Vayalar Ravi, the new minister for micro, small and medium enterprises, thundered last week that rules will not be bent for IKEA, the Swedish retailer, if its entry could hit local small and tiny units. IKEA is ready to invest euro 1.5 billion (Rs 10,500 crore) in the country over the next 10 to 15 years, provided the government relaxes some of the rules related to foreign investment in single-brand retail. Retailers like IKEA are required to source 30 per cent of their merchandise from Indian small companies (of turnover below Rs 5 crore); IKEA has said that instead of making it a day-one requirement, the government should compute it over a ten-year period. Also, some of the small suppliers may cross the Rs 5-crore threshold over time; it would be costly to dump them and appoint new suppliers every time they breach that mark. So, IKEA has sought practical relaxations to the rule. But Mr Ravi is not convinced. “Honestly,” he said, “Indian people know how to make furniture. IKEA will not make much of a change.”
You can’t be serious, minister, can you? This reminds me of the pre-1991 anti-liberalisation brigade, which included members of the Left and the xenophobic Right, people who said that Indians knew how to make cars, television sets, refrigerators, telephones et cetera, and there was nothing to be gained from multinational corporations. (Some right-wingers would even say that the ancient texts contained all the secrets needed to make spacecraft and nuclear bombs; all that was required was a man of pure heart and unsuspecting intellect to decode those messages!) Actually, we did make cars, televisions, refrigerators and telephones before liberalisation, but their quality was abysmal. Technology was primitive, after-sales service didn’t exist (television companies would congratulate you on becoming the proud owner of their sets, instead of thanking you for giving them the opportunity to serve you! What could you expect from them?), and prices were exorbitant. In a little over 20 years, we have travelled a long distance from those middle ages. And we have multinational corporations to thank — they have raised the bar for product quality, showroom experience and after-sales service. IKEA’s entry will have a similar uplifting impact on the furniture market. Designs will improve, prices (of the high-end variety) could fall, and choices will expand.
Wait a minute, Mr Ravi might say, the consumer may have benefitted but what about the small entrepreneurs? This debate is not about consumers — it is about Indian companies. The fact is that the entry of multinationals has made the Indian supply chain more efficient. Those who were ready to change have prospered; those who couldn’t change have fallen by the wayside. Should the government worry so much about saving inefficient producers? I don’t think so.
Arun Bharat Ram, chairman of tire cord maker SRF, had told me a few years ago that his company used to have four to five per cent product rejection in the pre-liberalisation days, while 20 per cent of the output was second-quality. And sometimes, when there were shortages in the market, which used to happen from time to time, his customers were willing to take seconds that they would put in non-critical applications. That era was hardly conscious of quality but highly conscious of production — not productivity. Once the import duties were brought down and entry barriers were removed, the company had no option but to overhaul itself. Arun Bharat Ram took a team of his top managers, 12 of them, on a two-week training course in Japan to understand TQM (total quality management). He found out that the Japanese’s rejection levels were zero, and the seconds were maybe one per cent. In about seven years’ time, SRF’s rejection rate came down to 0.5 per cent and its second quality fell to less than one per cent. He now claims SRF is the world’s lowest-cost producer of tire cord and among the highest-quality producers.
Some proponents of swadeshi and friends of Mr Ravi may still argue that unlike cars, televisions, refrigerators and telephones, furniture is low-technology and, therefore, there isn’t much to learn from IKEA. But the argument falters on two counts. One, there is enough technology and innovation happening in furniture. Visit any modern retail outlet and you will be amazed by the quantity of imported furniture it stocks. Much of it comes from Southeast Asian countries. The designs are innovative, and the prices are competitive. And that’s why they sell briskly. It is hard to believe that all this is low-technology work. There is much Indian furniture makers, big and small, can learn from IKEA on how to make and sell furniture. Two, IKEA plans to open two or three stores, to begin with, and may raise the number to 15 in the next 10 years or so. These will be, in all likelihood, located in metros, where people know about the brand. It has a premium image in the minds of Indian consumers, and that is how it is likely to be positioned — at the top end of the market, not the mass category. At least the high real estate prices will make sure that its price tags don’t hit rock bottom. How will it take away the livelihood of the hundreds of thousands of carpenters spread across the country? The question baffles me.