Need to ensure international confidence in India growth story: Harish Manwani

Harish Manwani, chief operating officer at Unilever, spoke to NDTV on the sidelines of the World Economic Forum in Davos, Switzerland. He says that while the mood this time at the summit is optimistic, there are still a lot of global issues that need to be resolved, adding that while the developing markets are growing, the pace of growth has come down.

Here's the transcript of the interview:

Shweta Rajpal Kohli: It's such a pleasure to have with us here at the NDTV studio in Davos Mr. Harish Manwani, COO of Unilever. Thank you so much for talking to us.

Harish Manwani: Great pleasure to be with you.

Shweta: What's the mood you are picking up in Davos? Can we safely say that the worst is over for the global economy?

Harish: Well put it this way. The sun is shining. The mood is more optimistic. But frankly the reality has to play out because there are still a lot of global issues. I don't think the problem for Europe has gotten away. I think we still have to see how robust the recovery in the US is and, let's face it, the developing markets of course are growing but they aren't growing at the pace they were too.

Shweta: Alright, so let's talk Europe first because it accounts for a large part of Unilever's business. How badly has that dented your business? Has it led you to change your strategies and focus more on other markets?

Harish: Well, Unilever has always focused on going where the growth is. Developing and emerging markets now are accounting for 55 per cent of Unilever's turnover and 90 per cent of Unilever's growth.

Shweta: And I heard this would increase to 75 per cent?

Harish: If you project this to 2020 then developing and emerging markets will well be contributing to well over 70 per cent of Unilever's turnover, so there is absolutely no doubt in our mind that emerging markets are where our growth lies. We have very good business in Europe and North America and here is the good news. Our business in North America, despite all the stress, was actually positive in terms of volume growth.

Shweta: So can we then say that FMCG is recession-proof?

Harish: There is nothing as recession-proof. The thing is how do you tackle consumer demand that is slowing down? So Europe, for example , we have no different metric for Europe. We are saying Europe should grow ahead of market. In another words, we need competitive growth in Europe as indeed we want in China, India, South Africa, Turkey and South America. But if the markets are negative and flat then what we are accepting is modest growth and I think what Europe has demonstrated that we can be competitive in Europe. The other thing is that we have a portfolio of brands that actually allow us to cater to consumers both at the top and the bottom end. And here's an interesting thing. In the last one-and-a-half years a lot of learning has taken place in Europe. For example, introducing 1-pound packs in UK are learnings that we have had from our developing markets.

Shweta: That is interesting. So share with us how consumer habits are changing and how your products are changing over the period of years?

Harish: There are two or three very important trends that are taking place. A couple of really important things have nothing to do with the fact that there is a recession. The fact is digital is a huge trend. The way people are deciding what to buy where. The way they are buying is changing dramatically as we speak and specially in developed markets, and catching up soon in markets of China so on and so forth. There is a trend of what i call responsible consumption sustainability and Unilever is ensuring that we not only deliver great product to consumers but also fulfill what we call Unilever Sustainable Living Plan Commission, which is to reduce our environmental impact and increase our social impact. All this is equally relevant whether you happen to be is Europe or developing markets. Here's a good news on Europe. Our business has embraced all the principles of being competitive, superb execution. In fact, a lot of things that we are doing in the developing markets, like perfect stores programme that we have for really step changing in our execution in our market place has been embraced in Europe and improved up on the good news is we have people who have worked in the developing countries. Jan Zijderveld, who is the president of Europe-Unilever, actually was handling South East Asia.

Shweta: So you are saying learning's of the developing world are applying to the developed world, where crisis is still continuing, and actually seeing that work?

Harish: That's the great thing, how Unilever has been operating, which is what we are ensuring that we are globally leveraged, but locally relevant, and it is that sweet spot that we are working on.

Shweta: Let's talk about India business. How significant is India business to Unilever's overall plan? You talk about emerging markets but let's talk India specifically.

Harish: Well, India is a very important part of anyone's business. Certainly for us it's one of our biggest businesses and am very pleased to see how our business has been performing there for the last two years. We have seen some consistent step-up on growth -- competitive growth and profitable growth. You saw our results last week and I am very pleased with the progress we are making and underlying these numbers is a substantial step-up in terms of our capabilities, execution capabilities, innovation capabilities, our supply chain which is allowing us motoring, along what I call business as usual on growth but business on usual of cost.

Shweta: A rather sticky issue -- the royalty payment increase. Why the need to increase payments so steeply? Investors clearly are not impressed.

Harish: The board has unanimously approved the proposal and this after they had scrutinized the case for the increase.

Shweta: So you are saying there was no opposition from the Indian unit?

Harish: This is not a question of opposition. This is to ensure that you have done your due diligence and the board has convinced themselves. In fact the benefits that HUL derives are commensurate with the proposal of increasing our royalties.

Shweta: So share with us your benefits since that hasn't gone down very well with the investors who have clearly punished the HUL stocks because of the increase in royalty payment.

Harish: Well the recovery that I was talking about, which can be attributed to the fact we have stepped up our innovation rates. The fact is that we are really able to bring functional excellence...an advantage of Unilever skills to the advantage of HUL. So if you take what has happened in the last five or six years within Unilever, there has been increasingly globalizing a lot of our innovation capabilities, research and development supply management and so on, and to this we are really able to make sure Unilever provides far better service  to the operating unit because we are leveraging our scales simple as that so take innovation there has been in last two years sustainable step up in market innovation. Success of innovation in India and part of it was to do with the fact whether it is Dove, Lux...is really coming from regional and global funds.

Shweta: And so you are saying that the innovation is the one reason why you feel it needs to increase royalty?

Harish: It's not the question of feel. It is about looking at what are cost Unilever is incurring, which fairly are been incurred to support our business in operating units that at the starting point it's not about saying you could give us more or less, so if there is an under-recovery of cost then the board quite rightly said could you show us, in fact, what are the bases on which the cost has been allocated and what is HUL getting out of it, and I am pleased that the proposal was taken into action.

Shweta: So how will the royalty work out?

Harish: So the royalty and payment are going up by 1.75 per cent, starting with 50 bps which is with immediate effect up to March 2014, and from there on to 30-70 bps  to cover the total 1.75 per cent.

Shweta: It could happen earlier?

Harish: It could happen earlier but you know once again the flexibility has been provided to ensure to run our business as efficiently as we need to.

Shweta: And what happens post 2018? Are we talking about further increase?

Harish: The proposal at the time is 1.75 per cent. I am not to say how things are going to change but the fact of the matter is it is going to cover us for a period of time.

Shweta: What will you tell the investors, who clearly don't see the benefits that you are talking about, and have punished the shares?

Harish: All I can tell those investors is see the benefits that you have got out of the new Unilever and new HUL  that has emerged in the last two years...this company  at the both global level  and at the local level has been delivering what i call competitive results and this has to be since we have to be doing something differently...this is part of doing things differently. I remain confident that going forward HUL will truly be a power house because it is to my mind the best combination of innovation and great execution and top talent.

Shweta: Let's hope that investors get your message, who have been very worried about the royalty payment. Let's change tracks and talk about the overall Indian economic environment...changes that have been taking place. But we have seen a rush of reforms after a huge policy paralysis as what it was famously termed. Are you convinced that we will be able to execute on some of these reforms?

Harish: First, I am happy there is some kind of a movement. Countries like ours need growth. The only way to lift up the standard of living of people and take people up from poverty is to make sure that our economy continues to grow and of course it has to be balanced ensuring it's been done responsibly. And I think therefore the growth agenda needs to be alive and kicking and doing the right kind of reforms that will help India grow is critical. We also have to make sure India is not on its own. India is competing globally. If you look at all our Indian folks who are at Davos they are running business that are getting global and whatever we do in India we need to recognize we have to be global and the last bit is confidence. We need to make sure that there is international confidence in the India growth story.

Shweta: Has that taken into beating is the question.

Harish: There was uncertainty around it...thinking there is more confidence that we are moving in the right direction and time will tell. See in matters like this...see we are living in the world that has lot of problem s. People are not focused just on India. We have to focus on India.

Shweta: Do you think this is becoming an increasing trend where perhaps places like Davos where India was really talked about earlier, is diminishing now. India is not so much a talk here in Davos this year.

Harish: Well I think India will always be on top of everyone's minds because it's an important market. You cannot ignore India, China, Indonesia. This is where you know where large population of the world lives. This is where future of growth and economy lies. Having said that, speed and skill at which you can increase your growth I think this is where confidence is important because when i talk to anyone there is lot of longer-terms that is still a lot of hope around India.

Shweta: But short-term, medium-term loss of confidences is what has happened.

Harish: We live in a world where resources are limited, investment is limited, and people will allocate will allocate resources on bases of confidences that they get. It takes very little to let go of confidences but takes little longer to build it back and I think we are in the process in building it back, which is a good thing.

Shweta: Let us certainly hope that India can build back that confidence and can be seen as the favourable investment destination. Thank you so much to talking to us.

Harish: Thank you.