Important lessons from Welspun case
Given the number of top global retail chains to whom Welspun supplies bedsheets, towels and rugs, among others, it is not surprising it was quick to own up its mistake after US retailer Target stopped all supplies from it after finding the Egyptian cotton bedsheets were of poor quality and were not made using the right amount of Egyptian cotton. The company whose shares tanked 20% the day this happened—and 20% the next day as well—has promised an audit to find out where the supply-chain broke down since it maintains this was an issue of incorrect labelling, a mistake and not deliberate; other big global retail chains are also relooking their Welspun categories in the light of the Target episode. Given the severe reputational risk, and the almost instant damage this causes, other Indian companies are also going to have to be very careful about being able to live up to their claims—while this looks like something restricted to just global markets right now, keep in mind the fact that product recalls have increased of late in even the local automobile market; in an increasingly globalised world, the good news for consumers is, product quality and standards cannot be different for local and international products in the same price range.
Markets play a big role in ensuring discipline among companies. If, to take the Welspun case, the company’s shares recovered quickly, the urgency to fix the supply-chain would not be so immediate; equally, if buyers were to simply take the company’s word at face value, and not threaten to stop purchases in the manner Target has, the change would never be permanent. In the case of real estate, to take another example, the public outing of top Indian companies for allegedly duping buyers led not only to some of them making their buyer contracts more transparent, it led to the government coming out with a policy that brings in regulators to address buyer concerns and to give them more power over real estate firms. Similarly, in the case of telecom, several companies that benefitted from all manner of regulatory arbitrage found this didn’t really help get customers and, increasingly, the standards that are being applied to all telcos are global ones, whether on dropped calls or data speeds on the internet—some of these standards, it is true, are unfair in the sense Indian companies don’t have the requisite spectrum to be able to provide top-class services, but from the customer’s point of view, that’s something the telcos have to sort out with the government/regulator.
Needless to say, punishments accorded by markets have to be accompanied by strict action from the government/regulators. Global regulators, it is true, have fined top banks over a few hundred million dollars for rigging all manner of things from Libor to Euribor and mis-selling assets, but it is not clear if the fines are large enough to make the banks think ten times before committing such a crime again. In the Indian context, it is surely odd that while the US FDA has found so many plants of Indian pharma majors to be supplying inferior-quality medicines, Indian regulators have found most to be kosher—had US-style indictments been handed down, and stock prices come crashing down, chances are the quality of medicines would increase dramatically. A critical ingredient of Make-in-India is top quality and that can only come from the discipline instilled by strong regulators and markets that are brutal in the manner they finish off companies who don’t conform to certain standards.