What should scale mean?

Recent reports say that Maruti Suzuki India overtook its Japanese parent (Suzuki Motor Corp) in over-all unit sales during the April-September 2007 period. The event is significant because it points to how Indian companies are acquiring true scale. So far, India has been a large market for basic products on the strength of its huge population "" becoming, therefore, one of the largest markets for an item like fertiliser. That has helped it develop industries (like sugar) that have become world-scale as domestic purchasing power has grown. But since the unit of competition is the company "" which must acquire technology, manufacturing prowess, scale economies and a global footprint "" the acquisition of scale at the corporate level is more significant.

With sales of 19 million bikes so far, Hero Honda, the joint venture between the Hero Group and Japan's Honda Motor Company, is the world's largest two-wheeler company, with a capacity to churn out 3.9 million bikes every year from two plants in northern India. Reliance Industries has the third-largest oil refinery in a single location, and is also the world's largest producer of polyester fibre and yarn, and among the largest producers of paraxylene, purified terephthalic acid (PTA) and the polypropylene. The Pune-headquartered Bharat Forge, through a global acquisition-led strategy quite like Mittal Steel, has emerged as the second-largest forgings company in the world with manufacturing operations across 10 locations in half a dozen countries. Suzlon is a leader in wind energy and Moser Baer in the manufacture of digital disks. These examples can be multiplied.

The new trend, widely reported and commented on, is the willingness of Indian companies to acquire scale through acquisition "" with Tata Steel being the best example following the acquisition of Corus, though other cases abound like Videocon. Reliance's Mukesh Ambani announced at his recent shareholders' meeting that he too is setting out on the acquisition road, having already bought companies in Africa and Malaysia. Soaring stock prices and the resultant high market capitalisation that companies command help to finance acquisitions at low capital cost. For instance, some reports suggest that the Indian stock market's newcomer DLF Industries' market cap outstrips that of the Marriot hotel chain (the world's largest) and Hilton combined. DLF has nascent plans for expansion in the hotel segment; in theory that should make the company a player with serious financial clout in the hospitality business.

The question is what Indian companies will do to capitalise on the scale advantage that they now have. Will they become innovators in their fields, and technology leaders, so that they acquire the autonomous capacity to set new trends as Japanese and later a few Korean companies did? If so, we need to be seeing far more investment in research and development. Or will they remain largely companies with just manufacturing prowess, as the Taiwanese companies have been characterised? There is also the question of strategy and focus. Reliance, even when it was setting up plants with world scale, focused essentially on the domestic market "" until recently. Maruti has only now become a significant exporter. True global leaders have a global footprint, not just a domestic one.