The Proxy Managers Of India Inc.

Have you bought a bpl, Electrolux or an LG refrigerator in the past six months? Chances are it was manufactured by Voltas in its Sanatnagar plant near Hyderabad. Similarly, your Samsung fridge and your Sansui washing machine may have been made in Videocon factories and your pre-'95 Sony TV by Olympia, a local brand-owner and electronics goods exporter. The Johnson & Johnson or Dettol soap you use comes from the Godrej Soaps' manufacturing unit as does Lux or any other Hindustan Lever Ltd (HLL) soap.

Contract or private label manufacturing (plm) is rapidly becoming a strategic business practice in Indian industry. Companies are shedding the belief that it is infra dig; on the contrary, they feel it may be a successful route to keep afloat or cut down losses drastically. Take the case of the Rs 919-crore Godrej Soaps. Godrej enhanced its manufacturing facility in 1990 to accommodate the needs of its joint venture, p&g Godrej. The JV fizzled out leaving Godrej with a huge capacity of nearly 60,000 tonnes of which it utilises just 25,000 tonnes annually for its own brands. For over 20 years, Godrej has been manufacturing soaps for others,Palmolive for Colgate-Palmolive till '90, Johnson & Johnson till '99, Neko for Parke-Davis and Dettol for Reckitt & Colman for the past decade. It has now restructured the business. We're looking at contract manufacturing as a separate business activity and are marketing the excess capacity aggressively, says Jayant Khandeparkar, deputy general manager, consumer products. The soap contract business amounted to 23,000 tonnes and was worth Rs 120 crore in 1997-98 against 19,000 tonnes for Godrej's own brands.

The Rs 1,355-crore Voltas took a serious look at its business two years ago when it posted a loss for the first time in its history in 1996-97. The new managing director, N.D. Khurody, decided to clean up the act. The company's strengths lay in manufacturing and after-sales service. It had messed up with marketing and distribution. We knew how to make products but could not manage the cash-flows involved in marketing and distributing, admits Khurody. So, out went its refrigerator brands, Voltas (the company retained the air-conditioner) and Allwyn. It found a buyer in Electrolux which decided it would take only four of the five manufacturing units. Voltas, after much negotiation, persuaded Electrolux to source goods from this left-over unit. It then struck the company to offer the service to others. Today, it has invested Rs 20 crore to expand the capacity of this refrigeration unit at Sanatnagar from 1.9 lakh to 5 lakh units annually. It manufactures for a host of clients, including Electrolux and bpl, Pepsi and Amul (for visicoolers). It has tied up a lucrative deal for 6 lakh units over three years with LG.

Khurody saw this not just as a way out but also a smooth road to success. Its cash management and logistics problems are solved,the money is paid by the buyer when the goods are delivered and Voltas doesn't need to collect from the market. It offers after-sales service, which has been one of its strengths, to clients like Pepsi.

Now Khurody sees Voltas building on this business by manufacturing for global brands. They (these global clients) improve your efficiency and productivity, and teach you a lot from no-damage packaging to quality control, design and costing, says Khurody. If Khurody is learning from LG, the $15 billion LG Electronics learnt its practices by manufacturing for GE and others. LG manufactured fridges for GE, air-conditioners for Westinghouse, audio products for Sony and colour TVs for Hitachi. At one time, 50 per cent of its business came from contract manufacturing. Today, it has built its own brand and uses most of its capacity, with just 10 per cent of the business coming from outside. Yet, it has manufactured in recent times for Electrolux and Godrej-GE for the Indian market.

plm serves the industry both ways. With the entry of global players, the markets and marketshares went through a shake-up. This has resulted in surplus capacities for the local brand-owners, while the newcomers are faced with a situation that necessitates investment of large sums for setting up brick-and-mortar factories. plm ensures that there are fewer sick businesses on the one side and global players can concentrate on building their brands on the other, explains Rajeev Karwal, marketing chief of LG India.

When do companies go in for plm? One, when a new brand or product is launched and the company is not sure of the volumes it will need. Often a marketer enters a new category and does not want to invest in manufacturing till it can establish a critical volume. Again, it may not have the skill or the capacity; for instance, all leading TV and audio brand-owners outsource lower-end products. When a brand grows but the additional volumes do not merit an investment in manufacturing, companies seek outside help. Again, if the demand is from a certain area close to another's factory, it's often economical to outsource. HLL practises this with Godrej. Products like tetrapak drinks face seasonal peaks and they source the extra volumes from us, says Sudhir Awasthi, managing director, Godrej Foods Ltd which makes about 15 lakh trays for clients including Dabur's Real orange juice and Parle's Frooti alongside its own brand, Jumpin'.

Says Vijay Crishna of Godrej-GE who sourced washing machines for two years, beginning '94 from Videocon: We wanted to enter the market, put the product through our system and study the market right away while our factory would take two years to get operational. Solution: buy from others and sell under your brand name so that you have learnt the ropes by the time your factory starts to produce. In those two crucial years, Godrej-GE says it learnt what the consumer wanted and how a refrigerator company could service a washing machine clientele. We would have been poorer for it if we hadn't done it, claims Crishna. While Crishna was strongly advised against this modus operandi five years ago, the entry of multinationals is now making this a common business practice.

On the other side, manufacturers see this business inflow paring down the fixed costs they have to incur on their units anyway. Khandeparker explains that no matter how small the business, it yet offsets this cost factor while the surplus capacity is being used. With the cost of funds high, the unit has to start manufacturing as close to capacity as possible from the first day, says Khurody. You can't wait till your brand achieves the required volumes. Otherwise, you could destroy your business. plm has been a boon for smaller manufacturers who have even opted for it as their mainstream activity. Volga, an air-conditioner maker in Gujarat, ran into trouble due to overinvestment. It leapt at the opportunity to manufacture for Godrej-GE when the latter decided to get into air-conditioners. Dixon Electronics, makers of the Weston brand of TVs, has made this its bread and butter after its brand took a beating. It now makes TVs for LG.

But isn't the fact that the manufacturer's own brand competes with the client's in the same range and markets a sensitive issue? It's a delicate balance and the manufacturer must have the capacity to hold on to his marketshare. Awasthi sees the manufacturer as having two clients,an internal customer and an external one. A good manufacturer pleases both by good planning and efficient delivery, he says.

But what about sensitive information like volumes and formulae? An associate of one of the above-mentioned companies quips how a client was publicly claiming larger volumes than what was being made. But Awasthi states firmly that while clients respect his quality and efficiency, he respects their confidentiality. Globally, companies like LG often talk it out with business partners to avoid marketplace clashes. So, features and, therefore, price ranges often vary to avoid direct competition. Misuse of information has been negligible in these gentlemen's agreements so far in India.

Should the consumer feel cheated when he learns about plm? Marketers believe that when the consumer buys the brand, he buys an assurance of quality and after-sales service, besides the physical product. The brand-owner has to provide this. Companies ensure this by posting their quality control executives at the factories, often supplying or arranging supplies of raw material and definitely providing their proprietary items, be it the concentrate, the soap perfume and wrapper, or the special compressor. All this should make where the product is actually manufactured unimportant to the consumer.

Gone are those days, say marketers, when the Indian company had to manufacture everything up to the nut and bolt to ensure quality and reliability. Supplies of quality spare parts are today easily available. To compete in today's market, every marketer has to concentrate on his own strengths. More than one quotes GE chief Jack Welch who says the skills for the future are brand building and marketing, not manufacturing. Outsourcing then becomes a corollary. While most often these arrangements are temporary, they can often go on to being medium or long-term as the client and manufacturer grow symbiotically till they are capable of parting ways. As did LG from its clients after learning how to build its own brands.

Being relevant to the future is more crucial and can knock out a competitor more than any quality or other glitch, says Crishna. Indian industry seems to have learnt this lesson rather quickly.