‘Every Business Is a Digital Business’

Featured-Image-How-CEOs-Stymie-Their-Own-Digital-TransformationNitin Rakesh took over as the CEO of Bangalore-based IT company Mphasis earlier this year. He was earlier CEO and president of Syntel, and president, CEO and managing director of Motilal Oswal Asset Management Company, and chief executive of State Street Syntel Services, a joint venture between Syntel and State Street Bank. In this conversation with Knowledge@Wharton, Rakesh talks about the rapid growth of technology. It must be “bionic, rather than a debate between automation and human,” he says.
An edited transcript of the conversation follows.
Knowledge@Wharton: Everyone talks about how the world of technology is changing. In your role as the CEO of Mphasis, how do you see that happening? What challenges does this create for companies trying to grapple with digital transformation?
Rakesh: Let me give you some perspective of why we are seeing what we are seeing, and what is leading us to this point where disruption through technology, especially digital technology, appears to be immensely scary right now.
This hasn’t happened overnight. It started 40 years ago with what we now commonly know as Moore’s Law. One thing about technology is that the human mind thinks in a linear fashion but technology advancement is actually exponential. The reason is tied to what Gordon Moore said 40 years ago.
A congruence of many independent technologies that were on their own exponential paths — whether it’s semiconductors, cellphones or the ability to write software — came together when the iPhone was ‘discovered.’ Look at what is happening in genetics and genome mapping. Look at what is happening in solar power and the exponentiality that is brought into these options. The other thing about this exponential curve is that the capabilities rise exponentially and the price declines exponentially, because they go hand in hand. That has led to the congruence of all of these technologies around robotics, genetics, the ability of chips and microprocessors and nanotechnology.
Now we are on the cusp of what I call the next digital revolution. People are calling it Industrial Revolution 4.0. I mean you can call it what you want, but the reality of this is that every business today is a digital business; some just don’t know it yet.
The reason I say that is when you zoom out and look at what has happened in certain industries, the common thread that starts emerging is that any industry that has a consumer element, the end consumer element is the first to get disrupted, whether it was retail with Amazon or payments with PayPal and Square. Or if you start looking at retail lending, Lending Tree is a good example, as is SoFi.
The reason is that the center of the universe 20 years ago used to revolve around what your core systems could support. Businesses would go building around the core applications and the core systems. If you were an insurance company you had an underwriting system, a claims system and a policy admin system. That would determine how you ran your business. But over the last 10 years customers have started to drive — based on the rapid advancement in consumer-facing technology — what kind of service they want, when they want it and how they want it delivered. That has turned the whole model on its head. You’re starting to see this rapid Amazonization of the world, which is essentially a combination of all these things coming together.
Knowledge@Wharton: If you take three industries — say financial services, insurance and real estate — how has digital disruption impacted them? What are the biggest concerns that you hear from companies in these industries?
“Over the last 10 years customers have started to drive … what kind of service they want, when they want it and how they want it delivered. That has turned the whole model on its head.”
Rakesh: Let’s take financial services — retail financial services. Think of brokerage or wealth management. It wasn’t uncommon for you to pay 2% commissions 20 years ago, and you’re probably paying two or five basis points today. In that way the brokerage platform is lucky. The way you dealt with your broker was you picked up the phone and called him; the way you deal with a broker today is on an app or on an online platform. And that exponentiality has actually emerged.
So while volumes have gone up multifold because of scalability and the greater ability of people to access the market, prices have fallen exponentially as well. This means if you do not have the ability to be in front of your customer in any channel that they want to deal with you on, you’re going to start losing market share.
The same thing is going to start happening to wealth management. Yes, there is always going to be a human element, but 70% of the time a financial advisor today deals with administrative issues, not really advising customers. They’re probably doing it 30% of the time. In my view, that will flip pretty quickly, because of technology, especially automation and robotics; robo-advisors are a good example. This will actually give you that much more ability on the way [you interact with] the customer. If you do not focus on adding value, you will get commoditized and essentially lose market share.
Now look at another example of financial services — payments. The way you dealt with payments [was] mostly physical and plastic. Now it’s turned fairly heavily into digital wallets. The fastest-growing segment of the payment industry is digital wallets, contact lists, no swipe needed…. In many cases, it’s a tap on your phone.
Again, if you are not set up to deal with that, you are going to start seeing disintermediation. Think of all of the providers that didn’t exist but are now making billions of dollars in revenue. Where is that revenue coming from? Clearly, you are starting to see the squeeze on that industry as well.
Now let’s talk about insurance. One of the great stories in insurance actually doesn’t even start in that industry. It hasn’t even started yet if you ask me. What Uber is doing to transportation is turn it into a service, with potentially driverless cars in the next 10, maybe 12, years. I’m not smart enough to predict how long it will be, but I am smart enough to tell you that it will be sooner than you and I think.
When that happens, what happens to insurance? How do you price risk? Today you price risk based on the individual’s driving history. How many sharp turns he makes, how many sharp brakes he does, what is the average speed he follows. What happens to all that when the driver in the driverless car is software?
I think that disruption hasn’t even started yet. What has started is the squeeze because of disintermediation and availability of information. The first wave was the information explosion, data explosion. The second wave hasn’t hit us yet, or the third wave. The impact of these technologies over the next 10 years will be 10 times of the last 10 years.
Knowledge@Wharton: How is the insurance industry dealing with this? And what is it doing to prepare?
Rakesh: There are two things. You have to run your current business as is, because you have to keep one eye on that while you prepare for the future. I don’t think everyone is still fully prepared for the current business either because of the fact that they are still so core systems focused, or centric, that they haven’t invested enough in technology, or essentially the intelligence layer that sits between their core systems and the customer.
There is a lot of focus right now on how you deal with data, and how you apply data in a cognitive way. How do you personalize insurance for each consumer? I think this is the right thing to do for the current big book of business. I personally haven’t seen a lot of effort being made on transportation; there’s a lot of skepticism on driverless cars at this point. But I think it’s going to sneak up on us so fast that we’re probably not going to have the time to respond and react.
“Technology’s exponentiality is hard to realize; it sneaks up on you.”
The smarter companies are preparing for a future, looking at how the business model will evolve. How do you price risk? I know one insurance carrier that is on a road map to unbundle their underwriting and risk systems. They currently use 90 plus parameters to price risk, and they have narrowed down three to identify which will be the most important in the future; 90% of the risk can be priced with these three. That means they will have to start at the front, which is at the consumer level, and then go backwards.
So I think it’s a long road ahead in terms of preparedness. I would like more CEOs to think about this as a real, imminent near-term threat versus just thinking of it as a 12-15 year threat. Technology’s exponentiality is hard to realize; it sneaks up on you.
Knowledge@Wharton: When you think of the consequences of what you are describing for IT companies, how will they need to change in order to address these needs?
Rakesh: You’ve reached one of my favorite topics. And the reason I say that is every business is a digital business. Some just don’t know it yet; they’ll all realize it sooner rather than later. What that means for our industry is that we will have a lot more to play in, because digital technology will become the core of every business.
If we have the ability and the capability to help large enterprises embrace, adopt and transform themselves, then we become a very important cog in that wheel. We have to be able to transform ourselves with new technologies, invest in the capabilities, have a point of view that we can take to our customers and help them transform. I genuinely believe that the future of our industry is tied to how we help clients transform themselves.
Knowledge@Wharton: Turning to Mphasis, your company is at an interesting point right now because it has a new majority shareholder in Blackstone. There’s new leadership; you have recently arrived. Where do you see opportunities to build value?
Rakesh: Mphasis is in a unique position because we come from fairly pedigreed shareholding, which was Hewlett Packard. We learned a lot working with HP for 10-plus years, built some capability that was very unique to that era and that time. Then, over the last five years, the company took further steps to invest in digital, or consumer-facing, tech. This is the ability to apply cognitive and cloud capabilities, and we are very well positioned there.
I think with Blackstone, the best realization that all of us are having is that they are longer term than long term, which means they want to do the right things, to invest in the right areas, and to move the company along in a way that we can be a leading-edge, next generation IT services company. That is the roadmap we are following right now.
“I … worry that maybe not a lot of our clients have embraced this digital disruptive threat at the scale that they need to.”
Knowledge@Wharton: What will your strategy be, specifically on something called X2C2. What does that stand for?
Rakesh: The revolution is in front of the consumer. The consumer-facing tech, powered by a very strong, intelligent, cognitive layer, is driving pretty much every enterprise, every industry. And then at the back end are core systems. What we are trying to do is help our enterprise clients embrace this consumer-facing front end view of the world. We are calling it a front-to-back transformation.
The two pillars of that transformation are hyper cloud and hyper personalization. Hyper cloud is because every large new initiative has to be cloud native. And hyper personalization is because the consumer is in the middle.
The two things that power this change are cloud and cognitive. X2C2 stands for anything to cloud, powered by cognitive, because those are the two pillars of this entire front-to-back transformation strategy that we believe very strongly our enterprise clients need today.
Knowledge@Wharton: What are some of the biggest risks that keep you up at night in implementing this strategy? And can those be mitigated?
Rakesh: There are two broad risks that I worry about. The first one is tied to what I earlier said. Our fortunes are tied to our customer’s fortunes. And I just worry that maybe not a lot of our clients have embraced this digital disruptive threat at the scale that they need to.
If their businesses start getting disrupted that has a pretty significant impact on our businesses, too, especially in retail financial services, retail insurance, which is a large part of what we do today. So that is the reason I am so vocal about bringing this to the fore.
The second risk is this is a pivot for us as well. While we are well positioned compared to our peers, we still have to balance the core IT services, the traditional IT, with the digital IT. The biggest pivot we need to make is with our people. How do you make sure that you are able to provide that opportunity in the platform, bring that talent along, and embrace new technology in a way that it becomes complementary, it becomes bionic, rather than a debate between automation and human [work]?
That is the journey we are on. It’s not an ordinary journey; it will take us three to five years.
Knowledge@Wharton: How do you position Mphasis in this space?
Rakesh: I think of us as the specialist player that understands your industry well because we are focused on a few segments of the market. We are not trying to be everything to everybody. We’ve chosen those industries and those sweet spots based on our capabilities and our investments.
I talk about things like wealth management, I’ve talked about retail banking, consumer banking, insurance … those are good examples of where we have depth. We are complementing that depth with this cloud and cognitive capability. And we are not in the market to build a product or to say we have the best automation platform. What we are bringing to you — we are actually shameless about leaning on all of the work that is out there in open source — is the ability to orchestrate and apply that to your business….
“What used to be a 20-year view of strategy now needs to be agile, just like the whole world around you, especially with technology.”
Knowledge@Wharton: Before Mphasis you were at Syntel for many years. What is the difference between being the CEO of Mphasis and your leadership journey at Syntel? What leadership skills did you need to develop in order to become the CEO of Mphasis?
Rakesh: I have a slightly classical view of leadership. I differentiate leadership from managerial skills. I think leadership is something that transcends time; management skills actually have to evolve to keep up with time. And the reason I say that is that leadership is all about finding a vision, aligning people to that vision. In the end you have to lead people. And finally put an execution plan around that which then can be managed.
I think leadership skills haven’t changed since time immemorial. The skills are pretty consistent, with one big difference, and that difference is that the time skills have shrunk rapidly. What used to be a 20-year view of strategy now needs to be agile, just like the whole world around you, especially with technology.
Technology is causing the timescale to shrink even faster. Globalization has caused it to shrink faster as well. So I think that’s my overall view on leadership. My personal leadership style is I believe leadership is a contact sport. You have to be in front of every stakeholder, whether it is your employees, your customers, your shareholders, your partners.
So I am very much a contact sport believer when it comes to leadership style. I also like to believe that management by vision is something that actually works very well for me rather than managing by objectives alone. I mean, I like to surround myself with people who can actually then work towards those objectives.
I’ve had a great run at Syntel. I grew through the ranks. I learned a lot working with a wonderful set of people, a wonderful set of founders. The challenge at Mphasis is a little different. The challenge is we are emerging from the shadow of a large IT company. We now need to find our own identity, we need to create and establish our own identity, we need to turn our subconscious competence into a conscious strategy and a position in the market.
Knowledge@Wharton: One last question, how do you define success?
Rakesh: We’ve set ourselves certain goals. Those goals have to be met because at the end of the day, in my fiduciary role, I have to maximize shareholder return. So that is one parameter of success.
The bigger parameter is that every stakeholder that we are working with should actually be able to experience this growth, and I call it inclusive growth. We’ve set ourselves what I call the four dimensions of growth as our targets — consistent growth, differentiated growth, profitable growth, and inclusive growth. That is the way I look at how we can succeed over the next few years.

Can Apple Get a Bigger Bite of India’s Smartphone Market?

iphoneSEDuring Indian Prime Minister Narendra Modi’s meeting with American business leaders during his recent visit to the U.S., Apple CEO Tim Cook is reported to have spoken with him about Apple’s first assembled-in-India iPhone – the iPhone SE. Apple started assembling the iPhone SE in Bangalore in May through its partner, the Taiwanese contract manufacturer Wistron Corporation. Over time, this is expected to be scaled up to full manufacturing. (iPhone SE was launched globally in April last year and at a starting price of $399 was positioned as Apple’s cheapest iPhone.) While at present the Cupertino, Calif.-based technology firm sells its iPhones in India through multiple channels like franchisee-run exclusive brand stores, multi-branded stores and online, it is now waiting for approval from the Modi government to set up its own company-owned stores in the country.
Apple is also in talks with the government on various issues like duty waivers on imports of components and permission to bring refurbished iPhones to India. In the company’s earnings call in May, Cook noted that Apple was “underpenetrated” in India and was “putting a lot of energy” here. He said: “We are very optimistic about our future in this remarkable country with its very large, young and tech-savvy population, fast growing economy and improving 4G network infrastructure.”
It’s not hard to understand why India is important for Apple. Last April while announcing its quarterly results, Apple reported, for the first time ever, that sales of iPhones had dropped. The company sold 16% fewer iPhones in January to March 2016 than it had during the same period in 2015. This year, for the first three months of 2017, iPhone sales remained flat. The company sold 50.76 million iPhones, 1% less compared to the same period last year. The drop in China, Apple’s second largest market which accounts for 25% of its profits, was steep: 20%, according to industry estimates.
Ravi Bapna, professor of business analytics and business information at the Carlson School of Management, University of Minnesota, notes: “Assembling iPhones in India is a strategic diversification move by Apple to simultaneously hedge against its manufacturing reliance on China and more easily — with potentially lower costs from ‘make in India’ benefits — tap into the growing upper middle class market in India.”
India is the world’s second largest mobile phone market after China, the third largest smartphone market after China and the U.S. and, most importantly, the fastest growing smartphone market globally among the big markets. According to technology market research firm Counterpoint Research, smartphone shipments in India grew 18% annually in calendar 2016 compared to the global smartphone market which grew at 3%. In the first quarter of 2017, while globally smartphones grew by 10% year-on-year, in India the growth was 15% reaching 29 million units.
“The rollout of 3G/4G mobile broadband networks and digitalization of almost every use-case has been spurring the demand for 3G/4G capable smartphones in India. Smartphone penetration here, which is among the lowest in the world, is on the verge of a massive growth as more and more people adopt smartphones to connect to the internet for rich multimedia communication, content and commerce,” says Neil Shah, research director, devices & ecosystems at Counterpoint Research. The government’s sharp push towards digital payments is also giving it a huge boost.
Anshul Gupta, research director at research and advisory firm Gartner, points out that with slowdown in sales in major markets, India represents the largest opportunity for handset makers. According to Gartner’s data, smartphones (which currently account for around 50%) are expected to account for 62% of all mobile phones sales in India in 2018. “And, while at present the average selling price of smartphones in India is around $100, two or three years down the line, the pyramid at the top will be big,” he adds
“Apple is taking steps toward saving on import duties and pricing its iPhones cheaper than before and thereby reducing barriers to enter the Apple ecosystem.”–Neil Shah
Benefits of Local Manufacturing
Apple needs to quickly strengthen its India story to make the most of this opportunity. According to Counterpoint’s data, for the January to March quarter this year, the premium smartphone segment in India — phones priced at more than Rs.30,000 ($465) — grew at 35% year-on-year. Apple garnered a 43% market share in this category; up 10% from the same period last year. In the overall smartphone market it has only a 2.6% share (up 0.1% from last year). In terms of India’s smartphone revenue share, Apple is in fifth position with 8.6%. In the first quarter of 2016, it had 10.1% share and ranked second.
Counterpoint’s Shah sees Apple’s new assembling activities in India as a measure towards “building its foundation” in the country. “Apple,” he says, “is taking steps toward saving on import duties and pricing its iPhones cheaper than before and thereby reducing barriers to enter the Apple ecosystem.” According to industry estimates, local assembling and manufacturing can give savings of around 12%. Pointing out that at present India is one of the costliest markets in which to buy a new iPhone and that less than 3% of the total smartphones sold here are in the $600 and above range where most of Apple’s models are positioned, Shah says: “India has never been a priority market for Apple until now when it is seeing that in the next two to three years, the Indian smartphone user base will swell to almost half a billion users and many of them will be buying their second or third smartphone.”
Market intelligence firm International Data Corporation (IDC) estimates that by the end of this year, India will have the second-largest smartphone installed base (smartphones in use) with 334 million smartphones. “This huge smartphone base coupled with the fact that India continues to be largest feature phone market in the world provides tremendous opportunity for phone makers to woo users who are looking to replace their smartphones as well as those migrating from feature phones to smartphones,” says Navkendar Singh, senior research manager at IDC India.
Singh considers Apple’s move to assemble its phones in India as “critical” in terms of the cost savings it will give the company. “This can be used to bring down prices as well as for expanding distribution, channel margins, retail marketing spends and to ensure placement in smaller towns and cities, where the consumer is highly aspirational and strives for a premium brand like Apple.”
Singh also points out that with around 40 local and foreign brands including Samsung, Oppo, Vivo, Xiaomi, Gionee, Micromax, Intex and Lava already assembling and manufacturing in India, the country is fast emerging as the new manufacturing hub for mobile phones and components. He cites “relatively lower labor costs, government push and incentives for local manufacturing coupled with high differential duties on import” as some key reasons for this. “Approximately 65% of phones sold in India are assembled in India. And in the next few years, vendors are expected to start exporting devices to South East Asia and African countries from their India manufacturing operations,” he adds.
Dinkar Ayilavarapu, partner at management consulting firm Bain & Company, gives another perspective. “I wouldn’t undermine what Apple has achieved in India. What is undeniable is that they are a large player in India despite a small volume share. And that could change with domestic manufacturing. Apple, he adds, will “always be a premium priced, premium segment” operator. “I don’t think manufacturing in India is going to change that. For now, manufacturing in India is for iPhone SE, which will be the bulk of what they sell in the country but it will still be premium-priced relative to most other phones in India. Also, most large manufacturers do end up making phones in India, so in many ways this is expected as you scale up.”
“India provides tremendous opportunity for phone makers to woo users who are looking to replace their smartphones as well as those migrating from feature phones to smartphones.”–Navkendar Singh
Chinese Brands at Play
How big a bite Apple manages to get of India’s growing smartphone market remains to be seen. For now, it’s Chinese brands like Xiaomi, Vivo, Oppo, Gionee, Lenovo, Motorola and others who are having an Indian feast. A recent article in business daily Business Standard reports that according Germany-based research company GfK’s global handset update for March 2017, India accounts for 67% of Xiaomi’s sales outside China, while for Vivo it is as high as 73% and for Oppo 48%. For Gionee, 25% of total sales (including China) is from India.
As per IDC numbers, in the first quarter of 2017 China-based vendors captured 51.4% of the smartphone shipments in India with 16.9% sequential growth and 142.6% growth over the same period last year. In contrast, share of homegrown vendors like Micromax, Intex, Karbonn and others dropped to 13.5% in Q12017 from 40.5% in Q12016. Also, for the first time, in Q12017, a smartphone model from a China-based vendor became the highest shipped smartphone as Redmi Note 4 from Xiaomi replaced Korean firm Samsung’s Galaxy J2 which was the top model in Q42016. The Business Standard article quotes a Xiaomi spokesperson as saying: “India is the most important and largest market for us outside China. Our chairman has announced that we would like to invest $500 million in India over the next three to five years in manufacturing, R&D and aftersales, after having invested the same amount till now in the existing business.”
IDC’s Singh attributes this sharp growth of Chinese brands to strong investments in brand building, huge marketing spends and continuing deepening of the distribution networks in the India market. This, he says, is creating “pull and push” for these brands in both offline and online channels. “They have successfully established themselves as a real option for smartphone consumers who are looking for a great quality device, with latest specs and technology, but don’t mind spending a little extra if the whole package is offered as a great value.” Adds Carlson’s Bapna: “In many sectors Chinese companies are out-innovating, by order of magnitude, their global counterparts. One only needs to visit innovation hubs such as Shenzen to see what companies such as Huawei and Tencent are bringing to the table. The Indian consumers have a sharp sense of value, and they see this in the Chinese smartphones.”
Counterpoint’s Shah divides the success of Chinese companies in India into two phases. Phase one, he says was around online distribution while phase two is around offline distribution. He explains: In 2013-2014, Chinese brands such as Motorola and Lenovo entered India with a go-to-market strategy drawing from the e-commerce-only smartphone brand Xiaomi’s success in China. They partnered exclusively with India’s biggest online retailer Flipkart with a direct go-to-consumer model allowing them to distribute smartphones at aggressive price points with no investment needed in multi-layer distribution or marketing. Following Lenovo and Motorola, most of the Chinese brands such as Xiaomi, LeEco, Coolpad, Meizu and others entered India through the e-commerce route. “It has been an easy entry strategy without needing much investment. These companies have been able to offer aggressive price points because of their greater scale in China or other markets which Indian brands didn’t enjoy,” says Shah.
Since the second half of 2016, he continues, there has been an “onslaught” from Chinese brands such as Oppo and Vivo on the offline distribution market on various fronts. For instance, in terms of promotions — Vivo retained its sponsorship for the Indian Premier League, the hugely popular cricket tournament, paying around $340 million for five years; pricing — cheaper than market leader Samsung; place — tier 1 to tier 4 markets; and product — excellent quality thanks to their own R&D and manufacturing. “In just a span of six to eight months, both Oppo and Vivo (both owned by BBK Electronics) have jumped to the top five rankings in terms of market share in the Indian smartphone market.”
Ayilavarapu of Bain thinks the Chinese stronghold could be a passing phase. Pointing out that the largest player in volume and value is still Samsung, a Korean company, he says: “Yes, the Chinese do have a strong share in smartphones but these things change and do so quite quickly. Market share is an outcome in many ways of a product pipeline, so this is a reflection of how the players thought of products a couple of years ago. At its core this is a reflection of product and technology change, and it happens quite often. As new disruption or newer products emerge, it won’t be surprising if others take share.”
“Most players are competing on price-to-feature comparisons. They need to build key differentiators.”–Anshul Gupta
Can India Firms Fight Back?
Why did Indian players lose out in the first place? Rajeev Jain, chief financial officer of Intex Technologies, which according to IDC was at third position with a 9.2% market share in Q12016 but today doesn’t rank among the top five smartphone players in the country, points to two key factors. One, Indian firms were simply not ready for the sudden shift from 2G to 4G that happened when telecom operator Reliance Jio Infocomm disrupted the market last year with its aggressive 4G services. Unlike the Chinese vendors who had 4G products, Indian players had large inventories of 2G and 3G handsets. Two, for Indian firms, the major growth was in rural areas. Most transactions here happen in cash. This got severely impacted during the demonetization exercise last year when the government in a sudden move derecognized the existing Rs.500 ($7.40) and Rs.1,000 currency notes as legal currency. “Even as we were grappling with these two major developments, the Chinese took over the market,” says Jain.
There were other reasons, too. For instance, Indian firms missed out on the pulse of the market, like the craze for selfies and the huge attraction of front-facing cameras. They continued to focus on low-cost entry level phones even as the consumers were willing to pay more for better products with innovative features. They also did not invest in strengthening their retailing network and marketing.
“Indians love brands. Unfortunately many Indian firms have focused on making their brands discount. On the other hand, Chinese companies have focused on making their brands count,” says Jagdeep Kapoor, chairman and managing director of brand marketing consultancy firm Samsika Marketing Consultants. Gartner’s Gupta adds: “They did not build on their strengths and did not develop their portfolios adequately. Most importantly, they did not come up with any innovations.”
Bapna reiterates there is a “larger systemic issue” around technology innovation ecosystems. “When you get a cluster of companies such as Huawei and Tencent in a single region such as Shenzen, you get significant knowledge and human capital spillovers. Also, Chinese universities are ramping up their research capabilities, paying premium dollars for top American academic talent in areas such as machine learning and AI (artificial intelligence) — and that forms the backbone of the next-gen digital business models. There is no such parallel in India, and universities in India are not embedded in collaborative research and innovation with industry,” he notes. Intex’s Jain laments that there are no incentives for R&D in India. “‘Make in India’ is only a jargon. We have to convert it into reality,” he says. Jain is confident, though, that they can make a comeback. Intex, he says, will soon be introducing 25 new models, 16 in smartphones and nine in feature phones.
IDC’s Singh suggests that to get back into the game, Indian firms need to play on their strengths in the sales and distribution networks they had. “These vendors have immense opportunity in quality smartphones at below US$100 which is losing steam since they lost the plot to higher priced offerings by China-based vendors. They should also focus on giving better device experience in terms of OS functionality, camera and battery in this affordable price segment.” Gartner’s Gupta says the main challenge for Indian vendors is to come up with quality smartphones in the $100 to $200 price range with 4G connectivity and the latest processor. “Most players are competing on price-to-feature comparisons. They need to build key differentiators.”
On July 21, in a move that could well disrupt the market at the lower end, Reliance Jio announced a made-in-India 4G phone named JioPhone for as low as Rs.1,500 ($23). This amount will be fully refundable after three years making the phone virtually free for the buyers. The JioPhone comes with unlimited data at Rs.153 ($2.37) a month, free voice calls and free SMS and other features. The pre-bookings for this phone will begin on August 24 and it will be available from September.
Meanwhile, Finnish brand Nokia, which was once the smartphone leader is trying to make a comeback after a long hiatus. In a recent interview with business daily Economic Times, Arto Nummela, CEO of HMD Global, the Finnish company that manufactures and markets Nokia handsets, said: “We are driving the India portfolio first because of the love for the brand in India…. We believe that India will be the biggest market for us in the initial phase.”
“‘Make in India’ is only a jargon. We have to convert it into reality.”–Rajeev Jain
Not everyone is convinced though. Samsika’s Kapoor says: “While Nokia is a familiar name for Indian consumers, its perceived value has gone down. It will have to reinvent itself.” IDC’s Singh feels Nokia’s brand image should be able to give it “initial traction in the market, which needs to be sustained by product portfolio, marketing and distribution investments and a well thought out channel strategy.” Bapna thinks it is going be an uphill battle for Nokia. He points out that Nokia “did not readily transform from a product to a platform-based business model, and the switching costs and network effects are against it. There is a war for app developers, and platform markets are known to be winner-take-all. Customer- and app developer-centric innovations that are part of a strong platform strategy are the key to success in this market.”
Ayilavarapu notes that what worked for Nokia when they were earlier in India was a “large distribution and service network and a high quality team which allowed for exceptional on-ground execution.” But distribution, he says, is not as much of a barrier to entry any more with the emergence of ecommerce. A new player could scale up very quickly if they have the right set of products to offer. “Ultimately, this is the technology space, where changes happen often and players emerge and disappear, on account of these shifts. So the question is: What is the shift which they see, that they will benefit from?”
Gupta, however, believes that a strong physical retail presence is critical to survive in India, for not just Nokia but every player. He points out that while online sales are growing and account for around 20% to 25% of all smartphone sales in India at present, vendors whose products are easily available offline will have an edge. Nokia at its peak, he recalls, had 100,000 retailers selling its product. It’s the same with Samsung now, and Oppo and Vivo are also strengthening their offline presence.
Another key aspect, Gupta says, is customization; devices need to be tailored for the India market and connect with the local buyers. This could be through specific features, local content or even through marketing and promotions. Citing the example of Oppo and Vivo who positioned themselves as selfie experts and targeted the social network savvy younger demographic, Gupta says that many times vendors bring globally launched products, but the trick is to create a niche for your products and connect with the target segment. “At the end of the day, vendors who can develop a strategy of differentiation in terms of experience and ecosystem around services and products will have an edge.”

Wells Fargo: What It Will Take to Clean Up the Mess

iStock_89199831_LARGEA series of scandals has sparked a crisis of confidence in Wells Fargo, the nation’s third-largest bank whose roots harken back to the Gold Rush era when it provided financial services to miners in the Wild West. The most recent scandals — which included falsifying and accessing without authorization more than 2.1 million deposit and credit card accounts — has led to one of the biggest stains on the bank’s reputation in its 165-year history.
Last fall, Wells Fargo agreed to pay $185 million to regulators to settle charges of manipulating and creating false accounts in its Community Banking division. It fired 5,300 employees who were implicated, as well as the CEO and other executives. In late July, the bank admitted that it took out auto insurance on behalf of 570,000 car loan customers without telling them, resulting in higher payments and some vehicle repossessions. Its plan to make customers whole would cost $80 million, plus any fines.
The fallout continues. Last week, Wells Fargo disclosed in a Securities and Exchange Commission filing that it is expanding its probe of these falsified and manipulated accounts and warned that there could be a “significant increase” in the number of compromised accounts. Also this past week, it agreed to pay $108 million to the government to settle a 2006 lawsuit alleging that it overcharged veterans in refinancing loans. This week, the bank is facing new charges that it did not refund insurance premiums when consumers paid off their auto loans early, according to The New York Times. Multiple lawsuits were filed.
“It is a very serious set of violations that calls into question whether Wells is in fact too big to manage well,” says Peter Conti-Brown, Wharton professor of legal studies and business ethics. “The problem is either outright fraud from the highest levels or a broad indictment of the Wells Fargo governance system.… The idea that Wells management initially advanced — that this was just a few bad apples — doesn’t add up anymore.”
The bank said these scandals could cost the company $3.3 billion more than what it anticipated, according to an SEC filing. Wells Fargo can afford to pay: It reported 2016 net revenue of $88.27 billion and net income of $20.4 billion or $3.99 per share, with nearly $2 trillion in assets. But the damage goes beyond finances.
“The fine is not the real damage to the company,” says Wharton accounting professor Wayne Guay. “The damage to the company is the [negative] publicity that they have received over the last several months — the CEO got fired, several executives got fired, several executives had to give back millions of dollars in compensation. There was a serious overhaul in the organization and presumably there’s been some goodwill that has been seriously damaged with respect to customers and shareholders.”
Indeed, the scope of wrongdoing is troubling — in the fake accounts debacle alone, thousands of employees had engaged in improper activities that affected millions of accounts. “This offense is clearly pretty egregious. We have not seen similar things in similarly large banks in the U.S. yet,” says Wharton finance professor Itay Goldstein. “Maybe this is just the first one to be revealed and others will follow. We can only wait and see. It definitely seems like there is a serious problem in Wells Fargo and they need to be working hard to fix it.”
Since the scandals emerged, the market has been punishing the bank. “Before the crisis, Wells was the most valuable bank in the world,” says Wharton finance professor Richard Herring. “Since then, its price-to-book value ratio has fallen by 31%. Moreover, Wells has been losing market share to other banks not tainted by this scandal.” In February, the number of checking accounts opened at Wells Fargo fell by 43% from a year ago while credit card applications declined by 55%, the bank reported.
Herring adds that Wells Fargo’s board was reelected in the spring by the “thinnest margin in recent history. Indeed, if the board had not gained the support of Warren Buffett, the single largest shareholder in Wells Fargo, many members of the board would not have been reelected.” Shareholders are right to be concerned about the board’s failure of oversight. “No bank wants to be caught up in this kind of scandal,” he says. “It undermines confidence, which is the most important asset of a bank.”
A ‘Controlling’ Executive
Founded in 1852 as Wells Fargo and Company, the firm provided financial services by steamship, stagecoach, Pony Express, railroad and telegraph. It served pioneer miners, merchants and ranchers in the West — buying and selling gold, offering money orders, traveler checks, fund transfers and others. Wells Fargo’s legendary stagecoaches, which remain part of its logo, at one point traversed 2,500 miles from California to Nebraska and Arizona to Idaho. By sticking to its roots in the West, it survived the Great Depression and two World Wars. The bank focused on consumer banking, auto and home loans as well as small business lending and did not get into complex securities.
“It is a very serious set of violations that calls into question whether Wells is in fact too big to manage well.”–Peter Conti-BrownSince 1960, Wells has embarked on a merger and acquisition spree that enabled it to expand beyond the San Francisco area. Among its biggest deals were the $11.6 billion takeover of First Interstate Bancorp in 1995, the $31.7 billion merger with Norwest and the $15.1 billion acquisition of Wachovia in 2008, which gave Wells Fargo a major presence coast-to-coast. The purchase of Wachovia gave Wells Fargo an investment banking business but also brought headaches. In 2010, Wells Fargo agreed to make loan modifications worth $2 billion to California homeowners who took out adjustable rate mortgages from Wachovia and World Savings but could not afford payments once interest rates reset. Wachovia bought World Savings prior to its sale to Wells Fargo.
Today, Wells operates more than 8,500 locations and boasts an ATM network of 13,000 with offices in 42 countries and territories. It employs 271,000 people full time and serves one in three U.S. households, according to an August 4 SEC filing. Wells is also one of the most diverse U.S. banks: Nine of the 15 directors on its board are women or minorities. And until now, it had enjoyed a relatively solid reputation. “Given the very surprising scandal from a team that was held in the highest regard and trust, we believe that providing more disclosures beyond very high level metrics is one of the changes that will give more confidence,” states a recent JPMorgan Chase analyst’s note.
So what really happened at Wells Fargo? Thus far, the most detailed explanation comes from the bank itself — on the biggest scandal of falsifying accounts. It hired a law firm to conduct a probe and the results were published in a report in April. The board has expanded the scope of the investigation and the review is expected to be completed in the third quarter.
According to the April report, a confluence of factors caused the wrongdoing. Wells has a culture of independence: Its internal mantra to division heads is to “run it like you own it.” The decentralized set-up ensured that control resided in the hands of division chiefs, who presumably knew what their market needed because they were closest to them. But it also became a weakness because autonomy led to wrongdoing — with poor oversight from the corporate office until it was too late.
In the fake accounts debacle, wrongdoing occurred in the Community Banking division, where employees were given tough sales goals to meet. Some low-level managers also encouraged workers to create bogus accounts, the report said. Employees were afraid they would get fired if they missed their targets, even though senior managers privately believed only 50% of the regions could meet them. Some managers would call employees several times a day to check on their sales.
The head of the Community Banking division was Carrie Tolstedt, whom the bank described as a “controlling manager who was not open to criticism” and “notoriously resistant to outside intervention and oversight.” But she had the ear of CEO John Stumpf because her unit drove at least half of bank revenue.
Stumpf was a champion of decentralization and cross-selling of additional products to existing customers. Indeed, Wells Fargo was known for its above-average ability to cross-sell products and services. Ironically, this prowess turned out to be its undoing when combined with an aggressive sales culture. “They were the envy of the banking industry for their ability to cross-sell products to their customers,” Herring says. “It would have been productive for the board to inquire why they were so successful at cross-selling, but I suspect this got little to no board attention because it was assumed to be a strength based on the Wells culture.”
“No bank wants to be caught up in this kind of scandal. It undermines confidence, which is the most important asset of a bank.”–Richard Herring
As for Stumpf, the bank said he didn’t move quickly or far enough to change errant sales practices, which first came to light as far back as 2002. Instead, these practices were seen as “tolerable,” “minor infractions” and “victimless crimes” that were handled by increased training, stepped up detection of wrongdoing and firing of offenders. But he didn’t make systemic changes.
Stumpf “failed to appreciate the seriousness of the problem and the substantial reputational risk to Wells Fargo,” the report said. The board pointed out that it first noticed these sales practices as a “noteworthy risk” in 2014, the year after a Los Angeles Times expose. In 2015, the city of Los Angeles sued the bank. Federal probes followed that led to a settlement in September 2016.
Wells Fargo fired Stumpf (Morningstar’s 2015 CEO of the Year) and Tolstedt, plus other senior executives. It has taken back $41 million in unvested equity awards from Stumpf and $19 million from Tolstedt, and canceled their bonuses. Wells Fargo also took away Tolstedt’s $47 million in outstanding stock options and Stumpf’s $28 million in incentive compensation. However, both still leave the bank with tens of millions.
As for the auto loan insurance debacle, if the fees led to more revenue for the bank and perhaps bonuses to officers, then they “blunt the initiative to verify that the client is not already insured elsewhere,” says Krishna Ramaswamy, Wharton professor of finance. Further, when bank officers know the processes, rules and products better than the customer, it leads to the possibility of abuse because the client doesn’t know enough to challenge what they’re told, he adds.
Wells Fargo’s board also shares the blame. Abuses in the car loan division were known by the board in 2016 but they were disclosed only last month. “It wasn’t disclosed for over a year, only after it becomes apparent that lawsuits and The New York Times (which broke the story) will reveal the details,” says Wharton accounting professor Daniel Taylor. “Back in September 2016, Wells just settled the fake accounts scandal, and management also had this issue on their hands.” If directors were aware of the issue in 2016 and did not disclose it, he says, directors may have breached their fiduciary duty to shareholders.
Jail Time for Executives?
To the public, it might seem that Stumpf and other implicated executives got off easy despite the scope of the wrongdoing. Would putting executives in prison curtail bad behavior? “Undoubtedly, it would,” Herring says. “Unfortunately, decision-making within banks is often so complex that it is difficult to identify the specific individual who should be held accountable.” Adds Guay: “Getting the CEO fired is one thing; finding them criminally responsible for that crime is another issue entirely. In the Wells Fargo case, you would have to show basically beyond reasonable doubt that the CEO was aware of what was going on.”
If prosecutors go after a CEO, he or she will hire the best lawyers to fight a case in court that could drag on for years, says Guay, who is an expert witness on corporate governance and executive compensation cases. And in the end, prosecutors might not even win. That’s why the government prefers to settle quickly with companies caught in improper activities — and companies usually also pay without admitting wrongdoing. To admit guilt is dangerous for companies because it opens the door to potential other litigation down the road.
“It’s not as sensational as putting people in jail and fining companies, but it’s a lot more effective.”–Wayne Guay
“For non-lawyers among us, this is a frustrating outcome,” Herring says. “The costs of pursuing a prosecution are so heavy and, given uncertainty about rulings by judges and juries, the expedient course of action is to reach an agreement in which the corporation does not admit having violated the rule but, nonetheless, pays a substantial penalty or restitution. The public sees through this convention and so it does not protect the bank’s reputation, but it certainly does leave the public with the impression that justice has not been served.”
At least, oversight of financial firms has intensified. Herring says all major institutions must now show three lines of defense: those actions responsible for ensuring compliance with rules and policies at the line of business and those responsible for independent risk management oversight, as well as creating an independent internal audit function to monitor the effectiveness of the first two lines of defense. “These three lines of defense are monitored carefully by the bank regulatory and supervisory authorities.… The hope is this heightened oversight within banks and by regulators will deter this kind of bad behavior.”
Taylor says that the frequency of corporate scandals shows the need for stronger consumer protections. “There have been recent calls for relaxing consumer protections and defunding consumer protection agencies,” he says. “It’s pretty clear, without getting into specific protections, that there is a need for consumer protection agencies.… Without those protections, there will be significant customer abuses.”
Taylor says the banking industry has been consolidating and getting less competitive, further opening the door to consumer abuses. He also notes that fines should be higher because repeat offenses imply the penalties are not a sufficient deterrent. If a company repeats offenses in the same area, it suggests that there is a clear corporate culture problem. “If the problem is systemic, then a CEO resignation isn’t going to change the culture, especially if the replacement is internal,” Taylor says.
A Better Way
Guay sees a better solution: “If we’re going to try to think about how to prevent these kinds of things from happening in the future, to my mind that’s the place to focus (executive compensation and corporate governance structures). Relying on regulators, relying on the court system, those things might have some marginal benefit, but making sure the board of directors has the right internal controls, the right risk management and corporate governance in place, that’s going to be the single biggest, most important thing we can do to make sure that these things don’t happen.… It’s not as sensational as putting people in jail and fining companies, but it’s a lot more effective.”
“It definitely seems like there is a serious problem in Wells Fargo and they need to be working hard to fix it.”–Itay Goldstein
The board’s main tools are structuring and setting compensation for senior executives and firing managers who don’t live up to board expectations, Herring says. Executives then are responsible for setting up incentive systems and oversight to ensure that employees are acting in the best interest of the bank. While this system of governance can break down at different points, “it is generally quite resilient and adaptive in responding to errors.”
Boards are quite effective in dealing with problems once they are identified, and business units that suffer losses receive heavy scrutiny, Herring says. “A more insidious problem is that boards seldom focus on areas that are quite profitable, but they should. The only way the bank can be more profitable in one line of business consistently is if it really has some advantage that no other competitor can gain, has had an incredible string of luck or is doing something unethical or implausible.”
Wells Fargo’s board is trying to right the ship. It named COO Tim Sloan to the CEO job and replaced two directors. The bank’s 15-member board now has 14 independent directors and one insider, Sloan. The roles of CEO and chairman have been separated, and by-laws have been changed to make sure the chairman is an independent director. Wells Fargo also ended the sales program at the Community Banking division — linking incentive compensation to customer service instead of sales. It is centralizing the control functions and has created a new Office of Ethics, Oversight and Integrity. Also, whenever a new account is opened, the customer gets an email notification. Credit card applications also will need documented consent, the bank said.
Will these measures work? Time will tell but at least Wells Fargo is taking the right steps to clean up the mess. “The board of directors is making a very conscious decision to try to put better internal controls in place,” Guay says. “And that’s where you would expect these things to get started — the board of directors.” When unsavory activities happen in a company, people get fired or replaced and an internal probe ensues. “The board of directors have to pick up the pieces and move forward.”