India Needs Its Conglomerates For More Reason Than One

A Marwari industrialist once explained to me why they pursued multiple, diverse businesses in response to a question on whether this approach diluted focus and affected core competence — a big theme two decades ago.

The industrialist narrowed it down to risk linked to business cycles and reward linked to opportunity. According to him, business cycles were such that it was important to be present in multiple areas. When textiles were down, steel might pick up and if both were down, maybe a finance business would gain traction.

Another driving force has been the allure of new opportunities. Every decade has seen new business opportunities, including sectors previously closed to private enterprise. Needless to say, industrialists have constantly diversified.

Thus the growing importance of conglomerates in India where ownership and control rest with a single individual, family or entity to whom the profits also flow.

I was reminded about the larger debate on conglomerates versus core competency after reading the recent column written by Rahul Gandhi, leader of the Opposition in the Lok Sabha, in The Indian Express. It appears to attack some conglomerates for their proximity to political power and alleges the use of clout to intimidate others, mostly smaller businesses, into submission or takeover.

“When you compete with them, you are not competing with a company, you are fighting the machinery of the Indian state," he argued, also adding that these groups decide what Indians read and watch, they influence how Indians think and what they speak. Gandhi wrote that today market forces do not determine success, power relations do.

Let’s digress for a moment. The examples Gandhi uses as a contrast to the big monopolists, as he termed them, seem somewhat misplaced. Many of them are startups that were trying to replicate businesses in China or the US, funded by overseas venture capital. And creating significant market distortions in the process, for example by driving up labour costs or causing migrations which were never sustainable.

Looking not too far back, most of those investments have already turned out to be lemons and more will, including some listed companies, in which case the investing public will carry the cross.

Why Conglomerates Work In India

There is a reason for the success and continuance of conglomerates — they are mostly family-started, owned and managed. This is not just the case in India but also across Asia where family-owned businesses represent more than 80% of all businesses.

The Ambanis, Tatas, Birlas and Adanis are conglomerates of multiple businesses and constantly scouring for new opportunities. Some old economy and some new. The Tatas came back into airlines but also are now one of the key drivers of India’s semiconductor ambitions.

The Ambanis ventured into telecom, retail and then entertainment and the Adanis went from ports and cement to power, solar power and data centres.

The Birla Group recently launched a paints brand and a retail jewellery brand. The paints brand is an extension of its cement portfolio and jewellery its retail portfolio which includes garments.

The linkages are not too difficult to see.

It is also inevitable that conglomerates with multiple interests will also engage with the government and attempt to influence policy from different quarters. Their combined bargaining power, if you want to call it that, will be higher than any individual business person. And perhaps for good reason.

Gandhi is obviously referring to a crossing of lines but has not presented any specific example or proof and nor is that the key issue here. The larger question surrounds the importance of conglomerates.

India Needs Its Conglomerates

An economy like India, driven by family-owned businesses, will inevitably create more conglomerates or see the expansion of existing ones. Such a structure works well not only for the business groups in question but also for other stakeholders like lending institutions, employees and shareholders. This is because conglomerates also can raise capital in tough times using other balance sheets and maintain general business stability.

Gandhi wrote that banks should overcome their fascination for the top 100 well-connected borrowers with their attendant NPAs and be made to discover the profit pools in lending and supporting the play-fair businesses.

There is no denying that but note that many of the top 100 borrowers are likely to be conglomerates with strong balance sheets within their universe too.

While there will be and have been some very bad eggs, investors also trust conglomerate management because they feel that the demonstrated capability in one industry is a good reason for them to invest in the next.

One instance is Ambani’s financial services foray Jio Financial, where the stock is already quoting at a healthy premium to listing last year, despite not having any real business to show yet.

There are many more examples but it would also mean by extrapolation that conglomerates work for the economy as a whole, including for creating formal jobs.

There is a last argument for conglomerates and goes back to my conversation with the industrialist — succession. The next generation, particularly if there are multiple inheritors, will want or demand businesses to run.

The Ambanis and Adanis have clearly demarcated businesses for the next generation, more visibly with the former as Reliance Group chairman Mukesh Ambani has publicly indicated.

That also presents an opportunity for fresh direction and value creation and the continuance of family business traditions, ownership and wealth.