Why defence PSUs need to evolve
Aug 04 2014
The government has opened up the hallowed defence production sector allowing foreign direct investment up to 49 per cent. Mark it, this is only the beginning and the FDI allowance may go up at least to 51 per cent (majority shareholding) and even 100 per cent (full ownership). Defence production is a tricky business since due to security concerns the governments of supplier and buyer firms are also actively engaged in the deals. The task of managing change to new competitive realities for a defence PSU (DPSU) is more complicated since its dependence extends on both sides — the customer has the option to buy from elsewhere citing quality and delivery issues, and the supplier who at times may be the only one to possess the requisite input component or technology. We have had cases of blacklisting some international suppliers that played havoc with the existing production schedules of DPSUs.
With the proposed increase in FDI in defence production, there would be a sea-change in the relationships between important stakeholders. So far, dealing with largely captive customers and being sole suppliers, DPSUs will henceforth face new incumbents. Major policy and/or technological changes cause rapid upheavals in the pecking order of winners and losers. In good ‘protected’ times, captive, dependent markets can be a huge plus point leading to large accumulated surpluses. However, this notion of competitiveness is only illusory — when the tide turns, the same relationship can become an albatross around the neck of the management.
If there is a dynamic, volatile and ever-changing industry that affects lives of people across the world, be they poor or rich, rural or urban, it is the telecom industry. It has undergone major technological and structural upheavals within a decade. In quick time, what was a landline-based analogue business has transformed itself into a wireless information and services highway with the added convergence of computing. It is now a truly global industry with large multinationals providing global connectivity, and witnessing some of the biggest acquisitions and mergers (sometimes hostile). Within a short timeframe, the industry has seen some of the biggest winners and losers, notable examples being Nokia, Siemens-Ericsson, Blackberry, BSNL, ITI, and to an extent, even Motorola.
While many private sector companies are thriving in India, the subsequent decline of BSNL and ITI is humbling. Both the companies thrived till the beginning of this century as BSNL enjoyed virtual monopoly in landline business, and ITI was its major telecom equipment supplier. Since the past decade or more, both the companies have been reporting losses. BSNL suffered a loss of Rs 14,979 crore on a turnover of Rs 25,655 crore in 2013-14 in landline business, while ITI showed a declining trend of Rs 705 crore (once upon a time it was Rs 4,660 crore) turnover with losses of Rs 261 crore. In BSNL’s case, there is an eye-popping figure of Rs 13,758 crore as salary and other costs (almost surreal 54 per cent) paid to 2,52,400 employees. (A comparative figure of cost on employees for Airtel is less than 5 per cent of revenue). This has happened in times when the telecom sector has exploded in India and GDP had been galloping at more than 6 per cent average.
The reasons for unsuccessful turnaround attempts can be several, viz.: historical hubris, false expectations and assumptions, complacency bordering on arrogance, rigid employee behaviours, limited managerial mindsets, and set automaton habits (always looking up!). In the new competitive paradigm, the management sometimes loses objectivity under pressure, and often has little idea about new emerging technologies, organisational structures, or even new ways of marketing.
The need for technological adaptation and market competition can be a deadly combination especially for those historically well-entrenched in protective cocoon environments. In India, change in the government’s thinking and behaviour is in the air — the old ways can no longer be acceptable. Between 2001 and 2011, India’s defence expenditure has increased by 231 per cent, and since 2010, the country has become the world’s largest importer of arms. The new expectations are reflected in the manner in which the government is participating and discussing goals and setting performance deadlines. FDI in defence production is a challenge to change for the country’s eight DPSUs.
(The writer is a professor of strategy and corporate governance, IIM-Lucknow)