Gobbling to globalise

Crompton Greaves has powered its way into the big league with three acquisitions in three years.

It might seem unbelievable but at the start of this decade, Crompton Greaves was actually in the red. But with three acquisitions under its belt in the last three years, the Rs 6,833 crore engineering company has bounced right back to find itself a place among the world's top 10 transformer makers.

Armed with a wider range of products and a longer list of customers, Crompton is looking to grow its share of the market at home and abroad.

Having already achieved some degree of success in the ¤40 billion market for power transmission and distribution products, the company, part of Gautam Thapar's Avantha, is aiming high. Managing director S M Trehan is hoping that, in three years or so, Crompton will rub shoulders with ABB, Siemens and Areva.

The takeover trail
If you can't beat them, buy them. Crompton realised a few years ago that no matter how good the quality of its products, it would be hard to convince buyers in the overseas markets to trust an Indian brand, given that transformers are critical equipment.

So it decided that the best way to break into the overseas markets was by buying companies that would give it immediate access to customers. It was looking particularly for an entry into the bigger markets like the US, which accounts for 45 per cent of the world's total consumption of transformers.

Crompton's first stop was Brussels, Belgium, where it spotted the ailing Pauwels, a family-run enterprise with revenues of ¤270 million. With manufacturing facilities in five locations "" Belgium, Canada, the US, Ireland and Indonesia "" Pauwels was catering to the US and west Europe and Crompton snapped it up for about ¤43 million.

That was in May 2005. Just over a year later, in October 2006, it closed in on the loss-making Ganz, a Hungarian company making switchgears and bought it for ¤35 million.

Ganz's technology was state of the art and it was present in markets like west Asia and east Europe. By May 2007, Crompton had completed its third acquisition; it bought Microsol Holdings, a small profitable company in Ireland that provides automated technologies for running sub-stations, for ¤9 million.

The global market
With Microsol in its hold, Crompton has a near-complete range of products in the area of transmission and distribution of power. "We can now provide end-to-end solutions."

But more than the product range, what Crompton has gained from the acquisitions is a large market and big customers. With the kind of distribution that it has today, the company can address 80 per cent of the world market.

Not that the market is growing by leaps and bounds "" the growth rate is a sedate 4.5-5 per cent a year "" but Trehan points out that there are opportunities galore.

"We have our pockets of strength within the US, with the bigger shares coming from Mid-West and Canada, but we could do better in other regions."

Crompton plans to stay away from China for the moment, even though it is one of the fastest-growing markets with 15-16 per cent annual growth.

The company wants to focus on growing its share of the market in the US and Europe. Says Trehan, "After the acquisitions, we have already increased our share by 300-350 basis points in west Europe by selling more to the existing buyers and to new customers. We believe we should focus on our existing markets for the time being. We can always explore China at a later stage."

In fact, Crompton believes that the Indian market has tremendous potential because it accounts for less than 2.5 per cent of the global demand. Trehan does not rule out another geography; it may even consider another acquisition if the market share gains are substantial. But the near-term objective is to sell more in the markets where it is already present.

Mix and match
To begin with, Crompton is getting manufacturing facilities approved by buyers across countries, so that it has more customers.

Product design is being standardised "" the design unit has been shifted to Mumbai "" so that any plant can supply to any buyer, though typically the plant closest to the buyer takes the onus.

"In any acquisition, the idea is to use the available assets efficiently. The ability to cross-transfer skills is what the opportunity is all about," says Shalini Pillay, the head of business integration services at KPMG.

Microsol's technology is already being put to use to upgrade products and will now be sold to customers that Ganz and Pauwels were catering to.

Explains Trehan, "Microsol didn't have too many customers, because of a weak marketing set-up, but we bought it for its excellent technology. We have already started transferring that home and now both the software and hardware will be made in India. The products will then be shipped out to customers of Ganz and Pauwels."

Meanwhile, some of the products from the Ganz range "" gas insulated sub-stations, rotating machines and so on "" will be launched in the Indian market this year. Besides, Crompton's India unit has already started supplying a range of components for equipment being made by Pauwels.

Save as you earn
That makes sense because labour costs much lower in India and therefore it is cheaper to make the parts here. It is more cost-effective even after taking into account the transport costs. However, the idea is not simply to shift all the production back home but also to make the overseas plants more efficient.

Over the past two years, the capacity utilisation of Pauwel's unit has risen from 60 per cent to nearly 95 per cent. All it took was some additional working capital of ¤7.5 million and a new approach to the workforce. Thanks to better economies of scale and utilisation of facilities, the costs fell.

The expenses for Crompton as a company are now lower because there is just one combined marketing team and one procurement unit, headquartered in Brussels.

Trehan says global sourcing has reduced the raw materials bill by 0.75 per cent, which translates into about Rs 35 crore a year. That's a fair amount, fetching a 100-basis-point expansion in margins during the year to March 2008.

As the business scales up, more savings are expected to kick in. "Cost cutting is very important area that should be looked at closely because it makes a big difference to the bottom line. Unfortunately, some companies don't pay adequate attention to costs," says Tanmay Kapoor, partner, business advisory services, Ernst & Young.

Please your people
While cutting costs is a priority, it's more important, says Trehan, to carry your people with you. Crompton hasn't cut wages at any of its units, nor has it reduced manpower.

On the contrary, it has added people both in Europe and the US. "We didn't want to send wrong signals, especially to the workers and we made sure we weren't high-handed with any of the employees. It is very important to make them feel comfortable." A third of Crompton's workforce is overseas.

The company was equally careful with the senior management, retaining almost every member of the top team. While it did send a team of managers from India to help the existing management overseas cope with the changes, the team was a small one.

Trehan believes that if Crompton has managed to integrate operations across so many locations in such a short time, the key reason for its success is good people management.

Integration experts say that since local expertise is crucial to avoid disruption in business, it is important to have the existing team on your side.

"It is crucial that a new management does not disturb the strengths of the target company and is sensitive towards people. Otherwise, it could result in the synergies not being realised," says Pillay.

Adds E&Y's Kapoor, "The organisation's structure and who the leaders are during the process of integration are very important. This is where half the battle is won or lost."

On track
Pauwels, which was in a decline at the time Crompton acquired it, grew its top line by 25 per cent to Rs 2,617 crore in the year to March 2008.

The ailing company broke even by March 2006 and moved into the black the following year. Ganz, too, has been doing brisk business, with revenues growing over 50 per cent last year. The company should break even in the current year.

That should improve the profitability of Crompton's overseas operations considerably. Already about 43 per cent of its consolidated revenues and about a fourth of its net profits are contributed by the three overseas units.

These shares should grow over the next few years, making the company a truly global player.