Titan - The Outsourcing Journey

OUTSOURCING AT TITAN contd...

This loss was due to the high overheads, excise duties and marketing spending in 1999-00, which increased expenditure by Rs 1.5 billion. Moreover, net profits had come down by 47% to Rs 146.4 million in 1998 from Rs 275.7 million in 1996 (Refer Table V). Company watchers partly attributed this to the heavy investments in the manufacturing setup.

TABLE V
TITAN - KEY STATISTICS (in Rs million)

Taking into account the above factors, Titan had no other option but to settle for outsourcing. Around the same time, Titan decided to change its focus to generating more volumes rather than value. This was because the growth in the premium segment of the watch market, which was Titan's mainstay, had been below its expectations. The company wanted to build up a base in the lower value segment and extend its reach. According to company estimates, outsourcing worked out be around 30% cheaper than manufacturing in-house.

Another reason why Titan wanted to reduce its focus on manufacturing was the high employee costs – 11.2% of its revenues in 2000. This was because in the days when the company had no other option but to manufacture, the Hosur factory had a huge worker base. In 1997 and 2000, the company entered into various wage agreements with the workers'union. As a result, even a low-skilled blue-collar worker at the company earned as much as Rs 10,000 per month. This increased overall employee costs. According to analysts, this was alarming because since 1996, Titan had neither made any fresh recruitments nor replaced close to 200 supervisory and managerial-level employees who left in the same period.

However, the biggest factor that swung the decision in favor of outsourcing was the fact that Titan was not being able to meet the onslaught of the unorganized sector for the first time. Since the company decided to focus on generating volumes from low-end mass products, it had come in direct competition with players in the unorganized market. With cheaper Chinese imports flooding the Indian market, Titan realized that the complete technology of making watches, from hand-plating technology to manufacturing cases, was easily available at prices much lower than what the Hosur factory could ever deliver. According to a former company manager, “The extra costs in the system aren't helping in differentiating the brand. Today, even unique elements of design are being easily copied at a lower cost.”

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