CUMI Indias Global Strategy: The China Puzzle Case Report

Carborundum Universal Murugappa Limited (CUMI) Established in 1 !"# Carborundu$ Uni%ersal Murugappa &i$ited 'CUMI( is a global leader in the abrasi%es and )era$i)s industry produ)ing abrasi%es# industrial )era$i)s# ele)tro$inerals# and

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super re*ra)tories+ Created to enter the Indian $ar,et# CUMI is the result o* a tripartite -oint.%enture bet/een t/o leading global players in the abrasi%es industry# Carborundu$ Uni%ersal 'US0( and Uni%ersal Grinding 1heel Co$pany 'U2(# and 0-a3 India &td# a lo)al steel *urniture and )oated abrasi%es $anu*a)turer+ CUMIs gro/th and e3pansion o%er the years has been de*ined by Indias post.independent e)ono$i) $odel o* )entral planning to )ontrol gro/th and de%elop$ent through an operating li)ensing pro)ess+ In the early 1 45s# CUMI /as a/arded only one operating li)ense 'out o* *i%e applied *or( and de)ided the only /ay to gro/ and e3pand /as to %erti)ally integrate to a)hie%e input sel*.relian)e+ In the early 1 5s# India ended its tight )ontrol o%er its )losed e)ono$y and passed a nu$ber

o* legislati%e $easures to liberalize and open the )ountry up to global )o$petition+ 6uring this period a nu$ber global )o$panies *ro$ the US and Europe sought to enter the Indian $ar,et through a)7uisitions and -oint.%entures+ CUMI responded by e3panding internationally to di%ersi*y re%enues by $ar,eting their generi) produ)ts through distribution agents helping to build their brand na$e and re)ognition abroad+ CUMI also /or,ed strategi)ally /ith )usto$ers in o%erseas $ar,ets to address their uni7ue needs by pro%iding appli)ation support le%eraged by their best in )lass R86 to )apture $ar,et share+ 9y this ti$e# the Murugappa Group# an Indian )onglo$erate# a)7uired the )o$pany and operated it as a publi)ly listed )o$pany+ In the early :555s# CUMI established o**i)es in the US and 0ustralia to pro%ide appli)ation support to )usto$ers and opened $ar,eting o**i)es in China# Thailand# the Middle East# and Europe+ 1hile these o%erseas operations /ere li$ited in s)ope and represented a s$all *ra)tion o* CUMIs o%erall business# they pro%ided the initial su))ess ne)essary to e3tend their strategy internationally+ Strategic Vision and Competitive Advantage In the $id.:555s CUMI brought together senior $anage$ent under an u$brella )o$$ittee to )reate a strategi) %ision *or *uture gro/th+ The )o$$ittee arti)ulated a ne/ %ision *or the *ir$ to gro/ into a global )era$i);abrasi%e )o$pany /ith sales in e3)ess o* <:+! billion by :5:5+ The plan# ,no/n as =>ision :5:5?# )ould only be a)hie%able i* the *ir$ gre/ at $ore than :5@ annually /hi)h $eant it

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/ould ha%e to e3pand internationally to gain a))ess to resour)es in the *or$ o* ra/ $aterial# energy# te)hnology and then $o%e into global $ar,ets+ In order to $a,e this possible CUMI belie%ed they operated /ith se%eral )o$petiti%e ad%antages the *irst being their poli)y o* a)7uiring and %erti)ally integrating ra/ $aterials into their operations+ 0brasi%es and )era$i)s e3)lusi%ely re7uire natural resour)es to produ)e and are )riti)al to o/n *or CUMI /ho other/ise /ould be hostage to suppliers or e%en )o$petitors+ CUMI also belie%ed their %ery /ell trained and e**i)ient /or, *or)e possess s,ills and e3pertise that )an be utilized a)ross the globe to turn around a business 7ui),ly or a)7uire a business and enhan)e its per*or$an)e+ &astly# in 1 A"# CUMI initiated their o/n in house resear)h and de%elop$ent depart$ent to design and de%elop ne/ produ)ts /ith )usto$ers to ad%an)e the *ir$s )apabilities and produ)t line+ This group also pro%ided appli)ation support to )usto$ers in international $ar,ets to address uni7ue needs and proble$s at the lo)al le%el+ Ea)h o* these ad%antages is trans*erable to international $ar,ets+ 0s $any not yet utilized abrasi%e and )era$i) natural resour)es e3ist outside o* India# CUMI needs to se)ure the$ be*ore e3panding into international $ar,ets+ Bo/e%er )ertain legal restri)tions $ay apply in )ertain )ountries prohibiting or li$iting *oreign o/nership or )ontrol o* su)h %aluable natural resour)es+ In these situations# CUMI $ay need to $a,e a)7uisitions or *or$ -oint.%entures to enter su)h $ar,ets+ CUMI *urther has $ade a )o$$it$ent to e3panding and di%ersi*ying their /or, *or)e by establishing ne/ hiring and talent a)7uisition $andates+ The e3pansion into *oreign $ar,ets $eans operating in ne/ )ultural and business en%iron$ents re7uiring a rethin, o* the de$ographi)s and s,ills needed to su))eed+ This *ir$ /ide )o$$it$ent $eant in)luding $ore /o$en and young pro*essionals *ro$ %aried ba),grounds to bring di%ersity into the )o$panys thin,ing to )reate businesses and gro/th *or the *uture ,eeping the$ ahead o* )o$petitors in ne/ $ar,ets+ Cinally# CUMIs %alue added appli)ation support group /ithin R86 pro%ides )usto$er e3pertise and ,no/ledge allo/ing the *ir$ to position itsel* as $ore o* a partner than -ust a supplier to their )usto$ers+ This positioning enables the$ to build a strong brand *aster than si$ply $ar,eting produ)ts through )on%entional $eans allo/ing the$ to )apture $ar,et share 7ui),ly+

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Ea)h o* these ad%antages allo/s CUMI to di**erentiate their business and produ)t o**erings *ro$ )o$petitors only i* they re$ain *le3ible abroad by tailoring their approa)h to ea)h $ar,et+ International Operations 9eyond CUMIs initial *oray into international $ar,ets through distributors pro%iding generi) produ)ts and appli)ation support ser%i)es and $ar,eting o**i)es# CUMI operates three $anu*a)turing *a)ilities in Russia# South 0*ri)a# and China under a port*olio strategy+ CUMI entered Russia in :55A %ia its A+""@ a)7uisition o* >olzhs,y 0brasi%es 1or,s '>01(+ 0t the ti$e CUMI /as on the loo,out to set up a $anu*a)turing *a)ility o%erseas *or sili)on )arbide /hen >01 presented the opportunity to be)o$e a strategi) in%estor in*using )apital and $anage$ent to gro/ the )o$pany+ This a)7uisition /as guided by its desire to a))ess and integrate a ,ey ra/ $aterial *or abrasi%es and ele)tro$inerals produ)tion# sili)on )arbide# and to pro%ide a turn,ey lo/ )ost $anu*a)turing lo)ation *or ele)tro$inerals in Europe+ CUMI *a)ed )hallenges asso)iated /ith politi)al and e)ono$i) ris, in addition to language barriers and the per)eption that Russian businesses /ere )ontrolled by the $a*ia+ To address these issues CUMI undertoo, an e3tensi%e due diligen)e pro)ess to understand the nature o* operating in Russia+ CUMI also hired se%eral *ull.ti$e translators to help both >01 and CUMI )o$$uni)ate+ Ulti$ately# this %enture has pro%ed to be %ery su))ess*ul *or both CUMI and >01 as CUMI has e3panded its )apa)ity# se)ured a %ital natural resour)e# and allo/ed CUMI to a ta,e a global position in this produ)t )ategory as >01 retained $anage$ent )ontrol o* operations+ Su))ess in Russia sho/ed /hat /as possible through an a)7uisition but ulti$ately /as only possible by its strong due diligen)e and *le3ible approa)h to address issues+ Dn the heels o* su))ess in Russia# CUMI o**i)ially entered South 0*ri)a in :55E /ith a strategi) e7uity a)7uisition '!1@( /ith a go%ern$ent o/ned )orporation# Cos,or Fir)onia &i$ited# then the third largest produ)er o* zir)onia# a )riti)al ingredient in the $anu*a)ture o* )era$i)s# abrasi%es# and re*ra)tory produ)ts+ Cor CUMI# the strategi) intent /as to be)o$e the leading supplier o* *used zir)onia produ)ts in the /orld+ This %enture ho/e%er /as *raught /ith proble$s asso)iated /ith rising ra/ $aterial )osts# lo)al $anage$ent# and deep seeded )ultural di**eren)es in a post.apartheid South 0*ri)a+ CUMI leaders /itnessed dis)ri$inatory /or, pra)ti)es /hi)h it /anted to )hange but ,ne/ it

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/ould be unable to 7ui),ly+ CUMI realized that )ulturally the distan)e bet/een India and South 0*ri)a /ere greater than they initially realized+ CUMI ho/e%er *elt they )ould resol%e these di**eren)es gradually through broad support *ro$ $anage$ent and the /or,*or)e to e3pand the )apa)ity o* the South 0*ri)an plant and o%erti$e le%erage its presen)e in South 0*ri)a to e3pand into 0*ri)a at large+ 0t this ti$e# CUMI re)ognized that the greatest $ar,et and opportunity *or their business and the abrasi%e industry in general /as in China as $ore than !5@ o* the ne)essary ra/ $aterials /ere a%ailable only in )hina+ China /as also seen to be)o$e the largest abrasi%e )onsu$er in the /orld by :51!+ Co$bined /ith their lo/.)ost $anu*a)turing Chinese )o$panies /ere presenting $ore )o$petition not -ust globally but also in India+ To )o$pete# CUMI de)ided to build a base in China to gain )o$petiti%e strength and build a base *or global e3port+ In :554# CUMI entered China /ith a " @ sta,e in a -oint.%enture /ith# Gingri Industrial 6ia$ond Co$pany# a state.o/ned )o$pany produ)ing syntheti) dia$ond grits# to $anu*a)ture dia$ond grits and abrasi%es under CUMI Super Bard Materials Co$pany 'Gingri( as they /ere restri)ted to enter the $ar,et the$sel%es green*ield+ Initially the -oint. %enture /as si$ple to set up as the Chinese partner pro%ided the e3pertise ne)essary to operate in the )ountry ho/e%er di**eren)es e$erged in the $anage$ent style o* the t/o partners regarding ris, and in%est$ents+ CUMI /ho other/ise /as seen as )onser%ati%e pre*erring s$all in%est$ents to test $ar,ets /as at odds /ith their partners /ho pre*erred larger in%est$ents to build s)ale and %olu$e in produ)tion+ The di**eren)es bet/een these t/o styles pro%ed too $u)h and the -oint %enture /as subse7uently dissol%ed three years later+ CUMI *or$ed a 155@ o/ned subsidiary *or its grinding /heel business+ This ne/ standalone entity struggled to rea)h pro*itability as India didnt realize ho/ i$portant it /as to ha%e a Chinese partner /ho helped the$ en-oy pre*erred a))ess to ra/ $aterials and )apital in the )ountry+ This di**eren)e in a))ess $eant that a )on*li)t e$erged bet/een operating ob-e)ti%es and e3e)ution as the entity /as not able to a)hie%e the sa$e lo/.)ost operating $argins ne)essary to turn a pro*it on the le%el o* produ)t it produ)ed there+ Curther# the operation /as hindered by the Indian CEDs inability to understand the nuan)es o* the Chinese $ar,et re7uiring lo)al leadership in his pla)e+ Bo/e%er# )hinas i$$ense presen)e in the /orld e)ono$y $eant CUMI needed to addresses these issues in order to a)hie%e the goals set *orth by >ision :5:5+

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China Options and Continuing Internationalization 0t this point# CUMI has se%eral options /ith ho/ to pro)eed in China+ 1ith a /holly o/ned subsidiary# CUMI no/ bears the ris, o* the entire enterprise and operates at a disad%antage to others operating /ith a Chinese partner+ CUMI )an either )ontinue to operate the subsidiary /or,ing to redu)e )osts and e$ploying $ore senior Chinese nationals to run the business or sell a portion o* the *ir$ to another Chinese partner /ho $ay be $ore *le3ible in the ob-e)ti%es and business philosophy asso)iated /ith the %enture+ I belie%e CUMI should see, another partner that is properly %etted to ensure a $utual understanding o* the stated goals *or the operation /ith a )ontrolling interest+ This /ould se)ure CUMIs interests and allo/ the$ to set the strategi) %ision *or the operation+ 1hile I belie%e this )ould raise the threat o* gi%ing a/ay its ,no/ledge and te)hnology to a partner that $ay /or, a )o$petitor in the *uture# I thin, /ithout a partner in the lo)al $ar,et to operate the business /ould al$ost )ertainly lead to *ailure+ 0s CUMI loo,s to turnaround the China operation the *ir$ also needs to learn *ro$ their e3perien)es in Russia# South 0*ri)a# and China i* they hope to be su))ess*ul in other $ar,ets+ Manage$ent needs to ha%e in pla)e a pro)ess to assess operating and )ultural di**eren)es in ea)h $ar,et they loo, to enter+ Su)h a pro)ess# /hether underta,en by their business de%elop$ent or ris, group# is )riti)al to *uture su))ess and )annot be *orgone /hen the in%est$ent and reputational ris,s are so great+ >ision :5:5 in%ol%es bold $o%es and ris,s and su)h a strong# /ell.de*ined due diligen)e pro)ess )ould help $itigate unne)essary delays and )osts+