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Business
Coca-Cola's continuing saga on equity
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It is significant that in India, unlike in some other countries including China, Coca-Cola had to face stiff competition from local bottlers of aerated drinks, says K. Subramanian.
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IT SEEMS to be the karma of Coca-Cola Corporation that in India it has to wage a war on two fronts. The first is with its archrival PepsiCo against whom it has to joust constantly to capture the market or retain its territory. The other war is more serious and is with the Government over equity.
The equity war is special to India. There is a surprising recurrence of dispute over equity. Times have no doubt changed. Gone are the days of FERA and the horrors of equity dilution. The FERA itself has been turned into FEMA and become a limp leaf. There is more openness to foreign investment and greater indulgence towards equity. And yet, Coca-Cola has this war in full public gaze. Is it a paradox or is there something rotten in Delhi? Neither. It seems more an instance of promises made during nuptials souring after the wedding. We begin with the FERA years.
When the FERA came into force on the January 1, 1974, the Government and the Reserve Bank of India were vested with powers to regulate foreign equity in companies operating in India. Companies in low-priority areas such as consumer goods could continue with 40 per cent equity. Coca-Cola came under this category.
Dilution was brought about through divestitures, new issues or a mixture of both. More than a thousand companies complied with the FERA. Dilution under FERA triggered the stock market boom of the 1970s.
Coca-Cola Corporation was operating as a branch since the early 1950s. PepsiCo was also operating in the country from around the same time, but decided to vacate India in the late 1950s, perhaps due to a cartel arrangement with Coca-Cola. With PepsiCo's exit, Coca-Cola had dominance in the Indian market. Its distributive network expanded with a large number of bottlers and franchisees. It is significant that in India, unlike in some other countries including China, Coca-Cola had to face stiff competition from local bottlers of aerated drinks. There were several regional brands, but the foremost was Parle, which had a good presence in the western and northern regions. Parle was able to lobby with the Government and Parliament to check the expansion of Coca-Cola. It brought to notice several irregularities committed by its rival. In one of its representations, Parle could muster the signatures of one hundred MPs. Though Coca-Cola was in operation since the early 1950s, it was seen that for over two decades it had not declared any profits from its branch in India. As one PAC Report revealed, the company sent annually large remittances to headquarters as share of administrative charges though the branch itself was making losses. Moreover, these remittances were tax deductible! It was also noted that the concentrate had to be imported from Atlanta. The price charged to the Indian unit bore no relationship to the cost of production or the prices charged to other affiliates. The company was obliged to earn import of concentrate through its exports. As Coca-Cola had no products of its own for export, it lifted traditional items such as cashew from third parties and obtained import entitlements in violation of import regulations. To all these squabbles was added a new row over equity.
Coca-Cola was directed to continue its operations on condition that its branch would be converted into an Indian company with 40 per cent foreign equity. It had to put through dilution within two years. The company, ostensibly, accepted the FERA directive and submitted a scheme. On closer examination, it was clear that its scheme was a clever ploy.
It had two parts. The first dealt with bottling and distribution. Coca-Cola was willing to hold 40 per cent equity in this unit. The second, more important, was the "technical" or "administrative unit.'' The company wanted to hold 100 per cent control over this unit and was unwilling to permit any local participation. As FERA required that the entire operations of a branch be brought under one company with 40 per cent foreign equity, the company was advised that its scheme was unacceptable. It was advised to submit a scheme conforming to the FERA guidelines.
Instead of complying with FERA, Coca-Cola decided to wind up its operations in India. Though the decision flowed from its corporate policies, the company made wild allegations that it decided to exit as Indian authorities wanted full disclosure of the formula for making concentrate! Though Coca-Cola decided to leave in 1977, India was too big a market to be kept off its antenna forever. Did not Coca-Cola re-enter China? It is somewhat curious that Coca-Cola commenced its re-entry into China in 1978, that is, after it vacated India.
Corporate structure
The corporate structure devised by Coca-Cola in China where it has operated from the 1920s is a maze.
First, the main collaboration is with state owned enterprises, which become focal points in the region. Second, there is a geographical allocation in bottling and distribution and areas are earmarked to two Chinese conglomerates, namely, Swire and Kerry groups operating from Hong Kong. In some areas local independents are also associated. In each, the equity pattern is structured on the basis of regional compulsions not all of which are economic or transparent. In regional bottling units Coca-Cola holds 12.5 per cent equity. In the major Shanghai plant, which was set up in 1994, Coca-Cola holds 35 per cent. Under the chairmanship of Douglas Daft who had long experience in Asia, Coca-Cola Corp. was also moving its policy away from centralisation towards localisation in a flexible way. In China itself, it introduced many local brands such as Tian Tu Di ("Heaven and Earth'') and captured the imagination of local consumers. Crates of coke were seen in Tibet regional also.
The kingpin or the anchor of these arrangements is the mother facility for the manufacture of concentrate located in Shanghai. This plant is 100 per cent owned and controlled by Coca-Cola and meets the requirements of all the bottlers in China. This factor is not highlighted in the writings of western analysts who report on Coca-Cola operations in China.
Reform process
During the reform process in India Coca-Cola decided to ... ...
Openness to foreign investment. Inevitably, comparisons came to be made between China and India in attracting foreign investment. Manmohan Singh, the then Finance Minister, appealed to the `animal spirits' to move the economy forward. For some reason, it was the fond expectation of the then Government that the entry of companies such as Coca-Cola would flag India as a sound destination for foreign investment. Consider also that PepsiCo had already entered India in the mid-1980s with a package to lift the plight of farmers in Punjab. Can Coca-Cola be far behind? We saw its re-entry in 1993 with a set of performance requirements/conditions.
The most crucial condition is that it should reduce 49 per cent of its equity in Hindustan Coca-Cola Beverages by July 2002. It is nearly a decade since the company re-entered and commenced its operations. On all accounts it has done well and is said to have reached the breakeven point by the end of 2001. And yet, it is dragging its feet over equity reduction. It is pleading for a total waiver or for an extension of five years, that is, July 2007 for compliance. Its request has been turned down twice — once in October last and again in the last week of May 2002. Is the company hoist with its own petard?
Unlike in China, it made a false start. It failed to locate sound local partners in resuming its operations. Partly, this was due to earlier legacy. As it could not tie up with Parle, it committed the mistake of buying up the company for an undisclosed price and assets valued at $400 million had to be written off. Unlike PepsiCo, it is a company engaged in soft drinks and has not diversified. Its product is high cost and unsuited to Indian pockets.
It wasted money on advertisements with doubtful returns. Lastly, it may well be that the stock market conditions do not favour large public issues. One may also argue that unless companies such as Coca-Cola enter the market, the stock market will not revive. This is the view taken by the Parliament's Standing Committee on Finance. Against the strong observations made by the Committee, it is difficult for the Government to relent on the equity condition.
Incidentally, the company was earlier given an option that it could divest equity by private placement if it was not practicable to launch a new issue. Coca-Cola is yet to react to this formally. Private placements of such large value could create management and control problems, especially when the endeavour of Coca-Cola is to have 100 per cent control over the manufacture and supply of concentrate.
We thus have two extremes defying short-term solutions. Though legally Coca-Cola is bound by the collaboration agreement, there are limits to state action against big corporations such as Coca-Cola close to the White House. Thus, we would see a war of words and Coke wanting more — Coke mange mores!
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