Old models and new
Indian businesses' and investors' approach to technologies is long past its expiry date
By Dhirendra Kumar | Apr 10, 2019
A couple of weeks ago, investors in a mid-cap stock were roiled by the foreign technology partner pulling out. When Hyderabad-based battery-maker Amara Raja announced that its American technology supplier, Johnson Controls, had terminated the agreement to supply technology, the stock crashed about 10 percent over a couple of days and hasn't really recovered. Given that Johnson Controls is the world's largest supplier of automotive batteries, the story looked like a familiar one, at least initially. Perhaps it's the old Hero vs Honda drama all over again, thought analysts and investors, with the big difference that Amara Raja is not quite the Hero in batteries.
The idea that one of the inputs that an Indian business must purchase is 'technology' is deeply rooted in our country, and with good reason. If a company can't buy technology from a foreign supplier, then there's generally nothing much to be done except going around looking for some new benefactor.
However, a little deeper excavation into the Johnson Controls business reveals that even that old assumption may not be valid today. Technological changes can come from unexpected directions and can suddenly change businesses in unexpected ways. For a start, it turned out that unlike past cases like Hero-Honda, the foreign partner had no interest in the Indian market, in fact it had lost interest in the business altogether and was moving out of it globally. Johnson Controls abrogated the technology-supply agreement because it would have, so to speak, no battery technology to supply. That it had, in fact, signed a deal to sell off this business as long ago as November last year. Which incidentally raises the issue of Indian companies neglecting to inform the stock exchanges about possibly critical developments but that's a separate story.
So why would the world's dominant car battery manufacturer decide that it was no longer worth its while to make car batteries. Now that I put it this way, the answer may be obvious. This company is dominant in what one may now call legacy batteries, which are lead-acid batteries. These batteries are on their way out and this is something that has been become clear relatively suddenly. They will be replaced within a decade or so by Lithium-Ion batteries. Lithium battery prices have fallen to less than one-fifth since 2010 and are still in free fall. In 2010, a traditional car battery costing Rs 3000 would have been replaced by a Lithium battery costing ten times as much. Today, it's roughly 2x and dropping. Drop-in lithium replacements for cars large motorcycles are already available and are purchased by enthusiasts. The fact that the lithium replacement lasts longer, weighs 1/3rd and is environmentally cleaner just seal the deal.
However, my point today is not about batteries per se but change. In today's world, businesses and investors can be hit hard and quick by technology changes. Johnson Controls doesn't have the financial or technical wherewithal to compete in the lithium battery world, and decided to get out while the going was relatively good. In fact, this is merely a canary in a coal mine for the wave of change that'll be hitting many industries and specially the auto industry in the near future.
However, even more than that, these events should provoke some thought amongst those who run Indian businesses, specially manufacturing ones. Why are there so many businesses that are just frozen in the 'technology agreement' of past and hoping that it will somehow carry them far into the future? This is the Ambassador car business model, and it's way past the time to move beyond it.