LEADERSHIP CHALLENGE OF JOSE

Kunnath Paper Mills (KPM) is a small paper mill in Kerala, India. It was set up by the
paper trading Kunnath family. Mr. K.T Francis, maternal uncle of Mr. Jose Mundassery and
Mr. K.T Antony were in the forefront of this entrepreneurial foray from paper traders to paper
manufacturers in 1979. Jose had lent 50,000 pounds for the venture, which was later
converted into shares. He was neither from the family nor interested in the venture and had
settled down in comfort in the US after his illustrious career as working director in ABB. By
2006, old age and illness took its toll on Francis. Just before his death, he had requested Jose
to take interest in KPM. Jose responded by visiting Kerala every quarter and helped with the
company affairs.

Nearly six years had gone by. One sunny morning in April 2006, as Jose reclined in the sofa
in the modest Mudassery Bhavanam (meaning Mudassery House) at Trichur 1 quite different
from his lavish condominium at Princeton in the US. Jose had to make a decision i.e., what
would he be known for - for making money in a global corporation or for being a leader who
transformed a small company?

Man and Paper

At the onset of digital revolution, people thought that paper would soon be pass. Far from
it, paper and paperboard industry is growing at a modest rate of three percent. Besides
writing, printing and newsprint, paper is used for cleaning, packing, insulation, to make carry
bags, egg and fruit trays, cartons, packages, book covers and so on. Paper and paperboard is
pervasive and endless in its use. The basic raw material for all types of paper is fibre. That is
true for Papyrus which Egyptians used as early as 4000 B.C, and for the paper we use now.
Trees are the primary source of fibre, and the alternative is used paper. Though the former
is better as a raw material, its environmental impact is self explanatory. Forests, virgin or
planted to harvest for pulp, store roughly 50 percent of all terrestrial carbon and form the
most effective safeguard against climate change. Forty two per cent of all wood harvest is
used for pulp manufacturing2. Additionally the pulping and paper manufacturing process
itself emits greenhouse gases and the industry is considered the fourth biggest greenhouse gas
releaser3. Combined with the effect created by cutting trees for pulp, the impact of the paper
industry on global warming is staggering. Yet not one of us can live without paper!

1 Trichur is a small town in Kerala where Jose retained his ancestral house for emotional reasons. He visited this place
every now and then.

2 Report on State of Paper Industry Monitoring the Indicators of Environmental Performance by Environmental Paper
Network, 2007 report accessed through http://www.greenpressinitiative.org/documents/StateOfPaperInd.pdf on 25th May
2012.

3 Report on State of Paper Industry Monitoring the Indicators of Environmental Performance by Environmental Paper

Network, 2007 report accessed through http://www.greenpressinitiative.org/documents/StateOfPaperInd.pdf on 25th May

2012.

1
 Most of the paper and paper related products are of use and throw nature and we throw
tons of it into a bin to be disposed of by our municipalities in landfills. If paper is used as
landfill, the decomposition process produces methane which is a greenhouse gas with twenty
three times heat trapping power as carbon dioxide4 leading to faster global warming.
However, if the paper is recycled, it obviates the methane emission resulting from land filled
decomposition. It also obviates cutting of trees. It is estimated that compared to virgin paper,
the Post Consumer Waste Recycled Paper (PCW paper) uses 45 per cent less energy,
produces 38 per cent less greenhouse gases, generates 45 per cent less waste water, creates 50
per cent less solid waste and uses 100 per cent less wood 5. Mills like KPM which use PCW
is, therefore, a boon to mankind.

Paper and Paperboard Market

Global paper and paperboard production was around 337 million tons in 2009 6. Production
is increasing fast in Asia (Exhibit 1). This shift is because of the increasing consumption in
this region particularly in China and India. The data also shows that China has emerged as the
largest producer with 24 four per cent of the world share while the US has 19 per cent and
India 2 per cent7. On the consumption side, there is large regional variation. In developed
countries it is as high as 300 Kilograms per year. In Japan and China it is 250 and forty five
kilograms respectively and in India it is only seven kilograms now 8. The consumption is of
course catching up in developing countries.

Paper consumption is closely related to GDP and general consumption pattern. Hence as
Indian GDP and consumption grows, production and consumption will also grow. While the
average global growth in paper consumption by 2020 is expected to grow at 2 per cent per
annum, Asia (less Japan) is expected to grow at nearly 3 per cent, China at about 5 per cent
and India at about 6 per cent9.

4 Ibid

5 Data accessed from Echopaper https://www.echopaperstore.com/why-use-recycled-paper.php on 26th May 2012.

Environmental impact estimates were made using the Environmental Defense Fund Paper Calculator. For more information,
visit http://www.papercalculator.org.

6 Data accessed from www.forestindustries.fi/statistics.

7 Tissari, Jukka, Forestry Officer (Forest Products Trade and Marketing), FAO Forestry Department, Highlights on Paper
and Paperboard: 1999-2009 using datasource FAOSTAT-ForesSTAT, released on 12 January 2011) accessed from
http://faostat.fao.org/Portals/_Faostat/documents/pdf/Paperper cent20andper cent20paperboard.pdf on 01 June 2012

8 Paper and Board Emerging Market Overview on India and Turkey presented by Pyry Forest Industry Consulting Soile
Kilpi, accessed from http://www.cpbis.gatech.edu/files/presentations/070314per
cent20Kilpi_IndiaAndTurkey_TAPPI_Jacksonville.pdf on 01 June 2012.

9 Ibid

2
 The Indian paper and paperboard industry (comparative statistics at Exhibit 2) produced
1.86 million tons in 2000. It grew to 2.14 million tons by 2005 and to 5.38 million tons by
2010. Though there are plenty of PCW based paper mills in India, because of poor recovery
of used paper in India, there is growing dependence on import of recovered paper, which
grew from 0.92 million tons in 2000 to 2.54 million tons in 2010 10. The firms which depend
on imported recycled paper have to manage this value chain and exchange rate fluctuations.
Indian Paper and Paperboard Manufacturers Association (IPMA) of India is very
optimistic about the industry. Between 2002 and 2007, newsprint had registered a growth of
13 per cent, while paperboard registered nine to 11 per cent growth. They feel convinced that
since the growth of paper industry mirror the growth of GDP, which is growing at 6 to 7 per
cent over the last few years, India is not only the fastest growing paper market now, but will
continue to be so for a decade or more. They estimate that paper production in India will
touch 13.95 million tons by 2015-16 which implies a growth rate of 8.5 per cent CAGR for
the industry. It is estimated that the paper consumption will grow at 9 per cent, outgrow
production and that import of pulp and paper products will increase in the days to come. The
share of the paperboard in this will be 30 to 35 per cent. This demands efficient management
of fibre, recovery of used paper to increase the raw material, management of power, which is
a major input for paper industry, and most importantly management of the value chain11.

Because of several challenges faced by the industry, supply may not keep pace with
demand. The challenges as per IPMA are12:

Enhancing Industrys competitiveness to face global competition

Economies of scale
De-fragmentation of industry
Modernization of mills
Building new capacities
Meeting incremental demand of paper
Productivity/quality improvement
Creation of robust raw material base
Environmental upgradation and green technologies

The Value Chain of Paper Industry

Paper is an industry with high raw material cost; the input cost of raw materials and power
account for 55 per cent. The backward integration is linked to national policy on earmarking
land for planted forests which can be harvested for pulp and the policy of recovery of PCW
paper. Effective PCW management which is usually in the hands of municipalities is crucial
for paper industry.

10 Statists from United Nations Food and Agriculture Organization accessed through http://faostat.fao.org.

11 Indian Paper Manufacturing Association report accessed from http://www.ipma.co.in/growth_pangs.asp on 02 June

2012.

12 ibid

3
 Raw Material. There was a sharp increase in the cost of pulp in 2010 (in fact, it doubled in
three months in that year) and was further affected by the major earthquake in Chile 13. In
addition, the US Govt. withdrew the subsidy of $125 to 150 on the black surge 14 processing
from January 201115. Currently (June 2012), pulp is quoted at $ 850 to 900 per ton 16. The
waste paper cost also increased by 13 per cent during this time. Waste paper recovery in India
is only 27 per cent of the paper products consumed, far less than Germany and Sweden which
recover about 70 per cent and the US which recovers 50 per cent. Imports cover as much as
57 per cent of the Indian requirement17. The scope for recovery of paper in India is enormous.
Power. Power is a very important input in the paper industry, and the forecasted power
shortage in India in 2011-12 is 10 per cent18. On 20, August 2008, Business Standard, a
respected business daily of India reported that the Kraft paper mills in Kerala decided to stop
production for six to eight days in a month, due to shortage of power. The state Govt.
imposed 25 per cent power cut for industrial units and the tariff commission announced an
additional 0.5 INR (which though equal to 2 cents in absolute terms, is eight per cent of the
current tariff). The problem is not any different in other parts of India-Chennai based South
Indian Kraft Paper Mills Association in its web posting decries the power shortage happening
since 200719.

Paper Making Process. Paper making process is remarkably similar no matter what type
of paper is made. The output is more a function of the quality of pulp. Virgin pulp (pulp made
from wood rather than recycled paper) is better for paper making, though it has serious
environmental consequences. The process is explained in Exhibit 3.

13 Business Standard March 2010, accesses through http://www.business-standard.com/india/news/paper-prices-rise-19-

24raw-material-cost-push/387766/ on 02 June 2012.

14 It is a harmful byproduct of pulping process that needs processing.

15 Business Standard March 2010, accesses through http://www.business-standard.com/india/news/paper-prices-rise-19-

24raw-material-cost-push/387766/ on 02 June 2012.

16 Report on Paperage accessed through http://www.paperage.com/foex/pulp.html on 02 June 2012.

17 Discussion Paper on Collection and Recycling of Waste Paper in India accessed through
http://dipp.nic.in/english/Discuss_paper/DiscussionPaper_Recycling_WastePaper_21October2011.pdf on 04 June 2012.

18 Central Electricity Authority data accessed through http://www.indianpowermarket.com/2011/06/peak-power-shortage-

jumps-to-129-energy.html on 06 June 2012.

19 South India Kraft Paper Manufacturing Association report accessed from http://southkraft.com/downloads/STATUS.pdf)
on 28 May 2012.

4
 Distribution. Paper is usually supplied to large paper dealers who in turn sell it to the
retailers. They have a say in the paper industry as paper can be considered almost a
commodity and little branding can be done on products like paperboard which KPM
produces. The paper so produced is used for making book covers, carry bag, cleaning and
wrapping paper and so on. A large number of small manufacturers of these finished products
purchase the raw material from the paper distributors. The small size and the fragmented
nature of the end producers of paper products make it necessary to have a strong distribution
network and it is not unusual to see sole distributors for paper companies in most states of
India. The promoters of KPM were sole distributors of some paper mills and therefore they
understood the value chain clearly.

KPM
KPM was incorporated in May 1979 as a private limited company due to the
entrepreneurial spirit of K.T Francis and K.T Antony. They came from a paper trading family
which had been in business for over 100 years, and knew the paper value chain well and were
sole suppliers of Amravathi papers and South Indian Paper companies. When Amravathi had
operational troubles, the duo intervened directly because a fall in production meant loss in the
wholesale business. Antony recalls during the interview with him,

We did it out of our self interest, however in the process, Amravathi mills got out of trouble and
our supply chain became smoother.

Though Amravathi had promised them shares in the company it did not materialize. This
only increased their resolve to set up a paper company. In a move towards this, Antony sent
his son, Thomas, for a degree in paper technology but on return he had to join the trading
business as the mill was nowhere in sight. It was then that luck shone on them and South
Indian paper mill which had the business of making and reselling paper making machines in
addition to paper making hinted at the availability of a used machine in the UK for 25,000
pounds. Antony went to the UK immediately to find out the details of the machine. Though
the machine was cheap, it was eighty years old with only a ten ton capacity per day. They
knew from their experience that such old machines will not operate at optimum capacity, but
also knew that even if it churned out half that, they will be able to pull through considering
the low capital cost. So they decided to purchase the machine with all its inherent risks.
They got their family to invest and got land in Meenkara about 70 kilometres from
Coimbatore, Trichur and Palakkad considering the industrial need of access to used paper,
water and cheap labour. While this was done quickly, Antony made three visits to the UK
before he realized that dismantling and bringing the machine to India was no childs play.
Interestingly, the promoters also realized that they could not buy the machine no matter how
much money they had with them because the foreign exchange 20 had to be found outside
India as per the rules existing then. When all their effort to raise foreign exchange with some

20 Indians had to get Reserve Bank (reserve bank is the central bank of the country) permission for converting their money
into foreign exchange because of the controlled exchange regimen that existed in India then. As per the rules, this permission
was rarely given and the investors had to find people working abroad who could provide the foreign exchange.

5
of their friends in Germany failed 21, the duo approached Jose22, who was then working for
Brown Boveri in the US. After some deliberation, Jose lent the money and the machine was
purchased. It took them another 25,000 pounds for the dismantling and transhipment and the
ingenuity of Antonys son Thomas, a young paper technologist, to do the job23.

The machine which landed in India in 1979 went through teething troubles characteristic of
an old and used machine being stripped and reassembled in another continent and they could
go into production only in 1984. They had established excellent relations with K.I Bawa &
Sons, Cochin, PeeYes Associates Palakkad, Hudha Noorie agencies, Calicut and Virgin Paper,
Coimbatore for supply of raw material i.e. used paper. These had been selected with care to
cover major townships/cities around the factory and were spread out, yet close enough to
ensure supply of PCW paper without bottlenecks.

The euphoria was short lived and they had to tackle labour unrest in 1986 24. Thomas, now
the CEO of the company, candidly admitted that it was the first time they realized that paper
manufacturing was very different from and more challenging than from paper trading 25 and
the complex industrial relations was new to them. They managed to handle it and smooth the
production. By 1987, the Kerala government began to shed its anti investment image and
wanted to encourage industrial development in the state. It announced a five year post
production tax holiday for industries. To take advantage of this, KPM decided to go for a
second machine. In the meanwhile, the loan by Jose was converted into shares which gave
the company adequate liquidity to purchase the second machine. With the conversion of debt
into equity, Mr. Jose came to hold 34 per cent and Mr. K.T Francis, K.T Antony, K.T
Cherukutty and K.T Jhonny came to hold 33, 21 10 and 4 per cents respectively. With a
second machine and improved labour relations, the company had a smooth run till 1996 when
another strike affected production; however it was also settled in 1997. Though the company
purchased a third machine in 1997 taking the owned capacity to 60 tons per day, this machine
was never made operational because of coordination problems among the partners. In fact an
effort was made to set up the third machine at a site approximately 5 to 6 km from the factory
site in an ad hoc facility neighbouring the guest house of the company. This machine was not
installed for a decade. Hence the production hovered around 15 to 20 tons a day and the
idling capacity of the 40 ton machine was never activated. Late Mr. K.T Francis, who had put

21 From the interview with K.T Antony, one of the initial promoters who is still alive and working in the company rosters,
the case writer learnt that they had some family friends who were nurses in Germany and they were hoping to raise the
foreign exchange from them.

22 Jose is the cousin of Mr. K.T Francis i.e., Franciss sisters son.

23 From the interview with Mr. K.T Thomas, it was revealed that he took technicians and carpenters from India and used
their services to dismantle and pack which reduced the cost to the manageable 25,000 pounds.

24 The promoters were paper traders and did not have firsthand experience of handling labor in industrial context.

25 From the interview with Mr. K.T Thomas.

6
in place a strong centralized one man control kept the others away and perhaps made
operating the company difficult. Because of the family misunderstandings, KPM did not
enjoy the expertise of Thomas who was a paper technologist and who had the expertise of
dismantling and refitting the first machine also. Somehow the wheels kept rolling and the
first two machines of KPM kept churning out paper and it kept going. Expecting that old age
will soon catch up, Mr. Francis had inducted two of his grandchildren into the factory
immediately after their engineering degree, but they were too young and inexperienced to
make an impact and in any case empowering them to do the job was also not in vogue. By
2006, Francis took ill and passed away the same year after making a request to Jose to take a
direct interest in the company. KPM now faced the classical small family business problem
leadership succession. At the operational front, it had three machines with two machines
having a capacity of 10 tons each per day and in working condition and the one having 40
tons per day capacity in a non operational condition. Late 1990s and early 2000s were the
years when Indian economy kept booming and several paper mills of the KPM era made
substantial growth. KPM somehow was not part of the story. Sree Sakthi Paper Mills at
Cochin some 150 km from KPM had commenced operation in 1883 with a capacity of 15
tons per day, very similar to the 10 tons of KPM. They came up with a paper board plant of
9000 tons per year in 1995 and a 2000 ton per annum duplex board unit in 1996 and its
capacity was increased in later years. By 2006, this company was able to go public and reach
a turnover of 2090 million rupees in the financial year 2011-2012, whereas KPM, in sharp
contrast, had reached only 315 million rupees by 201126.

Jose Mundassery27
Mr. Jose Mundassery was born to Prof Joseph Mundassery, a fellow traveller, a term
Joseph had coined to describe himself and to his pronounced leftist leaning. Prof Joseph was
born in the little known place called Kandassankadavu popularly called Kandas with an
anglicized tone. Though not endowed with wealth in the family and living in a rented coconut
leaf thatched shanty, Joseph cleared his B.A (bachelor degree) and then went to study his
masters in Oriental Language from the famous Banaras Hindu University (BHU) and had
opportunity to brush shoulders with men like Dr. Radhakrishanan, a philosopher and thinker
par excellence and former President of India. The BHU experience and his liberal education
formed his ideological leanings. Though Professor Joseph had served over quarter of a
century in the famous Saint Thomas College, Trichur, a well known catholic diocese
institution, his stay there was cut short as the college management thought that keeping a
pronounced leftist amidst them was not befitting and dismissed him from the college in 1953,
despite his stature amidst academics and his being a member of the syndicate of Madras
University under which the college operated.

Jose, fifth sibling of Professor Joseph, was born in Trichur in Kerala and after going to
Sacred Heart Convent till class IV, joined the Saint Thomas School, like every other good
Christian boy of the small town Trichur did those days. After Class XII, following his
brothers, he too wanted to do engineering somewhere in a metro outside Kerala, but with all

26 All data on Sree Sakthi Paper mills was extracted from http://www.sreekailas.com/ and
http://articles.economictimes.indiatimes.com/2012-04-09/news/31313119_1_power-project-west-coast-paper-mills-power-
requirement.

27 Based on interview with Mr. Jose Mundassery.

7
the siblings studying away from Kerala, his mother coaxed him to stick to Trichur. However,
fate had something better in store and he applied to Trivandrum Engineering College (located
in Kerala but some 300 kilometres away at the state capital). With his excellent performance
in Class XII, he got admission to the engineering college. His father was now jobless but
since it cost only a fee of Rupees ten in 1954 (approximately equal to 20 cents today), he
could afford the study. Moreover this four and a half year course had six months of paid
internship.

By 1957, the communist party made news by getting elected to the state assembly and
became the first elected communist government in the world. Joseph Mundassery 28, father of
Jose, rightly became the education minister in the government. For Jose, son of a minister,
life was to change forever.

The extent and rapidity of change initiated by the new government and perhaps their
disregard for religion resulted in several parties joining hands against the communist party
that ended in a struggle called vimochana samaram (liberation struggle) to remove the
communist government. As the struggle intensified, people were thronging the capital,
Trivandrum, to push for a change in the government. One day it happened that Jose was
returning from his internship and was catching a bus from Munnar 29, and his erstwhile
classmate, George (name changed), was returning from demonstrations in Trivandrum.
George pointed to his colleagues that Jose was the son of Joseph Mundassery, the education
minister in the communist government. It did not take too long for the crowd to manhandle
Jose. Hurt physically and mentally, Jose made up his mind to leave Kerala. But it was not so
easy. In the meanwhile, Trichur Engineering College had been set up in 1959. Since Jose had
a bachelors degree up his sleeve with excellent grades and his parents wanted him to stay at
home, he applied and got a lecturers job in Trichur. Though much to his dislike; he did so, to
please his parents. With his body in Trichur and mind outside, it took him hardly six months
to see opportunity. When Kellogg Consulting sought engineers for training in the US for their
subsequent deployment in Nangal Fertilizers in India for whom Kellogg, US, was consulting,
Jose applied for it and was interviewed. In the interview, a gentleman from North India was
very critical of Joses poor Hindi30. Jose tried to reason with him that given a chance he
would learn the language quickly. He knew that though he might be wavering in spoken
Hindi, his engineering knowledge was sound and sturdy. When the open criticism continued
in the interview and became unbearable, Jose decided to assert himself and asked the critical
interviewer if he knew how many South Indian languages existed. Obviously the interviewer
had no clue. Jose highlighted that for true national integration, those from North India should
perhaps study one of the four South Indian languages. The result of the interview was
obvious - reject.

28 Joseph Mundassery had worked as a syndicate member of Madras University, was perhaps the most qualified minister in
India to head the ministry of education.

29 Munnar is rather remote place 100 km from Cochin.

30 Hindi is considered the national language of India; however it is spoken only in North India and that too only in four
states. People from South India do not use Hindi. People from Kerala study Hindi but are not fluent in speaking the
language. The language popularly used by educated Indians is English.

8
 Disheartened yet determined to make it, he did not return to Kerala to continue his
lecturers job but remained in Bombay (now Mumbai) with some of his friends. His next
chance came in a few weeks when Brown Boveri who had tied up with Voltas in India sought
trainee engineers for their new Indian projects. Jose jumped into the fray, this time to face
another interviewer who questioned him on this language proficiency once again. However,
the Swiss engineer heading the interview panel was impressed with his engineering
knowledge and cut short the language issue. Jose heaved a sigh of relief and soon joined the
company as a trainee engineer of Voltas at Indian rupees 750 per month (a truly enviable
salary in 1959). The trainees travelled to several places for projects. While many kept
complaining on these moves, Jose enjoyed the challenges and learning from these. In the
meanwhile, an opportunity came for a job in Jamshedpur for installation of electrical works
for the Tata Iron and Steel Company (TISCO) which Brown Boveri was undertaking.
Jamshedpur is a remote place in India and other trainees were reluctant to go; but Jose took
the plunge. His engineering and business acumen attracted the attention of the Swiss
engineering chief who persuaded him to learn German at Max Muller Bhavan in Calcutta
(now called Kolkata) to connect better to the Swiss company leadership. Jose again took the
opportunity willingly. The relationship of Brown Boveri and Voltas came to an end in 1962
and Jose had to make a choice between Voltas and Brown Boveri. Unlike many of his
colleagues, he chose the latter which was risky, being a foreign company which could shut
operations in India anytime. Once on the roll of Brown Boveri, he was sent for one year
training in Switzerland to learn the skills to undertake work in their upcoming project in
Baroda. But since the project got delayed, he stayed in Switzerland for another year before he
returned in 1964 to take up a job with Brown Boveri, India. His base was Bombay, though the
project location was Baroda. His Bombay stint got him access to Bombay University library
which he used profusely. He also came in contact with other ambitious people who were
attempting their GMAT. He too joined the fray, worked hard and cleared his GMAT in 1964.

With a modest score of 650 in GMAT, 6000 dollars saved from his Brown Boveri stint,
about six years of work experience and several months of exposure to the European way of
working while living in Switzeralnd, he began to close down on the US universities and was
lucky to get in Chicago School of Business. In June, 1965 he set sail for the US and after a 29
day journey by ship, train and ferries to save the flight cost, reached the US management
education powerhouse at Chicago. He recollects with nostalgia his Economics 101 taught by
Samuelson. By the end of the first year, the 6000 dollars was gone and he was on the street
with a year to go to complete his MBA. So he searched the telephone directory to find the
phone number of someone who could give him a summer internship from which he could
make some money to brighten the prospects of completing his MBA. Luck shone on him
once again as he got the number of Brown Boveri which had just set shop in the US. With his
expertise in German, it was easy to get past the secretary of the German speaking Swiss boss
in the US, who after hearing of his knowledge of German and two year internship in
Switzerland quickly invited him for lunch and offered him an internship. With 3000 dollars
earned during his internship, he was better off to finish his MBA but the German boss saw
talent in him and offered to bear his education expenses provided he would sign up with the
company at the end of his MBA. Nothing could be better, Jose thought. By summer of
1967, Jose was a graduate of the Chicago School of Business with a job in Brown Boveri.

In 1988, ABB (Asea Brown Boveri) was born out of the merger of his company BBC
Brown Boveri Ltd. of Baden, Switzerland and Asea AB of Sweden and became worlds
leading supplier in the $ 50 billion electric power industry. At that time ABB controlled as
much as a third of Europes business and more than 20 percent of the world market, and its

9
CEO Mr Percy Barnevick, often called the merger maverick, successfully integrated 850
subsidiary companies and 180,000 employees operating in 140 countries. Jose was part of
this mega merger.
During one of the meetings in Europe which Jose attended, Percy learnt that Jose was a
product of the Chicago School of Business. Percy, who had a proverbial penchant for talent
and an amazing power of persuasion, called Jose, introduced himself as a product of Stanford
and told him to move from US to the headquarters in Europe to undertake greater
responsibility. Jose expressed his reservation since his family was by then well settled in
Princeton; but Percy, told him to take over as Country Head, Australia and spend two weeks
in Australia, one week in Europe and one week in the US every month and Jose settled for it.
He rose to the Head of Asia Pacific, was executive director of ABB and was on the board of
ABB, India and negotiated several mega projects including Chinas Three Gorges, Hubei 31,
from which ABB had to transmit 6000 KW to Shanghai. He retired from active work with
ABB at the age of sixty five, settled down in his condominium in Princeton to enjoy his
Colorado ski trips and occasional jaunt to Kerala to meet his folks and continued his
consulting relationship with them ABB.

It was during one of those trips in 2006, his ailing uncle, Francis, founder promoter of
KPM, asked him to take more responsibility in the paper mill. KPM was peripheral to Joses
life, though he was the largest share holder of the company. However, he continued his visits
to India more frequently now and spent time in the company while in India unlike earlier
days. He got the family together, had them accept him as Chairman of the company and
appointed Mr. K.T Thomas, son of Mr. K.T Antony as the CEO and the two grandchildren of
the promoters who were working in the mill were made in charge of other critical managerial
functions. He inducted the maverick engineering head who kept the old machines going and
the internal auditor into the top management team and told them to produce results which
they did (Refer Exhibit 5). By 2011, he had managed to get a fourth machine which would
take the capacity to 100 tons per day (This was being trial run while the case was being
written) and KPM was already scouting for another machine to replace the first one. Going
by the sentiments expressed by the top management and the workers in various interviews,
they liked Jose chettans32 focused business like approach at the macro level and the hands off
approach at the functional level. The CEO was very specific in commenting Jose chettan
brought in that new confidence and we are willing to go to any length now.

A Difficult Decision
As head of commercials of projects in ABB, Jose knew one thing well i.e., business
decisions should make money and not be swayed by emotions. But family business is
different.

As he reclined to evaluate the six years that went by, he realized that he is now seventy
four and his travels to India and work with the company had yielded some result. He had
prevented the company from falling apart. The family disputes look a thing of the past. He
had many questions in his mind.

31 Three Gorges Hubei is a 24,000 MW plant which makes it one of the largest hydroelectric power plants in the world and
Chinas pride.

32 That is how they address him and means Brother Jose when translated.

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 The demand for paper is steady and growing and shows no let up. There is a big gap
between the per capita consumption of the developed world and India and the market trend is
encouraging. The company had survived in the harshest industrial climate of the communist
era, but not flourished like its competitors during the twenty years of liberalization in India
post 1990. KPMs operational efficiency and financials seems to be better by no small
measure (Exhibit 5 and 6). KPM seems to be out of danger for now. He found it ironical that
he had achieved so much in a land that had compelled him to struggle and seek opportunities
away from it.

Should KPM be satisfied and let things be? Well, perhaps yes, he thought. The Chicago
School had taught him that if you did not grow and change fast enough the end would be
near and the American society had taught him the virtues of giving back to the society; but
what neither had taught is how to listen to the call.

EXHIBIT - 1 REGION WISE SHARE IN PAPER PRODUCTION 2009

Region 2009 Production Share (per cent) Change per cent Change per cent

(Mill tons) 2009 (2004/09) (2008/09)

Africa 3.9 1 1.1 -13.9

North America 84.9 22.5 -17.2 -11.5

Latin America 20.4 5.4 13.9 4.3

Asia 160.9 42.7 38.8 2.6

Europe 102.4 27.2 -6.7 -8.1

Oceania 4.2 1.1 4.2 0.7

World 376.8 100 6.4 -4

(Compiled by the authors from Tissari, Jukka, Forestry Officer (Forest Products Trade and
Marketing), FAO Forestry Department, Highlights on Paper and Paperboard: 1999-2009
using data source FAOSTAT-ForesSTAT, released on 12 January 2011 accessed from
http://faostat.fao.org/Portals/_Faostat/documents/pdf/Paperper cent20andper
cent20paperboard.pdf on 01 June 2012

EXHIBIT 2 - PAPER AND PAPERBOARD DATA SHOWING PRODUCTION, EXPORT,

RECOVERED PAPER (RAW MATERIAL), IMPORT OF RECOVERED PAPER (RAW
MATERIAL)
India (in Mill tons)

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 Year Prod Export Recovered Paper* Import of Recovered
Paper

2000 1.86 0.11 0.85 0.92

2005 2.14 0.97 0.85 1.75

2010 5.38 0.94 0.85 2.54

*Could be due to data insufficiency

China (in Mill tons)

Year Prod Export Recovered Import of Recovered

Paper* Paper
25.8
2000 2 2.64 15.19 4.8
42.2
2005 9 2.16 25.19 14.36
69.0
2010 8 2.2 44.1 25.1

USA (in mill tons)

Year Prod Export Recovered Paper Import of Recovered

Paper
56.5
2000 9 6.9 43.37 0.25
57.7
2005 5 7.3 45.05 0.49
55.0
2010 2 8.8 46.83 0.71

(Data source: http://faostat.fao.org)

EXHIBIT 3 - PAPER MAKING PROCESS

(Compiled by authors from visit to the paper mill and general literature on paper making)
Paper making is a process industry and most machines can make any type of paper. The raw
material and quality of pulp and the bleaching process of the pulp are the main variants in the
paper making process. The machines impact the production to the extent that larger and faster
machines can churn our larger quantity leading to economies of scale. The process based on
recycling of paper broadly follows the following steps.

i. Sorting. The input should be clean recovered paper. This means that the waste paper
should be free of contaminants such as food particles, plastic, metal and other thrash.
Sorting is best done at the collection point; but if not done it has to be before processing.

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 The contaminated paper has to be disposed of by burning for energy, in landfills or
composted.

ii. Collection and Transportation. Contamination free waste paper is collected by agents
and transported to the mill and these agents play a vital role in providing good quality
raw material in adequate quantity.

iii. Storage. Recovered paper is unloaded and stocked in a warehouse or sent for re-pulping
directly. Different grades of waste paper are used for making different grades of
paperboards or Kraft paper. Hence grade wise sorting and storing is important. Stored
paper is then moved for re-pulping using forklifts or conveyor belts.

iv. Re-pulping and Cleaning. The used paper is inserted into a pulper which is nothing
but a large vessel containing water and chemicals, fitted with a chopper which chops the
used paper until it becomes a muddy mixture. Some use heat at the pulping level to speed
up the breaking down of paper into pulp. This can be conveniently done by using steam
or a combination of both steam and water for the pulping process. The pulp is then
passed through several sieves which capture contaminants such as staple pins, plastic etc.
Clearer the pulp, better will be the paper. Cleaning is often fine tuned using huge
centrifuge which throws the heavy contaminants outward and the lighter ones inward.

v. Deinking. Since most packing material today comes with printing and stickers, there is a
need to do deink. The smaller particles can be cleaned by rinsing the pulp in water. To
remove the larger particles, the pulp is introduced into a large flotation cell where air and
a chemical called surfactant are introduced. Surfactants enable the ink particles to delink
from the pulp and they stick to the air bubbles which froth towards the top and is
removed giving clean pulp.

vi. Refining. It is the process of removing any lumps from the pulp and making the pulp
into individual fibre which is better for paper making.

vii. Colour Stripping and Bleaching. The waste paper may be coloured paper, in which
case, colour stripping will be done by adding colour stripping chemicals. Bleaching is
done if white paper is to be made; however this may not be important when making
brown paper boards or other cleaning products where paper need not be white.

viii. Paper Making. The concept of paper making using used paper is all about recreating
individual fibres which can bond again. Therefore the pulp which is prepared in the
above fashion is introduced into a large box at the head end of the paper making machine
and combined with water to the order of 99.5per cent water. Then it is sprayed into a
rapidly moving mesh which enables the water to drain out and the individual fibres to
link to each other. It is then passed through a series of felt covered presses to squeeze out
the water and increase the bonding. It now resembles paper. It is then passed through a
series of heated metal rollers which dry the paper. Coating and other special processes
may be done at the end of this cycle if required. The finished paper comes out as giant
rolls often 20 to 30 feet wide and is cut to smaller and more convenient rolls or sheets. It
is then packed and shipped.

EXHIBIT 4 - PLANTS IN KPM

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 In tons per dayCapacity

In (year)Purchased
Vintage
Plant No

Remarks
Purchased from

operations Installed and

Production
stabilized in
1 1901 UK 10 1979 1984 1986 This machine was
purchased in UK,
dismantled, shipped and
reinstalled in India.
2 1960 India 10 1987 1988 1989 All are used machines
3 1965 India 40 1989 2006 2007 purchased either from
4 1975 India 50 Mid Apr In closed paper mills or from
2011 2012 process operating mills which
scrapped the machines.
(Source: KPM documents)

EXHIBIT 5 - INFORMATION ON PRODUCTION AT KPM

2006 2007 2008 2009 2010 2011

Production at KPM in tons (annual) 6000 6750 12000 1350 1500 18000
0 0
No of machined owned 3 3 3 3 3 4
No of machines installed and in 2* 3 3 3 3 3
operation
*one machine purchased in 1989 not
gone into operation till 2007
Production capacity per day 60 60 60 60 60 110
considering the machines owned
No of days production stopped due to 50 60 40 30 30 30
power

No of days production stopped due to 10 15 7 5 5 4

raw material shortage
No of days production stopped due to 40 45 33 25 24 25
mechanical failures
No of days production stopped due to 0 0 0 0 0 0
industrial unrest

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 Total lost days 100 120 80 60 59 59

Total production days (negligible 265 245 285 305 304 304
holidays and works on three shifts) =
365 (-) lost days
Total No of employees (average) 200 250 250 275 275 300

Owned capacity for production after 1590 1470 17100 1830 1824 33140**
deducting for lost days (tons) 0 0 0 0

Production shortfall 9900 7950 5100 4800 3240 15440**

Production shortfall based on owned 62 54 29 26 17 46**

capacity (in per cent)
**Fourth machine purchased in mid 2011 and under trial run while writing the case.
(Based on data provided by KPM to the case writer)

EXHIBIT 6 - FINANCIAL INFORMATION OF KPM

(in million Indian rupees. 1 USD = approximately 55 Indian rupees)

2006 2007 2008 2009 2010 2011

Employee Cost 8.988 9.618 13.124 18.275 21.365 23.464

Raw material Cost 52.165 51.317 82.238 106.038 130.752 203.122

Power cost 14.276 18.680 27.963 39.529 47.298 55.530

Overhead Cost 14.362 11.721 21.277 25.673 20.934 22.603

Revenue 94.295 100.326 146.127 195.122 235.824 315.864

Profit before Interest

and Tax 2.094 4.072 -1.481 9.372 9.645 3.595

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Profit after Interest
and Tax 0.908 2.199 Nil 5.593 5.360 0.819

Debt 10.387 11.889 15.920 14.872 17.906 14.048

Equity in rupees 17.345 18.995 28.488 29.438 31.223 30.583

Fixed Assets - WDV 12.648 12.946 22.564 24.607 61.667 88.821

Dividend Paid
( Total) Nil 0.482 0.482 2.419 0.695 Nil

Retained Income
( Accrual) 0.908 0.757 0.327 2.293 1.777 2.639

Depreciation 1.294 1.062 5.031 5.439 5.531 6.650

(Based on Balance Sheet data provided by KPM to the case writers)

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