PIRATES, PYTHONS & PIRANHAS

In the Keynote Speech at CEO ICONfluence held at Mumbai, Deepak Parekh shared insights derived from his own experience and his leadership role over the years.

Good afternoon ladies and gentlemen:
Let me start by saying that I have always considered myself as an optimist by nature. Of course, there are many types of optimists:
• pie in the sky optimists;
• daring optimists;
• grounded optimists; or
• cautious optimists.

Yet, I draw my line on being an optimist with pirates, pythons and piranhas. Incidentally, the topic I was given to talk on is: “Pirates, Pythons and Piranhas: Will the faint-hearted survive?” The truth is I have absolutely no advice to offer anyone being robbed at sea, strangulated by a venomous snake or having their flesh being eaten by a deadly fish!
As CEOs, if you do choose to take on the pirates, pythons and piranhas, please ensure you have a darn good succession plan in place and have paid off all your outstanding debt! That said, the topic of the talk is catchy and I do appreciate the creativity.

With so many CEOs in this room in the middle of the afternoon, I take it that business must be doing fairly well. At least there isn’t any crisis happening. On a lighter note, I hope the CEOs here are not too free, too often in the afternoons. Some of you may recall that between the 1950s and 1980s in the US, there was the famous 3-6-3 rule of banking – which is borrow at 3%, lend at 6% and play golf at 3 pm! Life was quite comfortable till interest rates started moving upwards. When spreads shrank, riskier lending happened and eventually thousands of savings and loans associations (or S&Ls as they are called), went bankrupt, costing taxpayers billions of dollars. That was the end of CEOs playing truant in the afternoons! I hope your time here this afternoon will be well spent!

Initiatives like the CEO Lounge are much needed. It’s niche, it’s an opportunity to network with like-minded people and more importantly, it’s good to detach from one’s work every once in a while. I fully endorse the CEO Lounge’s philosophy of living a life beyond the boardroom.

Given that all of you are experts and leaders in your own field, I cannot offer any advice on how you run your business. Yet as leaders, irrespective of which sector you are in, there are certain common issues and this is what I’d like to talk about.

As a leader, one needs to constantly scan the environment. You don’t need to wake up at 4 a.m. to be a great CEO, but when you wake up each morning, you need to ask:

• What kind of world are we living in?
• What are the mega trends in the world today? and
• How will these changes impact the company?

CEOs and CXOs have control over their micro data, but on the macro environment, perceptions often differ. As far as the macro picture is concerned, often there is a tendency to focus on the short-term. As a result, one gets so consumed dealing with the “now and present” that one has little energy to imagine the future or strategise for the long-term.

It is in this context that I’d like to share some of my views on where India fits in the global picture and highlight India’s long-term macro trends. As leaders, you have to be optimistic because only then will you be able to have the vision for a better future and motivate others to achieve that shared vision. And yes, if you only go by the headlines, it’s going to get harder to find that optimism.

Globally, we are veering towards a synchronised slowdown across advanced and emerging market economies. The recovery from the global financial crisis which started in 2008 was very slow and a broad-based recovery was only seen in calendar year 2017 and the first half of 2018. Since then, global growth has slipped back again. The IMF is predicting a decline in growth for 70% of the global economy in 2019. So global growth which peaked in 2017 at 4% is now projected at 3.3% in 2019.

The reasons are well known:

• Despite the tax cuts and low unemployment, growth in the US is on a downturn. The inverted yield curve and the pause in interest rate increases by the Fed Reserve for this entire year have increased the possibility of an impending recession in the US.

• Just as there was hope that the tariff fight between US and China could ease, the US widened its trade hostility stance to the EU as well.

• Germany has slowed down, Italy is in recession, relying on Chinese aid for its infrastructure and the UK is tied up in knots over Brexit.

• Japan’s, the third largest economy has seen prolonged slow growth and recently its economy has worsened with a string of natural disasters of typhoons, earthquakes and flooding.

• China has been ramping up its monetary and fiscal stimulus to counter a slowdown and deal with the impact of tariffs.

• Much of the global economic weakness relates to the manufacturing sector, while the services sectors are holding up well.

• Since 2012, capex has flatlined. Fewer factories and infrastructure is being built. But leading global companies have announced share buybacks exceeding US$ 1 trillion last year.

• Ironically, while the economic outlook is sombre, global stock markets are buoyant.

India’s growth rate at 7% in the global context stands out. I am not merely painting a rosy picture, nor am I negating the fact that last quarter’s GDP growth at 6.6% was the slowest over the past five quarters. There is no disputing that India’s growth rate has slowed currently, but it is important to look at the longerterm trends. The focus has to be on realising the growth potential. I don’t worry about India’s overall macro-economic stability, nor am I too concerned about the economic reform agenda. India generally has been an incremental reformer. And it will only be overtime that tangible benefits of recent reforms like GST, RERA or IBC will show up. Yes, there are several problems in the economy but you all are well versed with these issues.

What really excites me about India is its scale, the pace of consumption and defining structural changes that are happening at the consumer level. That’s India’s greatest strength. This is the space where innovation is happening, where last mile connectivity is taking place and where lifestyles of people are changing.

• In the recent period, much focus has been on tight liquidity, tepid growth, low investments and concerns around asset quality. By being consumed with these issues, one tends to miss the spots where the sun is shining. I believe private consumption will remain India’s strongest growth engine.

• India has an estimated 235 million credit eligible consumers – these are people with incomes of over Rs 2.5 lakh per annum and customers between the ages of 20 to 50 years form bulk of this group.

• Now the question is: are we tapping sufficiently into this credit eligible population? And the answer is clearly no.

• Out of the 235 million credit eligible customers, just one-third currently have a live borrowing from a bank, NBFC, housing finance company or any other lending body.

• This means that financiers already have an untapped group of 150 million customers who are potential consumers and eligible for loans.

• If one addresses this 150 million segment – which is meeting their credit requirements through credit cards, home, auto, consumer or personal loans, it can give a major boost and provide a multiplier effect to the rest of the economy.

• In some cases, the ticket sizes are small – Rs 10,000 or 20,000, and more customers now prefer taking short-term loans, rather than pay cash upfront.

• That’s because convenience has set it in. The growth in point of sales, mobiles, low transaction costs and digital platforms has made consumer credit so easy.

• And to put in context the scale, in 2008, one million customers were applying for loans each month. Now a million customers can be acquired in a day – often seen on a Diwali or Dhanteras day. Household leverage in India is still very low. If one looks at any financial sector in India, it remains deeply under penetrated.

• India’s consumer credit to GDP ratio at 13% is amongst the lowest for a large economy. In US this ratio is 80%, in China it is 40%.

• The mortgage to GDP ratio is 10% in India. In China it is above 20%, in the US it is 63%

• Insurance penetration in India stands at 3.7% of GDP – Malaysia, Thailand and China have ratios closer to 5% of GDP

• India’s mutual fund penetration is 12% of GDP, compared to the world average of 62% of GDP. What low penetration means is that the scope to grow further is immense.

One just needs to imagine how much power and leverage is available with India’s 560 million digital consumers – these are the ones with access to the internet. This number has more than doubled in just four years. India’s digital sector is expected to contribute between US$ 350 to 450 billion by 2025. This is across an array of sectors – agriculture, education, financial services, healthcare, logistics, retail and many more.

So India’s growth comes primarily from domestic consumption. I don’t see any reason to be gloomy about India’s future growth. Short-term issues in the economy will tide over – these are part and parcel of market cycles.

So now let me address the issue of corporate survival – for the faint and strong hearted. When one looks at broader trends in terms of the largest companies by market cap, it clearly shows that lifecycles of companies and their dominance are both getting shorter. For instance, of the top 10 listed companies by market cap in 1980, 6 out of 10 were oil companies. In the 1990s, the top 10 listed companies were dominated by global banks and in 2018, 6 of the top 10 companies by market cap are digital stocks. There is only one company – Exxon which has stayed on the top 10 list between 1980 to 2018. This poses the big question of how do companies stay relevant for the longer term? It is difficult to answer. Given that the lifespan of technology is even shorter, we certainly need to be prepared for further radical change. I have to admit, I don’t even understand valuations of some of these unicorns. Perhaps I am too old school and can’t digest such high valuations on entities with negative earnings.

• So Uber has a US$ 90 to 100 billion valuation with cumulative losses over the last 5 years an estimated at US$ 7 billion.

• They say with unicorns you need to lose a lot of money before you make money. But how much is the question?

• True, everyone is looking for the next Amazon. It’s taken Amazon more than 20 years since it was listed in 1997 to get where it is today. That’s why Amazon was called the ‘patron saint’ of losing money – but today its quarterly profits stand at US$ billion.

But I recently read an interesting take on this. It said that companies like Uber or Lyft areresembling philanthropic organisations, where they extract money from rich venture capitalists and subsidise urban transportation for millions of users, besides creating thousands of jobs. Either way, as we get more and more online, the logistics sector and everything else that revolves around this becomes more promising.

Globally, there are growing concerns on the dominance or monopolistic nature of large internet companies. Because there are no barriers to access, countries are grappling with issues like how to regulate or even tax such companies. Between privacy laws, cyber security, misuse of social media and ownership of data, it is difficult to predict what these outcomes may be. You’ll get plenty of food for thought from the next 3 panels on AI, change and new work spheres and all the panelists are top notch at what they do.

So I come to my last point of what makes companies resilient in the new scheme of things? I think a “sense of purpose” has become central to the narrative for investors. A company’s footprint in society is being mapped closely from an environment, social and governance perspective. More than just the inclusive agenda, companies are recognising that people are wired differently and that diversity brings better decisions to the table.

And yet with all these dynamic changes, the most important aspect is the culture of an organization. c A lot of institutions start out with great culture. Leaders believe it’s well embedded in the organisation, but the reality is that the biggest risk is erosion of culture. Just like rusting or even hardening of arteries it isn’t always immediately apparent. It’s the same with an erosion of culture. Therefore one has to keep working at it every day. Values and ethics are always about demonstration at the top in order to ensure that it percolates down to every level in the organisation.

People will give their ‘all in’ if they are treated well and if they feel they are in a safe, transparent and sharing environment. Transparency in a work place gives people the ability to figure out things themselves, rather than rely on the grapevine. The upside is that transparency reduces harmful politics and the risk of bad behaviour in offices. Remember, bad behaviour almost always happens behind closed doors. Hang on to the open door philosophy.

Before I conclude, let me tell you why you should avoid the 3 Ps – Pirates, pythons and piranhas.

• Pirates are akin to the rogue traders, fraudsters and the ones always trying to game the system. If you want to sleep well at night, the only way is to be unwavering on ethics and values. Always be champions of integrity, transparency and accountability. These are time tested values.

• Now for the pythons – business is filled with snake-inthe-grass type of people – the traitors, backstabbers and double dealers. No matter how enticing the business opportunity is, only deal with like-minded people who share your value systems. Remember, it takes years to build a reputation and minutes to ruin it.

• And lastly, the piranhas. Hostile takeovers are a reality – it can happen with stealth or financial muscle. Mergers and acquisitions are inevitable in corporate life, but they need to be friendly, not hostile. Build strong relationships so you always have a white knight to take care of the sharks and piranhas.

• So can the faint hearted survive? My guess is as good as Darwin’s which is, it’s always about survival of the fittest. On that note, I’ll end by saying that work is just one part of life. The balance has to be found through family, friends and your own pursuits of happiness.

  Thank you.