IT did not take the throngs that gathered, the tears that were shed and the tributes that were paid at Dhirubhai Ambani’s funeral to prove that he had established himself as a legendary leader among industrial capitalists in India. Even when he lived he had taken on a legendary dimension.
Not surprisingly, fables about him abound, many of which were recalled by the media when he passed away on July 6. The most-quoted one was the familiar rags-to-riches story, of a determined individual who ostensibly arrived in Bombay (now Mumbai) from Aden in the late 1950s with Rs.500 in his pocket and went on to build a Rs.65,000-crore empire. He was also reportedly a man who learnt far more than others just by plying his trade, with instances of such knowledge varying from his reported ability to recognise the denier and quality of yarn by the sound of its twang when held to his ear to the capability to choose the best in technology in any sector he chose to invest in. Other tales were less complimentary, such as the one that he was a person who, though himself never a politician, could make and break both politicians and governments across the country to boot. There are stories of ruthlessness, when it came to bending the rules and winning the game, that made him the success that he was
Fables such as these, built often on a modicum of truth and sometimes from thin air, were testimony to the success of Dhirajlal Hirachand Ambani. Needless to say, as is true of all winners, in Dhirubhai’s case too, individual qualities - an acute mind, a sense of the other, a degree of cunning, an element of ruthlessness and a large dose of gumption that is required to make the dash to victory - would have contributed to the end result in no small measure. But by focussing on the man and his entrepreneurial adventure, they denude his life of social context and divert attention from the specific way in which the road to success of Dhirubhai and his Reliance group was related to India’s post-Independence industrial history. Dhirubhai was, after all, as much a product of his times as he was one who recognised and exploited the opportunities those times offered. That strategy needs to be and will be studied and analysed. But the occasion demands that a beginning is made.
When Ambani began business, a few business houses whose names and history captured the progress of industrial capitalism in India monopolised Indian industry. With their organisational features, their diversified structure, their dominance of virtually every sphere of manufacturing and their control over finance, they were able to manoeuvre the regulatory system, especially the licensing system, in their favour. Their track record, their financial strength, and their ability to attract credible foreign partners and to access information from within the secretive portals of the state, ensured that they were in a position to garner more than a fair share of licences. They used these licences for new investments in areas that were expanding and were profitable. But they merely held on to them as a means to prevent the entry by others into areas which they already dominated and where the profitability of new investment was not in keeping with the high returns they had come to expect in India’s protected market.
This meant that the licensing system, meant to ensure that actual investments were in keeping with planned inter-sectoral allocations, and expected to curb monopoly and prevent excessive regional concentration, failed to realise these very goals. Rather, it served as a barrier to entry that protected the traditional bases of monopoly power of the business groups that had historically dominated India’s industrial scene. Combined with tariff and non-tariff protection against competition from imports, this barrier to entry ensured that these groups continued to flourish even though they spread their investments thin, invested in uneconomic plants even in areas where there were substantial economies to be gained from increases in scale, and saddled themselves and the economy with high costs of production relative to that in the world economy. For newcomers like Dhirubhai Ambani, therefore, accumulation had to occur in areas outside the traditional spheres of operation of established oligopoly. He chose the synthetic fibre trade, which carried synthetic yarn from the few producers of the commodity to the vast number of composite mills and burgeoning powerloom producers that were its users. It was an area where the margins, resulting from extremely high protection, were adequate to provide a decent return to the trader as well.
To many, the subsequent investment of the surpluses accumulated in trading in textile production and the synthetic fibre industry, beginning with the first plant established in 1966, was a “natural transition”. But there were many prerequisites that had to be met for that transition to be made. First, Dhirubhai needed to break through the barriers to entry that the licensing regime had put in place. Second, he needed to have at his disposal an adequate amount of own capital to ensure that he could obtain the necessary credit to make up the capital required for investment in a capital-intensive area. Third, after entry, he needed to survive the competition he would face from the established players with deep pockets operating in the field. Further, if initial success had to be built upon to generate the business colossus that Reliance is, this strategy had to be replicated in more areas than one without being marooned by wrong decisions and damaging investments.
In his effort, Dhirubhai and his team were helped by circumstances. His trading operations combined with thrift, one presumes, allowed him to muster the capital needed for his first foray into manufacturing. While this was being done, the licensing regime was itself losing its credibility, having failed to achieve its objectives of ensuring an optimal allocation of investment, of curbing monopoly and of reducing regional concentration. This made the licensing system completely ad hoc and arbitrary, enabling new entrants to manoeuvre the system in their favour. It was here that Dhirubhai exercised his acumen to win favour with, manipulate and benefit from the power of the bureaucracy and the political class. This ability, which allegedly was used to garner more than a few initial benefits, won him not only the licences he wanted but also a degree of notoriety.
Finally, Ambani’s success in breaking into and coming to dominate the synthetic fibre industry was related to his ability to exploit the weakness stemming from the uneconomic scales which the business groups had established in the synthetics area during the years of external and internal protection. Partly in order to protect the domestic raw cotton producer and partly because of a perception that synthetics are a luxury because they involve a drain of foreign exchange, polyester staple fibre (PSF) and filament yarn (PFY) were heavily protected areas. In January 1985, for example, the customs inclusive price of PSF (1.5 D) and PFY (76 D) were at Rs.38.59 and Rs.114.56 per kg, more than double the cost, insurance and freight (c.i.f.) prices of Rs.16.91 and Rs.44.25 respectively. It was that protection which allowed firms to manage with relatively small installed capacities of around 8,000-10,000 tonnes in the case of PSF and even less in the case of PFY as compared with international capacities exceeding 1,00,000-1,50,000 tonnes for PSF and 60,000-1,00,000 for PFY. At that time Reliance entered the industry with official capacities of 45,000 tonnes in the case of PSF and 25,125 tonnes in the case of PFY. This would have allowed it to operate at much lower costs and earn relatively high returns and surpluses at the prevailing domestic prices. According to a World Bank study of the synthetic fibre sector, the price per kg of PSF manufactured from dimethyl terephthalate (DMT) falls from $6.36 per kg to $4.76 per kg as capacity increases from 6,000 tonnes per annum (tpa) to 30,000 tpa. That is, the fact that Reliance chose to enter a sector where the benefits of scale are large would have both helped it outcompete existing players as well as enhance its surpluses and therefore its ability to expand into new areas substantially.
In the initial years the process of expansion reflected Reliance’s decision to integrate vertically and concentrate on petrochemicals and downstream products. Throughout this period there were a number of features that characterised the strategy of the group: (i) continuous vertical integration (a) from synthetic textiles into the manufacture of polyester fibre and filament yarn, (b) from yarn and fibres to intermediates like purified terephthalic acid and mono-ethylene glycol; and (c) further upstream into basic building blocks like paraxylene; (ii) consolidation of internal capabilities generated in this process through related horizontal diversification into petrochemical end-products such as detergent intermediates, for example, linear alkyl benzene (LAB), or thermoplastics like high density polyethylene (HDPE), low density polyethylene (LDPE), polyvinyl chloride (PVC), polystyrene (PS), polypropylene (PP) and styrene butadiene rubber (SBR - synthetic rubber) and their intermediates and basic building blocks; and (iii) efforts to complete this process of integration through investment in an NGL/naphtha cracker and in oil extraction itself.
THIS strategy of committing all its investments in large capacities in closely related areas was indeed risky. But, in practice, adopting that risky strategy not only helped Reliance make major inroads into the industrial sector, but also provided it with handsome dividends. The point to note is that the strategy was not in the first instance one of becoming globally competitive. Rather, it was one of making inroads into the bases of traditional oligopoly. Even if this implied that Reliance had to set up world-class facilities, the latter were not used to support an export thrust. Reliance focussed on the domestic market where revenue opportunities were not lacking, and margins were much higher, permitting the generation of huge investible surpluses. In adopting this strategy, Ambani’s Reliance group acquired through outright purchase the best-practice technologies in the field. With world-scale plants, Reliance proved doubly competitive: not only was it able to displace both domestic producers and international suppliers from the market at prevailing customs duty rates, but in fact it could remain competitive even when duty rates were reduced. The strategy of ‘going it alone’, while investing in world-scale plants based on outright purchase of technology, obviously raised domestic financing requirements substantially.
It was here that Ambani exploited the other opportunity that the changing times offered. This was the possibility of mobilising money from households through the stock market. India’s stockmarkets were until the 1970s dominated by the financial institutions and a few large players, with trading activity being minimal and limited to a few shares. The first instance of equity serving as an option for investment of household savings arose when foreign companies, pressured by the Foreign Exchange Regulation Act (FERA), decided to dilute their equity through sale in small lots. With “respected” foreign corporates making an offer of equity with a credible promise of regular dividend payments, individual small investors made their first foray into the stock market. Seeing the opportunity this offered, Reliance under Ambani decided to enhance its equity strength to undertake new investments by tapping stock markets. Reliance made its first public issue in 1977, when it offered a chunk of Rs.10 shares to investors. The shares opened at Rs.23 reflecting the premium that Reliance was in a position to command. In the years to come, Reliance was to exploit the market through many routes to finance its breakneck expansion, garnering in the process huge premiums on the shares of existing companies. By the end of 1992, out of a total capitalisation of Rs.34,255 crores, share premium reserves and surpluses alone accounted for Rs.7,640 crores. Besides this, Reliance was to use the convertible debenture route and the American Depository Receipt (ADR) and Global Depository Receipt (GDR) issues to much benefit.
With large surpluses coming from its petrochemical operations and share premium reserves and additional equity and debt coming from the markets, Reliance was in a position to finance the rapid growth which took it to its current position as one among the leading business groups in India. Late in that process Reliance too decided to take the route of becoming a diversified conglomerate, entering unrelated areas like telecommunications, power and financial services.
It is indeed true that the growth and success of Reliance reflect the vision and the entrepreneurial skills of its founder. But they also epitomise the internal process of restructuring that Indian industry had begun to go through as the earlier system of regulation lost its credibility and was being gradually diluted. If Reliance had shown the way to others in that environment, India would perhaps have produced more globally competitive indigenous business groups. Unfortunately, before that process could gain momentum and be given a chance, the government opted for its current strategy of reform in which international rather than new or restructured Indian firms are coming to dominate the industrial sector.
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