This column in Business Standard of 28 January 2003 considers whether Kumar Mangalam Birla should take over Larsen and Toubro. L&T managed to stay independent.
ENGINEERS VS BUSINESSMEN
The fight between the management
of Larsen and Toubro and Kumar Mangalam Birla over demerger of L&T’s cement
business is heating up. Normally, if someone with such a large shareholding
were to oppose a management’s intentions, the management would retrace its
steps. In this case, however, the government financial institutions (FIs) are
even bigger shareholders. The A V Birla group would have been well advised to
take the FIs on board. Probably it tried and failed – as people generally do
with FIs. The government has so many layers, and there is so much distrust
amongst decision-makers, that it is virtually impossible to get a positive
decision from them. But then, the FIs have apparently taken a positive decision
– to support the demerger. Why did they? They are obviously taking the view
that L&T is better off under the present management than under Kumar Mangalam
Birla.
The A V Birla group was amongst
India’s best managed in Aditya Birla’s time; since his death, Kumar Mangalam
has improved the management structure further – cut out deadwood, brought in
more professional managers, and introduced systems of governance. Why is it
then that the prospect of his taking over L&T does not enthuse the
financial institutions – or for that matter, any significant shareholder?
However professional, however competent he may be, Kumar Mangalam is seen as a
businessman, whereas A M Naik and his people are seen as engineers.
This is an uncanny throwback to
the first days of independence. Then there was much distrust of businessmen,
who were seen as heartless profiteers. That image went back to the British, who
also looked askance at Indian businessmen. That went back partly to the rivalry
between British and Indian business – the British rulers regarded both with
disdain, but reserved more of it for Indian businessmen. After World War I,
things changed a bit. The rulers saw the wisdom of getting the support of
Indian business. The Industrial Commission was set up. On its recommendation,
Indian industry was protected; the sugar industry came up under the umbrella of
inordinate protection. The courtship, however, was incomplete; although Indian
businessmen did not rise in rebellion, many of them – including the Birlas –
had strong sympathies with the Congress.
But when the Congress inherited
the mantle of the British, it was under the leadership of Jawaharlal Nehru,
himself a science graduate and a socialist. He fully shared his predecessors’
discomfort with Indian businessmen. He surrounded himself with scientists and
engineers, regarded dams as temples of modern India, and initiated a state-run
process of industrialization that kept Indian businessmen off the commanding
heights of the economy. The great names of public sector industry like N Krishnamurthy
and M L Sondhi were engineers; the heroes were scientists like Homi Bhabha and
Vikram Sarabhai.
That experiment of science-led
industrialization failed. Enormous resources were wasted in setting up
junkyards like Heavy Engineering Corporation (it houses the government of
Jharkhand today) and loss-making enterprises. Worse, the government enterprises
monopolized entire industries, and it was impossible for anyone from outside to
enter and raise efficiency. Those are the mistakes that Arun Shourie is trying
to unravel against such heavy odds.
Having lived through that era of
frustration and failure, I was instinctively against scientists and engineers
and for businessmen. I thought that India was unique amongst Asian nations in
having a capable entrepreneurial class, and that the doctrinaire Congress
governments had wasted this valuable resource. If, in the 1960s or 1970s, I
disparaged India, my friends abroad would say, “But which other developing
country has Tatas or Birlas?”
So with that history and background
behind me, my sympathies should be with Kumar Mangalam Birla, and not A M
Nayak. But I am not quite sure. I do hold L&T shares; if forced into a
proxy vote, I would hesitate to vote against the incumbent management.
Why? Primarily because over the past
year I have closely observed a hugely successful industry run by engineers –
the information technology industry. The association in my mind between
scientist-managers and failure has been broken. It was not scientists that made
such a mess of the public sector, it was the government – as it does of
everything it touches, whether it is the police or hospitals or pensions. And
it is not the government as such; where, within the government, able engineers
were given their head, they achieved success.
The interesting thing is, that
businessmen are very much present in the IT industry. Azim Premji is a
businessman. TCS is ultimately responsible to Ratan Tata. I have known IT
entrepreneurs who felt stifled by Wipro’s commercial approach and launched off
on their own. Those who left TCS have spawned many IT enterprises. But even the
firms under business houses are largely run by engineers. The engineers I have
interviewed are aware and proud of the fact that they are engineers and not
businessmen. They do not think that there is anything in business which cannot
be learnt by an engineer; they think there are things that an engineer can see
and a businessman cannot. Engineers can assess technological risks and
opportunities; and because they can do so, they can bring down the risks. Many
years ago I was called by a Rajasthani businessman to advise. He said, “You
know, we Marwaris never take a risk. But I feel uncertain about this situation,
which is why I have called you.” Uncannily, I recently met an IT entrepreneur who
had entered what seemed to me a most risky niche; he said, “If you proceed step
by step, and think through each step, there is no risk. Even if I fail, it is
an experiment: it teaches me something.”
So I am beginning to see the
difference that knowledge makes: it reduces the riskiness of business
decisions, it makes them more robust. This is where the engineer scores over
the businessman: he knows a technology, and by operating it he learns from it.
This is what L&T has: it is a storehouse of technological capability. Just
look at how it entered cement. It started building cement plants for others.
Then it decided it would build better cement plants if it operated some of its
own. That is how it set up its own, and ran them so well that it became a major
producer. And it can do this with any industry that requires technological
competence.
That is one reason why investors
have more confidence in L&T’s management than in Kumar Mangalam Birla. The
other is that they think L&T will stick to its knitting, and not waste its money on businesses it does not
know. They worry that Birla will take money out of L&T and prop up one of
his other companies. These are the concerns that he should be addressing if he
wants to make a successful bid for L&T.
