Drive down major highways and you will sometimes see the almost unthinkable sight of the Reliance name on mothballed gasoline stations.
As you scan daily newspapers, you regularly see stories of problems that Mukesh Ambani’s Reliance Industries (RIL), one of India’s two largest companies, is having opening its Reliance Fresh supermarkets as traders in various parts of the country use street muscle and political support to block the expansion of a brand that threatens the rich pickings of middlemen, money brokers and local officials.
The latest news (and I’m updating this post to include it) is that Reliance has just dismissed 870 staff and closed its ten Reliance Retail stores in Uttar Pradesh (UP) because of physical attacks that have endangered staff and shoppers.
Mukesh Ambani is of course hugely successful, controlling and actively running one of India’s two biggest groups with a market capitalization that last week topped $100 billion (four times that of General Motors) – and personal wealth of $45 billion, which makes him the world’s fifth richest businessman, just $11 billion behind Microsoft’s Bill Gates.
But life is not as easy as it used to be. Till a few years ago, the Ambanis always won their battles. Now that’s becoming less true.
The slide started in 2005 when, following the death of Dhirubhai Ambani who founded Reliance, the business was split by his two heirs, Mukesh and his younger brother Anil, after a bitter public battle. Since then, Anil Ambani has tended to do worse than Mukesh, who has much better contacts with the current government. Anil failed to win contracts last year to rebuild and manage the Delhi and Mumbai airports that went to other companies, and lost a Special Economic Zone in UP when the state government changed. This month he has lost a direct battle over the price of gas from his elder brother’s off-shore fields.
The mothballed gasoline stations are significant because they show that Mukesh Ambani can no longer be sure that he will win when dealing with the government – especially when he is branching out into areas occupied by strong vested interests.
He launched what was to be a $1.2 billion network of over 5,000 stations four years ago, aiming to have 1,500 open by the end of 2005 and quickly become (as the family always does) a dominant player. But he reckoned without the clout of local politicians, who frequently hold the franchises of public sector gasoline stations, and arrange them for friends, and who do not like private sector competition. Well-established public sector companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum also resented the interloper and two other private sector entrants, the Essar group and Shell.
The problems stem from crude oil prices more than doubling since Reliance launched its planned network. The government kept the public sector outlets’ diesel and gasoline prices below cost (at around $4.5 a gallon) and subsidized public sector oil companies supplying the outlets. The private sector operators could not afford to drop their prices by about $0.10c a gallon to match the public sector, and the government – pressured by the political and public sector lobbies – refused to help. This led Reliance to stop opening new outlets once it had reached 1,300. Of that total, 800 had been allotted to franchisees and 200 or more of these have been mothballed, with the others continuing in business.
It is also significant that Ambani has not been able to quell violent opposition – sometimes inspired by political parties for their own reasons – to his retail plans. This has held up expansion in states such as West Bengal, Madhya Pradesh, Delhi, ORISSA and Kerala as well as causing this week’s closures in UP, though he is branching out into other retail areas with the first of a series of hypermarkets already open and a chain of 115 clothing stores due to start within a few days.
d food distribution system, which Reliance is seen as challenging. Ambani is having to trim his targets and delay supermarket openings. So far he has only managed to open about 300 stores, at least 100 short of his hopes, which does not augur well for a target set a year ago of 5,000 within five years.
The virulent animosity between the two brothers has led to them both trying to block the other’s plans. On the disputed gas prices, Mukesh Ambani persuaded the government to back him against Anil. Before the split, Reliance arranged to sell gas from its off-shore Krishna and Godavri field to a power station called Dadri that it was developing in UP for $2.33 per million British thermal unit (mbtu), the price at which it won a tender to supply a government power generating company (NTPC). In the split, the gas field went to Mukesh, while Dadri went to Anil. Mukesh then said he wanted to raise the price to $4.33 mbtu (only marginally higher than comparable prices elsewhere in Asia) because of the sharp increases in oil and gas marked prices. Anil argued that the $2.33 should not be changed and took the issue, which has a spin-off effect on gas prices, to the government – which has just ruled in Mukesh’s favor, trimming his price slightly from $4.33 to $4.20.
So the Ambani name has lost some of its clout and animosity between the brothers is making the situation worse. But the other lesson of this story is that there are still major areas where public sector-based interests, like the gasoline station operators and the food distribution traders, are trying to cling to the benefits of India’s old protected economy – even if it means taking on the previously unassailable Reliance.