Q: One of the key issues in the disinvestment process in India has been timing, whether to restructure and then disinvest or go ahead with disinvestment first. What has been your experience so far, and what would you recommend?
Nuding: The problem here is that almost everyone has had mixed experiences. There have been cases where it seemed better to sell off and leave it to the owner to determine how best to operate the business. In some cases, it is better to do it in a more social way. I would say it is better if you keep it and first restructure it.
It mainly depends on the management of the company, and whether the management is willing to take the company forward. This is really where the role of the consultant comes in. In such a situation, the first thing we will judge is whether it is the company that is facing problems or the whole business community that has problems. If the company has problems, then things mainly have to be done on the management side, like improving productivity and efficiency.
Q: What would your prescription be for PSU disinvestment in India?
Nuding: It is a difficult question. I think there are enough people in this country who know the way to go. The main question is that in a democratic situation things take a long time before they go on track. There are some people who are too defensive about opening up the economy, to let in foreign investment and foreign competition. This is understandable. But these are more or less the same questions that East Germany faced while opening up. Should you take a longer time, or should you do it abruptly? You have to find some kind of a consensus. It is really a matter of how you discuss it and find this consensus. Or else you have a strong leadership that can tell the people we want to do it this way and the people then follow.
Ulrich: There are two things crucial for the restructuring of PSUs. For you in India, after the political decision has been taken, there is a need for a statutory body. Of course, the discussions should happen, but at some stage you should say these are the people who will work it out, and leave it to them. This is a top-down approach.
On the other hand, there is a bottom-up approach too. You need to give the individual companies enough flexibility to decide on their own how to carry out the restructuring.
The question then is not whether we should do the restructuring, but how to do it. But you need the regulatory pressure from the top for this process to get started. If they are willing to do it, then they must also be allowed to find their own solutions.
Q: But the German solution was really shock therapy, wasnt it?
Nuding: The German situation was different. It could be done there because West Germany had the funds to revive East Germany. But in India, with an awful lot of people who will be affected by such a process, you will have to find a smoother, more social way. But then, it takes more time if you dont do shock therapy. And this is more or less Indias dilemma.
Ulrich: I think you need to do it fast because the situation here is different from the European setting. In Europe, the businesses and industries are really stagnating. But in India you have a lot of industries that are booming. And that makes the whole thing different when you are tackling issues like the problem of workforce during restructuring.
Nuding: But if you want to do it the fast way, you will have to allow foreign investment to come in. You cannot avoid it in the long run. And then the question is how these investors would like to put their money. If they see only the prospect of a minority holding in the long run, they will not put a lot of money in. These investors would want majority holding to make something out of it. But I will still say India will have to find its own solutions, others can only advise. We cannot tell you what to do.
Q: There has been a controversy about the valuation of PSU shares in the first round of disinvestment that we have had. How does one tackle that?
Nuding: It is difficult but I think in any situation where you dont know how to analyse or calculate anything, you negotiate and find out. It does not help much to think for a long time what the optimum price is after 50 years of calculations!
Q: Indian companies are also trying to cope with the changes unleashed by globalisation. What challenges would you say Indian corporates face today?
Ulrich: My very first reaction to it is that human resources are very important. If you think about the utilisation of this potential, and the empirical correlation between R&D and economic development, Indian companies and foreign companies in India do not invest enough in R&D.
Nuding: The more you spend on R&D, the more you get out of it. Indian companies go shopping for products and technologies and try to make money there. But that does not help you make products for the future.
Ulrich: A pro-active approach would be to go for your own products. The Japanese started by imitating, snapping everything in sight. But then they developed upon those products. Own products, own ideas that is how you make money. But I think this is changing. A lot of scientists and engineers are coming back. So it will take time, but it will happen. And that is why we are here!
Q: How do you rate Indian companies managerially?
Ulrich: The range here is amazing. The competence, background, skills of people across companies and within companies is much wider than, say, Europe. Here even the cultural backgrounds of people are very different. Some managers have been trained in American schools, so their operating styles are different. On the other hand, you also have a lot of one-man shows. It is amazing how they manage to control their entire range of operations.
Q: As an investment base, where does India stand today vis-a-vis countries like China?
Nuding: We did a study on how German investors see the markets of India, China and Indonesia. In this study, India is just behind Indonesia but ahead of China. In China, most investors feel that it is very easy to get into the market but the Chinese are very difficult to do business with. They want to keep control over operations, and are rather hard-headed.
Ulrich: A lot of German companies went in very early into China, in the early eighties. Some of those who had invested for the long term are now disillusioned, which is bad for India because when you tell those investors about Asia, they say, Oh! Not for me.
Q: But there has been disillusionment for multinationals in India as well. The market has not turned out to be as attractive as they estimated.
Ulrich: Thats because they did not do their homework. It is clear that the not-so successful ones did not do their homework at all. So it is not surprising.
Q: So in a case like Mercedes Benz, it was a case of shoddy homework...
A: Well, they are our international clients, and we wouldnt like to discuss our clients business.
Q: There has been some criticism about the role of government in developing sector specific policies. It is said that the market should be allowed to work out its own priority areas. Do you think, in the liberalised environment, there is a place for this?
Ulrich: To my mind, the government must give a secure framework so that you as an entrepreneur have a chance to decide that I will do this and not that. To be able to decide that I will invest all my money in that business now. But a proper framework for investment should exist. Otherwise there will be nothing.
But the government should give a stable framework, and nothing more. In India, you have an overall policy, then you have commerce policy, an industry policy, a finance policy. There is a lot of policy making, a lot of discussions. And today there is a lot of disturbance at the top. But as long as the long-term direction of growth and economic development is stable, and I believe it is still stable, there is no cause for serious concern...
Q: But that doesnt seem to explain a case like Russia. There is so much investment that has poured into Russia and you dont even have a stable polity there...
Ulrich: If you take a closer look, what kind of money has come and where it has gone, it will reveal a different story. The Russian situation is different. It was political money that came in, to stabilise the situation. The idea was to keep certain people on the top. The second thing is that Russia is much nearer to us in Europe than India or China for raw materials etc.
Q: So you think the Indian economy is moving in the right direction?
Nuding: I personally wouldnt be here if I didnt think so. But I think there are some people who dont want to give up the licensee situation. They took advantage of it, and now they would like to keep that situation stable. You are going through a change, and to me it is really a pro-blem of behaviour of people. But I think you are on the right track. You just have to take your chances. The timing is important.
For restructuring PSUs, there is a need for a statutory body... to give the regulatory pressure from the top.
Karl Ulrich, managing director, Roland Berger & Partner in India
