Mr. Kurush N. Grant
Chief Executive (Tobacco & FMCG Division), ITC Limited
Good afternoon, what I will try and do today is actually give a slightly overview, slightly different view of what I understand and what we understand as the Indian domestic market vis-à-vis the global market and therefore the development of global brands. We’ve all heard of standard measures and processes of doing business, sort of create value as is understood by the consumer, to carry on to communicate value to the consumer cause creation of value in isolation and in hiding doesn’t serve any purpose and then finally we try to capture value. However I would like to bring in one difference, classically this particular model which in ITC we call the 3CG model. It has always been capture value by the organization, by the share holder. I would like to differentiate this by saying how do we capture value to all stake holders. If in the process of capturing value to stake holders we are able to hold something to the relevant stake holder where we will be coming to shortly. Perhaps whether the market is domestic or whether the market is global, whether the building of brands is domestic or global doesn’t really make that much of a difference and let me give you some examples. Let’s talk about product and process development, if we do not have product and process development within India our ability to go outside the shores of this country to actually develop competent brands and capture value within India starts getting affected. First of all is the whole issue of knowledge that in developing of products whether they be service products or physical products. Without the ability to actually develop products and therefore develop the knowledge base which we need in this country there is no way that we can develop brands both within India and outside India. The second is the development of skills, the development of processes. We just heard about excellent execution, one of our problems in India is that even though we have a large amount of RND in terms of research, the actual development, the actual process engineering in producing goods and services very often get affected. So can we develop skills to actually become leaders in India and therefore ultimately abroad. Lastly develop attitudes, if we are not strong in out own home market, if we are not strong in understanding the categories we actually operate in, the attitude you require to become successful in globally is very often lacking and this attitude is an instinctive knowledge about the category one is operating in and this attitude is about the instinctive knowledge about competition, about what to do in adverse circumstances and what not to do in good circumstances. If this knowledge skills and attitude are not available for a domestic market for the product category itself there is a very low chance that one will be successful outside ones own country. There are examples of this not being the same and I think one of the finest examples is Heineken where they have dome remarkably well around the world not necessary in their home country but I cannot think of any other example. The other issues support systems, if one is not strong in ones own home country, the likelihood of one being strong outside ones own country – rather being a global brand it becomes extremely difficult and ill take an example from one of the industries I worked in which is the tobacco industry. In India we are the second largest grower of tobacco in the world but we are only the 10th largest exporter of tobacco in the world and although we grow I am given to understand extremely fine tobacco and the reason is that only 14% of tobacco in India is consumed in the form of cigarettes the balance 86% is consumed in the form of bidis and chewing tobacco and other forms of tobacco and this 14% is in fact a declining number, two decades ago it was 21%. The reason being the Indian government for reasons of their own have taxed cigarettes that 3400% higher than the tax rate on bidis and chewing tobaccos resulting into the cigarette form of tobacco consumption declining in India. As a consequence what has happened is the only form of tobacco which is exportable for which we can actually have a global brand commodity and remember tobacco is one of the most profitable agri commodities for any nation going today, whether it is Brazil or the US is cigarettes and because the cigarette market relative to overall tobaccos declining the Indian farmer is finding it extremely difficult to actually take the risk and invest for export. Wherever there is fears of a declining base in the domestic market suppliers of raw material, suppliers of goods and services tend to be hesitate in investing in R&D. Lets take another example, lets take the example, of the hotel industry, the hospitality industry which once again my company ITC is involved in. If you take a typical tourist focused hotel market be it the business tourists or be it the leisure tourists there has been very rapid growth in the last few years. More than 50% of revenues today come from visitors outside the shores of India in all of the large tourism related industries in India. And this has increased by 20% about a year ago. However without the domestic market to support the tourism industry in India to support the hotels and the spas and the leisure holidays and the spas. Everything we have in India today, most of the hotel chains in India being the one we have would actually close down. If the domestic market is not strong there is absolutely no way to create a global market for your brands and for your goods and services being offered. In the past people have talked about Indian being the land of tigers and snake charmers and so on and so forth and therefore I would like to use this analogy for what is happening in India at this point of time and what can happen in India in the future. In most product categories, in most product markets the Indian market is still very thin on the ground. Over all the size may be very large, we use lots of cell phones and we consume a lot of FMCG products and we have lots of soaps and shampoos and cigarettes and so on and so forth. But this market is spread over wide geographies, spread over wide markets, over large differentiated markets resulting in a very thin level of market in India at any point of time. Within this extremely thin market a lot of product category and certainly the FMCG sector the depth of competition is enormous. In fact it is one of the highest depth of competition compared to the size of market to any country in any parts of the world. I am given to understand that this phenomenon is not unique to India but most developing countries that have had a rapid growth in the last few years including China, including Thailand went through a very similar process. one difference is that there are a lot of other countries In the world including the developmental process actually had a lot of barriers to international competition which we in our wisdom have chosen not to have in India and consequently we are in a situation today where we have very thin markets in terms of individual product markets and with massive depth of competition. Quite honestly if we can make it successfully in this country we can make it anywhere else in the world. Certainly in those categories, in those product markets where the depth of competition is very high. And I would certainly cover goods, I would certainly cover automobiles, I would certainly cover financial services, I would certainly cover FMCG just to name a few of some of these industries. However let’s redefine what we mean by the domestic market. Where is value that we are trying to capture actually being captured? Lets take the example of the 100% export oriented garment exporter, doing a remarkably fine job, very successful, supplies to major retailers around the world. About 80% of the value being created out of this particular business is being captured in the hands of the high street retailer in London and New York and Paris and Milan. We need to question whether this is a successful and effective Indian business or whether it is an effective and successful UK or US or French or Italian business which is only outsourcing from India. If the value is not getting captured in India then we need to question whether we are actually creating strong brands within India. Leys take another example of the software business. 25 years ago the software business in India was fundamentally one of body shopping. The value quiet clearly was captured by those foreign companies who were utilizing Indian software professionals to actually work for them, and quite clearly once again the value being captured once again was not in India but the value being captured was outside India. This is changed over the last 20 years to the marketing and development of IT services and by making this change companies like Infosys and TCS and a whole range of other companies actually are moving from export of value outside India to capture of value inside India thereby actually converting what is a successful foreign business into a successful domestic business by capturing value in India. The last item as far as capturing value in India I would like to talk about is the inclusiveness of value capture. Two days ago the prime minister in an address to the CII in Delhi talked about growth of Indian industry which needs to b e inclusive and rest assured he was not talking about quotas, he was not talking about reservations, he was talking about overall inclusiveness. Is value capture happening in only one area, is value capture happening only to one segment of society and one stake holder or is value capture in the Indian domestic market happening to a much wider audience. I’d like to give a small example of the paper industry which is one of the businesses that ITC is in. We were proposing to set up a new paper mill somewhere in India, I am not allowed to say which state it is in, it is still confidential. And we have two choices; the paper industry being a very intensive capital industry in nature a new mill will cost us something like 300-400 million dollars, 1500 crores. If we were to invest this money successfully and following normal norms of value capture we would probably put up this mill somewhere close to a port, maybe Vizag or maybe one of the newer ports in Gujarat so that we could import pulp which is raw material for most paper mills from Brazil or from Indonesia or from any such place that grows pulp, bring it into India and then successfully convert it into paper and export it out again. We already have a good brand name as far as paper in this country is concerned and therefore it will make the most sense financially to locate such a mill near the port so that we can capture value successfully in India but would the capture of that value be inclusive. A 1500 crore expenditure in capital equipment would require only 600 workmen to actually run the mill. Is that inclusive capture, is that inclusive value? And the answer is probably not and hence the alternative, should we move the mill away from the port right to the middle of tribal India where there are no goods and services available, where there are no infrastructure available, where there is no support system available can we plant like we have done in the past a hundred million trees in the next ten years, can we create employment for 75,000 tribals and villagers who do not have access to even clean water in the past. And if we can actually do that can we create a paper mill in India which will not only generate value for the shareholder which is ITC but also value for the nation as a whole and that is exactly what we are trying to do and it is this investment in inclusive development of value capture in India which is ultimately going to make brand building in India more successful, far more effective than merely capturing value for stake holder or capturing value outside this country. Thank you.
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