Monday, May 25, 2015

Make in India – Sounds good but are we ready?

Published in WICMA's Industry Insight Jan - Mar 2015 Issue

Our incumbent government’s “Make in India” initiative sounds particularly promising and points in the right direction to strengthen the contribution of manufacturing sector to our GDP. Ideally, this would mean that businesses would go all out to expand and ride this wave but on the ground that is not the case. Everyone seems to be in a wait and watch mode as the government is nearing its “1st year in office” mark. Frankly, just by announcing “Make in India” will not mean that companies from the developed world will rain on our country with their manufacturing outsourcing plans.
The initiative is tremendously positive indeed. Foreign companies would love to make in India and take benefit of the price difference and talent pool. However they have stricter standards and norms. They are exceedingly precise about quality, delivery schedules and of course specification. The “Chalta Hai” attitude does not work for them. Business deals are never done over a few phone calls and a callously written email ordering say 500 pieces of shaft. The smallest of the businesses in the developed world believe in clear contracts, strong written communication with little space for misinterpretation, rewards and penalties for delivery schedule. Though payment is followed quite honestly, the clauses are extremely sharp and tight. Under these circumstances are we truly ready for “Make in India?”
Typically, when someone mentions that he or she is a business person, people immediately think of them to be loaded with cash and living a king’s life putting in least amount of efforts. Factually it is a business owner who takes the risk, invests in a venture, puts his house on mortgage to raise capital borrows from friends and family. Most often Indian businesses are proprietorship firms where the liability lies entirely on the owner. If a firm is not doing well, the employees and workers have all the freedom to seek a better opportunity and quit but does the owner have same options under our existing laws? This business person generates jobs, pays taxes, and helps the economy. And in return the government binds him with such laws, policies and conditions which create a strait jacket structure for the person to operate in. The picture is however not really gloomy and I do not mean to deride this wonderful move but there are at least 3 pain points which must be addressed before we go all out.  

Most of the MSMEs in India are still semi – automated and largely depend on the labor force. Labor has a lot of elements which needs attention. It is used as a major political tool which generates lot of vested interest. Availability of skilled work force is a common concern. Rampant absenteeism and festivals round the year affect production.
At present, the government issues the minimum wage figures zone-wise with no regard for the other business factors, they tinker with the provident fund norms and the union leaders at the other end are continuously negotiating for the workers. Union issues are badly affecting businesses and trade. Sadly, the actual worker is not really gaining much if we investigate deeply. Let me cite a true example. A well-established business in an interior part of the country with a large workforce was suddenly issued with a notice that a union has been formed by their workforce. The company shut shop the very next moment. No discussion, no questions asked. We all know how long the litigation will take in this country. Till date the fate of the workers is unclear, the owners are facing short term hiccups but they have another production location which is fulfilling their orders. Not all business owners have this choice but such cases are growing.
A business owner is not like the cruel and greedy “Sethji” from the movies of 70s and 80s trying to extract the maximum from the toiling workers’ while paying them peanuts. Business owners are usually fair and reasonable enough in their dealing though some bad apples do exist but that is human nature. Hiring, retaining, removing labor force should be within the purview of the business owner. I do not advocate straight hire and fire rule but there has to be some equanimity. There should be some link between the location of the unit, business performance, salary and wage structure, bonus and other benefits extended to the work force.
 Our government is initiating processes to streamline and subsume the existing laws to make them more efficient which is a good move but what is the actual outcome till date. Industry experts have to analyze in details whether the move is really going to be helpful or some section of another archaic act might cause conflict and still hurt businesses. Who will speak up for the business owners; the only people who will actually help realize the vision of Make in India!

Capital/ Funds

I don’t need to ask the readers their experience while trying to apply for a term loan/ working capital loan/ enhancement of overdraft limit or simply to buy some machinery for business improvement. Most readers will have more than one painful story to narrate.
Just by announcing “Make in India” is not going produce a Midas touch for the economy. Banks are still not easing lending system, too many bureaucratic hurdles, only large companies manage to get funded, and the smaller ones are still self funded or remain stunted. Financial bodies are the last source of raising capital for small businesses much of which play and will play a major role in the great Indian manufacturing story. Till these businesses gain critical mass, no one wants to touch them. If they do, it is at the cost of serious collateral and steep interest rate which often renders cost of production uncompetitive.
We would like to see some serious data on the vast number of schemes floated year after year; and their outcome. The actual case studies of businesses benefiting from bank finance and how. How have businesses actually gained through them? How can others take advantage of the schemes? What does the fine print say?
The issue of capital is quite intriguing. The banks won’t lend without collateral and if they do then we are expected to pay back on time by signing up a concrete fenced agreement failing which we will be penalized severely. (We do not understand half of the clauses we agree and sign, atleast I don’t). On the other hand customers won’t pay on time which has hardly any legal solution. Even a case of cheque bouncing drags on for years. The delayed payment clause of MSMED Act is yet to show its teeth. How many people have flouted this clause and what has been their punishment? There is no clear roadmap or intent shown by the government on how the issue can be resolved.

Market Development and Sustenance
In the west, people spend quite a bit of money in educating themselves, upgrading skills, learning new technology or marketing solutions to reach out to a wider audience. But mainly they focus on creating a product of excellence while identifying a niche.
Indian small manufacturing companies are either setup by first time entrepreneurs who have an idea and some amount of capital but not much experience or ex-employees of large companies who go out and create their own small business and become component suppliers. Over a period of time they increase their customer base using the tag of these large companies. Very few companies are involved in systematic market development, spend on branding or communication. Much of it is word of mouth publicity or through acquaintances and business network. There is a lack of structure or form.
Most small businesses here typically depend on few well paying ethical customers who are disciplined. There is no conscious attempt to explore and develop their market or reach out to a larger customer base. One reason is lack of a strong legal framework to operate at a larger scale and protect the receivables. Lack of a swift and strong judicial system for recoveries of outstanding is a common hindrance which forces these businesses to operate within a limited geographic area. Naturally the demand is limited and won’t grow beyond a certain point. This finally hits the ability to sustain. The few larger buyers also use their position to coerce cheaper rates which actually hit the balance sheet and owners realize much later when the path to recover is steep and unsure.
We need good business support and enhancement networks under the aegis of the government to train existing business persons about law, markets, technology, branding and communication. Strengthening the business environment with strong judicial foundation is another requisite from the government.
Much of the pain points will be alleviated if the three above factors are constructively dealt with. We, as business people also have to contribute our bit towards “Make in India” by becoming ready for the global players. We have to change our attitude (all of us) and become more professional, understand and respect commitments, create a formal system of written communication, appreciate the importance of quality and imbibe it into the DNA of our businesses, absorb the dynamics of global trade and continuously upgrade our knowledge and skill base to stay ahead of the curve.

Monday, May 4, 2015

Cost or Investment? – A Perspective

Ignorance may be bliss, but it certainly is not freedom, except in the minds of those who prefer darkness to light and chains to liberty. The more true information we acquire, the better for our enfranchisement. ~ Robert Hugh Benson, Intellectual Slavery

While setting up a small business, the cost burden is huge for an individual. Owners try hard to reduce costs through various means including (frequently) trying to do multiple things on their own. Thus, they often miss out on important data or information which can prove costly after a certain period of time. We have to accept that we cannot do everything on our own but at the same time we cannot depend on others completely. 

A series of events in the recent past has given me some wonderful lessons in understanding operating business more efficiently and cost-effective way. The reason I am writing this article is because I have been told many people make such mistakes and end of up paying a lot as a consequence.

Lesson 1 – We often remain dependent on one person (usually the accountant or sometimes the dispatch person) who knows what is happening and seldom is the information available on paper for retrieval. Accountants in small businesses are good at book keeping and only understand certain amount of the tax laws which are in repeated daily use. Owners should not depend on one person especially when it comes to Accounts or Production. Get two people to do the job. You might argue that does it make sense? Yes, it does. What happens if one person quits or falls sick? Can you imagine the chaos?

Owners are too engrossed in running the business and managing day to day operations thus remaining ignorant of the general gist of business laws. One cannot claim ignorance as an excuse and knowledge would never hurt. Business continuity and compliance should never depend on the activities of one person.

Lesson 2 – Business in India (or elsewhere too) is surrounded with many laws and regulations. It is practically impossible for one person to know everything. To navigate these complex compliance factors, if the business owner does not have good consultants or domain experts then there could be pricey pitfalls. Retaining the services of a consultant (Excise/ Sales Tax/ PF-ESIC) is an investment and not a cost. Do not try to cut corners. But do not depend on them blindly. Join an association. Be a part of an umbrella body. This will help enrich knowledge and gain frequent insight on changes in the business world especially the law and regulations aspect. Sit and discuss, ask the right questions, and understand the information, process it, analyze and store it for future reference. These associations are also genuine source of references of good consultants. Getting stuck with an undesirable consultant can also be a sad burden.

Lesson 3 – Try and walk through each and every activity of your business and make notes. As cumbersome it may seem; the benefits are manifold. How is a sales invoice made? How do you take the backup of your data? What is the procurement process? Do this frequently and compare your notes. At face value, it might seem absurd but take a moment and deliberate internally. We may not be able to do everything all the time but we must have the knowledge of how an activity is being done and why it is being done. As an entrepreneur, we must be able to chip in wherever there is a need for additional resource or to share the load.

As a business owner, you are the person in charge. You cannot claim to be unaware or dodge from the details of laws impacting your business. Since you cannot evade it, the judicious thing is to embrace it with open arms and remain truly “in charge”. Be aware, read, ask questions and educate yourself. Spending time in learning subtleties of business is not cost but a life-long investment.

Peter Drucker said “Today knowledge is power. It controls access to opportunity and advancement.”