The Hindu Business Line : A religion called cost control

While the improved economic outlook and the return of demand are responsible for the fat profits posted by companies, there is an unsung factor that has worked to boost bottomlines- cost reduction.

From a mere mantra, cost control has turned into a religion with a fanatical following across Corporate India.

It is now a major tool employed by companies; for some, it is a life raft to stay afloat while for others it is the apogee motor that takes earnings into a higher orbit. Companies have succeeded in dropping inventory levels, bringing down debtors outstandings, cutting down employee costs and, of course, reducing finance charges.

And no industry is an atheist when it comes to this religion. Automobiles or cement, steel or information technology, companies across industries have embraced the concept of cost reduction. Cost control has been as much a factor responsible for the turnaround of companies, such as Tata Engineering and Steel Authority of India, as a pick-up in market demand for their products.

Tata Engineering has actually produced a manual on cost control for the benefit of sister companies in the group, according to Mr R. Gopalakrishnan, Executive Director, Tata Sons Ltd. He told this writer recently that if there was one single factor responsible for the smart performances of the Tata group companies in recent times, that was cost control.

Actually, cost control is not something that descended from heaven yesterday. It is just that companies, spurred by the difficult years since the mid-1990s when the last boom in Indian industry happened, are rediscovering it all over again.

The period following the mid-1990s when companies invested in capacities indiscriminately was one of learning.

The excess capacities were not to be absorbed too soon and the demand recession in major industries only made things worse. Companies had to necessarily look inward to stay afloat and thus began to focus on cost reduction and control.

Major companies, such as Ashok Leyland, that had a serious cost reduction programme in place even four years ago showed the way for the rest. The company's Managing Director, Mr R. Seshasayee's favourite catch-phrase in the difficult years was "mining more value" which really meant that the company had to strive to get that extra bang for every buck it spent.

He was really trying to put a positive spin on what was essentially a very tough exercise, for cutting costs in areas such as employee compensation is not an easy job. The company was also a trendsetter in using information technology for cost control as by the reverse auctions that it conducts for vendors to optimise on material sourcing costs. Today, most major companies do the same.

The essence of all these efforts was to constantly keep bringing break-even levels down for that alone could ensure earnings in a recessionary market. Tata Engineering has excelled in this having brought down the break-even level for its Indica project from 75 per cent of capacity two years ago to 49 per cent. With costs recovered at this level, every extra car sold means pure profit for the company.

The second factor responsible for the awakening on cost control is the increasingly competitive market place. Gone are the days of cost-plus pricing; today, products have to be priced based on the competition and the producer has to work backwards from there to build his cost-structure.

Just look at how prices have dropped in the passenger car market since the advent of competition or for that matter in mobile telephony where tariffs change almost every other day. To survive in such milieu, companies have to constantly keep looking at their cost structure.

Companies can no longer complain of a high-cost environment, especially those in manufacturing which have always been grumbling about high power tariffs and interest costs that make them uncompetitive.

Today, these very same companies are designing strategies to overcome these handicaps even as the falling interest rate has been a major help to them.

Finally, the increasing focus on exports has also been a significant factor in companies taking a closer look at their cost structure.

Exports are no longer an insurance that companies take out during a recession in India; today they are an integral growth strategy for most major companies that want to be significant players on the global stage.

If a TVS Motor wants to set up a manufacturing base in South-East Asia or others such as Sundaram Brake Linings, Bharat Forge, Sundram Fasteners, Ranbaxy Laboratories, BHEL or Asian Paints, to name just a few, would like to count exports as a dominant part of their income, they not only need superior products and technology but also a competitive price- a tight cost structure becomes an absolute necessity then.

Most of those serious about controlling costs have achieved the difficult part already. For instance, companies in the Tata group as also others such as Reliance Industries, SAIL and IPCL have been quietly reducing payroll costs through VRS programmes.

All that they now have to do is to ensure that cost control programmes are continued as religiously in the good times as in the bad. If they succeed that would add an extra layer to their earnings. If they don't, well, they will feel the effect , perhaps, to a lesser extent than in the past when the next recession comes by.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Indo Gulf Fertilisers: Reject

Online trading: Simple and fast but fewer options

TVS Motor: Of facelifts and nosejobs

Segment reporting: Spirit matters too, not just the letter

Useful trend indicator

A religion called cost control

Liquidity: Fuel for market excesses

Using Liquid BeEs effectively

Punjab Tractors: Disinvestment at a discount

Templeton India Money Market Account: Invest

UTI Mastergrowth: Hold