The downturn in the economy has forced companies to take some hard decisions.
On the sidelines of the recent Nasscom conference NR Narayana Murthy, said his company may resort to salary cuts if needed. “If necessary, I think Infosys will do it in a manner that industry leaders do,” the Chief Mentor at Infosys asserted. Murthy went on to talk about the steps that his company was taking to deal with the changed situation overseas.
On the revenue side, he explained, Infosys was working on creating models for communicating business value to the customers in everything that it did. “At the end of the day, customers have to see business value. Secondly, we are moving from the era of price for performance to performance for price. Third, we are trying to move from fixed cost to variable cost and are trying to move from the era of indirect cost to direct cost, so that everything becomes part of the project.”
Technology firms may have been among the first to be hit by the near collapse of the financial markets in the US and Europe and so are probably a step ahead of the pack when it comes to restructuring their operations to deal with the new situation. But, as our own economy slows down, the impact has been widespread. “There’s a huge fear of the future, new projects are not happening and existing ones are being deferred. Nobody knows how long it will take for the economy to revive,’’ says A Subba Rao.
The CFO of GMR Infrastructure, is understandably anxious; his business depends on more people flying the skies but passenger traffic has been rather thin over the last year or so. With much of the infrastructure in place, he can’t do much but wait it out. Others like Mindtree CFO Rostow Ravanan are perturbed by the lack of clarity on what lies ahead. Says he, “The level of uncertainty we’re facing today is unprecedented and it’s becoming hard to respond to the crisis.”
Nevertheless act they must and so, from scaling back production to trimming salaries and making do with fewer perks and privileges, India Inc is adjusting to a more sluggish environment. Among the worst hit have been the auto and steel makers; with volumes for commercial vehicles down anywhere between 50-60 per cent the former have resorted to plant closures while steel makers have tried to adjust supply by cutting back production to the extent of 25 to 30 per cent, much in line with global peers like Arcelor Mittal.
JSW Steel for instance, slashed output by 20 per cent reducing inventory which came down from three weeks stocks in October 2008 to two weeks in January 2009. Production cuts across sector resulted in a contraction in factory output in December. Measured by the Index of Industrial production (IIP), factory output fell to a 15 year low, contracting by 2 per cent.
Obviously with production being scaled back, casual workers have been laid off. But, even in these challenging times, there are those who are using the opportunity to retrain people, and thereby make their cost structure more efficient. “We are trying to see if we can re-skill employees,’’ says Srivats Ram, CEO, Wheels India, an auto component manufacturer.
The other area that companies are focusing on is the efficient use of cash given that interest rates are still high and capital scarce. “Capital allocation is a major challenge in a slowdown. As sales slow down, and margins get squeezed, we are trying to prioritise, ration and allocate capital in an effective way,’’ explains JSW, director finance, Seshagiri Rao.
In the process companies are also making sure that others across the value chain are able to survive and are even hand-holding customers where necessary. JSW, for instance, has arranged channel financing for its consignment agents and dealers to make sure they have enough liquidity.
Rao’s hopeful the reduction in raw material prices will help companies get back on track. That’s probably because JSW imports 55 per cent of its iron ore requirements on a spot-basis and has, therefore, gained from the reduction in prices of key inputs like iron ore and ferro-chrome. But others, who tried to secure supplies and prices, when prices of key commodities were rising in early 2008, by entering into longer-term contracts, haven’t been so lucky. In the auto-components space, for instance, there’s a lead time of 4-5 months between sourcing raw material and selling the parts to auto makers.
Many buyers have found themselves caught in an inventory trap, as commodity prices fell. Since many of these contracts will expire only in March this year, companies are carrying inventories of raw materials bought at much higher prices or finished goods made with inputs bought at higher prices. “The pain is severe as we need to place the orders 90-120 days in advance and once you place an order, it’s difficult to change the supply schedule,’’ explains Ashok Taneja, president, Shriram Pistons.
Some players such as Setco Automotive are trying to take refuge in the after-sales market that is 7-8 times bigger than the original equipment (OE) market and push exports. But that’s not going to be easy in an industry in which there isn’t too much product differentiation. As Arun Maira, advisor, Boston Consulting Group points out, “Companies need to sharpen their value-proposition in a downturn.
That’s what Hero Honda has done and that’s why its bikes are selling in larger numbers,’’ he observes adding that brands with a strong value proposition are able to take away business from others. Indeed, it’s all about a different approach and a steering mechanism to sense things quicker and be able to turn the ship. That’s easier said than done though; navigating the current choppy waters is going to call for all of India Inc’s skills.
