Online Extra: What India Needs Now

Anil Naik of Larsen & Toubro has been taking lessons from China. He says the key to growth is increased spending on manufacturing
The BusinessWeek 50

Larsen & Toubro House is situated in the historic Ballard Estate area of Bombay, India's commercial capital. Under the British Raj, Ballard Estate, with its adjoining pier, was the heart of the mercantilist occupation of India. Larsen & Toubro occupies one of those stately stone buildings, with vast interiors and grand staircases. The company was started by two Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro, in 1938, to import machinery from Europe for an industrializing India. Today, it's the country's largest engineering and construction conglomerate.

L&T, as it's called, is now run by Anil Naik, an engineer who began work as a rookie at L&T in 1965. These days, with India's economy on a tear, so is L&T. Naik has a five-year growth plan, and he's passionate about manufacturing being the major employment generator for India. But he sounds a warning bell about India's ability to compete with China.

Naik spoke to BusinessWeek Bombay Bureau Chief Manjeet Kripalani about the company, its efforts, its past, and his own dreams. Edited excerpts from their conversation follow:

What's needed for India to maintain, and increase, its growth rates?

There's a huge opportunity in this economy, and all sectors are growing fast. But if you want to build 8% to 9% GDP growth, manufacturing needs to grow at least 15% per annum. Right now it's 11.5%.

In China, manufacturing is 50% of GDP. In India, it's 17% of a $700 billion economy that's a sixth the size of China. In Thailand, manufacturing makes up 40% of its GDP, and 45% of both Taiwan and Malaysia. Even if we try very hard, we can at best hit just 35% of the economy with manufacturing.

How would you compare India with China?

China was mindboggling to me. We opened a sales office in Shanghai last year, and six months later in Beijing. The people there wanted us to start manufacturing, so now we have opened a manufacturing operation in China.

I sent all my top executives and business heads, 50 to 60 of them, to China to see the strengths, weaknesses, opportunities, and threats. India can be impacted, if we are not careful.

Indian engineering talent seems to prefer going to IT over manufacturing.

We're losing talent to IT, to multinationals, and to talent migrating to the Gulf. Yes, we have raised salaries -- in the last five years, we have done better for our employees than we did in the last 50 years. We opened an engineering center in Abu Dhabi to make sure we keep our talent. We offer employees who wish to work overseas [that opportunity].

IT is only developing talent in 9 or 10 cities in India. All these cities are bursting. Manufacturing creates employment in second- and third-tier cities [and results in the wider distribution of prosperity across the population].

Unless the leaders of India recognize the importance of infrastructure and manufacturing as the backbone of India's development, we won't progress fast enough.

What ails Indian manufacturing? How can it be helped?

Indian manufacturing is in an unfair situation. Imports of finished machinery in some areas are 0%, while Indian companies which source locally have to pay sales and other taxes for inputs and on finished products machinery. The money we make is going toward the import of oil and for these sales taxes. We've lost millions there. We need too many permissions -- 100-odd -- to start a factory, while with IT you need nothing, just hire a building and get on with it.

Our problems can be resolved by the policymakers in New Delhi. If India can address the issue of infrastructure and labor reform and build talent, then it will be on its way.

But things are changing now, with the new emphasis on infrastructure. How are you responding?

Our order book is currently $4.5 billion, an all-time high. This year, we will grow by 30%, and we want to close the year with an order backlog of $5 billion. We're building three airports -- Bangalore, Hyderabad, Calicut. Also power plants, transmission systems, roads, bridges, ports, steel plants.

We're converting Jamshedpur into a region because three other steel plants are coming up in that area. We want to invest $1.5 billion in Orissa with Dubai Alumina, for an aluminum plant.

What are L&T's future plans, and what are the hurdles to achieving them?

Five years from now, I want L&T to be a $6 billion to $7 billion company, close to becoming an Indian multinational. It's a transformation. I want to improve returns to both shareholder and stakeholder. We want to multiply our stock price, we've already grown twice that of the market.

As a large, multilayered company, our decisionmaking is slower, compared to a one-man, entrepreneur-led company, which can be nimble. We have 10 different business units working in the same place in Dubai for instance.

We're decentralizing as much as we can, making business units autonomous and accountable, strengthening management information systems, having better appraisal criteria, connecting profitability to individual levels. Some steps are already taken. Five years ago, we were zero in international work. Today, it's 17% of our business. We have joint ventures in the Gulf states now.

What's your background?

My father was a teacher, and a Gandhian, so we went from Bombay back to our village in Gujarat, where he decided to be the local school headmaster. I went from sitting on a bench in a top Bombay school to sitting on the floor in a village school, with students from backgrounds very different to mine. I studied in the vernacular medium and in English only when I got to college. I dreamt about working at L&T.

What's your schedule like?

I start my day at 6:30 a.m., and am at the office way before it opens at 9 a.m. I leave at 8 or 9 p.m. I travel three times a week on average, spend about a third of my year traveling.

For the 40 years [I've been with] L&T, I've worked 80 to 90 hours a week, and for 21 of the 40 years, I didn't take a single day's leave. My father told me to be fearless if I want to achieve anything in life.

Edited by Patricia O'Connell

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