where there were fields four years ago. I congratulate those who built it.”

With raw material prices shooting up, everyone in the steel industry is realising the truth in Chanakya’s Arthashastra from the 4th century BC: “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.” (Chapter 2, Section 12). Situated in the midst of Magadh, an empire that Alexander made friends with due its prowess in iron technology, Chanakya very well understood the economics of the metal industry.

Mittal has focused on tying up raw materials by acquiring as many mines as possible. Last week he bought an iron ore mine in Serbia and now his teams are scouring Ukraine, Russia, and Iran for iron ore and Central Europe for coal. The other focus has been acquiring downstream mills as in Romania and Macedonia, while building a new one in China.

Last year the group had a profit of $2.2 billion on sales of $12 billion. Considering that the privately held part is virtually debt-free, that’s a lot of money. But this year, with higher sales and the acquisition in Poland, Mittal has forecast sales of $16 billion. Being the most integrated large steel company, profits too are expected to be higher. However it is to be noted that the public company Ispat International is trading at $11 (the issue price was $27) at a P / E multiple of 21(Tisco is trading at a P/E of 8.5).

“Today we have enough experts to run steel plants, so we are looking for talent elsewhere,” says Mittal. This year the IIMs in India saw the L N M Group visit their campuses for recruitment. “The CEO of our Mexican plant is from the chip industry. The one in Kazakhstan is from the aluminium industry. I am looking for cross-pollination now,” adds Mittal. With more and more experts acknowledging Mittal’s skills in running the first steel M N C, he shouldn’t have any problem attracting talent from the top business schools of the world.

While Asia and China in particular have led the bull-run in the steel industry, Mittal’s eyes are firmly on the EU as the emerging economic giant. And for that nobody is better prepared than he. “Central and Eastern Europe is definitely one of the best places to make steel in the long term. In fact, metallurgy seems to be vanishing as a science and art in the developed world. It would not be surprising if we keep it alive here by building a fine research institution right here,” says Mukherjee.

As for forays into his motherland, Mittal has so far confined himself to philanthropy in the form of building a hospital for earthquake victims in Bhuj and an IT institute in his home province of Rajasthan and a technology institute for women in Mumbai.But what about steel? “Whenever the Indian government is serious about privatising SAIL we are ready to participate,” he says.

“My theme at this time is how to make the steel industry sustainable. Actually it is very simple. The day every steel CEO sees making money as his objective the steel industry will become sustainable through downturns and upturns. We have been able to provide leadership in consolidation, globalisation, and low-cost production, and this is being recognised. Whether we become No. 1 or remain No. 2 is not important, but the leadership we are providing is. We have shown enough entrepreneurship now we have to build an institution,” says Mittal looking forward, which is of course easier said than done.

Commenting on the acquisition of a steel plant in Trinidad by Mittal, Business India wrote 16 years ago (14 November 1988): “A new Indian multinational is born, shall we say!” Last year the Confederation of Indian Industry had Building the Indian MNC as its theme. In a short period of time Lakshmi Mittal has provided to Indian businessmen one successful model of building an M N C and that too in an industry where none existed before. May he inspire a few more.

Knowledge as Business

Business India, Oct 9-22, 1995

The Know Business

Can India become a player in the global knowledge market? Yes, and the trend has already started. Through an extensive investigation of knowledge based Indian business, Business India discovered companies and labs that view the opening up of the Indian economy as an opportunity.

Shivanand Kanavi

Suddenly, there is an air of excitement in a number of Indian companies and research centres. But not only excitement –more importantly, there is a curtain of silence, one that evokes secrecy.

If you walk around an R&D centre these days and ask casually what’s new, the surprising response could be the lack of an answer. All one gets is polite smile and, “Sorry, this cannot be disclosed.” It takes an enormous amount of legwork, ingenuity and creative persistence to get information on business-oriented issues. Why has this veil dropped, in organization that would brag about their lab scale results being “break throughs in technology”, only a little while back?

The answer is, because there is a new understanding of the concept of wealth today. There was a time when only tangibles counted, but in this changing world, ideas and knowledge increasingly translate into hard cash. A design, and idea, a novel chemical entity, a new testing procedure, a probe to identify the presence of certain biological molecules, a way to increase the yield an efficiency in a reaction, identification of a need in the software/hardware market which can be satisfied by a suitably designed new product –the list goes on and on. All such kinds of knowledge, and more, mean hared cash and that too in any currency in the world.

Transnational corporations, beleaguered by rising R&D costs and diminishing returns, have been on the prowl for new technology, in order to stay globally competitive. In the last three-four years, a quiet change has taken place. India has become an important destination on the itinerary of globe-trotting executive vice-presidents sourcing global technology for their giant employers. Abbott, Acer, Akzo, Du Pont, Eli Lilly, FMC, General Electric, Haldar Topsoe, Hewlett Packard, Hughes, Lum­mus, Motorola, Nova Nordisk, Smith Kline Beecham, Telstra, and Unilever are among the notables who already have R&D alliances in place here.

Indian industry, led by the pharmaceu­tical and agrochemical sectors, does not lag behind in its support of R&D. Even Reliance, which once prided itself in buy­ing global scale manufacturing plants for commodity chemicals, apparently ignor­ing R&D, now highlights its joint technol­ogy development with National Chemical Laboratory (NCL) Pune, in the latest (1994-95) annual report. The NCL process, involving a novel non-polluting zeolite-based catalyst to manufacture LAB (linear alkyl benzene), is being tested in a pilot plant at Patalganga. If successful, it will put Reliance on the global technology map again - but this time as a technology supplier.

Once knowledge becomes marketable, it has to be protected as property. But even while the law is taking its time to conform to international norms, a working arrange­ment has come into being with the Council of Scientific & Industrial Research (CSIR) framing its own intellectual property rights (IPR) policy. Today its labs are signing contract research and joint technology development agreements - with confi­dentiality clauses written in - with Indian and foreign clients like Abbott, Du Pont, FMC, GE, Nova Nordisk, SmithKline Beecham and others.
What has catalysed these stirrings among Indian companies and labs, which now aim to become global technology players? Very simply, it is the opening up of the Indian economy. So far, India has been known for manpower export, a thin cover for what is otherwise known as "body shopping". In the meantime, Indian industry focused on importing obsolete, "proven" technology and reverse engi­neering, while politicians back-patted themselves with pointless claims of having built the second largest scientific-technical manpower base in the world. But today, the scene is changing.

Externally, economic stagnation in North America, Europe and Japan has led to intense competition among giant corpo­rations. To stay ahead of one's peers, acquiring newer and newer technologies rapidly has become a must. And strategic alliances are the key to rapid acquisition.

As Dr David S. Weir, vice-president (global technology) at Du Pont, explains, "Self-sufficient, independent R&D efforts are unlikely to meet today's demands, even for giant corporations. Our search today is from a global perspective, rather than being country-specific. We have tar­geted India for special emphasis and cre­ated a separate technology office. For example, our tie-up with IICT (Indian Institute of Chemical Technology) Hyder­abad, to screen the molecules they synthe­sise for agrochemical activity, might lead to the joint development of new agrochemicals with patent and licensing rights shared by both. It is a win-win agreement”

If IICT produces a molecule with novel molecule with novel agrochemical applications, Du Pont will run it through its elaborate system of screening. It will take all te necessary steps to develop it into a product and register it as a safe agrochemical in different countries. The entire process is both expensive and time consuming, taking anywhere between four and six years. IICT will have the marketing rights for India and the surrounding region, while Du Pont will have the rights for the rest of the world. On top of this IICT will get a royalty of about 15 per cent.

The most articulate champion of research as business is CSIR director­-general Dr R. A. Mashelkar. Before his recent elevation to this prestigious position, Mashelkar headed the NCL. Much before the events in 1991 in Moscow, Berlin and New Delhi, he put globalisation of Indian R&D on the agenda, and started a series of changes there. Mashelkar is not only an internationally well-known chemical engineer and an authority on polymer engineering, he is also the most well-known Indian R&D manager. He transformed NCL very rapidly into a model R&D centre, one that thinks globally.

Today, NCL holds the highest number of international patents in India. A culture has been created where PhD students file international patents when they find some­thing interesting. Patent holders are given awards and peer recognition at NCL. In fact, nine of the 21 people felicitated by NCI. at its last foundation day for authoring US patents were PhD students. Because of the patents, MNCs have made a beeline to NCI. for contract research and even joint technology development, together with sharing intellectual property rights, in catalysis and polymers. GE, Du Pont, Akzo and Neste OY are among NCL'S better known clients and collaborators. And it is beginning to payoff. NCL'S foreign exchange earnings through technology sales and contract research exceed $2 mil­lion a year.

This is quite a change from earlier attitudes. There arc many cases of missed opportunities due to the earlier emphasis on publishing papers rather than developing marketable technol­ogy. Even realising what is patentable and what is not at the right time can lead to money flowing in. For exam­ple, the DNA fingerprinting tech­niques developed by Dr Lalji Singh at the Centre for Cellular & Molecular Biology at Hyderabad have not been patented despite being 30 per cent faster than others.

A good example of a sudden wind­fall as a result of holding original patent rights for a new drug molecule is that of Centchroman. Centchroman ­a non-steroidal oral contraceptive developed by the Central Drug Research Institute (CDRI) at Lucknow - recently attracted international attention. Due to its chemical nature, Centchroman doesn't have the side effects that steroidal contraceptives, ­which affect the pituitary gland ­have. But like other oral contracep­tives, it has a limited market in India, mainly due to cultural reasons. Recently, however, scientists discov­ered new uses for Centchroman that promise to bring in millions of dollars for the CDRI.

Firstly, Centchroman can be used to treat breast cancer. In terminal cases it has been found that the drug reduces cancer growth. Not only that, it often can stop fur­ther growth and at the least improve the patient's profile. The human trials for this activity arc at an advanced stage.

Again, it has been found that Centchro­man has been effective in halting brittle­ness of bones -- which can lead to fractures, or worse -- due to old age (osteoporosis). Swedish pharma company Nova Nordisk, which identified the activ­ity, rushed to ("DRI for joint ownership of a use patent and licensing.

Cases like this illustrate why one of the first things Mashelkar did when he took over C:SIR was to sit together with all the laboratory directors (there are 39) to iden­tify existing patentable content in their knowledge base.

Indian R&D’s thrust so far has been organic synthesis and process develop­ment. The strength of companies like Ran­baxy, Lupin, Dr Reddy, Cipla, SOL, Gharda, United Phosphorus, Excel and others has been in process development. While this has been reverse engineering in most cases, totally new processes, leading to international patents, have also been developed.

Specialty chemicals involve difficult process technology, novel catalysts etc. But one can at relatively low capital cost, build a 1.000 to 2,000 tpa plant to achieve global scales. Thus, specialty chemicals have become a playground for many Indian entrepreneurs and laboratories.

Ranbaxy's SLlccess with the compli­cated synthesis of Ccfaclor has become an industry legend. The story goes that Dr J.M. Khanna, head of R&D at Ranbaxy, went to the US patent office with 18 differ­ent processes for Cefaclor, each time fail­ing to prove novelty. Not disheartened, he continued to work at the proolcm, and the 19th time, produced an acceptable solu­tion. All that diligence and hard work is paying ofT. Says an industry observer, "If Ranbaxy can spend Rs40 crore a year today on R&D. it is the money from Cefa­clor that they arc ploughing back. Eli Lilly itself buys aoout SI) million worth of Ccfaclor from Ranbaxy."

Eli Lilly, the original inventor of Cefa­clor, was impressed by Ranbaxy's abilities to resynthesise and compete with it in the generics market once the drug went off patent. After all, Cefaclor is the biggest selling anti-bacterial today. The result was a joint venture with Ranbaxy. The relation­ship is strengthening, and today Eli Lilly­-Ranbaxy is investing $100 million in manufacturing and marketing under a joint brand name, as well as joint R&D in process development.

IICT is today minting money from process development. It expects to earn close to Rs 17 crore this year from tech­nology fees and sponsored research. That's more than half its budget! The institute has developed numerous processes for agrochemicals and pharma­ceuticals and its client list for full tech­nology packages, including process know-how, plant design and performance guarantees reads like the Who's Who of the Indian chemical industry.

Even commodity chemical manufac­turer Herdillia Chemicals followed the Strategy of specialty chemical development, under the guidance of well-known chemical engineer M.M. Sharma, FRS. Today, its isobutyl Ibenzene and diphenyl oxide plants compete with giants in the global marketplace.

Having widened their horizons to the global market, Indian entrepreneurs, even small and medium ones, are ready to take big risks on technology development, the gamble is worth it; the rewards are very high if they succeed. Herdillia invested Rs20 crore to 30 crore in process technology five years ago- a move that was considered bold at that time. But, today, R&D efforts are backed by ten times that amount.

For example, even a small Rs50 crore company like Adarsh Chemicals has teamed up with Indian Institute of petroleum(IIP), Dehradun and NCL and is planning to invest Rs200 crore in new technology. Part of the project – cloaked under a blanket of secrecy – is IIP’s patented process on the single-step oxidation of cyclohexane to produce and adipic acid which is being scaled up at Adarsh’s pilot plant near Surat. The foreign collaborator is the well-known international technology vendor, Lummus of the US.

Adipic acid is the crucial intermediate for Nylon 6,6. if successful, IIP and Adarsh will become global players in adipic acid technology. The existing technology, owned by Du Pont, is a two-stage one and has the added disadvantage of using the environmentally-dangerous concentrated metric acid. IIP’s process, developed by Dr. S.K.Gupta and his team, uses a non-poluting catalyst. The importance of the development may be gauged from the fact tat just prior to the signing of the agreement between Lummus, IIP and Adarsh, a senior DuPont executive camped for three days at Dehradun, trying vainly to swing the deal the DuPont way till the last minute.

Dr.V.P. Kamboj, director, CDRI, reinforces the oint about techies’ readiness to take risks. He relates an example, “today we have a partner in drug development –whose name we cannot disclose – who has joined us at the lead molecule stage. Normally, industry wants tie-ups at the much later stage of human clinical trials, where the possibilities of success full drug emerging are much higher. Whereas this collaborator is ready to spend crores of rupees and finance the elaborate and risky process of new drug development. The notable thing is, today he is not even among the top five Indian pharma companies!”

Others – Ranbaxy and Dr. Reddy’s Labs(DRL) among them – have also taken the plunge into basic research, investing crores of rupees in new drug development . the irrepressible Dr Anji Reddy has publicly declared his ambition of making DRL the first Indian company to develop a new drug. Recently, he filed four Indian and international patents for new molecules wit promising levels of anti-cancer and anti-diabetic activity. Trials in the UK are under way currently. If successful, his ambition may be realized. Global pharma companies are negotiating with him for alliances and licensing rights.

One route with less risks but with large benefits. If cleverly exploited, is that of contract research. Contract research means conducting a given experiment or carrying out R&D as per the client’s instructions. Why a particular project is to be undertaken or for what a synthesised molecule is needed is not told, and the fol­low-up information is also not supplied. This way, MNCS can exploit cheap intel­lectual labour in India. But Mashelkar championed it in NCL, believing that it would help upgrade project management, delivery schedules, documentation and similar disciplines at NCL. The results are there to be seen. Clients like GE and Du Pont keep coming back. In fact, they are now signing more lucrative joint technol­ogy development contracts, with intellec­tual property rights shared by both.

A similar development occurred at Biocon, a small biotech company (1994-­95 turnover: Rs30 crore) based in Banga­lore. It started as a IV between an Irish biotech company and CEO Kiran Mazum­dar in 1978. From value-added exports, Mazumdar soon shifted to developing skills in solid substrate fermentation. The technology was then closely held by Japanese companies, who ruled the roost in specialty enzymes. Today, Biocon is a significant player in this field, with exports of over $3 mil­lion a year. Mazumdar later set up an independent com­pany, Syngene, to exploit her skills in genetic engineering and peptide synthesis. Ini­tially, Syngene synthesised molecules on a contract basis. It has grown already, using skills in fungal products, and today screens its own mole­cules for therapeutic activity. The result is that Syngene is hotly chasing lead molecules.

At times, a technological adversity can be converted into an oppor­tunity. For example, most catalysts used in chemical processes are highly polluting. With environmental consciousness grow­ing in the West, there is greater and greater demand for' green technologies' - that is, process technologies that are less pollut­ing. Indian expertise in the non-polluting zeolite clay-based catalysts is now paying off, as they increasingly replace the tradi­tional ones. Paul Ratnaswamy and his group at NCL have become a frontline group internationally in zeolite catalysts. NCL and IIP are two labs that are making hay while the sun shines on zeolites.

Again, in the 1960s, thalidomide, given to expectant mothers to bring relief from morning sickness, was discovered to produce horrendous deformities in their babies. Further investigation into this medical tragedy led to the realisation that there are two mirror images of the thalidomide molecule. One has a benefi­cial effect while the other causes deformi­ties. Thus chiral synthesis, that is, synthesising the correct mirror image of the molecule selectively, became a chal­lenge. Today, Indians have acquired con­siderable expertise in chiral synthesis. Former director A.V. Ramarao built up a world-class group at IICT, Hyderabad in chiral synthesis.

Similarly, using their biotech expertise, Dr Qazi at the Regional Research Lab (RRL), Jammu and Dr Bhalerao at IICT, Hyderabad have come out with novel fer­mentation-based enzymatic processes for the chiral synthesis of drugs, work that is attracting attention. Qazi has just signed a contract for transferring the technology to synthesise chirally-pure Naproxen to a Hyderabad-based drug company that is the largest manufacturer of the drug. Enzymes, being themselves able to distin­guish between right handed and left handed molecules, selectively catalyse the synthesis of one of them. Enzymatic processes are one route to chiral synthesis, but they require economic production of sufficient quantities of the enzymes. Qazi and Bhalerao's work will be very useful here.

An adverse situation that was converted into an opportu­nity is that of Gugulipid - a cholesterol-lowering drug developed by CDRI. CDRI'S technology for isolating gugul­sterone from a plant resin was passed on to Cipla and a French company. But since the resin is not available now, the French are unable to manufacture the drug. Cipla chairman Yusuf Hamied, an excellent synthetic chemist himself, turned this adversity into advantage by developing the synthetic route for making gugulsterone and patenting it internationally. In the absence of plant material, there is no option but to develop synthetic routes if possible, or develop simpler synthetic analogues and convert them into drugs.

What about exploiting our vast bio­diversity - ranging from Himalayan flora and fauna to tropical rainforests? Multinationals have exploited India's plant wealth and developed a number of new drugs, but Indians themselves have not succeeded in doing so. Even the herbal drug industry is plagued by numer­ous problems like lack of standards, lack of proper technology for growing medici­nal plantations and hence lack of appro­priate plant material in sufficient quantities. But with an increasing number of people in India and abroad ready to try herbal medicines, the industry is expected to grow from the current Rs800 crore to Rs4,000 crore by 2000 AD. We must take steps to protect the intellectual property of our traditional medicinal systems.

Prof S. S. Handa director of RRL (Jammu-Tawi) and his associates' unsung work in plant-based drugs at RRL, Jammu is very important. They are verifying the claims made in Ayurvedic texts about ail­ments for which modem medicine has no clear-cut solution yet, such as arthritis, rheumatism, diabetes, liver disorders etc. Once a claim is verified, the formulation can be standardised, the herbs involved can be properly classified and even grown so that it can be marketed reliably . ''Today, the industry largely relies on the bazaar for these plant materials. Whether the species is right, in what condition it is stored, what disease the plant has had, etc, nobody checks. One often sees herbal godowns where rats and other pests have been having a field day," says Handa.

Parallel to its herbal drug programme, RRL is also involved in isolating both the most relevant herb and its active com­pound from ayurvedic cocktails, so that modem medicines can be developed from them. The results obtained by RRL in immuno-modulators, arthritis, hepato­protectors, etc have been very encourag­ing, and there is a possibility that new drugs might be developed. The work being done by this low-profile team in Jammu is not only first-rate but even heroic, when one realises that they have been caught in the midst of political turmoil. Its scientists have even been taken hostage by militants. (They were kept in custody for 46 days before being released in an exchange).

While catalysts and specialty chemi­cals like drugs, agrochemicals and others have been at the front line of Indian technological development, where are computer software and telecom, an essen­tial part of today's technological revolu­tion at the global level ?

"With all these high-profile computer professionals, Indian industry has not even produced a video game that can be sold worldwide!" sneers one industry observer. Points out another, "All the big business groups in India - Tatas, Birlas, Mafatlals, Mahindras, etc - are in the infotech busi­ness. In fact, the Tatas have at least five companies in the field. The absence of an Indian product in the global market implies that traditional Indian business­men cannot be pioneers in infotech."

Despite phenomenal growth rates, it is a fact that the Indian software industry has largely sold knowledge workers in its body shopping exports, rather than take risks and invest money in product development. Interestingly, it is relative newcomers like Wipro, Ramco and Infosys that have developed products that are making a name in the global market.

Every infotech and communication multinational worth its name is rushing to India to set up software development cen­tres. This is no different from body shop­ping. But it seems as though it will have secondary positive effects. One of the problems in Indian software product development has been the distance between users and developers. Knowledge and nearness of the market is absolutely essential to come out with a product that will succeed. The R&D arms of MNCS coming to India are thus indirectly bring­ing the market nearer. Soon we will see individuals coming out of these establish­ments and setting up their own "garage operations" as start-ups.

Signs of this emerging trend are already visible. A number of small software com­panies are coming out with niche products. In fact, since body shopping and project exports are manpower-intensive, they can only be done by large software houses. The only way smaller companies can survive is through innovative niche product develop­ment. Thus, what happened in Silicon Val­ley in the US might well repeat itself in India, albeit a quarter-century later. In infotech, the constantly changing technol­ogy and market needs allow latecomers to join in the gold rush.

"We have gone through the stages of body shopping, offshore development, India development centres (captive R&D groups dedicated to a client but located in India), product development on contract, etc, to reach a stage where we are devel­oping products of our own. Even now, it is not that all the earlier stages have stopped. However, their relative impor­tance will keep changing," says Dr Srid­har Mitta, president (technology), Wipro Infotech. With a new global partner like Acer in a JV, one will not be surprised if Wipro will be one of the first to design the architecture of systems based on the still­-experimental P6 (Intel 686 chip)! Wipro has come out with innovative products such as a Pentium-based symmetric processor, a LAN switch meant for data communication based on the Asymmetric Transfer Mode technology and a remote access LAN server. "The real money is in communication software products where we can make an impact despite being latecomers," comments Ashok Soota, president, Wipro group. The convergence of computers, communication and consumer electronics in multimedia and internet will provide numerous opportunities for the bold and farsighted.

Dr Bishnu Pradhan, executive director, C-DOT, is pleased that the industry is finally turning towards what he has been saying for quite some time about commu­nication software. Having suffered desta­bilisation at the end of the 1980s at the hands of politicians, and then further shaken up by the opening up of the telecom sector, C-DOT has finally emerged with an aggres­sive strategy. Pradhan's game­plan is to concentrate on developing telecom software while continuing the develop­ment of better and cheaper exchanges. The completion of service checks for the 40,000­line C-DOT MAX switch in Ban­galore signals that C-DOT's original mission has been more or less accomplished. The chal­lenge now is to develop the soft­ware and hardware to make the C-DOT switches ISDN-compatible. ISDN will make a single telephone line capable of carrying voice, fax and computer data. C-DOT is expected to complete this in three years.

C-DOT has also made important advances in developing switches that can provide value-added services like the 1­800 toll-free calls, credit card verification etc. The ccs-7 (Common Channel Sig­nalling) recently developed by C-DOT will help separate the switching function from the intelligent functions within a switch. This will make it possible to upgrade its exchanges to provide new value-added services the very next year. Pradhan has not been averse to forging alliances with Telstra, Motorola etc either. C-DOT's switches are still proba­bly the cheapest in the world and Telstra plans to use its rural automatic exchanges to link the scattered communities in Aus­tralia. C-DOT is also developing low-cost wireless in local loop telephony, meant for difficult terrain where physical cabling is not cost-effective.

Through its switch technology, C-DOT has earned royalties worth over Rs60 crore. Meanwhile, it is being continuously raided by multinationals for trained personnel- many admit they are the best in telecom in India, with lucrative pay packages. Pradhan is working hard to corporatise C-DOT to gain flexibility in business plans, salaries and become more market savvy.

While Wipro and C-DOT are probably the tip of the iceberg that will surface in the next five years, the Indian Space Research Organisation (ISRO) is already making waves in the sky. Intelsat, the global satel­lite communication consortium, has leased II C-band transponders on the Indian communication satellite Insat-2E (to be launched in 1998) that will yield a revenue of over $100 million to the department of space over 10 years. In another area, remote sensing, the painstakingly-built expertise in designing, building and launching Indian Remote Sensing satel­lites and developing the infrastructure for remote sensing software will make India the lead supplier of remote sensing data to the world market in three years. The alliance with the marketing company, Eosat of the US, is expected to help ISRO achieve this target.

The near-perfect launch of PSLV-D2 last October, if followed by another one in early 1996, will make it possible for ISRO to launch 2.5 to 3 tonne communi­cation satellites in the Low Earth Inclined Orbits. That might come in handy for a host of satellite-based global telecom schemes, including Motorola's Iridium, which can then avail of ISRO'S launch services. Meanwhile, ISRO is quietly negotiating lucrative subsystem supplies to major satellite builders of the world like Hughes, Matra-Marconi, Loral etc. Despite the shock suffered by a debilitat­ing media campaign of innuendo and sus­picion in the so-called 'ISRO spy scandal', ISRO'S low-profile scientists and engineers are producing a remarkable hi-tech success story, built painstakingly out of knowledge bricks.

At more perceptible altitudes is another success story in engineering and design in the making. And that is in civilian aircraft design. Indian aerospace engineering, which produced such internationally ­known engineers as S S Dhawan, R. Narasimha and others, is finally taking the plunge into the lucrative civilian aircraft market. The National Aerospace Labora­tory (NAL) in Bangalore has already come out with a pro­totype of a two-seater train­ing plane, the Hansa, targeted for flying clubs.

Now, NAL has developed a complete design package for a 14-seater aircraft. Named Saras, the aircraft can be configured as an air ambulance, a passenger air­craft, an eight-seater execu­tive plane and so on. There is an estimated demand for about 300 such planes in India over its manufacturing life cycle. A Russian design centre, the Myasishchev Design Bureau, which was in the midst of designing one itself, saw the superiority of the NAL design and teamed up with NAL to complete the package. Russia itself will need around 1,000 such aircraft. Currently NAL director Dr K.N. Raju and his team are looking for industry partners to produce prototypes.

Says Raju, "A similar aircraft produced by the Italians cost over $250 million for development. A liberal estimate of devel­opment costs for our design is expected to be $40 million, which is being shared equally by us and the Russians. Each air­craft will give a neat Rsl crore profit for the manufacturers while pricing it at about $3 million, well below all the competing models in the market. CSIR is putting up Rs25 crore and another Rs40 crore needs to be put up by any partner from the private sector. The manufacturing itself will need only RsI70crore." It won't be surprising if an ambitious new entrepreneur emerges soon, for NAL is currently negotiating with a number of them.

Each of these examples of knowledge ­based businesses are stories in themselves, but the trend, clearly, is that a few techies in business and research are mixing the two into a heady brew. Some businessmen are investing in research while some researchers are becoming businessmen. Mashelkar's provocative slogan, "I want to be known as the first CEO of CSIR Inc" is one side of the coin, while Reddy's ambi­tion to be the first Indian to develop a new drug, is the other side.

The ball has been set rolling. We have not even touched on the developments in other knowledge-based services like edu­cation, training, health care, market research, etc, which deserve a story to themselves.
It is already clear to many that a rupee put in well-directed technology development yields many mo' in a fairly short period of time.

Every nation in the newly ­industrialised fold used cheap labour as the first competitive advantage to climb up the lad­der, and are now looking for other niches like quality, basic research and specialisation. For example, Japan has concen­trated on automobiles and con­sumer electronics, Taiwan on personal computers, and South Korea on heavy ~engineering. India can use knowledge-based businesses like specialty chem­icals, catalysts, engineering design, telecom and computer software, aerospace technology, biotech etc as its core competence to leapfrog into the industrialised league.

These new technologies have also evolved in the last decade. They can be characterised as technologies in which size does not matter - an innovator can go ahead with a good idea even if not backed by a giant organisation. To that extent, the new technologies have a decentralising effect and are allowing newcomers an entry. Knowledge-based entrepreneurs have identified the opportunity and grabbed it.

A manufacturing advantage based solely on cheap labour hardly lasts long. One soon finds a country that can manu­facture even more cheaply. But it is diffi­cult to erode an advantage based on knowledge. What we need is far-sighted entrepreneurs and researchers, and it is heartening to see that India has them in plenty. And they are not restricted to the traditional trading -money lending - manu­facturing families that have dominated the business scene till today.


The new wealth

If one is to make money out of knowl­edge, it should first be acknowledged as property. In the world of Indian R&D today, there are no two opinions on intel­lectual property and the need for its pro­tection. There is a mad rush towards filing applications for international patents, despite the fact that a US patent costs thousands of dollars to file and to main­tain annually. Cipla's Dr Yusuf Hamied, who doggedly cautions against changing the Indian intellectual prop­erty rights (IPR) regime, is an exception. But then, Hamied, while advocating the exploitation of various clauses within the WTO framework to make sure that drugs will be available in India at affordable prices, has recently got two interna­tional patents himself.

Patent literacy is now on top of the agenda; Indian researchers are learning how to read and write patents. Dr R.A. Mashelkar, director-general of the CSIR, in fact, wants to launch a patent literacy mission. Says N.R. Subbaram, head of CSIR'S patent division and one of the few experts in India, on international technology patent­ing, "Many are realising that one should read patents before beginning work, so that the novelty of the line of work pro­posed is clear. You might even get a clue as to which line to pursue. At the same time, one should learn to write patents so that not much is disclosed."

However, even before the IPR regime is changed by law, both Indian researchers and foreign companies have recently formed working relationships, respecting both a high degree of confi­dentiality and exclusivity in joint research. While it is easy for private companies to form such relationships (as many are doing), it took an agonising time for the CSIR labs to do the same. Can a publicly-funded R&D organisation act as an arm of corporate R&D, was the question. Ranbaxy's Dr Parvinder Singh, whose corporate mission is to transform Ranbaxy into a 'research-dri­ven global pharmaceutical company', comments, "Two years back when we proposed a joint drug development pro­gramme with a CSIR lab with exclusive rights to us, it was rejected. Now that Mashelkar has come to head CSIR, things will change very fast."