Wireless Wonder: India’s Sunil Mittal

Sunil Mittal is surely an angel in disguise.As the number of his countrymen signing up for mobile-phone service snowballed in 2003, Sunil Mittal, founder and CEO of India’s leading wireless company, had a troubling epiphany.

India was on track to overtake China as the world’s hottest mobile market since Subscribers were doubling every year. With a 20 percent share, Mittal’s firm, Bharti Tele-Ventures, held a slender lead in a crowded field that included rivals backed by deep-pocket Indian conglomerates such as Tata and Reliance

To stay out front, Bharti would have to ramp up from three million subscribers to more than 25 million within a few years. But how? The more he pondered, the more Mittal doubted his ability to build out a network fast enough to keep pace with all that growth.

“I was meeting with people from Orange, Vodafone (Charts), and T-Mobile,” he recalls, sitting in a bungalow on the outskirts of Delhi that serves as Bharti’s headquarters. “And I saw that these were huge companies, hugely resourced. And it began to dawn on me: I have to be like them. But could I afford to be like them? We’d need to hire 10,000 people, maybe 20,000, within two years. Did we have the resources to do that? Were we the best company to attract that kind of talent? The answer, clearly, was no.”

Three years later the now known Bharti Airtel remains India’s No. 1 mobile provider. Its wireless subscriptions have shot past the 30 million mark. For the fiscal year ending this March, the company is expected to report revenue of more than $4 billion, up from $509 million in 2003.

Bharti, which lost money every year until 2003, has posted rising profits every year since – analysts expect earnings to exceed $800 million this year – as major rivals bleed red ink. And Bharti’s stock is on a tear, rising to more than $14 a share on the Mumbai exchange in late December, a fivefold gain since 2003. With a market capitalization of $26 billion, Bharti has emerged as India’s fourth-most-valuable firm, and Mittal one of India’s richest men.

Mittal rose to the challenge of managing breakneck growth By taking a quintessentially Indian solution – outsourcing – and standing it on its head. Egged on by his CFO and a core of in-house technology specialists, Mittal resolved to give away his network.

In 2004 he signed contracts worth $400 million to hand over operation of Bharti’s entire phone network to Sweden’s Ericsson, Germany’s Siemens (Charts) and Finland’s Nokia (Charts). The deal means Bharti no longer has to worry about buying and maintaining equipment. Instead it pays the European vendors a fee determined by customer traffic and the quality of service the firms provide.

That same year, Mittal signed a ten-year, $750 million contract with IBM (Charts), farming out the bulk of Bharti’s information-technology services, including billing, management of customer accounts and even operation of the Bharti intranet. The IBM contract is a revenue-sharing arrangement, but the objective is the same as the deal with the European equipment vendors: freeing Bharti to do what it does best – marketing, devising new services for its customers, and searching for new business opportunities.

The Bharti outsourcing model is unique in many ways. In the telecom world, turning your network over to another firm is heresy. “People gasped in horror” when they learned of the plan, says Mittal. “I got calls from around the world saying, ‘You’ve gone nuts, this is the lifeline of your business, it’s something you can’t afford to lose.'”

But Mittal figured he never owned the network in the first place. “If something goes wrong with my switch, there’s no way anyone from Bharti can do anything about it. An Ericsson guy is going to have to come and fix it. I don’t manufacture it; I can’t maintain or upgrade it. So I’m thinking, ‘This doesn’t really belong to me. Let’s just throw it out.'”

What’s truly innovative about Bharti’s approach is that it reverses the stereotype about outsourcing – that it’s something Indian firms do for big U.S. and European multinationals. Mittal says he never seriously considered solving his growth problems by partnering with Indian firms. “I can’t risk it,” he says. “They’ve never done this kind of thing. They’re new, I’m new.”

Western companies, by contrast, have proven ability to work for large mobile providers and can render services locally through Indian subsidiaries. “IBM has thousands of people in India who work only on my job. Indians run it, but they’re governed by the IBM structure, under the command and control of IBM’s global experts.”

Mittal’s enthusiasm for foreign partnerships is unusual in India, a country that, since shaking off the yoke of British colonialism, has remained deeply suspicious of outside meddling in its economy. India’s wariness is reflected in the fact that it received $7 billion in foreign direct investment last year, compared with $72 billion that flowed to China.

Mittal, however, deems partnerships not merely useful but “the core of my strategy.” And he ascribes much of his success to his refusal to tie up with other Indian firms. “It’s very hard for two Indians to partner well,” he says.

Early in his career, Mittal, 49, struck profitable alliances with manufacturers from Japan, Taiwan and Germany. More recently he launched a joint venture with France’s AXA (Charts) to sell life insurance in India, and another with the Rothschild family to export fresh fruit and vegetables grown in India to supermarkets in Europe.

Mittal has also courted foreign investors. In 1999 he sold an 18 percent stake in Bharti to Warburg Pincus for $294 million. (Warburg unloaded the last of that stake in 2005, reaping a net gain of $1.9 billion.) SingTel, Singapore’s state-owned telecommunications firm, owns 31 percent of Bharti Airtel, while Britain’s Vodafone purchased a 10 percent stake in 2005. Although Mittal says he isn’t interested in further diluting his family’s controlling 26 percent stake in Bharti Enterprises, the parent of Bharti Airtel, he was a vocal proponent of the government’s decision to raise the ceiling on foreign investment in the telecommunications sector from 49 percent to 74 percent.

Now Mittal is forging his most audacious foreign partnership yet. In November he announced that Bharti Enterprises will team with Wal-Mart (Charts) to transform India’s underdeveloped retail market. Terms of the alliance, structured to end-run Indian restrictions barring foreign investment in any retail operation offering customers more than one brand, grant Bharti full ownership of stores selling directly to Indian consumers under the Wal-Mart name.

Bharti and Wal-Mart will form a separate joint venture to take on back-end activities in which overseas investment is permitted, including wholesale, logistics, supply-chain management and distribution. The companies haven’t disclosed who will own how much of the joint venture. But Mittal says he will open hundreds of stores over the next five years in formats ranging from supercenter to neighborhood market, and he predicts investment in the venture will exceed $1 billion. Wal-Mart spokeswoman Elizabeth Keck hails the partnership as a “perfect match.” Bharti, she says, “excels at meeting customer needs in India, while Wal-Mart excels in logistics, sourcing and supply-chain management.”

An affinity for foreign allies is consistent with Mittal’s formative experiences as a first-generation entrepreneur in the heyday of what was known as the “license raj.” The era was so named for the government’s policy of closing India’s economy to foreign competition while doling out exclusive rights to produce essential goods and services to politically powerful industrial dynasties like the Tatas and Birlas.

Unlike the scions of those great families, Mittal wasn’t born to wealth. He was raised in Ludhiana, a manufacturing hub in Punjab, as the middle son of a Congress Party politician. He founded Bharti in 1976 at the age of 18, after graduating from Punjab University, with $1,500 borrowed from his father. At first he made crankshafts for local bicycle manufacturers. Within three years he had set up two more plants, one that turned out yarn and the other stainless-steel sheets used for surgical utensils.

Despite his success, it was clear to Mittal that these ventures would never match the size of his ambitions. So in 1980 he sold the bicycle-parts and yarn factories and decamped to Mumbai, where he reinvented himself as a trader, crisscrossing the nation by train in search of customers for imported stainless steel, brass, plastics and zip fasteners. Business was good, but Mittal’s first real break came in 1982 when he parlayed a chance encounter with a salesman from Suzuki Motors into a role as the exclusive India agent for the Japanese manufacturer’s electric-power generators.

In Suzuki’s home market, generators were a sideline, used mainly to power ice cream vans. But Mittal knew that in Indian cities like Ludhiana, where power outages were part of daily life, generators would be snapped up by ordinary households. Sales boomed. Within two years Mittal had established a national distribution network with offices in four cities.

But then the big boys muscled in. In 1984, with no warning, bureaucrats in New Delhi announced they had awarded licenses to manufacture generators to Sriram and Birla, two of India’s largest industrial groups. Never mind that licensee factories wouldn’t be up and running for several years. The import of foreign generators was immediately banned. “It was all gone, just like that,” recalls Mittal, snapping his fingers.

Desperate for another breakthrough, Mittal scoured markets in Japan and South Korea, eventually landing at a trade fair in Taiwan, where he discovered an extraordinary device: the touch-tone phone. In those days Indians were forced to make do with clunky rotary phones, if they were lucky enough to own a phone at all. One look at the push-button version, says Mittal, and “I knew instantly this was the big one.” Within days he had signed a contract with a Taiwanese supplier.

Months later he was selling the gadgets to customers in India under the German-sounding brand name Mittbrau (short for Mittal brothers). But the process took some fancy footwork. Touch-tone phones weren’t on the government’s list of products approved for import. So Mittal disassembled the phones in Taiwan, shipped the components through Kolkata, Delhi and Mumbai, and reassembled them in Ludhiana.

That success, too, was blunted by a shift in government policy. When regulators decided touch-tone phones should be made in India, they parceled out licenses to 52 Indian firms, relegating Bharti to second-tier status behind the larger, better-connected industrial groups. But phones weren’t a priority for the conglomerates, Mittal explains, and Bharti’s venture flourished, diversifying into fax machines, answering machines and cordless phones. Today Bharti is India’s largest phone manufacturer and the only one of the 52 licensees still in the business.

By 1992, Mittal had set his sights on the next big thing. A 1991 balance-of-payments crisis had forced the government to loosen regulations and open India’s markets. As part of that effort, it was taking bids for licenses to operate India’s first mobile-phone networks. Mittal didn’t know much about the technology. But he knew enough about the aspirations of Indian consumers to sense that “this was the bet of a lifetime.” Turning management of the factories over to his brothers Rakesh and Rajan, Mittal moved to London, where he spent lavishly on outside experts to educate him on the workings of the mobile-phone industry and to assemble a world-class tender offer.

Bharti won licenses in India’s four largest cities, but over the next two years the victory was pared back to just Delhi after a series of legal challenges by rejected rivals. But the setback proved a blessing. Running mobile-phone service in India proved far more costly than anyone imagined. Bharti’s initial estimate of $25 million to build a network in Delhi was too low by a factor of four. Says Mittal: “People told me this was a business for companies with deep pockets. Had we known how deep, we’d never have tried it. We begged, we borrowed, we stole, but we put the project together fast.”

When the government invited bids for mobile licenses in cities across India, Bharti sat on the sidelines, unwilling to match the sky-high offers of competitors. Later, when rivals who overpaid went bust, it picked up assets on the cheap. “Banker after banker told us how silly we were not to bid higher,” recalls Mittal. “But lo and behold, in two or three years the other companies started falling like ninepins. They couldn’t even pay the licensing fee. They struggled, and we were ready.”

Then, in 2002, as Bharti plowed resources into bringing its assets up to speed, formidable players entered the fray. Bharti’s stock plunged to less than half its IPO price early in the year. “The question on everybody’s lips – bureaucrats, politicians, the media – wasn’t if we’d collapse, but when.”

These days, most analysts think Bharti’s mobile business is out of the woods. Mittal says outsourcing agreements help Bharti take blistering growth in stride. Sales, earnings and share price now climb in tandem with new subscriptions. Technology specialists, who once struggled to keep pace with expansion, have the latitude to explore new ideas for broadening and deepening the content Bharti offers its subscribers. In November, for example, Bharti announced an agreement with Google that enables Bharti wireless customers to use the California firm’s technology to search the Web.

Mittal, who has vowed to step back from day-to-day management of the mobile operation soon after he turns 50 in October, is already shifting focus. Bharti Airtel is “running on its own steam now,” he says. “It’s come to a point where, if I interfere, I’ll only create trouble.” He is already devoting more time to charitable activities and later this year will take on a high-profile role as head of the Confederation of Indian Industry, the nation’s leading business lobby. Inside the company his priority is the new retailing tie-up with Wal-Mart, an endeavor he says will have a “transformational” impact on Indian life.

That venture will put Mittal’s entrepreneurial skills to the test. India’s restrictions on foreign retailers reflect fears that global giants will run roughshod over mom-and-pop stores. Wal-Mart, a lightning rod for criticism in its home market, has stumbled in several efforts to expand overseas.

Bharti has no prior experience in retail. And as India’s rising middle class clamors for a more modern shopping experience, the large Indian conglomerates are moving in. For Mittal, the challenge seems too big to resist. “As an entrepreneur,” he says, “I need to scale a few more peaks before I hang it up.” three cheers for Mr.Mittal,keep it up.