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07_At your Servicejuly4.qxd 7/19/08 2:38 PM Page 86 STAY HUNGRY STAY FOOLISH “We compete with the big names - the Taj and Windsor Manors of the world.” For the first time since we've been speaking, Baljee smiles. “You have both ups and downs in business... You need to have staying power.” So what if the IPO happened 20 years after it was first planned? “I never felt disheartened... God has been very kind. This is all part of life.” 86 07_At your Servicejuly4.qxd 7/19/08 2:38 PM Page 87 AT YOUR SERVICE ADVICE TO YOUNG ENTREPRENEURS Identify what kind of work you want to do. I love the hotel business - food, making menus, everything to do with the business. If you love the business you take up, you will definitely make a success of it. Learn the business you want to get into for a couple of years. Raising money is not so difficult today. There are VCs, or at least angel investors. There is even lease financing, for example, unlike my time! Your family life may get affected - for example you can't take long holidays and when you do take a holiday, phone calls and emails may follow you. But if you enjoy your work, you won't feel it is an intrusion. 87 08_Such a long Journeyjuly4.qxd 7/19/08 2:39 PM Page 88 STAY HUNGRY STAY FOOLISH SUCH A LONG JOURNEY Madan Mohanka (PGP '67), Tega Industries In the 1970s it took Madan seven years to get government approval for a foreign collaboration. But he persevered with his dream of excellence in engineering and today, Tega Industries is the world's third largest company designing solutions in the field of mining equipment. 88 08_Such a long Journeyjuly4.qxd 7/19/08 2:39 PM Page 89 SUCH A LONG JOURNEY The first generation entrepreneur is technically someone who does not come from a ‘business family’. But it is often as difficult - or even more difficult - to scale up and professionalise a family run business. It is a challenge thousands of second and third generation entrepreneurs are facing in India today. In transforming a small business dealing in electrical installation into a multinational engineering company, Madan Mohanka faced all the hurdles and challenges of starting up from scratch. But then Madan had what you would call - ‘junoon’. A passion, which one is driven to pursue at any cost. That passion is what led to the creation of Tega Industries, and kept it alive through the most trying of times. It is no coincidence that Madan's home and office are right next to each other, in the peaceful New Alipore area of Kolkata. On a Sunday afternoon, you can catch him having lunch with colleagues in the Tega canteen, overseeing a training program, instead of enjoying a nap. I marvel - how do you get a kick out of the company you started after over 30 years? Let’s find out! 89 08_Such a long Journeyjuly4.qxd 7/19/08 2:39 PM Page 90 STAY HUNGRY STAY FOOLISH SUCH A LONG JOURNEY Madan Mohanka (PGP '67), Tega Industries Madan Mohanka is one of the very early graduates of IIM Ahmedabad. In those days the institute didn't have much of a name. In fact, Madan's was a business family and it seemed rather pointless that he should go and learn how to do business. “I had done my engineering and my family thought it was time that I started doing something.” But Madan did join IIMA and it changed his outlook towards business. “In the environment in which I was brought up,” reflects Madan, “the only thing that mattered was the rate at which one increased the family fortune.” * Despite these reservations, Madan did eventually join the family business after completing his MBA. The company, Techno Electric Pvt Ltd, was in the business of electric installation. It was fairly traditionally run and this was something which Madan decided to change when he joined. For example, despite the nature of its business, Techno Electric did not employ any qualified engineers. Madan hired five graduate engineers and added new lines of business involving a higher order of complexity in technology. Techno Electric started undertaking the design, supply and erection of Fuel Handling systems. Very little investment was required and the profit margins were attractive. But apart from the money, this diversification changed the character of the company. From an outfit which merely supplied materials and labour for electrical installation, Techno Electric was transforming into an engineering company. * some of the information in this chapter is based on a series of cases on Tega written by Prof V L Mote and Prof Jahar Saha 90 08_Such a long Journeyjuly4.qxd 7/19/08 2:39 PM Page 91 SUCH A LONG JOURNEY Madan was constantly on the lookout for new areas and opportunities for expansion. He used a simple method to spot these opportunities - scanning international trade journals related to mining, coal, steel and power industries. “If any of these products appeared to have market potential in India, I would write to the manufacturers and ask for details.” This was a personal passion; other members of the family were busy managing branches of the company in Jamshedpur and Durgapur and showed little interest. Madan’s first successful foreign collaboration was with Bischoff and Hensel, a German company which manufactured motorised cable reeling drums. Techno Electric achieved a near-monopoly position in this business and although the market was small, the annual sales of the company reached Rs 19 lakhs in the first year. This grew to Rs 32.5 lakhs in 1976, which was a quantum leap for the company. Profitability was high and encouraged by this success, Madan formed two new companies. The first was Electro Zavod (India), headed by a senior professional from Techno Electric. This company concentrated on project work for steel and power plants. The second - Techno Pipe Works - was formed to take up piping projects. But even as all this was happening, something bigger was brewing in the background. In June 1971, Madan had come across an ad of Skega AB, Sweden in a mining journal. Skega specialised in the design, development and manufacture of abrasion resistant rubber products for the mining and cement industry. “I wrote a letter to Skega saying that I would like to visit Sweden in the first week of July 1971 to meet the Managing Director of the company. They wrote back saying that they were not keen to have an agent for their products in India. But I never received their letter. I sent them a cable and I went to see them.” Naturally, they were surprised but a sales engineer met Madan at the airport. As the MD was not in town, he met with the Technical Manager. The discussions went well and a friendship was established. However, the Technical Manager was doubtful of whether Madan's company had the capability to absorb Skega technology and market its products. On his return from Sweden, Madan consulted N Guha, the Chief Engineer (maintenance) at the National Mineral Development Corporation (NMDC). On seeing Skega's literature and brochures, Guha urged Madan to definitely go ahead. And thus began a long, arduous and passionate pursuit. 91 08_Such a long Journeyjuly4.qxd 7/19/08 2:39 PM Page 92 STAY HUNGRY STAY FOOLISH “When I went into this venture of Skega I didn't realise that this may have a repercussion on the family. Maybe, had I known that the family would break because of this venture, I wouldn't have taken it up at that time. So I don't know whether it was a good or a bad decision. But once I took it up, I never gave it up.” Madan started reminding Skega through letters and cables to send an agency agreement. On August 24, 1971, Skega accepted Techno Electric as their representative for India and Nepal for one year, under certain conditions. In 1972, a representative from Sweden came down to assess the market potential in India. Subsequently, a development engineer from India went to Sweden for training as the product and manufacturing process was a complex one. In fact, a big change in mindset was required as three different technologies were involved - grinding, mining and mechanical engineering. “We couldn't get an engineer who had knowledge of all three engineering areas, so we had to create our own engineer to absorb the technology and implement it for the customer. And this required a completely different attitude and very strong professionalism.” Meanwhile, between 1972 and 1974, every six months Techno's marketing engineer Mr Manoj Basu travelled extensively to make presentations to potential customers. There seemed to be good demand. Techno received two orders totalling Rs 3 lakhs and Skega warmed up to a licensing agreement. Madan met Assar Svensen, Skega's Managing Director. “I was most impressed by this man. Assar was as much at home repairing a machine on the shop floor as he was in the boardroom of a multinational company. Moreover, he was a very warm person.” In fact meeting Assar resulted in more self questioning on the business values of Madan's own company. The Svensen family once owned 100% of the shares in Skega but slowly Assar persuaded the family to disinvest. The reason being that many a time Assar noticed that the interests of the family and of the company were in direct conflict. Assar and Madan developed a good friendship. Negotiations started but here, there was a problem. Skega wanted a down 92 08_Such a long Journeyjuly4.qxd 7/19/08 2:39 PM Page 93 SUCH A LONG JOURNEY payment of Rs 15 lakhs plus a minimum guaranteed royalty of Rs 35 lakh over the next five years. This was not possible under the guidelines laid down by the Government of India for approval of technical collaborations. Secondly, Madan was unsure whether he would be able to achieve enough sales to generate the minimum royalty payment expected by Skega. A less determined man may have given up at this point. After all, there were other profitable lines of business in the company. And the German collaboration was already in place. But Madan persisted. As expected, the company's first application to the DGTD (Director General of Technical Development) was rejected. The terms DGTD offered were not acceptable to Skega. The Swedish company sent its representatives to India to meet the officials and explain its rationale for demanding a higher license fee. After all, Skega's products involved an extensive R & D effort. Meanwhile, an Indian delegation visiting Europe to purchase mining equipment paid a visit to Skega and came back impressed with the company and its products. In light of this feedback, the Government agreed to increase the royalty from 3% to 5% but limited the lump sum fee to Rs 5 lakhs. Skega also had to give a commitment to import material worth Rs 45 lakhs from India over the next five years. Skega agreed to these terms and signed an agreement on December 10, 1975. The Government suggested some modifications to the agreement and a final approval was obtained on February 9, 1977. So why did Madan fight out this battle? Was there really something so special about Skega? “What attracted me was they never advertised how much turnover they had. They advertised that we take up solutions for the customer. And the customers respected those solutions.” And that in a nutshell captures the allure of Skega for Madan Mohanka. There was already a steady business, profits, good lifestyle. “We were able to live and eat well, no problem on that. It was more the challenge that attracted me to go to Skega.” Of course, the major hurdle in those days was government approval but there was no other way to do business. Yes, many years were lost in the maze of red tape but you had to simply grin and bear it. However, once approval was out of the way, other issues cropped up at the newly formed Tega Industries. There just weren't enough 93 08_Such a long Journeyjuly4.qxd 7/19/08 2:39 PM Page 94 STAY HUNGRY STAY FOOLISH “If you believe in a product, never give it up. You will succeed. It may take time, it will cost money.” customers. Before starting, Techno and Skega had undertaken a market survey and most of the customers they met declared the product would definitely sell. But when manufacturing began, orders just did not come in. Firstly, except for the Tatas, the entire mining industry was under the public sector. “When we went to sell, the first question they asked me is, “If it does well, I don't get a promotion. If it fails, I lose my job. Why should I stick my neck out for you?” Being government employees they had no incentive to improve efficiency, the easiest thing was to maintain the status quo. The only other option to ‘motivate’ officials was to pay a bribe. But Madan refused to go down that route as a matter of principle. “The irony is, even those fellows who told me that it will sell like ‘hot cakes’, refused to buy this product!” recalls Madan. Which is a huge lesson for any entrepreneur. Surveys are all very well but the proof of the pudding lies in the customer opening his wallet and handing out cold hard cash. In reality, Mr SS Nadkarni, then General Manager of ICICI had hinted that such a problem may arise. When Madan presented his business plan to Nadkarni, he had remarked that he was concerned about the acceptance of the product. However, fuelled by the optimism of youth, Madan remained gung-ho. He later remarked, “Had I stopped in my tracks to think about the comments made by Mr Nadkarni I would either have dropped the project altogether or implemented it in a radically different way.” Madan did get the required funding from ICICI but the next four years were extremely tough. Midway through the project, Madan met with a serious road accident. When he returned to work five months later he discovered there was a significant over run in the cost of construction. He later discovered that the initial estimate itself was faulty. Then when the company started executing the few orders it had received, it was found that the moulds it had acquired were not suitable. Additional investments would have to be made. Even after new moulds were made, bookings were poor. In fact, there were virtually no orders from September 1977 to January 1978. 94 08_Such a long Journeyjuly4.qxd 7/19/08 2:39 PM Page 95 SUCH A LONG JOURNEY Production was to begin in June 1978 and this was now a full blown crisis. There was only one avenue - to get a contract from the Kudremukh Iron Ore Co Ltd (KIOCL) to fabricate and rubberline their indigenously procured equipment. In order to be attractive to KIOCL, Madan devised a pricing where the profit on fabrication was low while the margin on the rubber lining was reasonable. Colleagues at Tega advised that the price he was quoting was too low. Skega also advised against accepting large orders which had substantial amount of steel fabrication. However Madan went ahead and in June 1978, the company secured the KIOCL contract. Unfortunately, steel prices started rising. Tega also realised it did not have the capacity to fabricate 800 metric tonnes within the stipulated period. Some of the work had to be subcontracted and given the very low margins, Tega Industries suffered a huge cash loss. In fact, the company's entire capital was almost wiped out. In April 1979, Tega was unable to pay its employees on the due date. “The memory of that day is still vivid in my mind. I did not go to office,” recalls Madan. Noticing his low mood, his wife asked what the matter was. Madan told her about the company's financial difficulty and also that he believed these were of a temporary nature. On hearing this, she offered him her LIC policy and her wedding jewellery. The world may seem to have ended but if you have the support of your family, you can always make a new beginning. Salaries were paid two days later and an uphill climb to solvency began. “I learnt a few things during that period in my life,” says Madan. “One, if you take a new product, which has not been tried out before, at least plan for 50% or double the investment you envisage. Otherwise you will be in trouble. When your project fails, and you have no money, people treat you like a dog. And you are like a beggar asking for money and help.” (In fact when Tega eventually came out of the red, this case was taught at ICICI training school in Bombay and they took a decision that in future, if there is an entrepreneur with a new technology, they will sanction 50% more money than what he asks for. But they will only disburse it if the project runs into difficulty.) “Number two, if you believe in the product, and if you believe in the business, don't give it up. Never give it up.” When Madan went bankrupt, he mortgaged his wife's jewellery, but did not abandon the dream. “Not one man left us. My marketing manager then, an IIT and IIM 95