XIBMS – SEN SCHWITZ – INTERNATIONAL BUSINESS
XIBMS – SEN SCHWITZ – INTERNATIONAL BUSINESS
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XIBMS – SEN SCHWITZ – INTERNATIONAL BUSINESS
At 14, he had assembled, from parts scavenged from the local dump, a spool-recorder that had fitted nicely into a suitcase. By the time he time he was 37, in 1979, Sen & Sen (S&S), a company he had promoted with his elder brother, Sanjoy — who made up for his lack of technical expertise with a razor sharp business brain — was Asia\’s largest manufacturer of radios and cassette-recorders. Now, at 56, he presided over India\’s largest audio-Products Company. Sen-Schwitz, a joint venture with the Frankfurt-based consumer electronics giant, Schwitz GMBH.
S&S association with Schwitz had actually begun in 1984. Music had become a movement in Europe at that time, with immigrant labour of all colour and teenagers of all sizes constituting market-segments that no company could afford to ignore. But their means were slender, and intensity of output, rather than nuances of pitch and tone, was what they were concerned about. Since assembling was a labour and cost intensive process, at least in Europe, Schwitz could not manufacture low-end boom-boxes cheaply.
So, the company turned to Asia, where it was certain some Chinese or Taiwanese company could meet its requirements. None could. However, on a reach of Taiwan, one of the company\’s managers had spotted a couple of S&S products at a retail outlet. While this Indo-German relationship had begun as a vendor-buyer one, Helmut Schwitz, 51, the CEO of Schwitz — no relation of Adolf Schwitz, who had founded the company just after the end of World War II — took an instant liking to the Sen brothers. Two years after S&S started supplying it products, in 1986, the German company acquired a 10 per cent stake in its Indian supplier.
IN 1992, when Schwitz released that he could no longer ignore the Indian market and the Sens accepted the fact that they couldn\’t survive the threat from global competition without technology and marketing support from their German Partner, they formed a formal joint venture. The Sens and the German company both held 26 per cent stakes in Sen-Schwitz, with the rest being divided between the financial institutions and the investing.
The joint venture did well right from its inception. The transnational\’s superior quality standards and S&S strong distribution network worked wonders. Within 2 years, the company had managed to carve out a 45 per cent share of the Rs. 795-crore market. The Sens were happy and so was Schwitz. By 1998, Sen Schwitz\’s share had increased to 65 per cent in a market that had grown to Rs. 1,150 crore, And when Sen reached Frankfurt for the annual review of the joint venture that Schwitz GMBH insisted on — the company had 7 joint ventures across Asia and Latin America — he could not but help feeling that all was well with the world of music and money.
Sen\’s feelings were only amplified during the review. After the preliminary greetings, Helmut Schwiz took the oais. The room darkened, and a series of PowerPoint images flashed on the screen behind Schwiz as he spoke. Sen caught only fragments of the German\’s heavily accented voice, his attention was focused on the images and the bullets of text they contained. Sen scrawled a few of them on his notepad
* A turnover of $ 100 billion by 2005
* AQ growth – rate of 20 per cent a year.
* 35 per cent of the growth coming from India and China Then. Schwiz started speaking about India and Sen\’s attention moved from the screen to the man. What he heard pleased him. \”Sen-Schwiz has a marketshare of 65 per cent in a market that is growing at the rate of 30 per cent a year. As far as our targets for 2005 go, we believe that it is our most promising joint venture.\”
\”India is, clearly, the market of the future, Binoy,\” he said, biting into a roll. \”You\’re doing a great job, and can expect support from me for all your endeavours. But I\’m worried about your margins.\” Here it comes, thought Sen, the twist in the tall. \”A post tax margin of 8 per cent doesn\’t look too good,\” continued Schwiz, \”especially when seen in the light of rising volumes. We should take a fresh look at our Indian operations, Why don\’t you meet with Andrew?\”
Suddenly, Sen was on guard. The 55 year old Andrew Fotheringay was Schwiz\’s President (International Operations). Sen liked him; they had worked together when the joint venture was being set up, and had been impressed by his eye for detail. But he also knew that Fotheringay was Schwiz\’s hatchetman. \”What\’s on your mind, Helmut ?\” he asked point-blank \”oh, nothing yet,\” replied Schwiz, \”but we have to find a way to introduce more products into the Indian market without stretching Sen-Schwitz, Talk to Andrew.\”
That wasn\’t to be Fotheringay, whose wife was 9 months pregnant, had to suddenly leave for London, but promised to fly down to Calcutta, where Sen-Schwitz was based as soon as the baby was born. Now, Sen was sure that something was up : Fotheringay wasn\’t the kind of manager to do something like that for nothing. Sen voiced his fears at a meeting of the Sen-Schwitz board, which had been scheduled on the day of his return. One of the board members, R. Raghavan, 53 a professor of corporate strategy at the Indian Institute of Management, Gauhati, felt that Sen was over reaching I don\’t think it is quite what you think, Sanjoy he started although Sen hadn\’t put any specifics to his fears. \”Sen-Schwitz is, as BUSINESS TODAY keeps reminding us, evidence that there is, indeed, scope for a win-win joint venture even in the Indian context.\”
He was wrong. Sure, the joint venture has benefited from the German parent\’s technical expertise. In turn Schwitz GMBH had profited substantially from Sen Schwitz\’s dividend pay-outs : more than 25 per cent every year. Werner Kohl, 48 Sen Schwitz\’s Technical Director, seemed to agree with the professor. Kohl was a Schwitz nominee on the board, and had been a Vice-president (Operations) at the transnational\’s Hamburg plant before being seconded to Sen-Schwitz for a 5 year period. But Kohl Sen knew was not likely to know what was happening back home.
The one person who agred with Sen was Rajesh Jain 44, the IDBI nominee on the board, who expressed the opinion that Schwiz GMBH could possiibly, be planning another joint venture with some other company. That sounded far-fetched even to Sen. Sen-Schwitz\’s closest per cent. Besides, no company could match Sen-Schwitz;\’s distribution network. So, he decided to let his fears abate till Fotneringay could either dispet them — or make them come alive.
True to his word, Fotheringay, now the proud father of his first daughter landed up in Calcutta a week later. He first met the company\’s functional heads, and gave them a pep talk: \” Sen-Schwitz\’s volumes-thrust should be backed by a profitability focus. Once we ensure margins of 13 to 15 per cent, we will be on our way.\”
Alone with Sen, though, Fotheringay quickly laid his cards on the table. Schwitz, he informed Sen, wished to set up a 100 per cent subsidiary in the country. Sen\’s mind was, suddenly, clear. He had been a fool not to see it coming. All that talk about restructuring the joint venture, introducing newer models, and the need for higher margins led up to just one thing: a fully-owned Schwiz subsidiary.\” So what does this mean for us, Andrew,\” he asked, \”Is this advance warning about a parting of ways?\”
Fotheringay was quick to dispel this notion. \”The subsidiary will not compromise the interests of the joint venture. Schwitz has a long-term commitment to the India market, and this subsidiary is just a step in that director.\”
All this talk-about commitment, realized Sen, was taking them nowhere. He sounded just a little imitated when he spoke: \”I just can\’t understand why you people are even considering a subsidiary when the joint venture has been so successful. We have a great brand, good products, the finest distribution network in the business, and an excellent supply chain Together, we have created a matrix that has delivered. Why does Schwitz want to reinvent the wheel?\”
Fotheringay\’s answers didn\’t satisfy him. He made some noises about the subsidiary taking upon itself a large portion of the expenses involved in building the Sen-Schwitz brand, thereby reducing its operational expenses, and improving its margins. Sen was quick to point out that the Government of India did not view proposals for fully-owned marketing subsidiaries favourably. \”Besides, does this mean that we transfer our marketing and distribution network to the subsidiary?\” he asked incredulously.
Fotheringay side-stepped the issue: \”No, no, the subsidiary will only manufacturer products.\” Reading the look on Sen\’s face, he hastened to enumerate Schwitz\’s gameplan: \’Of course, none of our offerings will complete directly with Sen-Schwitz As you are aware, the audio systems market is fairly segmented, so there is a great deal of potential for new offerings. We want to set up a committee from Sen-Schwitz and Schwitz to decide on the respective roadmaps of the joint venture and the subsidiary so as to avoid any conflict.\”
\”That apart,\” he smiled, here comes the carrot, thought Sen and he wasn\’t wrong, \”the Sens will have the option to buy upto 49 per cent of the subsidiary\’s equity when it goes in for an
IPO.\” The subsidiary is not even off the ground, thought Sen and Andrew is already speaking in terms of US and THEM
Fotheringay took Sen\’s silence to mean acceptance. \”The other reason,\” he continued, \”is that we cam use the subsidiary to introduce our premium brands into the country. There is evidence that the market for premium audio-systems is all set to boom. Think about it, Binoy. The subsidiary will only strengthen the strategic relationship between the Sens and Schwitz GMBH.\”
The Sens aren\’t involved, thought Sen; this is an issue that concern Sen-Schwiz and Schqitz. But he didn\’t want to split hairs, and promised, instead, to think about it.
Sen-Schwitz\’s Executive Committee thought about it for 3 months. And it still didn\’t make sense to them. Schwitz GMBH operated through joint ventures in every part of the developing world. Only in the US, UK, and France did it have fully-owned subsidiaries, using the subsidiary as a sink that would absorb the joint venture\’s marketing expenses didn\’t make sense too.
\”It sounds altruistic,\” said V.K. Kapur, 44, the company\’s head of marketing. \”If launching more products is the only behind the subsidiary, there is no reason why the joint venture cannot serve that purpose.\” Sen and the rest of the Committee had to agree. \”There\’s also no reason why we cannot improve our margins by focusing on our operational efficiencies,\” argued Ajay Singh, 46, Sen Schwitz Director, operations, and Sen had to agree.
He decided to discuss the matter with Sanjoy, who had retired from the business, and was involved in managing a charity. But Sen didn\’t get a chance. News-agency had picked up a report that had appeared in the Financial Times Schwitz\’s decision to set up a 100 per cent subsidiary in India. The report created a major stir in the Bombay stock Exchange, with the price of Sen-Schwitz\’s stock falling by 30 per cent a day.
It was evident to Sen that no matter what Fotheringay and Schwitz thought, the stock-market perceived the subsidiary as a threat to the joint venture. It was also evident that the stock-market viewed Schwitz as the more valuable brand. \”I understand, \”Sanjoy told Binoy, when the situation had been explained to him. The technology is Schwitz\’s. The brand, at least the more powerful one, is theirs. And they have access to our distribution network. Face it, we don\’t have a plank to fight on.\”
Questions:
- Identify the sequence of events that has led to the current problem.
- Analyse the problem in the context of the process of globalization that has been increasingly witnesses over the past decade or so.
- Examine the \”fairness\” of establishing a 100% subsidiary by Schwitz GMBH when the alliance is on.
- What future course of action would you suggest to S&S? Give reasons for your answer.
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XIBMS – SEN SCHWITZ – INTERNATIONAL BUSINESS
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