Wednesday, May 19, 2004

Remarks by Mukesh D. Ambani, Chairman and Managing Director, Reliance Industries Ltd., India

Global Business and Global Poverty Conference Stanford Graduate School of Business

Introduction by V. Seenu Srinivasan, Adams Distinguished Professor of Management It is my great pleasure to introduce Mr. Mukesh Ambani, Chairman and Managing Director of Reliance Industries Limited, India

The Reliance Group of India is one of the largest business houses in the world, and one of the largest in India with annual revenue of $18.8 billion dollars. The groups activities span exploration, production, refining, marketing of oil and gas, polyester, textiles, power, telecom and financial services.

Mr. Ambani joined Reliance in 1981 and initiated Reliance backward integration from textiles to polyester fibers and further into petrochemical's. In the process he created 51 new companies, raising the manufacturing capacity from less than a million tons to 9-million tons. Mr. Ambani directed the creation of the world's largest grass roots petroleum refinery in India and is credited with bringing financial innovations into the Indian capitol markets as well as pioneering India's entry into overseas capital markets.

He is currently involved in rolling out Reliance Infocom, covering more than 600 cities in India, making the telephone costs cheaper than a postcard.

The London Financial Times honored Mr. Ambani as one of the top 50 most respected leaders of the world. Mr. Ambani holds a Bachelor of Chemical Engineering degree from the University of Bombay and attended the Stanford Business School.

On behalf of the Stanford Business School and the Global Center, it is my honor to welcome Mr. Mukesh Ambani.

Remarks by Mukesh Ambani Good morning ladies and gentlemen. For me, a visit to Stanford is a walk through memory lane. I came here in 1979 as a young chemical engineer and like most chemical engineers I was trained to talk engineering to chemists and chemistry to engineers and politics when both were present.

Stanford added a new dimension. My years here clearly helped me recognize that Stanford was leading the way in terms of trends. Today the Business School is talking about global poverty, a topic I believe is a new trend in itself. When businesses start talking about global poverty and the Business School gets involved and the Global Center gets involved, this is a trend that I believe is one of the most important in the 21st Century.

The Business School experience honed my business skills, helped me network, and I think that being part of the MBA program was invaluable for me. When I went back to India it made me see business in the context of development and alleviating poverty, and I was very happy to learn that the class of 2004 is contributing through its gift to the Global Center, something I think is a great tribute to globalization and the center itself. Congratulations to all of you. And I wanted to particularly thank Dean Bob Joss and the entire team for giving me this opportunity.

Let me talk a little bit about and start off with poverty.

Since the end of the Second World War, the developed world has spent about a trillion dollars on poverty eradication programs. Ironically, we still have a long way to go in decisively winning the war against poverty at the global level. The percentage of people living in absolute poverty has been reduced almost by half over the last 30-years, but millions of people continue to suffer the pangs of hunger, disease and deprivation. The world is witnessing a race of progress and prosperity, but of the 6 billion human beings on earth, 5 billion are on the margin in this race; about 20 percent or 1.2 billion live in chronic poverty on less than $1/day. And an additional 1.9 billion live under an income of $2/day. Three billion people do not have access to safe and clean water. These numbers should make our conscience aware that the global spread of poverty is staggering. No one can remain insulated from its deeply disturbing consequences, not nations, least of all not businesses. Let me emphasize that in the next 25-years, the world will add another 2 billion people, 90 percent of them will be in the developing world.

When we analyze approaches to poverty, three categories come to my mind. The first category is compromises of countries and corporations who never factored the poor in economic development. They were products of the industrial revolution. They unleashed unproductive forces in a big way. For them development was based on the premise that unless you kept some people poor, you could not become rich. For them, poverty for the many was an unfortunate but inevitable byproduct of prosperity of the few. Their response was simple, offer direct aid to the poor countries and channel it through multi-national lending agencies and non-governmental organizations dominated by them. Creating conditions for upward economic growth of the poor countries was not seen as a viable option of poverty alleviation. Not surprisingly, protectionism and subsidies have continued in the developed world. These have inhibited conditions for economic growth and development in most of the poor countries.

The second category comprises many political parties and private organizations flourishing in the name of the poor. These outfits talked about poverty alleviation without any tangible outcome or impact. Politicians with a socialistic and communist mindset sold dreams to people in poor countries. They talked of distributing wealth before figuring out how to create wealth. The state appropriated wealth from society in the name of the poor and it was shared by those with power and privilege. The poor in these countries lived on a staple diet of dreams. No wonder socialism and communism failed.

The third category is corporations and countries that see their growth and security as being convergent with the progress and prosperity of the poor. There is now a growing realization that poverty feeds into conflict and breeds terrorism. A desperate poor man has little to loose by becoming a human bomb. Probably the world has come to realize now that the war against global terrorism cannot be won only by military might and homeland security. This was also requires a sustained commitment to fight against global poverty.

Ladies and gentlemen, why should global business be interested in the war against global poverty? My immediate response is direct and simple, because it is in their enlightened self-interest. There are several compelling and concrete reasons why private enterprises cannot ignore the war against poverty.

Here are a few:

First, large disparities in the world are no longer sustainable. Poverty continues to persist, despite considerable policy efforts. Globalization of the economy and technology has lead to globalization of aspirations, more so for the poor and deprived. The spread of satellite television, Internet, communication and literacy continuously fuels the desire for better quality of life amongst the global poor.

These aspirations must be addressed here and now, delay beyond a point would give rise to unmanageable social crisis. In a globalized world such aspirational crisis would engulf, over time, country after country and ultimately a majority of the people in the world. Then the $20,000 plus, per capita income of the developed world would also be under threat. The U.S. enjoys a third of the global gross domestic product. It can no longer remain insulated to this explosive situation. Private enterprises must, therefore, support poor economies by investing and creating opportunities for wealth creating.

Second, the war against global poverty helps create huge new markets. Competition today is over a relatively small number of customers and a huge latent customer base lies untapped. The war against poverty will tra nsfo rm the loswer/ pstrata of t he global population pyramid into large consumers, and the payoff for business will be immense. Imagine 3 billion new consumers in the global market. It can pave the way for at least 30-trillion dollars in new consumption, as much as the entire current global output. Over the past five decades global corporations saw healthy growth in home markets. Of late these markets reflect that Asia has become the new destination, but much of Asia is mired in poverty. Nearly one-in-three Asians is poor, including 300-million in India alone. Resurgent Asia can fuel demand on an unprecedented scale. A similar situation would unfold in Africa as countries in that continent move up the economic development path. All this will be possible only if the issue of poverty is addressed.

Third, an increasing number of global corporations are emerging from the Third World. In the top 100 companies in the world in 1993, there was not a single corporation from Asia outside of Japan; today there are four. If you extend the horizon to the 500 largest companies in the world, you will find that in 1995 there were 18 companies from Asia outside Japan. These companies cannot be islands of prosperity in oceans of poverty. They must factor poverty alleviation into their strategies. With a greater number of global corporations from poor countries, the linkage between global corporations and global poverty cannot be wished away.

Fourth, in an era of globalization, governments are not the only institutions that provide public services. About 80 percent of financial flows to the developing world now come from private sources. Public enterprises now account for less than 20 percent of industrial input, compared to 66 percent in 1990. Private enterprises have emerged as a major source of economic power. Of the 100 largest economies in the world, 37 are corporations and 63 are countries. Any one of the Fortune Global 500 Companies is larger than the 134 governments which make up a fifth of the world population. Global corporations also enjoy remarkable access to resources and development. They are able to champion projects, get roads built, power lines wired and pipelines flowing. They are able to bring skills, knowledge and access on a huge scale. Such attributes are important because development is much more than just an economic process.

Fifth, global corporations must be seen as builders of human capacity, not as exploiters of human and natural resources of poor countries. Such perceptions cannot create a favorable environment for participation by global corporations in new markets. Global corporations must incorporate engagement in global poverty alleviation in the interest of their long-term sustenance. You may ask, how should global corporations engage themselves in the war against global poverty? Conceptually, they should follow the principle enunciated 5000 years ago by Kautilya, the great Indian philosopher. In Autrashastra, the first treatise on the interface between economics and statecraft, he calls upon the ruling of light to emulate the sun. The sun we know draws water from the rivers and oceans and returns it to the earth as rain, raining prosperity on our planet. Global corporations must bring opportunities inherent in their initiatives to rain prosperities on the poor.

Let me translate this concept into some concrete steps in the current global context.

Let me cover agriculture first. Private enterprise must support the development of agriculture in poor countries because much of the world's poor depend on agriculture for their livelihoods and for marginal farming. More than 70 percent of the world's poor live in rural areas. They are trapped in a vicious cycle of low investment, low yield, and low-income model of agriculture. In poor countries farmers have little access to markets. Intermediates take away anything from 30 to 70 percent of the market value of farm products. Getting the poor out of this vicious cycle needs a paradigm shift in economic practices. Marginal farmers in poor countries can escape poverty if they attain higher yields of staple foods, have access to markets and realize market prices. Global markets are capable of initiating and vigorously pursuing this transformation. Those whose businesses are based on agricultural inputs can help raise yields through new agricultural techniques and biotechnologies. Corporations and information technology companies can also help provide access to market information by deploying the latest communication and information technologies methods.

Let me move to the area of health. Much of the world's poor are subject to life threatening diseases like cholera, malaria, tuberculosis, HIV AIDS and river blindness. Global corporations must invest in finding cures to diseases predominant in poor countries. Diseases deter poor people from work, lower their lifetime earnings, and drain their little savings in search of medical care. Unchecked diseases in these countries can pose threats to the whole world as we saw last year with SARS. Disease denies workers the opportunity to become customers; above all, it diverts limited government resources to addressing disease fallouts. Global health corporations have the capacity and the capability to develop cures for diseases of the world's poorest. It is estimated that only 10 percent of global research spending is directed to diseases afflicting 90 percent of mankind. The global corporations must step up the level and intensity of research efforts for diseases of the developing world.

Ladies and gentlemen, global corporations in all sectors must make products and services affordable to the common people in the entire world. The fact remains that much of the world goods and services are out of the reach of the global population. Global corporations must learn to play on the cost volume tradeoffs to address huge market opportunities. They must create a different model of business built around affordable products and services. This will create a virtual cycle of higher market demand and greater opportunities to leverage economies of scale. Several Indian companies are learning to make products and offer services from personal computers, custom computers, ATM machines to pharmaceuticals at highly affordable costs. New ways must be found to lower costs and meet the price points that the bottom of the pyramid can afford.

I am somewhat surprised that outsourcing has become an election campaign issue in the United States. Outsourcing is not an issue between America and India or America and Ireland, it is an issue between America and America. It is America's response to the challenge of rising costs. In fact, corporations must step up outsourcing of services to developing countries. Outsourcing of services is not just an economic imperative for global business. It is also a weapon in a war against global poverty.

Allow me to highlight another important dimension of this issue. Developed countries and global corporations have traditionally resorted to giving aid to fight poverty. This comforts their conscience, but does not offer a sustainable solution. We also cannot ignore that a good part of aid is governed by political considerations. Foreign aid is also said to have worsened the plight of the poor in about 70 countries by sustaining corrupt or inefficient governments. Loans for fighting poverty or promoting economic development from multi-lateral lending agencies come with several covenants. Only a fraction of all this money actually reaches the needy. Outsourcing of services does not have any of these shortcomings. Instead it places income directly in the hands of those who work and those who are needy. It rightfully bypasses the maze of government and non-governmental functioning. Greater outsourcing, especially to poor countries is an important way in which global corporate can address global poverty as an integral part of their strategic plans.

In the field of education, healthcare and government, corporations can work with governments to develop and deploy key technologies. Many of the world's poor are illiterate and the educational infrastructure in most poor countries is fragile. Fortunately, technology offers a solution. Global information technology can make a difference by supporting the widespread use of e-learning and a similar story can be found in healthcare. Again, technology in the form of tele-medicine can help address this situation. Global information technology corporations have the opportunity to make this happen.

Governance is another aspect of poverty alleviation. Many of the world's poor live in countries with poor governance. Individuals and societies will remain poor if they are not empowered to participate in making decisions that shape their lives. They will also remain poor if they are totally at the mercy of government functionaries. Technology in the form of e-governance can put decision making in the hands of people. It can cut through the corruption-infested bureaucratic maze. All of us in the global corporate sector must strongly advocate free trade and competition because free trade and competition lower the cost of basic necessities like food and clothing, and discourage corruption. They allow democracies to develop and grow, leading to a better quality of life, especially for the poor. Above all, free trade creates opportunities by allowing resources to flow where they are put to productive uses. Unfortunately, the current rules for global trading are against poor nations and do not allow poor countries to follow and export lead development strategy. They can no longer follow strategies adopted by several Southeast Asian countries in the 70s and 80s. The collapse of the World Trade Organization talks indicates this. The situation must change. Subsidies, quotas and non-tariff barriers institutionalized by many advanced countries must be abolished. I found it interesting to note that the subsidy for each cow in the United States and Europe is twice the annual income of a farmer in a poor country.

Special interest groups are normally behind the erection of these barriers. I urge them to see that these issues are seen in the larger context and interest of the global population and creation of new markets. Removing every rich country barrier to trade is an imperative to addressing global poverty. Global corporations must strive to sustain steady economic expansion, above all, and must engage in new partnerships. Communities and societies are increasingly expecting corporations to be involved with social issues; these expectations are much higher in poor country context. Corporations, therefore, need partnerships with governments, local corporations and non-governmental organizations. They should engage organizations in the development of local economics, this will not only enhance their acceptability, they also will benefit from local expertise, networks, and resources.

At this stage I wish to share with you our experience at Reliance Industries, and it's response to the question of poverty. Reliance is a $20 billion (U.S. dollar) enterprise located in India. Despite a substantial reduction in the number of poor over the years, poverty remains an important issue in India. We therefore cannot walk away from the context of poverty. Reliance is guided by five basic principles in its initiatives, they are:

Democratization of the process of wealth creation. Establishing a mutually reinforcing cycle of wealth creation and distribution. Creating businesses that are matchless at empowering people. Offer affordable production services and build human capacity and world-class competencies in all our people.

These principles are not merely articulated, they are etched in every action of Reliance activity that's been taken since its inception, in every Reliance initiative from textiles to polyester to petrochemicals, to oil and gas, to information and communications and life sciences.

Friends, my father, Dhirubhai Ambani, who founded Reliance, was the son of a schoolteacher. He built Reliance brick-by-brick and made it India's leading private sector corporation. In fact, he lead it to become a Fortune 500 company and achieved this miracle with the power of his ideas. In the 60s and 70s the equity market in India was the preserve of an exclusive set of rich businessmen and brokers. He pulled down the walls of the rich man's fortress and involved millions of Indians in the process of Reliance and in the process of the capital market. He floated Reliance industries in 1977 with an IPO of $1M when the oil market cap for India was 3,000 gross. Today the oil market cap of India is 118 million gross. For all of you to get an idea, from 3 to 118 million in 25 years and it is widely recognized that he is the father of the Indian Capital Markets.

Millions of ordinary middle-class people responded enthusiastically. Reliance became a company shaped by the middle-class of India. Today, Reliance has over 3 million equity shareholders. This is how he brought about an equity cult in India. By the late 90s, a dramatic technological revolution began to transform the information and the communication sector. Reliance participated in building the next generation digital infrastructure in India. In a 3-year time span, using the power of technology, India has gone from the highest cost mobile market to the lowest cost mobile market. Mobile phone calls used to cost 30 cents a minute in India and today you can make a mobile call from anywhere to anywhere in India for at one cent per minute. That is what technology can do. More so, what has happened is that India has become the fastest growing mobile market in the world. We are adding between 2 and 3 million new subscribers every month. We believe that communication really empowers the millions in India and that's what technology can do in terms of really changing a country.

We at Reliance believe in the power of youth, our average age of our 75,000 people is early 30s. Reliance Infocom is a new business that has been built over the last three years and in a span of less than 36 months we have built a team of 32,000 people, 90 percent of whom are professional and the average age is 29. Within India, our challenge really is to bring into the workforce between 15 and 20 million people on a yearly basis for the next 15-years, and to keep all these people productively employed is a great developmental challenge.

Talking about India, I believe that India must measure its success only on what it lacks. Are the poorest of its people free from human suffering? The poor in India are those who lack access to basic necessities: shelter and nutrition, land, water, housing, credit, infrastructure, literacy, healthcare and capital, both social and financial. About 260-million Indians fall in this category. The country has no doubt recorded impressive gains in many areas since independence:

In the 60s, half the population lived in abject poverty. In 93-94 the official estimate of India's population below the poverty line was 35 percent, but the absolute number of poor has been increasing. Between 1951 and 1994 the numbers doubled from 170 million to an estimated 340 million. This is largely because the population increased three-fold. Social advancement in some states and districts in India is similar to leading industrialized countries. Achievement levels in other parts of India are worse than the average of the poorest countries in the world.

India, therefore, remains a country of stark contrast and striking disparities. The glass can be considered half full or half empty, much depends on the eye of the beholder.

There is another important aspect of poverty in India. One-third of India's population and roughly half of India's poor are concentrated in three states, Upper British, Bahar, and Middle British, which are the north and central parts of India. Marashta, OrIshta and West Bangal account for another 22.5 percent of poverty. Thus 70 percent of the poor are in 6 out of 22 states in India. A major battle against poverty has to be fought in these states. India is currently on a high growth trajectory and it is true that economic growth has the potential to reduce poverty. But equating growth with poverty reduction is too simplistic. In India, success in eradicating poverty will be contingent upon several factors. We need a high GDP growth rate over the next 10 years. Simultaneously, we need to provide basic minimum services for the poor and these include universal access to safe drinking water, 100 percent coverage of primary healthcare centers, universalization of primary education, housing for all shelterless families, road connectivity to all villages, and habitations targeting the public distribution system to families below the poverty line and special attention to the poor and the socially disadvantaged groups. Remember, there is no Social Security in India; these tasks are thus clearly defined.

Obviously, large financial resources are required to implement these tasks. I believe these resources can be mobilized if a focused strategy is put in place.. Participation of all sections of society is critical to the success of this strategy, especially of policy makers, business leaders, and grass root activists. I am confidant that India is on the right track and that this generation of Indians will win the battle against poverty decisively. In this context I urge you not to depend exclusively on macro economic strategies in the war against poverty. It assumes that the prosperity for the general population trickles down to the poor. It is based on the metaphor that a rising tide lifts all the boats; unfortunately a rising tide may drown those without boats. Global corporations have the ability to enable the poor to have their boats.

Friends, if a free society cannot help the many who are poor, it cannot save the few who are rich. This warning does not come from a left wing anarchist; it comes from a great American president, John Kennedy. Poverty is an unacceptable human condition. We must refuse to accept that the existence of poverty is preordained or that the poor are necessary so that the rich can gain merit in heaven by helping them.

New, visionary, courageous, and convincing models are needed to banish poverty and restructure society. Technology offers humanity this opportunity in the 21st Century. It is possible for the first time to banish illiteracy, disease, and deprivation. It is possible for the first time to raise the standard and quality of life of every man and women on our planet. The 20th Century witnessed the victory of freedom over dictatorship. The 21st Century can usher in wellbeing for all over the good life for only a few on this planet. This will be possible only if:

There is a grand engagement of global corporations in the war against global poverty. Such an engagement must begin to eradicate poverty among 3 billion people in the coming decades. This is not an appeal to their consciences. It is an appeal to their self-interest, and it is an investment for the future of our world. It is an imperative for the security and the future prosperity of mankind, because prosperity, like peace, is indivisible. Thank you.

Question: Mr. Ambani, thank you so much for traveling so far to be with us today. I'm wondering if you could comment a little bit on the role of politics and government in India in light of this week's elections in supporting economic growth or stymieing it, and also what Reliance's role has been in working with government to help bolster India's economic growth?

Ambani: Well I think within India we've gone through phases of socialism and all the three categories that I described were there. But if you look at the most recent election results, they send out a very clear message that a lot more has to be done for the bottom of the pyramid. I think that if we look at India's economic performance, the performance was good but the message that the election sends is 'yes, while you were good, you were not good enough for us.' That shows the rising aspirations and I think that the political ruling class is now understanding that it is important to perform at a pace that is much faster than they have during the last few decades.

What is also important in terms of fighting poverty is really to think about India, and I think that businesses and government and the not-for-profit, or NGOs as we call them, the non-governmental organizations now recognize that one will have to segment the problem. I talked about the geographic segmentation but we also need to segment the problem in terms of saying that we need to generate wealth at a much faster pace. The challenge is to find a new economic paradigm where all of us understand that free markets generate wealth, but what is important for India is to see that that wealth is equitably distributed.

So if you ask me, I think that this recognition among all political parties is there, the challenge is really to find the right model where millions of people can generate wealth and while we pursue a free market framework. That wealth doesn't remain in the hands of a very small percentage of the people is the development to challenge. Fortunately, the knowledge age and its competencies that the younger people in India have, I think will facilitate this process. We have to show more compassion to the absolute bottom of the pyramid and to nation building programs. I think there is a broad consensus among political parties, and this election and the whole campaign was a good indication of that. You could see a cross section of all the political parties, really in the same direction as far as development issues are concerned, so that's really good news for India and good news for the world.

Question: This morning in Mr. Offenheiser's talk we talked about dumping of commodities in developing nations and we specifically talked about cotton and the evil effects it has on developing nations. But what we didn't talk about was how the dumping of wheat and corn has actually fed millions in developing nations also. Similarly I think there is a parallel to be drawn with outsourcing as you just mentioned. I think that in the Silicon Valley at least, we consider outsourcing to be a dumping of services in the reverse direction. But, on the other hand, it has also made companies more efficient, it has made products more affordable both here and in the global economy.

So I am wondering if there is something more fundamental to be addressed by policy makers, governments, and organizations worldwide that will be bilateral trade more successful and mutually benefiting to nations. Maybe better access to technology in developing nations could be traded for better outsourced services or something like that. I am wondering what your opinion on that would be?

Ambani: I think that all of us have to be looking for this new paradigm. The biggest economic challenge—the unresolved issue for all economics in the world—is really how do we get to the next level in the free market system, whereby you generate wealth and distribute it equitably without getting into lessons that we've learned in the past 50-to-60 years. In so doing, I think that we cannot use selectively the concept of free trade. The idea of competition and selected usage of free trade is to my mind not right, so we can't talk about dumping of goods which create employment on one end and follow into development. So if goods move, so should labor be able to move.

Today with technology you can move labor on the wire and at the end of the day we've gone through these discussions and suffered in India by high protection because ultimately the consumer suffers. If you see manufacturing has moved out of the developing economies and gone to China. It has possibly generated employment in China, but reaped large benefits for consumers in the developing world. I see services exactly on that basis and I very strongly believe that efficiency shouldn't be compromised. We need economic models for more equitable distribution so that when you look at the world, you see what happens in the world. Today at the beginning of the 21st Century the world is a starkly desperate one. Like I have said, 5 billion people are way down below and the other 3 billion people are below and the only way you can equate this, and it's in everybody's enlightened self-interest to do so—is to champion free trade. I am sure that as all the innovative steps of the past 50 years have shown we will always like the strength of the developing world and will always find the next frontier. That's what's going to lead the world. Human progress is not going to stop, so I frankly would champion along with free trade of commodities opening up all markets to goods and services and really shoot for efficiency.

Question: You talked about the democratization of world creation and my parents are actually one of the original stockholders in Reliance. They are very grateful to you for that. My brother goes to school at the institute and clearly my family has been impacted but what I'm wondering is in the next 20-25 years, what role do you see Reliance playing not only in terms of some of the market activity it has been doing to bring cheap communications to people, but also as an organization with the tremendous amount of power in India and using that to impact both the war against poverty, and to influence government in their fight against this.

Ambani: As Reliance we're very, very committed to building what we call knowledge age competencies. Not only for our businesses, through investment, and education but for India as a whole. We are also big believers in the world as one market. We respect the competencies in the valley and you would be happy to know that Reliance is starting up at Stanford Research Center. We talked about outsourcing, but some people would find it funny that an Indian company is now opening a branch office and employing people in the Valley. We will get up to 50 people by the end of this year and this is really our belief that the world is one integrated market. We can work in multiple countries, multiple markets and we really think that over the next 20-to-30 years the development of the market is really to develop the 3 billion consumers that I talked about. We consider that as a huge growth of opportunity from a business point of view and we think that at the end of the day you have to develop competencies in your people and for India. The big challenge when we're always willing to work with governments and organizations is to develop the next generation's systemic competencies. It is very, very important to have the right systems and build systemic capacity. We've got a legacy of British systems, a bureaucracy of Colonial systems and I think we're fast getting out of that and you will find a big change in the next 10-20 years.