In an era of reforms, only big is beautiful

D. Sampathkumar

With nearly a decade down the road of economic reforms, it is time to pose the question: how have the reforms played themselves out for the organised corporate sector? A definitive answer is somewhat difficult. That is because, the process of liberalisation initiated back then, has unleashed forces whose impact is still being felt by the corporate sector. Of even greater significance is that its impact has tended to vary across industry segments and enterprises within each segment.

It is easy to see why this should be so. A divergent impact is in the very nature of the liberalisation process itself. In its broadest sense, liberalisation is all about conferring 'freedom' on economic agents. But 'freedom' in this context has meant so many things. There is for instance, the freedom to expand or diversify into hitherto restricted areas. Then there is the freedom to access the capital market both internal and external available to the corporate sector. Enterprises differ from one another in their capacity to exploit freedoms available to themselves or counter the freedoms available to their competitors. Consequently, its impact too is bound to be differing from one industry to the other. Similarly within an industry too its impact could vary among different players therein. It is unrealistic to expect that the capacity of Reliance Industries to raise money from the market and grow would be the same as that of say, Welspun India, a company with interests in the textile industry. Similarly the freedom to import certain goods already manufactured in the country may not affect players across all industries, uniformly as competitive capability differs from industry to industry. A company such as TI Cycles has less reason to fear competition from German cycle manufacturers than Videocon of competition from audio equipment manufacturers from China.

The differing impact can perhaps be studied from the framework of 'value chain' across a product. A case in point is that of textiles whose value chain originates in petrochemical fibre intermediates to fibre, yarn, fabric and finally in apparels. Ethylene Glycol is a fibre intermediate, which is then used in the manufacture of polyester staple fibre. The fibre in turn goes into manufacture of polyester yarn. Now yarn is an input in the manufacture of fabric and the fabric leads to the manufacture of apparel. How do forces of competition impact different sectors in this value chain? There has actually been an increase in the concentration of economic power at the lower end namely fibre and fibre intermediates. The index of concentration has doubled in the case of ethylene glycol and polyester staple fibre with Reliance Industries increasing its domination over the years. Things are not so gloomy from a consumer perspective as we move up the value chain to polyester yarn. There is some concentration of economic power. But they have pretty much stayed at the same level in the last few years thanks to the presence of a larger number of players each vying for a share of the market pie. The position improves far more dramatically once we get to fabrics. Here, the players are so numerous that no one can claim any worthwhile market share for oneself. A statistical measure of market share (the sum of squares of individual market shares) is so insignificant as to be almost zero. But the moment we move up to the branded apparel market we begin to see emergence of economic power and what is more, there has been a strengthening of economic power in the last few years.

What is the lesson to be drawn from this example? It is this. It is a fallacy to think that with the ushering in of libralisation there should be greater consumer choice or Intermediate goods with more or less uniform product attributes have tended to become a 'commodity business' as they should be. Any player who is able to exploit cost advantages in manufacture could reasonably look to improve market share and eventually drive out other players operating at the margin. Should such a player also possess superior capacity to mobilise monies in the market, the potential for concentration of economic power gets only reinforced. In contrast, liberalisation has not impacted on the market structure in a commodity business with low capital intensity. The more or less diffused market structure in the man-made yarn industry or the near total absence of concentration in fabric business testifies to this proposition. But as we move on to the apparel market, there has been a strengthening of market power. What this means is that at the tail end of consumer product markets, brand power acquires a significance. Hence, even though the manufacture as such may not be capital intensive, the ability to lay out vast sums of money in sales promotion and advertising can make a difference. In this sense, consumer goods too have the inherent potential for concentration of market power due to capital intensive nature of outlays on sales promotion and advertising. But there is a fundamental difference between capital intensity in intermediate goods and that of consumer goods. The capital intensity in the case of the former can be bridged with loan capital. But the latter requires shareholders' funds to mount a massive campaign of advertising and sales promotion for gaining market power. Highly profitable companies already in existence can thus leverage their financial strength for greater concentration of market power in an era of economic liberalisation. In major segments of consumer goods such as garments or food processing, consumers are not all that brand conscious. There is perhaps room for the neighbourhood tailor or the housewife sponsored jams and pickles. But as incomes go up consumer choice is increasingly likely to turn towards branded goods. Money power would begin to call the shots then.

It is much the same story in capital goods sector. Customers increasingly demanded more sophisticated and versatile pieces of machinery which domestic manufacturers given their poor capital base and lack of investments in R&D have been unable to deliver at competitive costs. That prospective customers also had the choice of acquiring cheap second hand machinery from the West, which itself was getting out of commoditised businesses, added to their woes. The only ones to have survived are those in the public sector (BHEL) or MNCs. Even they have found the going tough. Their performance, such as it is, once again drives home the message that the future belongs to those with access to capital.

Is there space for domestic industry? In manufacturing, financially weak domestic enterprises may have to resign themselves to providing sub-contract services to larger invariably overseas companies. The 'Services' sector offers some hope. The inherently undifferentiated nature of services is the key here. For all the advertising hype it is difficult to perceive 'value' in savings accounts of different commercial banks or vehicle loans from two different finance companies. Or at least, not in the foreseeable future.