Nothing Always Earns, and What Comes Closest

The man in Bhosari

The machines were still warm when I first saw them. That is the detail I remember best, more than the price or the paperwork: I put my hand on the frame of a second-hand slotter in a shed off the Bhosari industrial road in March 2004, and it was warm, because the man selling it had run a job that morning. He was closing his factory and he was still making boxes.

I will call him Vilas. That is not his name, and he would not thank me for using the real one. He was perhaps forty-five, with a ballpoint pen behind each ear and a habit of tapping the order book on his desk while he talked, as if to remind himself it was there. It was a thick register with a red cloth spine. Every page I saw had entries in it. Orders for March, orders for April, two lines pencilled in for May.

"Work is not the problem," he said. "Work, I have."

I was thirty-one and still an accounts clerk at an auto-parts supplier in Chinchwad, earning ₹9,500 a month and spending my Sundays looking at other people's machines. I had saved some money and borrowed more from my wife's brother, and I had decided, with the confidence of a man who had never run anything bigger than a ledger, that corrugated boxes were a sensible business. Everyone needs boxes. I still believe that. What I did not yet understand was how a man with a full order book could be selling his slotter and rotary cutter to a clerk for ₹3.8 lakh.

The answer took about twenty minutes to come out, and most of it came out sideways.

Vilas had one large customer, a biscuit maker out towards Talegaon, which took roughly seventy per cent of everything he produced. The biscuit company paid at ninety days. In the good years it paid at ninety days. Then it changed its purchase manager, and ninety became a hundred and twenty, and a hundred and twenty became "next month, definitely", and by the time I was standing in his shed it owed him a little over ₹11 lakh. Meanwhile his kraft paper supplier wanted payment in thirty days, his eleven workers wanted wages every month, and the electricity board did not care who owed whom.

"On paper I am making profit," he said, and he said it without any irony at all. He opened a file and showed me. Sales up. Margin per box perfectly respectable, by his reckoning. He had worked out his costs once, three or four years earlier, and had been pricing off that sheet ever since, through two rounds of paper price increases he had absorbed because he was afraid of losing the biscuit account.

I asked him, because I was an accounts clerk and could not help myself, what a 3-ply box for the biscuit company actually cost him that month.

He looked at me for a while. Then he said, "Roughly."

That word has stayed with me for twenty-one years.

I bought the machines. I negotiated him down from ₹4.2 lakh, which I felt rather proud of at the time and now feel slightly ashamed of, because he had no position to negotiate from and we both knew it. A tempo came on a Thursday to take them to the shed I had rented on a lane behind the MIDC water tank. MIDC, for readers outside Maharashtra, is the state's industrial development corporation, and its estates are where most of Pune's small factories live.

Vilas helped load. He was careful with the cutter, careful in the way you are with something that used to be yours. When the tempo pulled out he went back inside, and through the open shutter I could see him sit down at his desk and open the red register, as though there might be something in it he had missed.

What the market does, and what you do

For about a year afterwards I told the Vilas story as a story about bad luck. A purchase manager changed, a big customer turned slow, a decent man went under. It made a good tale at weddings. Then I began running my own boxes through my own shed, and the more I learned about what each one cost me, the less the luck explanation held up.

There are two ways a small factory dies, and it helps to keep them in separate drawers.

The first is demand risk: the market stops wanting what you make, or stops wanting it from you at your price. A product goes out of fashion. A technology makes it unnecessary. A cheaper version arrives from Guangdong in a container. In 2004, two lanes from my shed, a man I'll call Prakash was moulding plastic shells for audio cassettes. He was good at it, his tooling was sharp, his workers were loyal. By 2008 almost nobody in India was buying blank cassettes, and no amount of good management could have saved the shells. He sold the moulding machines and, to his credit, went into bottle caps, which people still throw away by the crore.

The second is management risk: everything the owner does to himself. Selling on credit he cannot fund. Letting one customer become seventy per cent of the business. Pricing from a cost sheet four years old. Hiring a cousin as supervisor because it feels safer than hiring a stranger. Buying a machine before finding a buyer. None of these arrive from outside. They are decisions, and usually they are decisions made on an ordinary Tuesday without anyone noticing a decision is being made.

Vilas had almost no demand risk. Biscuits get eaten, biscuit cartons get torn open, and the biscuit company was still ordering when I bought his slotter. His order book was full because the market was doing exactly what he needed it to do. Everything that killed him came out of the second drawer.

I have kept an informal list, over fifteen years of helping other people set up, of units I knew well that shut down. It is a notebook, not a survey, and I would not defend it in front of a statistician. There are thirty-four names in it. In five cases, by my reading, the product itself stopped selling. In the other twenty-nine, people were still buying the thing when the shutter came down. They were just not paying for it on time, or not paying enough, or the owner did not know which was happening.

The two drawers are not equally in your hands.

Demand risk is partly controllable, and almost all the control comes at the start, when you choose what to make. Pick a product that people use up, buy again within the year, and keep buying when money is tight, and you have removed a good part of the danger before you sign a lease. You cannot remove all of it. In 2021 kraft paper prices jumped so fast that I lost eleven per cent of my margin in six weeks, and there was nothing I could have chosen in 2004 that would have prevented that. Steel, palm oil, polymer granules, cotton: every raw material in this book has had a year like that, and will have another.

Management risk is almost entirely yours. That sounds like bad news. I have come round to thinking it is the only good news in this business, because it means the larger share of what closes factories is something an owner can watch, measure and change, often with nothing more expensive than a pen and a fixed time each morning.

I did not see it that way in 2004. In my first eighteen months I made four of the five mistakes on that list above. I avoided the cousin only because I do not have one who wanted the job.

Vilas, as far as I know, now runs a small transport business out of Moshi. Somebody told me a few years ago that he keeps his accounts on a whiteboard in the office, updated every evening, and will not let a lorry leave until the previous trip is paid.

Five questions before the first machine

Over the years, people who came to see me about starting a unit usually arrived with a product already in their heads. A cousin was doing well in it, or they had read about it, or a supplier had shown them a machine running at an exhibition in Pragati Maidan. I started asking them the same five questions every time, mostly to slow them down. Somewhere along the way the questions hardened into a test, and I now ask them about every product before I let myself get interested in it.

• Is it consumed or worn out? Eaten, burnt, torn, thrown away, worn down.
• Is it bought again within twelve months? By the same buyer, not by a new one you have to go and find.
• Is it bought in a recession? When a family or a factory cuts back, does this survive the cut?
• Is it hard to import cheaply? Because of weight, bulk, freshness, duty or the need for local service.
• Can a buyer switch to you without retooling? If a customer has to change his own machines or redo his approvals to try you, a newcomer will wait years.

Four "yes" answers out of five and the product earns a place in the hundred. Three, and I would want a very good reason. I call this the Repeat-Purchase Test, and it is less clever than it sounds. It is simply a way of asking whether the first drawer is mostly shut before you start worrying about the second.

Three products on the table

Corrugated boxes. I would be a poor witness for my own trade, so take the answers on their merits. Consumed: yes, nearly every box I make is cut open with a blade within weeks and ends up with the kabadiwala. Bought within twelve months: my biggest pharma customer orders every nine days. Recession: yes. In the slowdown of late 2019 my volumes fell about eight per cent, while one customer making washing machines cut his order by a third, but the dal mills and the medicine makers kept shipping, and everything they ship needs a box. Import: a corrugated box is mostly air, and nobody pays sea freight to move air from Vietnam to Pune. Switching: a box is a specification on a sheet of paper (size, number of plies, paper grade, bursting strength), and any competent unit can match it. Five out of five. That last answer cuts both ways, and I will come back to it.

LED decorative lights. In 2016 a young man called Rohit (I have changed his name) asked me to look at his plan to assemble festive light strings in a shed in Chakan. He had priced it carefully. I ran him through the test across my desk. Consumed: partly, since the strings fail after a season or two, though many families keep them in a carton in the loft for years. Within twelve months: once a year if you are lucky, and in a three-week window before Diwali. Recession: no. Decorations are the first thing a household drops. Import: no, and this is the killer, because finished strings were landing from China at prices below what Rohit would pay for the components. Switching: yes, a retailer will buy from anyone. One and a half out of five, on a generous day.

"But everyone buys them," he said.

"Everyone buys them once a year from whoever is cheapest," I said. He went into it anyway, with ₹9 lakh. The unit lasted two Diwalis.

Steel fasteners. Bolts, nuts, studs, washers. Here the answers depend on which fasteners you mean. Consumed: yes, they go into assemblies that leave the factory and never come back, and maintenance departments replace them constantly. Within twelve months: yes, every month for an assembly line. Recession: only partly, since a fastener maker serving auto plants rides the auto cycle, and in 2019 several in the Hosur belt saw orders drop by a quarter. Import: for standard M8 and M10 hex bolts, no, they arrive cheaply by the container load. For special fasteners made to a particular drawing, with short delivery times to a plant two hours away, yes. Switching: standard parts, easily. Specials, only after samples, trials and a vendor audit.

So fasteners pass, but only if you make specials for nearby buyers, accept the audit delay at the start, and spread your customers so that no single industry can starve you. Make the commodity bolt and you fail on imports. I have watched both kinds of unit open within a kilometre of each other in Bhosari.

Year three

That fifth answer for boxes, the one that cuts both ways, is where this section starts. Any competent unit can match my specification, which means any competent unit can take my customer. The same ease that let me win my first orders in 2004 lets a new shed in Chakan quote ₹1.50 less per box tomorrow morning. A product that passes the test protects you from the market going away. It does nothing to protect you from your own buyer walking across the road.

Of the units I have watched close since I started keeping count around 2010 (somewhere above thirty, in Pune and the clusters I visit), very few died in their first year. The first year has adrenaline in it. The owner's savings are still there, the bank loan usually carries a moratorium of six months or so before the full instalment begins, and every new order feels like proof. The second year is busier and slightly more tired.

The third year is when the bills from the first two arrive together. Look at what lands on a typical small unit in months twenty-five to thirty-six:

• The loan instalment is now at full size, every month, with no grace left.
• The second-hand machines need their first serious overhaul: rollers, bearings, a gearbox, a motor rewound.
• Sales have grown, so debtors have grown with them, and the cash locked in unpaid bills is double what it was.
• The owner's own money, the cushion he quietly used to cover gaps, is gone.

None of these is a disaster on its own. Together they make a factory that is profitable on paper and cannot pay its wages on the seventh. Here is the arithmetic I showed one founder in 2018. He sold ₹10 lakh of goods a month and gave ninety days' credit. That meant ₹30 lakh of his money was sitting in other people's accounts at any moment. His margin was a respectable twelve per cent. It made no difference. He was profitable and broke at the same time, which is a condition accountants understand and bank managers do not forgive.

One name in the ledger

Then there is the third killer, the one Vilas had. When I went through his order book in March 2004, I saw that one buyer, a consumer-goods distributor in Pimpri, made up roughly seventy per cent of his sales. His books were full. They were also, in practice, one book. When that distributor slipped from sixty days to ninety and then to "next month", Vilas had no other customer large enough to keep the corrugator running while he waited.

I did not learn from him as quickly as I should have. By 2007 a single pharma buyer accounted for forty-one per cent of my turnover, and I remember a Diwali when his payment was three weeks late and I sat in this office working out which suppliers I could ask to wait. He paid. Many do not. Since then I have kept a rule: no customer above a quarter of my sales. I break it sometimes, for a few months, and I sleep worse while I do.

So these are the places where small factories actually die: in the third year, of cash rather than of losses, and very often of one name in the ledger that was allowed to grow too large. A good product helps with none of that directly. It only buys you the right to fight these battles instead of a worse one.

The slotter I bought from Vilas is still at the back of my floor. We use it for short runs now, odd sizes that are not worth setting up the bigger machine for, and the operators call it buddha, the old man. It has outlived his business by twenty-one years. A hundred products follow that would pass the test it has passed. The first of them is something nearly every kitchen in India runs out of by Thursday.