It is not an open and shut case to say that India is least cost
Banmali Agrawala, President and CEO of GE South Asia, is a veteran of the energy sector having spent close to three decades working with Wartsila Group and Tata Power. He may be heading a small part of the $146 billion GE’s worldwide empire, but at around $2 billion, GE in India compares favourably with other Indian companies.
In this interview with The Hindu in New Delhi recently, Mr. Agrawala offers insight into GE’s conservative approach in India explaining why it does not make sense to invest in manufacturing power equipment here. He appeared just a bit defensive when asked about the relative inflexibility of American corporations vis-à-vis their Japanese and Korean counterparts while doing business in emerging markets. Excerpts:
If there are three things that you would advise the next government to do to get the economy back on rail, what would they be?
You’ve first got to get infrastructure going, especially power. Second, we’ve got to get manufacturing moving. There is a huge challenge over jobs looming over us and it is not going to be sorted out by services. It has to be solved through manufacturing. The notion that we can address manufacturing on the back of exports is misplaced. For manufacturing to thrive and flourish there has to be a sizeable and substantial domestic market. You can supplement that market with exports but it is very difficult to base our manufacturing strategy entirely on exports. The third one is to create a climate by which investments actually happen and I’m not talking of only FDI here. We don’t need to do anything special for FDI if the general investment atmosphere is right.
GE has been in this country for more than a century, yet its presence is not very big. Why is GE not a more active participant in India’s growth?
I think GE is indeed an active participant. It’s just that what we do and the scale in which we do it is not apparent because we are not a listed entity. GE has evolved tremendously over the years; some of the businesses in our portfolio now were not there even 15-20 years ago. If you look at oil & gas, it was not a part of our portfolio 15 years ago. We do about a couple of billion dollars worth of business in India. We employ about 13,000 people. GE has been at the cutting edge of almost every new technological development in the infrastructure space in the country. We were the first to start the business process outsourcing business through Genpact. We were the first among the big MNCs to realise the talent here and set up a technology centre. We’ve had some 2,000-odd patents come out of this centre. We source a lot from the market. We have 13 manufacturing units here and are investing another $200 million in a multi-modal facility in Pune.
But if you look at the opportunities available, one gets the feeling that GE is probably not capitalising enough…
That could have been argued maybe some time ago but over the last 5-8 years, if you look at all the segments we operate in here, be it in power generation, water, aviation or health care, we have a fair share in every one of them. Maybe on the electrical side, we have a limited portfolio but that is what GE is worldwide. We really haven’t got a full suite of offerings and services on the capital side but that again is a matter of strategy because we want to control the risk. In transportation, we have been waiting for the government to make up its mind for the last 10 years on the locomotive tender. We have the technology and would love to participate.
What we perhaps need to do better is to see if there is a way to tackle the unmet demand and how can we innovate in a fashion that is out of the ordinary, routine business. In the health care business we have a range of products at completely disruptive price points. This is not about cosmetic changes, but dramatic innovation of a product. That is the approach we need to follow to address the unmet demand in other sectors such as power generation.
On the subject of manufacturing in India, I think it is purely a matter of economies of scale. If the volumes are large enough we would not hesitate to manufacture. We find that the volumes fall short to justify full-fledged manufacturing, especially in infrastructure equipment. So we have to fall back on exports. The moment you get into exports, then there are at least a dozen other countries doing the same. That means you have to be competitive enough to export in relation to other countries. It is not an open and shut case to say that India is least cost. This led us to the concept of multi-modal manufacturing where we build multiple products in one facility so that we are able to get scale.
If you take the power generation equipment sector we have had Mitsubishi, Toshiba and a couple of others setting up manufacturing plants in India. Has GE missed something here?
Not at all. Let’s talk about steam turbines. It might be worth taking a look at these ventures now in terms of their volumes and financial viability. The maximum generation capacity that we have added in a year is about 8 GW. Let’s assume we are able to double that to 15 GW. Half of that will be kept aside for BHEL, so you are left with 7 GW. Assuming that we use super-critical turbines it would roughly translate into demand for 10 units a year. That in turn means 2 turbines of 800 MW each for the 4-5 manufacturers present here. That does not support manufacturing and is not adequate volume by any yardstick. The supply-chain will also be a problem. So when you talk of manufacturing of heavy equipment, you need to look at what scale a manufacturing unit becomes competitive. You have to consider if the supply-chain that will feed into the manufacturing unit is localised. When you do this analysis, you will realise that there is some work to do. That is what we are doing now looking at how to build a supply chain that will cater to us.
So, why can’t GE South Asia base a unit in India and supply to the region which might give you scale economies?
Absolutely yes but you have options. Do you do it here, or Malaysia or Vietnam or Indonesia? You would figure out the relative merits and demerits. Second, there is a difference between passenger cars and infrastructure. In cars, it’s me as a manufacturer and the market. I can set up a unit, get the right quality and price and get access to the market. If suppose in infrastructure you were to allow the manufacturing industry to have access to the market openly, then the industry would do what it takes to innovate and get to the right price point. But if you control that access, monitor and throttle it, that’s when the volumes don’t come into play. If we have access to the market we would look at many things aggressively.
When you talk of market access, you can see Chinese suppliers are now big in India’s power sector. So have you lost out to them?
I differ a little here. In the space where we are strong, such as gas turbines, our share of the market is fairly high. We were way ahead of the curve in grabbing the opportunity. Though we have good products and are present in select markets, the position that we have in steam turbines is not the same as we have in gas turbines. If we were to localise in gas turbines, we need to ask ourselves if we would be competitive compared to an imported machine. If machines are still imported despite domestic capacities coming up, you need to ask why? Finance is a critical part of the infrastructure business and we are getting a whole lot of cheap credit from various countries who want to encourage manufacturing in their countries. From a buyer’s perspective, if you were given low-cost credit over a long period as opposed to a slight benefit in the initial capital cost, then you know which will win.
The point I was really driving at was this: are American corporations too rigid vis-à-vis their Japanese and Korean counterparts who are more flexible in devising entry strategies for difficult emerging markets?
If you see Korean corporations, and the speed and scale at which they move, it is impressive indeed. We have a lot of respect for them and we are trying to figure out how to move as fast and there is a lot to learn from them. But having said that, I think the flexibility that GE has shown given the diverse company that it is, the number of countries that it operates in, the results that it has shown consistently, I think it is fairly impressive. Of course, there is always scope to improve but the financial performance of GE in relation to its peer group is good.
Let’s talk of your nuclear power business in India. How are you planning to work around the constraints and are you planning to work around it at all?
I think we have made our position very clear that the clause has to be addressed. There is a certain regime around the world when it comes to nuclear plants. We are just asking for that to be followed. It is not a question of how to read or interpret the rules but we feel that the law needs to be amended. That’s what we would wait for.
Source : The Hindu