How to make denim in licence raj Mike Clarkson August 14, 2022 Trade Liberalization The Lalbhai heritage traces to Shantidas Jhaveri, an eminent merchant and chief jeweller to Mughal emperors Jahangir and Shah Jahan. In the 18th century, the Gujarati family expanded into banking, providing loans to local warlords seeking to control Ahmedabad. But after the British cracked down on indigenous banking after 1858, the Lalbhais turned to cotton trading. Check Out Our Special Coverage on [email protected] Global prices were at an all-time high due to the American Civil War, and Kasturbhai’s grandfather Dalpatbhai made substantial profits by offloading cotton bales during the 1860s. By the time his son Lalbhai inherited the business in the 1880s, the trade in white fluff was not as profitable. Lured by new opportunities in heavy industry, Lalbhai set up Saraspur Manufacturing Company in 1897, followed by Raipur Mills in 1905. View Full Image Jayachandran Thrust into the family business, Kasturbhai evolved it into the iconic Arvind brand in 1931. It remains one of independent India’s most successful companies, with a market capitalization of ₹2,514 crore and a client list that includes Tommy Hilfiger, Calvin Klein, Gap, and Aéropostale. The Lalbhai journey across the long 20th century is a story of Indian entrepreneurship that thrived in demanding environments, from the shortage economy of “licence raj” to post-liberalisation India. Cusp of freedom (1890s–1957) In 1917, when the mill-owners of Ahmedabad faced a city-wide labour strike, it brought business to a standstill. In Dwijendra Tripathi’s The Dynamics of a Tradition: Kasturbhai Lalbhai and His Entrepreneurship (1981), Kasturbhai recalled, “There was a plague in Ahmedabad…war was on, and the profits were quite good. The mill owners decided to reduce wages…[Mahatma] Gandhi … sent word from his Ashram that it would be wrong on our part.” The workers demanded a 35% increase, while owners led by Kasturbhai agreed to 20%. The stalemate was resolved by Gandhi, who suggested a midpoint rate of 27%. Kasturbhai would say that he learnt the art of industrial arbitration from Gandhi. By 1919, his Raipur Mills was making impressive profits. The family decided to build a bigger mill with a capacity of 20,000 spindles and 500 looms with an initial capital of ₹ 12 lakh. Several leading brokers from major cities, including Bombay, wanted to buy shares worth over ₹3 lakh at once. But this would have been difficult, given the small paid-up capital Kasturbhai floated. He decided to increase capital shares to ₹24 lakh and used the additional funds to order the latest machinery from England. In addition to major investors, several dozen small depositors were eager to subscribe. The mill was finally built in 1925 in Saraspur, just outside Ahmedabad’s city limits. That was the start of the company’s long-term strategy of fundraising from the market. In India’s inflationary economy, debt was cheaper than equity, and the culture of the small-time investor made raising capital from the market more lucrative than from banks. During this time, antagonism against colonial rule was also growing. Kasturbhai needed a reliable workforce for his mills, and political agitation was disruptive to business. At the same time, when the Indian National Congress required finance to organize party activities , industrialists like Kasturbhai pitched in. In his Collected Works, Mahatma Gandhi records several letters to Kasturbhai, Jamnalal Bajaj and other business leaders for funds. Kasturbhai also cultivated relationships with GD Birla of Calcutta, Thakurdas of Bombay, and Lala Shri Ram of Delhi, businessmen who worked with political elites of the day to ensure their overall interests were upheld. Each tycoon became a powerful voice for a particular region, able to sway the local and central government’s positions on industry in the 1930s. Between 1924 and 1938, Kasturbhai owned seven mills, making him the biggest textile magnate in Ahmedabad, and certainly one of the largest in the country. In 1930, he was the tenth largest cotton consumer in the country and by 1939 rose to number seven. The key to his rapid growth was faith in new machinery, interests he furthered by co-founding the Ahmedabad Textile Industry’s Research Association in 1947. It was one thing to believe in research, but quite another to obtain expensive gadgetry to modernize mills. Kasturbhai borrowed and raised funds from the public by floating stock options. The boycott of British textiles, as part of Indian nationalist strategy against colonial rule, also bolstered Arvind’s growth. The Planned Economy (1958-1991) In independent India, the state sought to regulate the economy to balance growth and social development. A foreign reserve crisis in 1957 led to tighter controls on imports and exports. Yet, despite capital being a scarce resource, India did develop capitalist institutions, under the vigilant eye of the “licence raj”. How did Arvind overcome challenges of heavy regulation —when permissions were needed to set up factories, import raw materials, manufacture products, and export finished goods? First, the Lalbhais were astute in avoiding any businesses that would bring them under the watchful gaze of the state, including cement, refineries, steel, and telecommunications. Second, they chose businesses driven by science and technology, and only expanded into industries adjacent to their core competency of textiles. For example, they struck a productive partnership with the American Cyanamid Company to develop Atul, a factory that made dyes, chemicals, and starch in India, all essential products in the textile value chain. “My grandfather taught us that you have to be non-aligned. So, your businesses should not be based on any kind of political patronage,” said Sanjay Lalbhai, Kasturbhai’s grandson, in a recent interview with this writer for the ‘Creating Emerging Markets’ project at Harvard Business School. In markets characterised by volatile political circumstances and unclear institutional norms, political non-alignment became key to Arvind’s success. As was the strategy to raise capital through debt, since any expansion of shareholding might have undermined the family’s control of the company. Thinking global (1991-present) Sanjay Lalbhai joined the family business in 1977 in a minor role. With free time on hand, he collaborated with friends on several ventures. Most failed, barring an air conditioning distribution company. “My father gave me no capital, because he thought I should not dabble in so many things….But I was at heart an entrepreneur … So, I borrowed in my personal name,” he said. The name was like “gold”. “I got money from private citizens and I put that into equity. So there was 100% debt and at that time we were able to borrow from the government or banks at very high interest rates.” Like his grandfather, Sanjay leveraged his family reputation in the market to raise capital. This was crucial for Arvind in the 1980s, when the power loom sector challenged the big mills by skirting labour laws and manufacturing standards to make cheaper garments. In contrast, Arvind mills was asset heavy and slower to adapt to fashion trends. And so, Sanjay teamed up with in-house scientists to develop the next generation of textiles, ones that power looms could not easily compete with. Growing in popularity through Bollywood and international cinema, denim jeans became Sanjay’s million-dollar idea. But there was no way the Lalbhais could import or domestically manufacture the product in the 1980s. Sanjay innovated by printing indigo on twill fabric for a denim-like feel and look. He worked with his brother-in-law, Rajiv Badlani, to run a memorable advertising campaign for their new Flying Machine jeans. “Who Needs Phoren!” was the tagline. By 1987, Arvind manufactured their first metre of genuine denim through new machinery imported from Germany. Those were the years at the cusp of liberalization. In New York, Sanjay used a series of legal manoeuvres to set up a subsidiary and build his first international collaboration with Arrow — the first foreign clothing brand to arrive in India. Yet, entrepreneurship is always laden with risk. In 1995, Arvind faced its first major crisis with the decline in demand for denim, and the appreciating of the rupee which negatively impacted their exports. Sanjay relied on financial restructuring to save the company from bankruptcy. Family reputation made creditors more willing to work with the company, and Arvind learned valuable lessons in the process, such as not overleveraging. There are several challenges facing the company in 2022: rising prices of cotton, environmental drains caused by textile manufacturing, competition from mills across the globe, and domestic issues such as unemployment. To further Arvind’s standing as a true global conglomerate, the Lalbhais have taken several steps. First, the company was demerged in 2019 into several units, and there has been a new focus on branding and retail. The company sells in over 1,300 standalone stores and 5,000 departmental stores across 192 cities and towns in India. By building a portfolio of brands, Arvind’s strategy has been to divest manufacturing assets and mills, taking a distinctly asset-light approach to move up the value chain. The company is turning away from water-intense organic fibres like cotton in favour of synthetic materials that are easier to manipulate. The recent demerger is also in line with how Kasburbhai reorganized his family enterprises in the early 20th century—to bequeath companies to sons. Over the years, Arvind has adapted standards of corporate governance, combining modern management with the family’s keen understanding of longer-term trends. “When you do that, you have more dynamism and it gives you a better chance of surviving in the long run,” says Sanjay. The journey of Arvind is a story of both opportunity and constraints, one faced by generations of entrepreneurs who have built lasting businesses despite the unpredictability of the Indian economic landscape. “India is unique as the home of a set of businesses which have been both innovative and socially responsible across multiple generations. Arvind is a prime example,” says Geoffrey Jones, professor of business history at Harvard Business School. Much like their peers running companies under the Bajaj, Cipla, Birla, and Tata brands, the Lalbhais not only inherited business smarts, but also a willingness to change. That puts them in an excellent position to navigate the vagaries of markets and political life in the next 75 years of India’s economic journey. The writer is a historian with The Lauder Institute, University of Pennsylvania Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. 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