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V. S. Pai

IT IS nearly a decade now since India started on the liberalisation path. Customers were supposed to benefit and Indian companies were supposed to face intense competition from their foreign counterparts.

A study, on CMIE database, was undertaken to test the competitiveness of private sector companies against foreign companies. The study, spanning seven years ending March 2000, covered a cross-section of industries. Two dimensions of competitiveness were addressed: Cost management and profitability. First the cost structure was analysed. Interestingly, the raw materials expenses to net sales for foreign companies was lower by 5 per cent vis-à-vis the Indian companies. Cost of production to net sales too was lower for the foreign firms by a similar margin.

On the profitability side, the PAT to capital employed ratio was 5 per cent higher for the foreign companies. By employing lesser capital they managed a higher return, indicative of the more productive use of funds invested.

This superior earnings point was reiterated by the PAT to net worth ratio. Indian companies stood 8 per cent lower in their earnings on net worth. The shareholders of foreign companies operating in India in this period were better off not only on this return but also on the dividends paid. The foreign firm shareholders received higher dividends vis-à-vis their counterparts in Indian private sector firms, as their dividend paid to PAT ratio was 13 per cent higher.

Where the Indian companies were ahead was in holding back considerably higher funds by way of retained earnings. Their retained earnings to PAT was 13 per cent higher than the foreign firms'. One is tempted to conclude that this is because Indian companies may not be able to access low-cost funds abroad compared to the MNCs. However, given the continued lower dividends paid out by the domestic firms, one wonders what is the benefit to the shareholders. Shareholders may be better off getting out of these companies and reinvesting in foreign ventures to earn better returns. The ideal time for such a reinvestment decision is now as most the stocks are trading close to their lows. The fear that Indian companies may find the going tough post liberalisation is proving true, going by the study's findings. On most parameters considered to gauge the level of competitiveness, domestic companies have shown poor results. How these companies will perform economically in another decade is a vital question.

As a case in point, the ROCE (return of capital employed) for the Indian firms fell from 6.3 per cent in 1993-94 to 1.6 per cent in 1999-2000. So also the RONW (return on net worth), which fell from 13 per cent to 3.1 per cent in the same period. It is not that foreign firms did not experience a slow down in their performance. For the above period, their ROCE slipped from 10 per cent to 7 per cent and the RONW from 17.8 per cent to 11.6 per cent. The negative impact in the latter case has been relatively less. This can be attributed to the superior product/service quality, greater ad spend, tighter cost control and perfected managerial practices.

The extent of the fall in performance between the two groups of companies was also measured. For instance, on the profit side the difference in PAT to capital employed between the two sets of companies, which was only 3.7 per cent in 1993-94, rose to 5.4 per cent by 1999-2000. PAT to net worth in this period rose from 4.8 per cent to 8.5 per cent. This indicates that the returns for foreign companies have been rising compared to their Indian counterparts. This clearly portrays the increasing gap in performance between the two sets of companies.

The general refrain is how to ensure the sustainability of competitive advantage for a firm. If the competitive advantage itself is suspect, where is the question of making it sustainable.

Therefore, the challenge before Indian companies is to address the fundamental business issues of cost and profitability to ensure their survival in the foreseeable future.

(The author is Professor, Corporate Strategy Area, Kirloskar Institute of Advanced Management Studies, Harihar, Karnataka.)

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