W13154-PDF-ENG.pdf

W13154

CUMI INDIA’S GLOBAL STRATEGY: THE CHINA PUZZLE

S. Ramnarayan, Charles Dhanaraj and Krithiga Sankaran wrote this solely to provide material for class discussion. The authors do
not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain
names and other identifying information to protect confidentiality.

Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written
permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies
or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University
of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]

Copyright © 2013, Richard Ivey School of Business Foundation Version: 2013-04-23

The 2011 summer meeting of the board of Carborundum Universal Murugappa Limited (CUMI) was in
progress in the Parry building, overlooking the busy city traffic of Chennai, India. The company, a leader
in the abrasives and ceramics industry in India, had recorded 25 per cent annual growth in sales revenue,
topping Rs. 16 billion, almost half of which was coming from overseas. For K. Srinivasan, managing
director, the performance was tracking well with his company’s strategic vision of becoming a global
leader in the abrasives industry by 2020, a goal he and the management group had established in the early
2000s. This was all happening, in part, because CUMI was growing its operations in Russia and turning
around its South African operations. However, the China market continued to pose several challenges.
CUMI entered China in 2006 through a joint venture with a Chinese state company and had subsequently
bought out the partner in 2009. As of 2011; the company’s Chinese operations were improving but
continued to incur losses. China was expected to hold 50 per cent of raw materials for the industry and
was the largest market for abrasives worldwide. For Srinivasan, it was clear that winning market share in
China was a necessity to realize the company’s vision, but the complexity and foreignness of the Chinese
market was a challenge. The board was keen to hear what CUMI’s China strategy was and how he would
execute it.

CUMI: MAKING OF A GLOBAL LEADER

After nearly 60 years in business, CUMI had emerged as a leading player in the abrasives and ceramics
industry. (Exhibit 1 presents an overview of the company financials.) As of 2011, CUMI’s business
operated around four segments: abrasives (41 per cent of the total revenue), industrial ceramics (11 per
cent), electrominerals (36 per cent) and super refractories (12 per cent). Abrasives were hard, tough and
wear resistant substances for grinding and polishing operations. Manufactured through a complex and
highly technological process, these abrasives were used in metal removal, cutting and finishing operations
in almost all industries. The industrial ceramics segment made products that harnessed the wear and
corrosion resistant properties of ceramics, as well as impact resistance (ballistic applications) and
electrical insulation (vacuum circuit breakers). Refractory was a material used in applications that
required extreme resistance to heat, such as linings in furnaces used in the steel industry. Electrominerals
were raw materials used in the production of abrasives, refractories, ceramics and other applications. For
example, CUMI manufactured silicon carbide and aluminum oxide, fused zirconia and other specialty
products within its electrominerals segment.

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Early History (1930—90)

CUMI was the flagship company of the Murugappa Group, with total revenue of US$4 billion in 2011.
Dewan Bahadur A.M. Murugappa Chettiar started an indigenous banking business in Burma (now
Myanmar) in 1900, which grew and spread to Malaysia, Sri Lanka, Indonesia and Vietnam. In the 1930s,
during the Japanese invasion of Burma, Murugappa Chettiar moved to India and restarted his business as
a steel furniture manufacturing company in Chennai, Ajax India Ltd.

Ajax also ended up making coated abrasives, or sandpaper as it was called, to finish steel furniture and
safes. In the 1950s, Carborundum Universal, USA, and Universal Grinding Wheel Company, UK, two
leading global players in the abrasives industry merged their global operations and were exploring a joint
venture in India; they chose to partner with the Murugappa Group, leading to the formation in 1954 of
Carborundum Universal Madras International (CUMI), a tripartite joint venture. By the early 1990s,
Murugappa Group had bought out both partners and was running CUMI as a listed company with more
than 17,000 shareholders. Over the years, the group diversified into a wide range of businesses, including
financial services and rubber plantation. The group was perceived within the country as a professionally
well-managed company with sound governance. See Exhibit 2 for an overview.

CUMI’s history of its early days in post-independent India showed several key traits within the company.
After its independence, India followed the Soviet model of central planning for economic growth and
development, and the licenses awarded by the Indian government controlled business growth and
expansion. In the early 1960s, securing only one of the applied five licenses and with a restricted imposed
growth rate and expansion, CUMI integrated vertically as the only way to expand the business and
achieve input self-reliance. M.M. Murugappan, vice-chairman of the group and chairman of CUMI,
recalled:

Our DNA from our very early days focused on three core foundations. One was to be self-
sufficient in terms of input material. In our industry, our raw materials come from outside the
country. Even in the early sixties, we were working with customers to design and develop new
products, which today are more popular as application engineering — our second core
foundation. In 1974, we initiated our own in-house research and development (R&D). Often your
collaborator handed you down, in hindsight perhaps, dated technology, but relevant enough with
what was happening with the customer base here. We wanted to be able to develop and engineer
new processes to advance our capability and our product line. Most people saw no real need for
R&D in India at that time, but we chose to be different.

Post-Liberalization Growth and Internationalization

In the early 1990s, India ended its insistence on tight control amid a closed economy and liberalized its
economy by opening it up to global competition. CUMI’s main competitors in 1990 were Grindwell
Norton (GN), a U.S.-based company and a global leader in the abrasives industry, and Wendt (India), a
subsidiary of Wendt Corporation, owned by Winterthur Technologies, a Swiss-based supplier of precision
grinding technology serving the industrial, automotive, aircraft and cutting tool industry. Saint-Gobain, a
French multinational firm, more known for its glass manufacturing, acquired GN in 1990, just around the
time Indian liberalization moves began. With the backing of Saint-Gobain, and the new open environment
in India, GN was planning an aggressive expansion in India. In 1994, CUMI responded by getting partial
control (41 per cent) of the Indian operations of Wendt Corporation, which held a distant third of the
market share in the industry. Wendt India, a leading manufacturer of super abrasive grinding wheels and
tools (diamond and cubic boron nitride), was incorporated in 1980 as a joint venture between Wendt
GmbH and The House of Khataus. With the acquisition of Wendt, GN and CUMI held two-thirds of the
abrasives market in India.

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With increasing competition, management wanted to take their generic products overseas through
distribution agents and their niche products worldwide, directly leveraging their strength in application
support in industrial ceramics. Management was inspired by the success of the Indian software industry
abroad and wanted to leverage its overseas partners. Murugappan recalled:

We were still seen as an Indian company with an Indian product, which perhaps was an initial
disadvantage in the overseas market. But we thought if we could put our knowledge base along
with our product and start addressing customers’ unique problems, we would have an
opportunity. So we first started identifying products which could take on a worldwide stance
where there were little gaps in the market and went into those markets, went to the customers
along with application support. We were thus carefully treading overseas, not attempting to do
things on our own but always trying to leverage the fact that we worked well in partnerships.

In the early 2000s, CUMI established offices in the United States and Australia to provide application
support to key customers in abrasives and also entered into a partnership with their distributors to provide
application support for customers in coal lining. CUMI established marketing offices in China, Thailand,
the Middle East and Europe. Although the overseas operation was a small fraction of their overall
business, success of these initial international forays in the ceramics business allowed CUMI to extend the
strategy to all other areas.

Strategic Visioning and Diversity

In 2004, Murugappan was elevated from vice-chairman to chairman of CUMI, and Srinivasan, who was
then the vice-president of marketing at the abrasives division of CUMI, was appointed as managing
director. Prior to the appointment, Srinivasan was the marketing head, and later CEO, of Wendt India; in
1999, he joined CUMI in its industrial ceramics business, taking charge as the vice-president of marketing
of the abrasives division in 2002. Murugappan reflected on the transition:

I chose Srini personally, clearly for two reasons. He was an outstanding manager and understood
this business. And secondly, he came from a joint venture partnership. By being on the receiving
end, he saw the fairness of our group. His thinking resonates well with our philosophy, which was
instrumental in him coming on board and later heading CUMI.

The company brought together the senior management under an umbrella named Business Group
Management Committee (BGMC) and went through a strategic visioning exercise. After much
introspection about CUMI’s strengths and weaknesses, they noted that CUMI’s growth was just keeping
pace with inflation, and thus they needed a new strategy for growth. They articulated a new vision for
CUMI to grow into a global ceramic/abrasive company with sales in excess of $2.5 billion by 2020. This
plan became known as its “Vision 2020.” Realizing this vision meant that CUMI had to grow more than
20 per cent annually and also expand internationally, so it had to step outside its home shores of India to
gain access to resources in the form of raw material, energy, technology or brand and then to access
global markets. Srinivasan commented on CUMI’s global strategy:

Ours would necessarily have to be a resource-restricted expansion that is very different from
those of the developed world multinationals. We don’t have their deep pockets, so we have to be
cautious about the bets we take. We are likely to make different choices in terms of size and risk
profile. We may even go with companies that are not so easy to do business with. Our engineers
and managers have to step up to bigger challenges…. We have certain advantages — we have a
very well-trained and efficient work force, such as the engineers, middle managers or
technologists. We can deploy them, and their skills can be utilized across the globe. Now that’s a
huge advantage that we have compared to everybody else. For example, we have 530

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technologists available here. We can move them to where the need exists to turn around a
business quickly or acquire a business and enhance its performance. That’s a big advantage that
we have.

CUMI’s managers embraced the new vision enthusiastically Management realized that in order to create a
global company, it needed to increase the diversity and demographic mix of the company; since its
inception, CUMI’s employees were mainly from South India. Muthiah, vice-president of human
resources, commented:

We had to move from a “tn” to a “TN” company: “tn” is Tamil Nadu, the state we are located.
“TN” is transnational, our goal. We had to adapt our recruitment changes, put in place new
training mechanisms for the new demographic profile, etc. We consciously worked hard and
measured our diversity to reach a pan-India employee profile. We recruited from specialized
geographies. Calcutta has a history of ceramics, and thus we brought in ceramics people from
there. Now our factories have people from Bihar and Northeast India. We are moving to get at
least 25 per cent women to get different perspectives at all levels. We realized we had mainly
linear thinkers like engineers and finance persons. Over the past several years, we have brought
together lateral and abstract thinkers. We have put together a core team of these youngsters, all
under 25, from diverse backgrounds, like writers and painters, to bring diversity in our thinking,
to create future businesses.

GLOBAL VENTURING

CUMI faced intense competition both from within India and from overseas (see Exhibit 3 for an overview
of CUMI’s competition). The company focused on a two-pronged strategy for its internationalization.
One was a product-specific, backward-integration strategy where CUMI would go overseas to access
cheap sources of raw materials to control input cost. For example, CUMI made acquisitions in Russia and
South Africa, both of which were sources of key raw materials for abrasives. The second was a country-
specific strategy where CUMI went to countries to leverage its competitive advantages and access
markets for their products. For example, China, the single largest market for abrasives, was a target for
such a strategy. Exhibit 4 gives an overview of CUMI’s global strategy.

Acquisition of Volzhsky Abrasives Works (VAW), Russia

Volgograd, earlier called Stalingrad, a city about 500 miles north of Moscow, was rebuilt after the Second
World War. Orlovsky, on the right bank of the Volga River, was a source of silica sand, and Volgograd
Petroleum Refinery was a source for petroleum coke, a carbonaceous solid derived from oil refinery
cooker units or other cracking processes. Volzhsky Abrasive Works (VAW) was set up to cater to the
growing demand of grinding materials from silicon carbide. The plant started in 1962 with markets in
Russia and neighbouring countries and expanded over the years to include an abrasive tool shop and a
silicon carbide production shop. In 1993, the company was listed in the stock exchange of the new
Russian Federation following the Soviet collapse. As of 2006, VAW was the largest producer of silicon
carbide (SiC) abrasives in Russia, with 65,000 tons per annum installed, along with other products, such
as bonded abrasives and refractories. Total sales topped US$54 million. The management was looking for
a strategic investor for infusing capital and management to grow the company.

CUMI was on the lookout to set up a manufacturing facility overseas for silicon carbide. Its management
was evaluating a proposal to either set this up in North Africa or in the Middle East when they learned
about the VAW opportunity in Russia. VAW’s production capacity was 20 times that of CUMI’s. Both
pet coke and silicon carbide, key raw materials for abrasives, were available in Russia, and thus this

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acquisition would allow control over input costs. This was also an opportunity that would allow CUMI to
take a global position in these products. Murugappan recalled:

Srini brought the opportunity to my attention. My initial reaction was, “It’s great, but is that
doable?” And then we worked on very diligently, and we found that we had the best chance to
take the company forward. Everyone else who was in the bidding process wanted bits and pieces
of it. I suppose the investors were primarily interested in selling it at the best price, but we wanted
to emphasize the relationships with the local management. Srini worked with local management,
and I worked with the investors and the administration to give them the confidence that we would
invest in the business and that we had some good policies in terms of operations, dividends,
capex, etc. I told them that we will ensure that we don’t strip the assets and we don’t disaggregate
the business. The fact that we were a people-oriented business did augur well for us.

Even in the late 2000s, Russian investments were viewed as high risk due to both the political and
economic conditions in that country. Language also was a significant barrier to most investors, as many
Russian executives speak only Russian. Many multinationals that had considered taking over VAW
dropped the proposal, thinking it was a risky option, and there was a general perception among Indian
business executives that the mafia controlled business in Russia. Thus, CUMI undertook an intensive due
diligence process. P.R. Ravi, who was then president of the ceramics and electrominerals division,
recalled:

After our discussions with many of the government officials, we felt that this was largely one of
perceived risk as opposed to real risk. The real issue was that only one of the senior leaders in the
Russian management team was fluent in English and had business experience in India. We had a
big language barrier. We hired two full-time translators, one in India and one in Russia. So we
had full-time interpreters with us who knew the whole time what was going on. Then we also had
one person in the Russian management who could speak English and that was very helpful. We
also engaged Russian language translators to train CUMI managers on basic Russian language
and etiquette.

After a year of negotiations, being the only bidder that offered to take the company in its entirety and due
to CUMI’s reputation, CUMI secured the bid comfortably and decided to go in as a strategic investor with
the mindset of a partner. Srinivasan commented on CUMI’s acquisition philosophy:

CUMI does not approach the acquired partner with the mindset of a “conqueror.” It goes with a
mentality of humility, joint learning and sharing of good practices. We never do a deal on the
basis of just synergy or cost reduction. We don’t say that we will put these two businesses
together and that would reduce the costs. If that happens, it would be a bonus; we never look at
that as a reason to buy a company. We justify a deal based on growth stories. What will we do
differently compared to the existing management? We need to write at least five growth stories
when we do an acquisition.

Immediately after the acquisition, CUMI rolled out a100-day integration plan with joint teams from both
India and Russia. Growth in revenues were expected to come from increasing silicon carbide production
by 25 per cent (from 52,000 to 65,000 tons), introducing technical improvements, doubling the
production of bonded abrasives from 12,000 to 24,000 tons annually and changing the product mix from
metallurgical to higher value crystalline material. CUMI retained the local management and continued to
use cross-functional teams from India and Russia to source good business ideas, which were embraced
and implemented irrespective of their origin. Srinivasan commented:

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As a policy, we do not disturb the local management. By and large we leave them to run the
business. First, after an acquisition, we don’t put a “superman” from India and declare that this
person would be the new boss. The local team continues to run the business in all locations unless
there is a compelling reason to do otherwise. We don’t try to transplant people unless there is a
strong need for someone to go and help.

Second, we employ cross-functional teams. Such teams would have people from the acquired
business and from the Indian business. They will travel to each other’s place. They will take
projects together. To build mutuality, CUMI invites the team from the acquired company to
implement two or three projects in India. Once the team decides that this is a better way, then it
becomes the CUMI way — open and available to all.

For CUMI, the Russian acquisition had been a great success. The company had reinvested profits into the
business and provided generous salary hikes for its Russian employees. In 2010, Sergey Kostrov, general
director of CUMI Russia, was voted as the manager of the year in the Volgograd region. In April 2011,
during the celebration of the fiftieth year of VAW, the mayor of the town congratulated CUMI on its
model employer performance. The mayor’s words as paraphrased by Srinivasan and Murugappan were as
follows:

We are highly delighted that CUMI is here and has operated this company for the last four years.
As I can see three things have happened — there is growth in the investment in the company, the
employee salaries have gone up by 20 per cent year on year in the last four years and the taxes
that the company pays have grown by 10 times in the last four years. I look forward to more such
Indian companies coming here. CUMI had achieved the status of a model employer in our region.

Acquisition of Foskor Zirconia, South Africa

The Industrial Development Corporation (IDC), a government-owned corporation in South Africa,
founded Foskor Corporation in 1951 to produce phosphates for the country’s agricultural sector. The
group’s core activities focused on the mining and beneficiation of phosphate rock and subsequent
production of phosphoric acid and phosphate-based fertilizers. The company commissioned a plant in
Phaloborwa, South Africa in 1991 to produce zirconia, a critical ingredient in the manufacture of
ceramics, abrasives and refractory products. Foskor went through a difficult period between 2004 and
2006, with losses for three consecutive years. Coromandel Fertilizers, a Murugappa Group company,
acquired 2.5 per cent equity in the Foskor group in 2005 through a business management/sweat equity
route. They later bought into Foskor with a 15 per cent stake. Subsequently, Foskor spun off its zirconia
division, which was at that time the world’s third largest producer of zirconia, as Foskor Zirconia (Pty)
Limited, and CUMI acquired 51 per cent of the company. For CUMI, the strategic intent was to become
the leading supplier of fused zirconia products in the world market. But it also came with several
management challenges. Murugappan commented:

South Africa gave us an opportunity to build our position in the raw material availability and we
bought into an existing company and this particular division was a non-core asset for Foskor. We
already had [a] relationship with the parent company, as our group owns 15 per cent of their stake
in the fertilizer business. It came to us at [a] fairly attractive but fair price. But the management of
the unit has been a major challenge.

As planned, CUMI rolled out the100-day integration plan with targeted goals for building synergies, but
execution was limited by unexpected external and internal challenges. Zircon sand prices suddenly rose
more than 200 per cent, and the global meltdown in growth was stalling the steel industry, both of which
significantly affected the market for refractories. CUMI shifted its product mix to make zirconia bubbles

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instead of grains and started investing in zirconia bubble production to broaden the customer base.
Internally, CUMI was disappointed with the company leadership and the work culture it found in the
South African plant. CUMI let go the country head whose performance was not acceptable and appointed
one of their own. V. Ramesh, president of abrasives, recalled:

Unfortunately we ended up with a CEO and top management which was just not coalescing. In
Russia we were very lucky to have the leadership which was pulling the way we wanted to pull
the company. But the leadership in South Africa was not inclined to perform or cooperate…. We
had no option but to ask the CEO and CFO to go. We sent a manager from India as a CFO, and
now he is also the CEO. He basically is covering for multiple positions now.

CUMI management also felt that apart from the strategic challenges, South Africa posed unique
workplace challenges due to the contradictions embedded in a society that was transitioning from its
history of apartheid. While CUMI leaders wanted to change the discriminatory work practices, they were
unable to do that quickly. Murugappan reflected:

South Africa is culturally very different from India because of the predominantly white
management and the predominantly black work force. I thought the management kept us away
from the workforce until I made the effort to meet them personally. I will never forget my first
day in South Africa when we had this lunch just after we had taken charge of the company. It was
called a braai, an open-air barbecue. We went into this lunch where the whites were sitting with
the whites, the blacks were sitting with the blacks, the ladies were sitting by themselves and the
Indian in me did not know what to do. Just at that time, I got a phone call, which caused me to
move away for a couple of minutes. That helped me make my choice. I just took my plate and
went around to each table and stood rather than sat with any one group, so there is fair balance
between everybody. So this was also cultural learning in a way.

Although South Africa posed several management challenges, CUMI management was confident it could
resolve them gradually due to the broad support they had from the management and workforce.
Srinivasan echoed:

There are paradoxes. Top 10 managers are drawing as much salary as 100 workmen. This is like
India in the sixties. While it hurts us to perpetuate this system, we can only bring about gradual
change. We try to be sensitive to local customs, don’t make dramatic changes but gradually try to
move things to what is acceptable globally. For instance, we are stopping separate lunch for
different categories of employees. Now we have the same lunch facilities. As Indians, we are
used to working with such contradictions. For generations, we have lived in a society that was
never homogeneous in terms of language, culture, religion or governance. Survival needed us to
be flexible, handle conflicts and build consensus.

CUMI also had to battle the rising cost of raw materials and the strengthening of the South African
currency, the rand. CUMI wanted to augment the capacity of the South African plant and, overtime,
leverage its presence in South Africa to expand into Africa at large.

CHINA STRATEGY

As CUMI embarked on a global strategy, China presented a huge opportunity. More than 50 per cent of
the raw materials — alumina and silicon carbide — required for the manufacture of abrasives globally
were available only in China. China was expected to become the largest abrasives consumer by 2015.
(Exhibit 5 presents an overview of the global abrasives market.) China was competing aggressively in the
global abrasives market through cost-effective manufacturing, and thus low-cost Chinese imports were a

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strong competition to CUMI even in the domestic market. CUMI saw the possibility that China would be
setting the global standards for pricing, quality and delivery and decided to build a base in China to gain
competitive strength and potentially to build that as a base for global export. In 2006, when CUMI was
considering China, international investment in the grinding wheel business was restricted. Srinivasan
recalled:

In China, international companies were not allowed to invest in the grinding wheel business. The
only way we could enter the Chinese grinding wheel business was either to buy an …

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