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The Rediff Interview/Mukesh Ambani, chairman, Reliance Industries Ltd
Mukesh Ambani on retail and SEZ plans
January 19, 2007
If Dhirubhai Ambani was a larger-than-life patriarch and Anil was the public face of Reliance, Mukesh Ambani was an enigma. Those who knew him well credited him with leading Reliance's turbo-charged growth over the last two decades.
But very little is publicly known of his beliefs, vision and motivation. In his most expansive interview ever to MoneyLIFE, a personal finance magazine, Reliance Industries chairman Mukesh Ambani tells MoneyLIFE editors Sucheta Dalal and Debashis Basu, what drives him and his business decisions.
Here is the third and last part of the interview:
And then you got into retailing. . .
Within organised retailing, we are really talking of agri-based retailing. For a variety of reasons, our economy did not get a chance to develop a sustainable value chain in the foods business.
The US and Europe saw large players in foods by the '50s and '60s; but in India, food has always been a disorganised, fragmented value chain. We believe that India's purchasing power will be food-dominated. The first thing we need is safe to eat food that will, in turn, meet many other needs.
But all kinds of mindless legislation remains in place and other players like Hindustan Lever have tried to get around it without real success.
True. But we are in a different era. It is easier for people to see the value proposition -- 28% of our GDP comes from agriculture, but 60% of the people depend on it. So, if we want to make a difference to this 60%, we will have to bring agriculture to its true potential.
Having looked at it obsessively for the past year, I feel that we can convert all our disadvantages into an opportunity. We have fragmented landholdings; but we can integrate that with technology. With proper inputs, there is no reason why Indian farmers cannot become world-class. What is missing? It is distribution.
We now have an opportunity to straightway catch the next wave of distribution logistics. We don't have to go through what the world went through and we can build what even the US will not have by 2010. That is possible today. In terms of sheer money, it may take Rs 25,000 crore (Rs 250 billion).
In the earlier days, it was impossible for corporates to think of this. Today, it is possible for the world to finance it and for you to execute a distribution network. We are not big believers in contract farming. So we have removed the 'r' out of cont(r)act farming. I believe that everyone should be able to relate to market economy. If you produce something, you should be able to sell it at a market price.
What is the model that will deliver your vision?
We are working at putting the most modern technology in farms at Indian costs. I always say whatever the US implements in dollars we should be able to do it at exchange rate of Rs 10, then we would be globally competitive.
When we start off, this looks impossible. Then we think through it, value-engineer it and come close to it. That is the cost part. Then comes the quality issue. While we are working at improving the offering to the Indian consumer, we are ultimately interested in connecting the Indian farmer to the global market. Global consumers have to accept Indian agricultural products.
We all know India has a huge competitive advantage -- we have the largest arable land, focused sunshine, sensible utilisation of water in 30% of land. The question is what should we do to make the US market -- the most difficult market in the world -- accept our produce. For that, we need traceability. It is a simple technology, which we are giving the farmers. It needs certification and verification processes -- to us it is like a process plant. You can then get the output, sort it and grade it.
At what point to grade is a decision that Reliance will make, at the farm level or at the intermediary's level. . . what is least-cost, what works, what everybody is comfortable with.
Coarse products are easy, the problem with fresh produce is perishability -- it becomes worthless in seven days. That is why farmers are not producing fresh. That is the tallest mountain for us to climb. . . to put in place distribution and logistics to handle fresh. If we can send fresh produce through technology and distribution from any farm in India to anywhere in the world at their quality standards, then imagine the arbitrage.
What is the arbitrage? Can you give us an example.
We talked of IT. What is IT? It is the arbitrage between the per hour rate in the US and India. We have gone from zero to $20 billion in exporting software, employing about 1 million people in 10 years. These million people changed the brand of India, consumption pattern and gave us the confidence that we can do everything.
The arbitrage has narrowed but is still there. It will disappear in a few decades by which time our software exports may be $100 billion. From a million people, it will benefit 10 million people. If that is what has happened in software, imagine what will happen in agriculture.
Is there this kind of arbitrage in agriculture?
Let me give you some numbers. Take potatoes, the most common food across the world. From Bill Gates to my driver, everybody eats potatoes. Now, plot the prices. Farmers in Uttar Pradesh and Bihar get about Rs 4-5 a kilo; in the Middle East, the wholesale price is about Rs 25-30 a kilo. In the US, Sam's Club, it is Rs 90 a kilo. In Europe, it is Rs 110 a kilo. The arbitrage is 1:20. If we get our produce right, and if the US market is opened up, you will be surprised how quickly we reach $20 billion.
The food market is much bigger than the software services market. And the money goes straight into the hands of millions of farmers. The spinoffs are enormous -- jobs, houses, durables, a whole new consumption boom will start in rural areas.
What about the front end -- the retailing sector?
The most employment-intensive industry in the world is retail and our next generation needs these jobs. India has a strategy for the next generation of doctors, engineers and biotech graduates, etc. But for the country as a whole, what we need to resolve is how to create sensible jobs for undergraduates and or those even less educated.
Organised retail alone can absorb these people in large numbers. We estimate about 1.5 million jobs from this sector over the next three years. In the process, we will reduce the cost to consumers by 20% and increase the efficiency of farmers thrice over. Farm incomes can go up 600% to 900% over the next few years from the current base.
By higher prices or higher output?
Higher output. The country produces 150 million tonnes of fresh produce today. We can go to 300-400 million tonnes fairly quickly over a few crop cycles, as long as we can move those millions through the system and have world-class quality.
This means that when you go to the market -- doesn't matter whether it is Reliance or Bharti -- you should have the confidence that you are buying quality and it is safe to eat. After meeting the needs of Indian consumers, how do we take advantage in fresh through exports and value added industry such as processing?
It's really a yield-productivity-distribution story that we are involved with right now. Our strategy is fundamentally different from the others.
In what sense?
Most other retailers come in when purchasing power has developed. That's what Wal-Mart did in China. India is also at that inflection point, so retail chains would come in and start in the urban areas and move backward.
Ours is a diametrically opposite strategy. We are driven by creating purchasing power first. The farmers will have purchasing power and their staff will have purchasing power. Today, the farmer with two acres of land has five people in his family. It is like running a factory, but one that is only running 20% of the time because 80% of the time he cannot sell his products.
He doesn't have the inputs to produce the right quality. What we have to do is win his trust and bring him to his true potential so that he can run his two acres at 90% and increase his income by nine times. Once we do it, it is such a big market that there is a place for at least 5-6 players like us. We can't do it all alone. But we can show the way.
It is like in telecom; when we said we will get 10 million phone users, a lot of people laughed. Today, there are 3-4 guys who are getting a million customers a month. We think exactly the same needs to happen in farms. When that happens, we will have created purchasing power.
We will start at the bottom and sell them their first cooking range, first washing machine, first bed -- whatever is needed to improve quality of life. All this will create sustainable employment. That is really retail as we see it. We need to execute it well and prove some of these hypotheses. We might be wrong in some of them so we will have to fine tune, adjust and learn.
We only have a superficial knowledge about the true rural India -- the power structure, how to operate in tehsils, what are their true concerns, etc. But we think we can significantly change purchasing power and how we live. That's what motivates us.
How far have your progressed in your plans?
We have pilot projects in Andhra Pradesh, Punjab and West Bengal. In all three places, we are very encouraged. There will be some big learning involved but the potential undoubtedly exists.
You also have massive plans for SEZs. What is the thought process there?
The logic of SEZ is simple. India is long on talent and we need to create as many jobs as possible in manufacturing and services.
India's land bank is about 750-800 million acres. Out of this, 500 million acres can be potentially farmed, but today only 300-350 million is arable and used for agriculture. We need to bring the remaining 150 million acres into productive use. More than 100 million households rely on this land base. India is creating 800,000 engineers a year and 400,00-500,000 semi-professionals. So we will bring in about 2 million professionals into the workforce annually over the next 20 years. We need to create jobs for them.
Government jobs and self-employment in manufacturing are not enough. It is large companies that create employment. That's the reality. So we have the supply of talent that can potentially be of the highest quality and lowest cost for 10 years and we also have large markets here.
What is missing? It is integrated infrastructure and a reasonable assurance of facilities that are good for at least 10 years. My target company would want to come to India but operate near the big metros. This is the example that you learn from Shanghai or Shenzen. That is where our SEZs with integrated infrastructure come in -- they provide an integrated airport, seaport, transportation, power and housing -- all at sensible costs.
When I put out a comparative chart, I should be able to tell big employers: this is how we compare with Singapore, Dubai, Shenzhen or Malaysia and Korea. On every parameter, I should beat others in cost and quality of infrastructure. India might be short of infrastructure but here you have guaranteed infrastructure and talent.
You are near Bombay and Delhi and have access to the Indian market and global markets. So ours is an employment-led SEZ. The strategy is first to get the employer. I think we can create 5 million jobs in each of the two 25,000-acre SEZs. But we need many more just to make sure that most of our educated youth is occupied.
The criticism is that SEzs are really land plays. . .
Most people don't understand that the residential commercial piece is also a big cost element in SEZs. For employers to attract and retain talent, India has to be almost as attractive as the US. So I have to provide for the cost of living -- housing, shopping environment and everything else exactly like the US, but at an Indian cost.
We have a big talent pool in the US and they are coming back with huge enthusiasm. For our agri-business, we are now bringing back a lot of talented Indians from the US who have worked in Wholesale Foods, Kraft, etc.
We offer to protect their savings in a job here. If you earn $100,000 a year there, you also spend $80,000 and save $15,000-$20,000. We say, if you work for us in India, we will ensure you save $15,000 dollars a year and are part of something exciting without a loss to you.
But this doesn't work without a scheme. If you ask me to build a power plant, I cannot give that power at 3 cents or 4 cents, unless I put up a 2000 MW project. It's the same for an airport, seaport and all the other stuff. You need to spread costs over a sensible size to keep unit costs low.
These projects will take time to fructify. When do you expect to start getting returns?
Both agri-business and SEZs will make a sustainable return in the long run and we have a strong enough balance sheet to sustain these. At the end of the day, it will leave us with the satisfaction of having tried to show the way. The easiest thing for me is to go to London and New York, sit in a hotel, talk to investment bankers and buy 10 companies.
Are you going to do that too?
(Laughs) Depends on the value we get and what excites us. But that's the easy stuff. What does it take? It's deal-making followed by a PR pitch to justify it. That doesn't give me the same satisfaction: of saying that we tried our hardest to blaze a new trail or change the status quo. There are 300 to 400 of us who think the same way.
Young people want to go to Punjab and stay there for a month to figure out what works. In telecom, when we said we would go into six lakh villages, a lot of our friends thought it's all talk. Even the regulator was sceptical. Today, it is rural areas that are making more money.
I have noticed that talent is automatically motivated by larger goals and some of the brightest people want to do things that are different. After we hire from the IIMs and IITs every year, we run them through a six-month induction programme where we teach them the Reliance way and let them choose where they want to work through a competitive framework.
Each business makes a presentation. In the '90s, finance and treasury was the in-thing. Then, it was marketing. In the last two years, most bright young people want to work in rural areas. This is a big mindset change.
In retailing, they are saying, we don't want to do merchandising; we want to create those rural markets. In that sense, it is great fun. I always tell my young guys, we are going on an expedition together. When you do that we need to support each other because we can get lost quickly.
In this wide canvass, aren't you looking at the education sector?
Education is one of the many services we aim to offer. I personally worked for three months on education and healthcare as part of Prime Minister Vajpayee's advisory. It is a tougher mountain to climb.
Education is the first aspiration of Indians, no matter what the prosperity level. In that sense, you have a ready customer.
(Laughs) To learn what you said, we spent crores of rupees. After our restructuring, we wondered what we should be getting into and got the best brains together to visualise where the big opportunities are. We studied what people want to spend their money on at all income levels and in different geographies.
People first want to spend money on food -- that is common across the world. The second, in India, is education. In many parts of the world, it comes way down the list of priorities. So, there is a huge opportunity.
What has been your best investment so far?
Our best investment has been in technology and in developing skills. For instance, we invested Rs300 crore in technology that gave us unparalleled transparency and accountability within the organisation.
It allows us to spend Rs 40,000 crore (Rs 400 billion) a year and sleep in peace. We were among the first to introduce videoconferencing in India. In the 80s, we invested in helicopters to go to Patalganga to save time. People saw it as flashy lifestyle. For us, it was facilitating investments.
The other big investment we are now making is in talent. We are developing a culture of creativity that will, in turn, create critical product-service differentials. You must see our life sciences business to appreciate this. Another way to say this is that we are investing to build the skills and experience of our people so that they can then believe in their conviction, take risks and deliver results. Let me also answer the flipside.
We have not invested well in marketing ourselves. It is partly because of my trait. I believe that if my conviction is right, I will not need to go and explain myself to anyone. I believed that ultimately everyone will figure out what you are. We are changing this approach.
ALSO SEE: Dhirubhai Ambani: A slide show
Photograph: STR/AFP/Getty Images