Mission Possible

Time & Date: Noon, early August 2001

Venue: MIT, New Delhi

People: Leading beacons of the Indian IT industry

Issue: Meeting with Pramod Mahajan, minister for IT and telecom, to
discuss issues pertinent to the Indian IT industry

On that fateful day, industry captains were informing the minister about the
problems faced by the software and hardware sectors–and outlining what the
government could do to help out. Issues like rationalizing tariff structures,
need for the government to step in to push demand, and the threat posed by China
were discussed at the meeting.

At this juncture, Mahajan turned to Moser Baer managing director Deepak Puri,
who was representing the hardware-manufacturing players. He asked Puri–"What
are your views on the problems faced by the hardware manufacturing industry. And
what are the possible solutions to pep up this segment." The reply came
fast, "Mr Minister, we don’t have any problems." It was sometime
before anyone spoke, and the possible translation of his reply, as read by the
other industry captains, was that he was trying to score "brownie
points" with the minister. After all, wasn’t Puri worried about so many
"intrinsically Indian problems"–lack of basic infrastructure,
infrequent power supply, high customs turnaround period...

Ask Deepak Puri about that meeting and he just laughs. "Problems are
part and parcel of the any industry, and people need to work around them. There
will always be handicaps, so do we sit and crib about them...or do we get going
and do business?"

Take the power problem, one that has affected every Indian corporate and
consumer. Puri’s solution was simple, fast and unusual–build a power plant.
But that’s easier said than done. Sure, Puri’s seen the good old socialist
days, where largescale manufacturing was only in the domain of the government,
where capitalists were looked down upon and license raj was the order of the
day. Comments Puri, "If I could work in those days, current issues suddenly
look less frightening. Let’s look at how we can leverage the huge advantage
India has–I am sure no other country in the world can boast of availability of
low cost-to-company and an excellent pool of human resources."

That’s where Moser Baer seems to have made the difference, and proven a
point. While India will continue to face constraints in terms of low-end
hardware manufacturing, the country can still be a major force in terms of
high-tech manufacturing.

How it all began…

And here’s how Puri–hailing from a family in Punjab with firm roots in
government service–ended up running one of the largest media companies in the
world. "I realized that I was far too ambitious to work for anyone."
But he had had his share of misses before the big hit came to pass. Given his
mechanical engineering background, he started a venture in the precision tool
segment in Kolkata. This had to be shut down due to labor issues. Next, the
family shifted to Delhi and Puri–with the entrepreneurial bug still intact–started
a company in 1983 in technical collaboration with the Switzerland-based Moser
Baer AG. Moser Baer started out as a Time Keeping solution company, but Puri
soon realized that the market was not big enough and growth possibilities were
limited. And then storage fanned its way into Puri’s life, literally. On a hot
day, sitting at his friend’s office at IBM, he saw an 8-inch "something
like a fan" and was quick to use the same for some relief from the
scorching sun. He was reprimanded for this action for it could have cost hisfriend some valuable data. Puri saw that the 8-inch fan was inserted into a
huge box and data could be accessed. Soon, business potential overtook curiosity
and Puri landed in California to talk to Xidex–the largest manufacturer of
audio/video media. And thus began Puri’s tryst with data storage. He started
manufacturing floppy diskettes out of India but had to face a whole lot of
problems. Given the days of license raj and SSI preference, Puri was given a
license to manufacture 50,000 units per month. Puri needed no market research
data to figure out that since the Indian market was practically non-existent,
"competing with global players at such low capacity utilization rates was
foolishness".

ALL ABOUT APPRECIATION: A block of Moser Baer shares bought in 1998 for Rs 1 lakh would fetch you Rs 13.3 lakh in the open market today. That’s a cool 1,200%-plus growth and a CAGR of over 90%–in these slowdown times!

Also, the response Moser Baer got from global customers when it made
enquiries was astounding–it bagged an order for half a million diskettes at
one go. For Moser Baer, with an annual capacity of little over half a million,
the implications were clear–sell the products at once and shut down the
factory for the rest of the year. Puri took the next logical step in a country
trying desperately to promote exports and moved to the Noida export-processing
zone. From then on, life has been in a fast lane. The company moved from 8-inch
diskettes to add 5", then 3", and then 2" (which never made it to
the market).

Extension of the magnetic media product portfolio was the next move and Moser
Baer began making audio/video tapes.

Looking
beyond magnetic media, the company saw opportunities in the optical media space.
However, the market was in its infancy and, in 1996, the management, after
evaluating its resources and the risks involved, decided against getting into
manufacturing the product. However, a year-and-a-half later, Moser Baer saw huge
opportunities and decided to take the plunge into the same space. But here
again, there were obstacles. When the company started its due diligence, the
sale price of CDRs was about $7 apiece. Within three months, the price crashed
to a dollar–and the problem was that the manufacturing cost was a
dollar-and-a-half. Also, the company was looking at an annual capacity of 30
million units, while the global demand was pegged at 60 million. So here was a
Rs 60-70-crore organization keen on investing Rs 300 crore to provide nearly 50%
of the global demand, and that too products sold at prices lower than the
manufacturing cost–Puri had clearly hit upon a magic recipe to become a
millionaire fast, since he was already a billionaire!

Says Ratul Puri, executive director of Moser Baer, "A lot of people felt
that setting up half of the global demand did not account for good business
sense, and were waiting to write our obituary." However, the Puris had read
the market right and the rest is history. Revenues and profits have been growing
at over 70%. Net margins are at 30%-plus–something few software companies can
boast of. "We are in the hi-tech game and profit realizations are
high," adds Ratul.

How was it done?

Hardware manufacturing, exports, and India make for a troika that has seldom
belonged together–about the only companies that have bucked this trend are
Mumbai-based Celetron and Moser Baer. But how did Moser Baer emerge as a global
player? "A key reason was that I had realized we had to master the art of
mass production," says Puri senior. When the company started manufacturing
floppy diskettes, its annual capacity was 600,000 units. Today, its daily
production is over three million units. With huge capacities came huge economies
of scale and today, Moser Baer can supply the same quality as anyone else, at a
substantially lower price. Also, the company invested in creating a
state-of-the-art facility. Says Moser Baer president PM Pai, "I went and
saw the facilities in Noida and was convinced about my new workplace–my
skill-sets of high tech manufacturing were met by this company."

Another key factor was customer satisfaction–"another clichéd term,
but a trait that made all the difference". Says Puri, "A customer
doesn’t want to listen to excuses about problems in India. Even in the early
days, we tackled issues like opening LCs, import export procedures and other
irritants of doing business in India quietly and fast." The strategy paid
off–today, Moser Baer is a top OEM supplier to the likes of BASF, Nashua,
Boeder and Dataright. But the biggest success determinant has been huge
investments in R&D. Moser Baer has an annual 3-5% spend on R&D and,
currently, has a team of over 100 people to do just research work. Says Pai,
"We are a knowledge-intensive company and our employee requirements are not
simple–no assembly line workers, only process engineers and doctorates."

But the creation of global benchmarks comes at a price–Moser Baer no longer
has the luxury of calling in an expert or using reference material... it has to
go it alone. Its up to the R&D team, therefore, to make the difference. For
instance, when the company decided to get into the CD-R business, it imported
the technology from a Japanese company. Within a few months though, it junked
the technology as its in-house team had improved over it significantly. And this
sort of work opportunities have seen it show amongst the lowest attritions rates
in the business.

So what next? Ramping up. The company has already finished ramping up
production to 750 million units and aims to take this up to 1 billion units at
the same project cost. It is setting up a plant in Germany to move into the
value-added packaging segment of optical media business, and thanks to this new
plant, will be able to provide a complete gamut of services to global customers.
Says Ratul, "The next few years will be interesting." Sure thing.

Yograj Varma In New Delhi