In an interview with PwC, Baba N Kalyani, Chairman and Managing Director of Bharat Forge Ltd, talks about his company’s growth prospects, de—risking strategies and talent challenges. Kalyani was one of the 1,258 business leaders who participated in PwC’s 15th Annual Global CEO Survey. Edited excerpts:
What is the outlook for the global economy, as you see it?
Clearly, the global economy now has a far more negative outlook than before. While Asia will continue to grow, those rates may be lower. China will lead the growth in Asia, followed by India. Europe will take the biggest hit.
How confident of growth are you in this environment?
Our Indian operations will continue to witness some growth while our group companies in Europe are going to see lower volumes.
Looking forward, what is the one risk to your growth that you are most concerned about and why? How are you preparing to deal with it?
We learnt several lessons from the financial crisis of 2008 and have put in place a very good strategy to minimise risk. First of all, we have made all our businesses lean so that they can respond to market changes very quickly. Second, we have opted for a flexible manufacturing system that allows us to increase or decrease operations by 25 per cent, without any issues.
Third, we have minimised risk by entering new business sectors, including energy, construction equipment, oil and gas, and mining. Most of these businesses are growing, so fluctuations don’t matter much unlike automotive, where any fluctuation matters a great deal. Since we operate in multiple geographies—Europe, China, Japan, the US etcetera—we see less risks to our business. Our businesses will grow.
Has your strategy changed over the past year? If yes, then how?
We had put this strategy of de-risking the business in place back in 2005. It was clear to us that we needed a structure that could combat volatility in the global markets. We felt the need for lean manufacturing and flex manufacturing systems then. We strengthened this strategy in 2009, post the financial meltdown and the recession. So nothing has really changed for us on this except we are looking for new opportunities amidst the downturn.
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Do you anticipate more strategic changes in 2012?
We don’t foresee any change in strategy in 2012 and we are optimistic for the medium- to long-term because we are in areas where we see growth.
What are the most important strategic and operational advantages you need, given the current economic conditions?
Our growth model is based on two to three fundamentals. First, our company’s ability to compete on technology, product and cost: we have created a great deal of focus in our systems on high-technology, high innovation and high quality. These systems create an enduring business.
The second fundamental is the continuous evaluation of mega-trends in the market. We did that three years ago and found infrastructure, energy and oil and gas to be the clear mega trends in India, so we are participating in those—and we have got into mining commodities too. For us, automotives is the base business—but it’s also a mega trend in India. My estimate is that in the next 10 years, it will grow to three times the size it is today.
How is your approach to managing enterprise-level risk changing?
We address risks rather simply—by balancing our assets and liabilities. For us, this is a natural hedge. We do not get into things that we know nothing about, such as currency. As a group, we are conservative about risk. We have a deleveraged balance sheet, a strong strategy and sound systems to implement it. And we have some very good people working for us in India and abroad.
Is your board becoming more engaged with enterprise risk? How has that affected your planning and operations?
Yes, the board is getting more engaged. It includes professionals such as bankers and lawyers and is a good sounding system. Boards can’t get into operational matters, but yes, they are more focused and are asking more questions on our strategy and the risks to our businesses.
How is your approach to innovation changing? Is your focus changing towards more radical innovations?
You can’t change an approach to innovation in one year. To build innovation capabilities you need a minimum of about 15 years. It will take us another five to seven years to become as innovative as companies in the West. But we will get there for sure.
We have been running an M Tech programme for our employees, in collaboration with the Indian Institute of Technology (IIT) in Bombay for the last three years. This two-year programme is designed to foster academic and research interaction between the two partners. So far 24 employees have enrolled and we are seeing some results now, with the filing of six to seven patents.
Are innovations coming from different places—perhaps from different geographies, different parts of the organisation or from outside your organisation?
We encourage innovation. We have four to five programmes going on with universities in Europe. Mostly, innovations take place through joint efforts. For instance, our aluminium forging plant in Germany has created a new game-changing technology. While it was developed in Europe, the idea came from our headquarters in Pune.
To what degree can innovations be exported to other markets and to what degree must they be developed in the market?
It will take a little time. India does not have the infrastructure for hard-core innovation. For innovation to happen, we need people, industry and organisations that believe and invest in innovation; technical universities that partner in innovation; and, most importantly, an ecosystem of technologists and engineers. Silicon Valley is able to come up with innovations as it has the necessary ecosystem.
In what ways has talent become a strategic issue for you?
Talent is the most strategic issue for a country like India. The country is tremendously short on talent. Attrition rates are in double digits. There is a gap between what comes out of technical institutes and what the industry needs.
How are talent challenges different in different markets where you do business?
Europe has the best universities and technical institutes but it has an ageing population. By 2020, it will be very short of talent. Manufacturing talent has now become important to the US, which challenges on that front because it has the education infrastructure to create that talent and a population which is not ageing.
India faces big issues on talent. I believe organisations have to find their own solutions. We run a talent factory of 700 to 800 people here in India and we are working on creating a global talent pool of about 100 people—60 of them from India and 40 from other countries—so that we can send them anywhere across our operations. We hope to have this talent pool ready within the next three years.
Do you have well-formed succession plans for senior leadership positions? Do you believe that you are adequately developing the right talent in-house to support your succession planning?
For the last three years we have been running a programme called Masters in Manufacturing Management along with the University of Warwick in the UK. It is designed to give mid-management the leadership skills to move into senior management. Thirty employees—20 from India and 10 from our subsidiaries—have enrolled on the programme.
