Lessons the Jet debacle can teach the Indian pharma engineering sector

lessons-from-jet-airways

Until that is, the Indian skies opened and Jet took a massive battering from low-cost airlines. Jet refused to take these ‘fringe players’ seriously in the early days, with their budget fares and previously unserved routes. Jet felt secure enough in its status as the preferred choice of corporate India. But soon enough budget airlines started pulling away all of Jet’s price-sensitive customers. By the time Jet acted, it was too late. To compete with low-cost airlines, Jet acquired beleaguered Air Sahara for a whopping INR 14.5 billion in cash, well over what they should have paid. Rebranded JetLite, the division continued to haemorrhage money, and in 2015, Jet wrote off its entire investment.

Analysts blame Naresh Goyal and his controlling management style for much of Jet’s troubles. His decision to have a single management team, headed by himself was a mistake. Jet also lacked a concrete business model – it was tweaked frequently confusing investors and passengers alike. Goyal has been blamed for bad decision making, a lack of transparency and bad investments. Goyal’s refusal to step away cost Jet an additional investment from Etihad Airlines, an investor in the airline.

Goyal was ultimately forced to give up control in April to a consortium of lenders led by the State Bank of India. If they don’t find a buyer Jet will be the second major private airline to collapse since Kingfisher Airlines ceased operations in 2012. If this does happen, it will be a real pity, because flying Jet has always been a great experience. Staff at Jet Airways have always had a customer-first culture that will be sorely missed.

Promoters make companies and promoters break companies by not stepping away at the right time. Goyal’s refusal to step away was the worst decision he could have possibly made, costing Jet and its many employees their future – which brings me to the parallels I see in the Indian pharma engineering sector.

Medicines in India are affordable because of price control and also because of the low cost of engineering infrastructure. In the early days, pharmaceutical manufacturing machinery would be imported from the West often at a prohibitive cost. Even if you could afford to buy these machines, this was the license raj era, and complex customs and import laws made the process incredibly frustrating.

Keen to find a solution, a few indigenous manufacturers gave Indian engineering companies access to these imported machines with a mandate to reverse engineer and manufacture them locally. I am not going to debate the merits or demerits of this, but I’m very glad for it as this act is responsible for the birth of the Indian pharma engineering sector. Homegrown businesses sprouted all across the north and west India, several which are now into their second or third generation. Today for every machine type there are as many as 15 – 20 manufacturers if not more. Little has changed however with the management style – they remain tightly controlled family-owned businesses each competing for a piece of a pie that gets tinier with every passing year.

It is the fear of losing control that prevents businesses from aligning or seeking investment. They’re often wary of investors or partners because more often than not they treat their company finances as their personal pocketbook, often a red flag for investing companies.

While there are many success stories of Indian family-run enterprise on a global scale, in pharma engineering, I can think of only one. All of these companies have one thing in common – they all brought in professionals to guide them onward at the right time. They focused on creating value.

Promoters need to behave like financial investors, bringing in self-discipline by undertaking due diligence on their own businesses consistently. They need to uphold fiscal discipline and include forensic audits, purchase procurement policies and SOPs to ensure statutory, internal and ethical compliance at all levels and in all departments – all of which are instrumental in creating value. It should not be a business only for themselves and the next generation but a company that creates value for all its stakeholders. Value creation occurs if you crystallize profits in the books and agree to pay taxes to all statutory authorities like good corporate citizens.

If our industry has a future, it will come from consolidation and alliances. Companies with complementary capabilities can partner for a shared vision, leveraging each other’s strengths and buffering weaknesses, ultimately going after a larger piece of the pie.

It’s far more valuable to own a piece of a growing company than 100% of a stagnating enterprise. I can give you examples of value creation as a result of our investments in TSA and Pacifab. TSA which manufactures high purity water systems and process equipment, went from INR 160 million to INR 430 million in 4 years with a 60% EBITDA jump, and Pacifab has grown to 4 times its value since our investment. Pacifab, our capsule filling machinery company, is a classic example of multiple strategic investors coming together to build value, all adding professional management and harmony at the board level despite differing schools of thought.

We are standing at the edge of a chasm. If we choose to hold tightly to our minuscule fiefdoms, we will watch our industry slowly die. It’s time for all of us to think and act like investors and take a leap into the future.

This post originally appeared on LinkedIn Pulse