As I was engrossed in a file, my attention was broken by the voice of my secretary, Jagmal.
I looked at the bunch of papers Jagmal had put up before me. These notices were to be sent to those taxpayers whose 15th June (2007) advance-tax installment payment was not satisfactory. The previous day, the Commissioner had convened a meeting of all the Addl. Commissioners of Income Tax and reviewed the advance-tax collection. Though the performance of my Range was quite satisfactory, yet he had directed to identify those taxpayers whose Advance- tax installment was less than their corresponding installment for the previous year and to seek their explanation to justify the shortfall. This was to be done by issuing notices as prescribed under the Income Tax Act. Jagmal had prepared the notices accordingly.
As I was browsing through these notices, I saw that one of them was for Rockfeller Infotech (RI).
I personally knew Sh. Surendra Sharma, one of the Directors of Reckfeller Infotech. Just a couple of years back he had come to me and told that very soon Rockfeller would be the largest tax payer of my Range. Thus finding the name of his company among the cases who did not pay any advance-tax this year was kind of a shock. I thought it would be better to talk to Sh. Surendra Sharma before issuing the notice. Hence a call was made to him and an appointment was fixed for the following day.
The next day Sh. Surendra Sharma (SS) arrived and I started enquiring about the reason for not paying any advance tax this year.
Me: What happened Mr. Sharma, I find that your company has not paid the June installment of Advance-tax?
SS: Sir, unfortunately, this is true. Rockfeller Infotech is having a tough time.
Me: But only a couple of years back you were so upbeat about Rockfeller’s future.
SS: Indeed, I was, but the whole situation changed quite dramatically.
Me: Why, some accident?
SS: No, just that the business environment changed so fast that we could not cope with it.
Me: Really, but how?
SS: It is a long story, will take some time to tell.
Me: Don’t worry; I have enough time for you.
Surendra Sharma thus began narrating his story. I was listening curiously. I kept on probing and Surendra kept explaining. As a result, though I intended to know just the reason for the Advance-tax default, I ended up listening the whole story behind Rockfeller’s rise and fall. The same is summarized hereunder.
Background
The Sharmas were a well known and respected family of Moradabad. Surendra’s grandfather Ram Datt Sharma inherited the family brassware business and made it grow continuously so that at one point they were the biggest exporter of Moradabad. But as Ram Datt grew older, the business started dwindling because his health did not allow him to devote much time on the business. Though it was a family business, Ram Datt’s elder son, Raghu Datt, did not join him. Raghu preferred to become a professor of Physics rather than running the family business. The younger son Yagya Datt was a bright student and Ram Datt thought that it would not be appropriate to ask Yagya Datt to scarifice his studies for the sake of business. Thus there was no one to support Ram Datt and gradually the business had to be closed.
Meanwhile, Yagya Datt joined IIT, Kanpur to do BTech in Electrical Engineering. The Electrical Engineering program at Kanpur is part Electrical and part Electronics. Yagya Datt was more interested in Electronics and chose most of his electives from this stream. He loved to design various types of small electronics gadgets. Once he designed a circuit for conducting the ‘Just a Minute’ (JAM) competition at Culfest, the IIT Kanpur inter-college cultural festival. Soon he became known around the campus as the ‘Electronics Guru’.
Yagya Datt completed his BTech program and immediately got an offer from the Rockfeller foundation to pursue post graduate studies at an American university. Most of his batch mates were proceeding to USA for higher studies and his family also wanted Yagya Datta to accept the Rockfeller fellowship. But Yagya Datt found his love for India too much to overcome and refused the offer.
Thus the old family workshop was refurbished to set up a business for electronics manufacturing. Ram Datt agreed to provide the necessary capital. Though the fellowship was not accepted, Yagya Datt had developed some fancy for the word ‘Rockfeller’ and therefore the new venture was named ‘Rockfeller Infotech’.
The Initial Years
To begin with, Rockfeller manufactured a small educational computer for teaching electronics to engineering students. For those times, this product was a marvelous innovation and marketing it to various engineering colleges was not a big challenge. Rockfeller sold this product for 4-5 years and Yagya Datt was a satisfied enterpreneur.
In 1989, Surendra Sharma, the son of Yagya Datt’s elder brother Raghu Datt, completed his masters degree in Commerce and joined Rockfeller. Surendra was young, dynamic and ambitious. He could see that educational computers had only a limited market. Thus he advised his uncle to search for some other business. Yagya Datt thought Surendra’s advise was sensible.
They had a relative in the Railway Board who was aware of Yagya Datt’s genius in electronics R&D. He advised them to study the Track Monitoring system being imported by the Railways. There was no comparable product which was available domestically. Moreover, the Railways were paying huge cost for maintenance of these machines and yet, they could not get satisfactory service.
An R&D team was assigned the project of developing the track monitoring system indigenously. Within months, Rockfeller launched their own Railway Track Analysis System (RTAS).
RTAS was a huge success. It was an excellent substitute for the imported system and they immediately received order for 14 machines. Over next 2-3 years the Railway business grew substantially.
Soon the foreign manufacturers started lobbying with the government and the Railway Board changed its policy. As a result, the RTAS became an unviable product. The things came to such a pass that it became almost impossible to run the business.
An adversity offers an opportunity
6th December, 1992 was a fateful day in the history of India which shall not be forgotten ever. Following the Ram Janmabhumi agitation, the Babri Masjid was demolished. This event shocked the entire country. The communally sensitive town of Moradabad was particularly affected and was engulfed by communal riots immediately. The troubled Rockfeller Infotech could not withstand this blow and had to pull down its shutters abruptly. Yagya Datt was in a shock but Surendra thought that something must be done to tackle the situation.
Surendra got in touch with Dr. Saifuddin, a professor at IIM Lucknow. The professor analyzed their business and explained them the Porter’s 5 forces model. He told them that Railways is a huge organization and in comparison RI is just a small fry. Using Porter’s 5 forces model he explained that, under the circumstances, their sole customer the Railways had undue bargaining power. There is no way RI could have a profitable business with them (Railways) on a long-term basis.
Thus Sharmas decided to search for an alternative business. They had a friend who was a dealer for Anjaleem, a Baroda based company selling PCO machines. Through this friend they learned that the business of PCO machines was a growing industry. They decided to explore further.
The era of pay telephony was launched in 1989 by Sam Pitroda under patronage of the late Prime Minister Sh. Rajeev Gandhi. Thus, in 1992, the PCO Industry was about three years old and was growing rapidly. Apart from Anjaleem, the other major players were CPD (Bangalore), Digi Control (Delhi), and Pactel (Hyderabad). Market size was about 70000 machines per annum.
Initially, the PCO machines were designed with an inbuilt Tarrif Table. This system was prone to manipulation and the government had been receiving complaints regularly. Thus in January 1993 a new policy was announced whereby PCO machines were to be based on a new technology which allowed tariff calculation using pulse received from the telephone exchange. This policy was to come in force from September 1993.
Sharmas realized that they had an opportunity before them. After being locked up for more than a month, the factory was reopened. Yagya Datt was at his favorite job once again – R&D. Surendra was raising and readying his team for their new business. They had 9 months, but their prototype was ready by July, 93 and the production began very soon.
Despite being a late entrant, RI had no such disadvantage as they were the pioneers of the new generation PCO machine. Competitors also developed similar machines but the Rockfeller PCO system was a cut above the rest.
The Marketing Efforts
All this while, marketing was not recognized as a separate activity at RI. Yagya Datt used to look after R&D and Production. All other activities including Marketing were left for Surendra. With launch of the PCO machine, the need for a dedicated Marketing setup was realized.
Initially a sales team of 7 to 8 persons was setup under a Marketing Manager. Stockists were appointed in UP, Punjab and Haryana. These stockists supplied to dealers who were located in various district headquarters.
The initial setup was a mix of Level-1 and Level-2 distribution. For the Northern states L-2 distribution was used whereas for other states since sales volume were low it was not feasible to appoint stockists and sales were done directly to dealers.
In 1993 they could sell about 50 machines per month and as marketing efforts progressed, this figure kept rising. As a result, the sales which were just about Rs. 40 lacs in 1993-94 rose to about Rs. 11 crore by 1999-2000 (Exhibit 1). By that time RI was selling about 12000 machines annually and had about 7% share of the total market (Exhibit 2). The sales force also grew in size to 30 and their marketing network had spread across the country. Coin Phone was added to the product portfolio by this time.
26th January 2001- An earthquake jolts Gujarat and another the telecom Industry
On that fateful day, while Gujarat was devastated by the Bhuj earthquake, the government came out with a policy that calls up to 200 km distance could be made as local calls. This was big jolt particularly for the pay telephony industry.
STD calls were the major source of revenue for the PCO operators. Now that less than 200 km calls were local calls, one would pay just a few Rupees for them. As a result daily sales dwindled drastically for PCO operators.
This affected Rockfeller Infotech badly. Their dealers could not sell the machines as the pull factor was missing totally. The dealers thought of switching over to some other business. The company sales force was demoralized as they found no logical way to convince these dealers that PCO business had some future. The perception in the market was that the PCO business is dead.
No. of machines sold per month dropped rapidly (Exhibit 3). Falling numbers prompted Surendra to consult their old friend Prof. Saifuddin (IIM Lucknow). Surendra & Prof. Saifuddin made field visits to some districts in UP, Haryana and Rajasthan. They retrieved the 6 months call data from the memory of various PCO booth machines. After coming back, they analyzed this data and the result was startling. (Exhibit 4)
The apparent may not be real
Analysis of the PCO data showed that PCO revenues had indeed fallen drastically post 26 January 01. But number of calls per day had gone up sharply. Though, most of these were local calls. The PCO owners would charge Rs. 2 per local call which cost them just 85 paise. Thus the margin per call was more than 100%. Further analysis, (Exhibit 2) showed that PCO owners were making more profits than what they made prior to the 26 Jan, 01 policy.
The analysis was thus quite revealing and dramatically boosted the sagging morale of the management team. A seminar of the entire sales force was convened and the analysis of the data was shown to them. Everybody was startled to find how misconceived their own understanding of the situation had been. They realized that sharp decline in the top line need not manifest in a decline in the bottom line.
The learning from this seminar considerably boosted the morale of the sales force. The re-invigorated sales force spread out across the length and breadth of the marketing network and convinced the channel members that the situation was not bad at all for the pay telephony industry. They (the channel members) in turn sold the same message to the PCO operators.
The results of this exercise were amazing and within 3 months (Exhibit 3) sales volumes increased considerably to reach pre-January ‘01 levels. This also resulted in arresting the trend of turn over in the sales force and retaining them was no more so challenging.
Management education helps
Now the business at RI was growing rapidly. The 200 Km local call policy had resulted in exponential growth in the local call business and the Rockfeller coin phone had become the market leader in its segment.
Despite this, Surendra was not satisfied. He realized that his lack of formal management education was preventing him from embarking on a flight of fancy. His ambitions were not fulfilled yet. Thus he decided to join a 4 months executive program at IIM Ahmedabad.
After completing the course, Surendra started analyzing his business with professional insights he had acquired at IIM Ahmedabad. He realized that though the Rockfeller products were of better quality yet their market penitration was not so impressive. After careful thinking, he could find two reasons.
One, though internal tariff tables were banned after 1993, still some PCO machine manufacturers provided the tariff table in the machines so that if desired, the unscrupulous operators could manipulate the bills to cheat their customers. The RI channel partners tried to impress upon the RI management that they should also provide internal tariff table in their machines in order to compete in the market. Sharmas were conscientious people and rejected such suggestions.
Two, RI had a two tier marketing channel of stockists and dealers. RI used to sell to the stockists and the stockists in turn supplied to the dealers. In this scenario, selling outside UP was considered inter-state sale and could be made against C forms only. Otherwise sales tax @ 10% was chargeable instead of 4%. Many dealers would promise to give C-forms later but would not comply. As a result RI had to take additional burden of the shortfall of 6% sales tax. To avoid this, RI demanded security from dealers but they were not willing to oblige. As result, it was difficult to sell out side UP.
To overcome this problem, Surendra decided to open warehouses in other states. For this purpose, Surendra got in touch with, his batchmate at IIM Ahmedabad, Prakash who was the Chief Business Development Officer at Getex, a reputed logistics company. The creation, management and operation of various warehouses across the country was outsourced to Getex.
Thus Surendra was able to overcome the major bottleneck in the RI marketing channel. Now, moving goods to warehouses could be treated as stock transfer and thus requirement of C-forms was obviated. Henceforth, the sales started growing out of UP also.
The Golden Years
Year 2003-04 brought drastic change in the pay telephony business. The policy was revised and private players (the telecom companies) were allowed to enter this business. The companies like Tata Telecom & Reliance Communications seized the opportunity immediately. They were allowed to operate on WLL network. For this purpose, a device called Network Interface Unit (NIU) was utilized whereby a normal phone could be connected to the WLL line. Thus a normal coin phone could be usedfor setting up a PCO on WLL network.
These companies resorted to proactive marketing and soon such coin phone PCO’s could be seen in every nook and corner of the country. At this stage, the pay telephony market reached the rural market also.
Thus the demand for coin phone and PCO machines grew manifold. In the initial years (pre-privatization), the growth witnessed was in the range of 5 to 10%. But in the current scenario, the growth exploded. Within two years, the industry sales increased from 1 lakh 20 thousand machines per annum to 12 lakh machines per annum.
Now, Rockfeller Infotech started selling directly to Tata and Reliance. Earlier they were selling about 800-1000 machines per month. But now 2000-3000 machines per month were sold to Tata alone. Similar growth was witnessed in coin phone sales as well.
In 2004-05, another change was brought in. The NIU based setup was also allowed for GSM networks. This brought in players like Airtel and Idea in the pay telephony market.
RI became a major supplier to both Airtel and Idea and, as a result, the sales grew rapidly. The business grew so much that these companies ( Idea, Airtel, Vodafone) started seeking supplies from China. Soon some Chinese companies developed similar products to compete with the Indian Players.
Good Times do not last long
With the China trump card in their armour, the telecom companies started arm twisting the Indian manufacturers. Result was a price war and falling margins. Soon the Indian manufactures stopped manufacturing and instead started supplying by buying from China. Thus most of the players established partnerships with Chinese manufacturers.
At Rockfeller, Sharmas were in a dilemma. But they ultimately decided to play on their own. They thought that their core competencies were R&D and manufacturing and by closing these operations, they would be deprived of these competencies. For some time they stuck to manufacturing PCO machines.
History repeats itself
But this business was no longer lucrative. The mobile revolution was at its peak and almost everyone could afford a mobile phone. Hence the need for going to a PCO arose rarely. As a result, for RI, the sales were dipping rapidly and at the same time, due to the Chinese competition, the margins were shrinking.
Sudden downfall in the PCO business forced Sharmas to analyze the reasons for the decline. Soon they realized that they were in the same situation, as Rockfellor Infotech was, when they were having business with Railways. The Porter’s five forces model was proving its applicability once again. Like Railways, the telecom companies like Idea, Airtel etc. were giants when compared with R.I. Thus R.I. found itself once again in a situation where the buyers had undue bargaining power. Hence Sharmas realized that they had no option but to exit the PCO business.
Changing track
A meeting of the top management team was convened to discuss what course to adopt for future. After much deliberation, they zeroed on Power back-up business (inverter, UPS etc).
After narrating his story, Surendra explained that Rockfeller Infotech was incurring huge losses as their Power back-up business was yet to takeoff properly. This was the reason why no advance tax was paid this year.
My curiosity wasn’t satisfied yet. Thus I probed further.
Me: What made you opt for power back-up business? It is a B2C type business whereas the pay telephony business was B2B type.
SS: You are right. It was a tough decision. But this seemed to be our best bet.
Me: How?
SS: We realized that the reason why we succeeded in pay telephony was that it was an India specific business and there was no threat of any competition from global electronic firms.
Me: So you thought that power back-up business is also India specific.
SS: That’s right. Shortage of power is a problem specific to India and thus it is unlikely that the global firms would enter into manufacturing of inverters.
Me: But marketing inverters would be an entirely different ballgame.
SS: Indeed. But we thought we would adjust ourselves and our existing marketing channel would be able to market the inverters.
Me: But, for inverters, service commitments would be too high.
SS: You are right. For providing service to the inverter buyers, we have set up a dedicated service team. Whereas the channel partners shall be responsible for selling, R.I. shall provide the necessary service backup.
Me: Then, why aren’t your inverter sales picking up?
SS: Unfortunately our sales network hasn’t been quite stable. We had relied heavily on our old channel partners but most of them left us.
Me: Why?
SS: Well, we committed a grave mistake.
Me: What?
SS: When the pay telephony market was at its peak, in order to smoothen the delivery mechanism, we introduced our channel partners to our major customers like Airtel and Idea. While the pay telephony business was falling rapidly, the telecom business was exploding. These telecom companies needed to strengthen their network and very conveniently they lured our channel partners.
Me: That’s sad.
SS: Yes, and we couldn’t do anything.
Me: Oh.
SS: Sir, now you would appreciate that our default of not paying advance tax is not deliberate.
Me: Of course.
SS: Now that you have heard of my story can you tell me where did we go wrong?
Me: Can’t say.
SS: But in your career you would have studied many businesses.
Me: Yes, but not in so much detail.
SS: Sir, just think about it and if you get some idea, do let me know.
Me: Of course, I would.
With this, Surendra begged to leave. As he left, I was left thinking how Rockfeller Infotech would be able to revive itself.
©Sunil Bajpai
Exhibit 1
Financial Performance of Rockfeller Infotech
Financial Year
|
Annual Sales(Rs lakhs)
|
1993-94
|
40
|
1994-95
|
80
|
1995-96
|
150
|
1996-97
|
250
|
1997-98
|
500
|
1998-99
|
800
|
1999-00
|
1100
|
2000-01
|
1300
|
2001-02
|
1200
|
2002-03
|
2800
|
2003-04
|
3800
|
2004-05
|
4500
|
2005-06
|
5000
|
2006-07
|
2500
|
2007-08
|
1500
|
Exhibit 2
Economies of a typical PCO
Before 26th Jan 2001
| |||||
Local calls within a city like Moradabad
|
Local calls within 200 KMs with 95 dialling
|
STD calls with 0 dialling
|
ISD calls with 00 dialling
|
total per day
| |
No. of calls a day
|
6
|
0
|
15
|
1
|
22.00
|
Avg duration of call in minutes
|
5
|
0
|
3
|
3
| |
Chargeable minutes
|
6
|
0
|
3
|
3
| |
Cost per minute to PCO owner
|
0.33
|
0
|
7.56
|
20.16
| |
Call rate per minute charged by PCO in Rs per minute
|
0.6667
|
0
|
9
|
24.00
| |
Avg Amount charged per call Rs.
|
4
|
0
|
27
|
72
|
24.23
|
Sservice charge per call
|
0
|
0
|
2
|
2
| |
Total amt charged per call
|
4
|
0
|
29
|
74
|
24.23
|
Total amount charged per day
|
24
|
0
|
435
|
74
|
533.00
|
Avg. cost per call
|
2
|
0
|
22.68
|
60.48
|
20.21
|
Margin per call
|
2
|
0
|
6.32
|
13.52
|
5.56
|
Mark up per day
|
12
|
0
|
94.8
|
13.52
|
120.32
|
Total cost of all calls
|
12
|
0
|
370.2
|
62.48
|
444.68
|
Percentage of margin
|
16%
|
0
|
16%
|
16%
|
0.48
|
Commission by BSNL per day
|
1.92
|
0
|
0
|
0
|
1.92
|
Margin per day
|
13.92
|
0
|
94.8
|
13.52
|
122.24
|
Margin as % of rev
|
22.93%
| ||||
Exhibit 2 contd…
From March 2001
| |||||
Local calls within a city like Moradabad
|
Local calls within 200 KMs with 95 dialling
|
STD calls with 0 dialling
|
ISD calls with 00 dialling
|
Totals per day
| |
No. of calls a day
|
6
|
35
|
5
|
1
|
47.00
|
Avg duration of call in minutes
|
5
|
5
|
3
|
3
| |
Chargeable minutes
|
6
|
6
|
3
|
3
| |
Cost per minute to PCO owner
|
0.33
|
0.33
|
7.56
|
20.16
| |
Call rate per minute charged by PCO in Rs per minute
|
0.67
|
0.67
|
9
|
24
| |
Avg Amount charged per call (Rs.)
|
4
|
4
|
27
|
72
|
7.89
|
Service charge per call
|
0
|
0
|
2
|
2
| |
Total amt charged per call
|
4
|
4
|
29
|
74
|
7.89
|
Total amount charged per day
|
24
|
140
|
135
|
72
|
371.00
|
Avg. cost per call
|
2
|
2
|
22.68
|
60.48
|
5.70
|
Margin per call
|
2
|
2
|
4.32
|
11.52
|
2.73
|
Mark up per day
|
12
|
70
|
21.6
|
11.52
|
115.12
|
Total cost of all calls
|
12
|
70
|
123.4
|
62.48
|
267.88
|
percentage of margin
|
16%
|
16%
|
16%
|
16%
|
0.64
|
commission by BSNL per day
|
1.92
|
11.2
|
21.6
|
11.52
|
46.24
|
Margin per day
|
13.92
|
81.2
|
21.6
|
11.52
|
128.24
|
Margin as % of rev
|
47.87%
| ||||
Gain(+)/Loss(-) in margin per day as compared to pre 26th Jan)
|
0
|
58
|
0
|
0
|
6.00
|
Gain(+)/Loss(-) in margin per day in %
|
0
|
0%
|
4.91%
| ||
Exhibit 3
No. of Units sold – Year 2001 - PCO Machines
Month
|
No. of Units
|
January
|
1070
|
February
|
250
|
March
|
195
|
April
|
150
|
May
|
350
|
June
|
850
|
July
|
985
|
You may also like to read:
