Myth: The social costs of retrenchment are immense rendering the working class vulnerable to massive unemployment and poverty.
Reality: Tata Steel, earlier Tisco, shed 30,000 employees at its Jamshedpur plant from 78,000 to 48,000 between 1996 and 2001. There were murmurs of protest from sections of left leaning unions, but not a day’s loss of work was reported. The employees were given a handsome retirement package and most of their social security entitlements retained till their actual age of retirement. Some of those retrenched blew up their money on booze and the undesirable ‘luxuries’ of life, but most who took their golden handshakes home turned petty entrepreneurs, opening an STD booth here, a grocery there, a xerox shop here and many other profitable ventures of trade and commerce. Tata Steel’s topline grew from Rs 6,349.35 crore on 31 March, 1996 to Rs 8,490.78 crore on 31 March, 2001, it’s bottomline, fluctuated between Rs 565.70 crore on 31 March, 1996 and Rs 553.44 crore on 31 March 2001. Much of the fluctuation would have resulted from the massive retrenchment payouts. But if you look at the full impact, then Tata Steel, with its much depleted labour force, posted a topline of Rs 15,876 crore and a bottomline of Rs 3,474 crore on 31 March 2005. Tata Steel’s capacity rose by only half a million tonnes between 1991 and 1995 to 3 million tonnes, but during the period that it laid off its workers, the company added another million tonnes to its capacity. Right now, Tata Steel has a capacity of 5 million tonnes and is planning to expand to 7.4 million tonnes by 2008-09. For regular visitors to Jamshedpur, the city looks much more propserous today than anytime in the past.
Myth: A mega entity creates an unmanageble monster.
Reality: India’s biggest private sector company, Reliance Industries Ltd was built on the principle of backward and forward integration where every manufacturing process was linked to the other in an integrated whole, yet, each big enough to survive as an independent enterprise. At one end of the chain, RIL has oil and gas production, at the other end is fabrics. In between are as many as 33 independent manufacturing processes that turn out everything from LPG, motor spirit, kerosene, naphtha, propylene, ethylene and butene to polyester chips, PSF, PFY, texturised dyed yarn, twisted dyed yarn and spun yarn. RIL could have settled for any one of these manufacturing processes and made good money. Yet, since most products in Reliance’s flow chart are commodities that typically follow a cyclical price trend, certain products reap huge profits during boom time, and losses during a downturn. By getting so many products in the value chain, Reliance insured itself against cyclical downfalls. Integration also helped Reliance save taxes on various inputs manufactured in-house. This resulted in huge topline growth year after year. And huge bottomline growth to boot. At a compounded annual growth rate, RIL’s bottomline grew 26% every year for the past 25 years, making it among the top 150 global companies in terms of net profit, and among the top 450 in terms of sales. On the stock market, the RIL scrip posted an average annual return of 39%. This, in turn, brought huge dividends for Reliance shareholders, who add up to a quarter of all equity investors in the country.
Myth: Monopolies are not good for business. Oil monopolies will result in cartels.
Reality: When John D Rockefeller set up Standard Oil in 1870, kerosene sold for 30 cents a gallon. Some 20 years later, when Mr Rockefeller controlled almost 90% of the American market, kerosene sold for only 8 cents a gallon. By 1910, Rockefeller’s net worth equalled almost $250 billion in today’s terms, i.e., nearly twice as much as Bill Gates.
Between them, India’s state-owned oil companies ONGC, IOC, HPCL, BPCL and GAIL generate an annual turnover of Rs 2,96,659 crore, with reserves of Rs 94,599 crore and annual profit of Rs 26,000 crore. Exxon Mobil and Royal Dutch Shell each are still three times as big entitites.
Soon after taking charge as minister of petroleum and natural gas last year, Mani Shankar Aiyar proposed the merger of India’s oil companies as either a single monolith or as two giant entities to take on the world’s big players and to create operational synergies brought about by gigantic scales. This would not only add money and muscle to India’s energy security needs, but also help take on global competition in an open economy.
Aiyar argued that the oil companies could possibly be merged into two separate entities the ONGC-BPCL-HPCL combine and the IOC-OIL combine. In terms of size alone, and as per their balance sheet for 2003-04, the first would represent net sales of Rs 1,44,245 crore, with reserves worth Rs 58,000 crore and an annual profit of Rs 14,141 crore; the second would have a matching turnover of Rs 1,40,000 crore, with reserves worth Rs 30,000 crore and an annual profit of Rs 10,000 crore plus.
To examine the proposal the government set up an advisory committee on Synergy in Energy under the chairmanship of one-time public sector heavyweight V Krihnamurthy. This week the committee suggested against the merger of state-owned oil companies. Why?
Because the committee feels that (a) For enabling competition and recognition of vulnerability toward energy supply, presence of a mega entitity dominating the energy market has ambiguous implications...any merger in the Indian context would result in reduction of manpower and shall not be feasible, (b) In many cases, after merger, a situation of oil monopolies was created and cartels were formed, and (c) Available examples of M&As suggest that just 29% of all M&A globally has succeeded in increasing returns for shareholders and that lack of attention to the human side was a major cause of failed mergers. There are also equal numbers of international examples of specialist firms in each segment of the value chain who have performed better as they are more focussed, have lower overheads and have greater operational flexibility.
Essentially, in rejecting the merger story, the Krishnamurthy committee says that mergers are bad because they lead to depletion of workforce and the human cost is significant, mergers lead to cartelisation, and finally, there are any number of examples to prove small is good and profitable. The arguments are fallacious. The examples of Tisco, Reliance and Standard Oil prove that neither does retrenchment create social upheavals, nor merged entities along a value chain erode profitability or business synergy. Finally, monopolies are not necessarily evil as in the case of Standard Oil. Rockefeller brought down the price of kerosene from 30 cents a gallon to 8 cents once he gained monopoly over 90 per cent of the American market.
The committee has also not explained how specialist firms in each segment of the value chain have performed better as they are more focussed, have lower overheads and greater operational flexibility, though it suggests that there are enough international examples to prove this contention. A few years ago, the global oil industry witnessed the merger of two former Standard Oil outfits, Exxon and Mobil, in what was was billed as the industry’s biggest successful merger. The merger move resulted in antitrust campaigners raising their voices against retrenchment, monopoly and cartelisation. But executives in the two companies argued that the merger would allow the new, more efficient company to close down outdated refineries, slash 7% of the workforce and provide consumers with better and cheaper products. In the end, the company executives proved right, the anti-trust campaigners wrong.
In 30 years of state-controlled oil economy in India, the retail price of petroleum products have been artificially managed by the government. No single player has been allowed to set its own price list so far. Result: price of petroleum products remain the same across the retail outlets of four state-owned companies (IOC, BPCL, HPCL and IBP) as well as the pumps operated by two new Indian private sector players (Reliance and Essar), one multinational giant (Shell) and one state-owned upstream player (ONGC). There’s a state-managed cartel at work.
Between them, India’s state-owned oil companies employ 97,000 workers. Do they need protection? If protection leads to unproductive labour, the answer is clearly no. Tata Steel’s labour policies are a case in point. What’s more, the state-owned Steel Authority of India (Sail), where Mr Krishnamurthy had been the bossman till the late ’80s, is classic proof of how staff rationalisation can save a behemoth from the brink of certain collapse. In 1998-99, Sail undertook a massive voluntary retirement scheme for its 174,736 workers. That year, Sail posted a net loss of Rs 1,574 crore on a turnover of Rs 14,994 crore. By 2004-05, Sail had retired 35,356 workers, bringing down its staff strength to 126,857, and posted a net profit of Rs 6,817 crore on a turnover of Rs 31,800 crore. Labour productivity at Sail went up from 95 tonnes of crude steel per person per year in 1998-99 to 144 tonnes of crude steel per worker per year in 2004-05.
What was Mr V Krishnamurthy doing during this period? He was happily into retirement until the Congress government resurrected him last year.
Popular American folklore has a story about a man waking up from a 20-year slumber to find the world around him had changed. Mr Krishnamurthy, and his team, made up of public sector and government officials who cut their teeth in the sad old days of licence-permit raj would have surely read the story of Rip Van Winkle.
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