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Case B (Sequel) – GMR: deciding future alliance strategy for airports
RitaDubey
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Case B (Sequel) – GMR: deciding future
alliance strategy for airports
Downloaded by Chinese University of Hong Kong At 16:39 11 October 2016 (PT)
Rita Dubey
Rita Dubey is Research
Scholar at the
International Management
Institute, Delhi, India.
On April 4, 2013, the meeting of GMR’s Group Executive Council (GEC) was scheduled to
take place. Srinivas Bommidala, G.M. Rao’s son-in-law and Chairman of GMR’s Airports
business, was gearing up for the meeting. The meeting was called to discuss a proposal
for bidding for an upcoming airport project in the Philippines. It had been more than a
decade since GMR entered the airport infrastructure sector. The organization had built
substantial airport operating expertise during that period. It adopted a joint venture (JV)
model for expanding in the airport infrastructure business. Until now the organization had
always formed JVs for all its airport projects. JVs, with existing airport operators, were
necessitated by the bid conditions that required a certain minimum airport operating
experience for qualifying as a bidder for various projects. In some cases, JV with a local
player helped GMR with market knowledge for functioning in a foreign market. GMR also
used JVs to access the capabilities it lacked for operating in this sector and gradually learnt
from its partners for building capabilities in-house. The group now had the required
operating expertise in the sector to qualify as a bidder. One of the key issues the GEC was
contemplating was:
Whether GMR should continue to form JV for bidding for the upcoming project or should it
go solo? Further, if it had to form a JV then, in which areas should it seek a partner?
Background
Since its foray into the infrastructure sector in 1994 through its power business, GMR
diversified into highways, airports and urban infrastructure segments (Exhibit 1).
Authors wrote this case solely
to provide material for class
discussion. The authors do not
intend to illustrate either
effective or ineffective
handling of a managerial
situation. The authors may
have disguised certain names
and other identifying
information to protect
confidentiality (Version
2014-04-03).
Disclaimer. This case is written
solely for educational
purposes and is not intended
to represent successful or
unsuccessful managerial
decision-making. The author/s
may have disguised names;
financial and other
recognizable information to
protect confidentiality.
DOI 10.1108/EEMCS-05-2016-0234
Airport
The airport business was the largest business for the group, contributing more than 60 per
cent to the group revenue and 75 per cent to EBITDA in FY 2013[1]. GMR’s airport portfolio
comprised the Delhi and Hyderabad airports in India and Istanbul airport in Turkey (See
Exhibit 2). After the Hyderabad airport project, the Government of India invited bids for
modernizing the airports in Delhi and Mumbai in 2004. These projects were Brownfield
investments and employed build, own, operate and transfer models along the lines of
Bengaluru and Hyderabad airports privatization. The consortium led by GMR managed to
win the bid for both the airports but had to choose one airport project only. The regulations
did not allow a single player to develop both the airports. After much deliberation, GMR
chose Delhi airport because of its larger growth potential and fewer land problems. The
group then ventured abroad by bidding for an airport project in Istanbul, Turkey, in 2007.
It won the bid for another international project in Maldives in 2010. However, GMR’s
international airport venture suffered a major setback. In 2012, two years after winning the
contract, the new Maldives Government unlawfully repudiated the concession agreement.
VOL. 6 NO. 1 2016, pp. 1-25, © Emerald Group Publishing Limited, ISSN 2045-0621 EMERALD EMERGING MARKETS CASE STUDIES
PAGE 1
Power
GMR made its foray in the infrastructure sector through its energy business in 1994. Energy
business was the second largest business for the organization contributing approximately
30 per cent to its revenue[2]. Its first project in this sector was a thermal power plant in Tamil
Nadu, India. The group had a portfolio of thermal, hydro and solar power plants. It had a
portfolio of 15 power plants out of which eight were operational with a total capacity of 2,500
MW[3]. The power generation assets were located in India and Nepal. Besides power
generation, the group planned to diversify into power distribution as well.
Highways
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GMR made its foray in the highway business in 2006. It had a portfolio of seven highway
projects in India of which six were operational. Highways contributed less than 7 per cent2
to the group revenue. Nevertheless highways were an important business for the group. A
significant proportion of projects in this sector was based on annuity model and, therefore,
had stable and predictable revenues, which were, in most cases, backed by a guarantee
from the government.
Urban infrastructure
The group’s business in this segment comprised the development of special economic
zones. Its portfolio in the segment comprised a 4,300-acre multi-product special economic
zone in Tamil Nadu and a 10,000-acre port-based multi-product special economic zone in
Andhra Pradesh. The project in Tamil Nadu was a JV with state-owned Tamil Nadu
Industrial Development Corporation. Both the projects were under development.
Financial position
GMR Infrastructure Ltd., the flagship company of the group, was listed in 2006. GMR spun
off its airport business into a separate holding company in 2010. This was done to raise
funds through private equity investment to fuel the expansion plans for the airport business.
The group adopted an aggressive growth strategy during 2007-2012 focused on investing
in new projects and acquisitions. Multiple projects in the power sector were stalled
because of fuel shortages. The acquisitions did not yield the expected value and failed to
generate sufficient cash flows to meet the interest costs. GMR’s debt in the process grew
to more than $6bn [4] in FY 2013 (See Exhibit 3). It adopted “asset light asset right strategy”
to improve the financial health of the group. As part of the strategy, it identified assets that
had either achieved maximum value or were in a loss and had divested such assets to
release capital. It divested its stake in multiple assets including the Istanbul airport project
and three road projects. Owing to the group’s sustained efforts, it managed to reduce its
level of debt. It decided to continue with its asset light strategy while adopting a more
balance approach toward growth.
Organization evolution
GMR initiated an exercise of organizational restructuring to address the increased growth
that it had achieved during the past decade (See Exhibit 4). It was organized into four
business verticals, namely, urban infrastructure and highways, airports, energy and
institution building and governance. The heads of each of these business sectors were also
made a part of the GEC, which was GMR’s highest decision-making body. The GEC laid
down the three-year strategic plan for the group, while the business level strategic plans
were laid down by each business vertical. These plans were then approved by the GEC.
The GEC was also responsible for corporate governance and performance review of each
business vertical.
GMR professionalized its top management in response to the huge growth in the scale and
scope of its business. G.M. Rao’s two sons, son-in-law and B.V.N Rao assumed the role of
PAGE 2 EMERALD EMERGING MARKETS CASE STUDIES
VOL. 6 NO. 1 2016
chairmen, while professionals were hired for CEO position for each vertical. This was done
to enable the family members to focus on the overall strategy while letting the professionals
handle the day-to-day functioning. Alliance-level decisions were initiated by the heads of
each individual business vertical. The decisions were finally taken by the GEC.
GMR’s approach to alliances
Alliances formed the DNA of the organization. GMR gained competitive advantage in its
businesses through alliances. It was one of the first organizations in the infrastructure
sector to use alliances extensively for capability building and bridging capability gap
across various businesses (see Exhibit 5). This is what Parmit Chadha, CEO, Strategy and
Corporate Development, said about the rationale for forming alliances for various
businesses:
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We formed a partnership with them because they knew much more about it than we did. When
we needed a capability to do a project more effectively and we didn’t have it, we selected a
partner. This was mostly when either it was new area or we didn’t have the people.
GMR had an extensive alliance portfolio comprising equity alliances and non-equity
alliances. Most of the equity alliances were formed in the areas where it needed to
internalize capabilities such as airport operations and operations and maintenance of
power plants. Most of the non-equity alliances were formed as technical collaborations for
capabilities that were non-core for their business. Citing Anirudh Ganguly, CEO, Energy
Business, on the factors influencing their choice of type of alliance:
Criterion for selecting the kind of alliance was very simple. One was whether we wanted to
develop our own capability in future. If we didn’t want to develop internal capability in future, we
formed a non-equity alliance. If we wanted to create an internal capability, we formed a
short-term alliance with somebody and had a transparent process telling the partner clearly
about our intentions. Those were alliances for learning and once we achieved that we both
parted ways amicably. So, it was basically driven by our focus of whether we wanted to build
a capability internally or not.
The group made a conscious effort of learning from its alliance partners. It followed that
approach across various businesses. For instance, it lacked expertise in operating and
maintaining a power plant. It, therefore, formed alliances for operations and maintenance
and gradually learnt from its alliance partners. After having internalized the capability, it
ended the alliances amicably and took over the operations and maintenance.
GMR developed a balanced approach for evaluating and selecting alliance partners. It laid
as much emphasis on the domain expertise and financial position of a prospective partner
as on the softer aspects. According to S.K. Kulkarni, VP, Mergers, Divestment &
Acquisitions, besides an organization’s technical expertise, its business performance,
hunger for growth and ability to raise finance are important aspects while selecting a
partner. For softer aspects, the focus should be on evaluating an organization’s reputation,
cultural compatibility and organization policies. GMR preferred to own majority stakes in
each of its JVs to have clear control and efficiency in decision-making. This is what Ashok
Pandey, Chief Strategy Officer, Airports Business, had to say about the rationale guiding
the level of equity stake in their JVs:
The important thing was whether the other partner brought a capability, which we lacked.
Whether a partner brought in a unique capability or it was just a capability that met our
qualification requirement and in what manner that affected our chances of winning a bid were
the main guiding factors.
The organization had long-standing relationship with its various alliance partners. For the
airports business, it forged a partnership with Malaysian Airports Holdings Berhad (MAHB)
for multiple airports projects. After partnering for the Hyderabad airport, GMR and MAHB
continued their partnership for bidding for airports in Delhi (India), Male (Maldives) and
VOL. 6 NO. 1 2016
EMERALD EMERGING MARKETS CASE STUDIES
PAGE 3
Istanbul (Turkey). Although both the partners had different ideologies, with GMR being
more aggressive in its approach, the two managed to work productively as a team. Citing
Parmit Chadha, CEO, Strategy and Corporate Development, on the nature of GMR’s
relationship with its alliance partners:
I couldn’t think of any situation where we had a really bad experience. In all areas where there
was a clear majority ownership, results spoke for themselves. We didn’t have any litigations with
our partners and managed to achieve the objectives quite well.
GMR laid the emphasis on ensuring effective communication with its alliance partners. The
group made extensive efforts in engaging with its alliance partners and provided them
complete information to achieve consensus on key decisions. According to Saurabh
Kumar, Strategy Head, Hyderabad Airport, effective communication with the alliance
partners was one of the key reasons for a smooth relationship with them. In fact, GMR was
one of the few organizations to have succeeded with its alliances, as globally, the failure
rate of alliances was as high as 50 to 70 per cent (Duysters et al., 1999).
Alliances for the airport business
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GMR adopted the joint venture model for all its airport projects (Exhibit 6).
GMR Hyderabad International Airport Ltd
In 2003, the consortium formed by GMR and MAHB won the bid to design, finance,
construct and operate an international airport in Hyderabad. GHIAL was formed as the JV
between GMR, MAHB, Government of Andhra Pradesh (now Government of Telangana)
and Airports Authority of India (AAI). The equity stake of the Government of Andhra Pradesh
and AAI was stipulated by the regulatory conditions of bidding.
The opportunity for Hyderabad airport came at the time when the Indian airport market had
just opened up for private players. There was no Indian player who had prior experience of
operating an airport. The bidding conditions required at least one player in a consortium to
have a minimum operating experience of 10 years. Thus, GMR searched for a partner who
would have developed a Greenfield airport in similar conditions. According to Kulkarni,
GMR scanned airport operators from different geographies to narrow down on its choice of
possible partners. It formed an alliance with MAHB, which provided required operational
expertise to be eligible for the bid. Besides the mandatory requirement for an airport
operator, MAHB also provided the technical expertise for airport design, construction,
operation and services. MAHB agreed for a minimum stake of 10 per cent that was
stipulated for the airport operator as part of the bidding conditions. It wanted to cap its risk
of investing into an emerging market. This is what Kulkarni had to say about the rationale
for selecting MAHB as a partner:
Their experience of building a new airport while an existing airport was there in the city was very
important point for us. They were also managing around 38 airports in Malaysia. So, they had
a diverse experience. They had done a rail link and an expressway between the airport and the
city. So, all these things were very imperative.
MAHB’s participation in the airport operations was more during the launch phase in areas
where its expertise was essential. For instance, it took the lead in designing and
construction of air data computer systems for the airport. GMR had local and on-ground
understanding. It took on the responsibility to procure government approvals as per the
prevailing laws and guidelines laid down by the concessioning authority. This facilitated
timely completion of the airport project. The partners collectively selected the management
and operations teams of the JV. MAHB provided the initial foundation for building GMR’s
airport operations-related expertise. MAHB trained the airport employees at its training
center in Malaysia. MAHB deputed its executives to India for the airport project. Those
executives supervised the operations teams and helped in establishing the standard
operating procedures. GMR took the lead in establishing HR policies and practices of the
PAGE 4 EMERALD EMERGING MARKETS CASE STUDIES
VOL. 6 NO. 1 2016
JV. Once the JV was fully operational, MAHB’s involvement was more at the board level.
Citing Pandey:
MAHB’s strategy was not to seek an active role in any of their overseas investments. They
looked for a 10-20 per cent stake in all overseas investments. They preferred to remain more or
less silent on the board also except when there might be an issue, which they would want to
raise to the board.
For the commercial operations, which involved services such as operating duty-free shops
and restaurants at the airport, the consortium adopted a mix approach. It completely
outsourced some of the services such as retail of food and beverages. However, for some
of the services, it formed JVs with individual service providers (Exhibit 7).
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The JV was governed through the board, which had three members from GMR and one
each from MAHB, Government of Andhra Pradesh (now Telangana) and AAI. GMR’s
relationship with MAHB was characterized by a long-standing and smooth partnership.
Based on the smooth partnership experience during the Hyderabad airport project, the two
partners continued their partnership for all future airport projects that GMR entered into.
The airport became operational in 2008 and had experienced steady growth in passenger
and cargo traffic. Its revenue grew at a compound annual growth rate of 16 per cent during
2010-2013 to $128m[5] for FY 2013.
Delhi International Airport Pvt. Ltd
In 2006, the consortium formed by GMR, MAHB and Fraport won the bid to develop and
operate Delhi International Airport (DIAL). DIAL was the JV formed between GMR, MAHB,
Fraport and AAI. AAI’s stake in the venture was stipulated by the bid conditions. Foreign
investment in the project was restricted to 49 per cent. GMR lead the consortium with 54
per cent stake, while both Fraport and MAHB owned 10 per cent each. Fraport and MAHB
wanted to limit their exposure to the Indian market, as it was a new market for them and the
airport infrastructure sector was emerging.
Delhi airport was a Brownfield development. The winner of the bid was expected to operate
the existing terminal in Delhi while designing, financing, constructing and operating new
terminals. The bidding conditions stipulated a minimum operating experience to qualify for
bidding. GMR searched for a partner who would have developed an airport under similar
conditions. It formed an alliance with Fraport, which developed and operated the busiest
commercial airport in Germany, the Frankfurt airport. Fraport provided expertise in the
various areas of airport operations such as terminal management, cargo operations, airside
management, quality, route and traffic development and IT systems. It also roped in MAHB,
which provided commercial expertise required for non-aeronautical operations. This is
what Pandey had to say about the rationale for selecting Fraport and MAHB as partners:
We lacked the airport operating expertise, which was one of the criteria for qualification. So, we
had to get a JV partner who brought in the operating expertise as part of the consortium. That
was where Fraport came in. The other challenge was to build up our commercial expertise. We
tied up with MAHB for that.
GMR started preparation for the bids for Delhi and Mumbai airports in 2003 while the bids
were opened in 2005. It hired 16 international consultants and spent $8mn on the bidding
process [www.forbes.com/global/2006/1127/034.html (accessed 11 June 2015)]. The
consortium led by GMR was the only one, which qualified for both the Mumbai and Delhi
airports. GMR, however, had to choose one because of regulatory compulsion and it chose
Delhi. GMR took the lead in bidding for its international projects as well.
GMR’s innovative finance strategies and timely reputation of project execution in the power
sector enabled it to secure project finance for both Delhi and Hyderabad airports at
favorable terms as compared to competitors [www.cfo-connect.com/title_detail.asp?art_
id⫽141&cat_id⫽9 (accessed 25 June 2015)]. Lending institutions in India had no prior
VOL. 6 NO. 1 2016
EMERALD EMERGING MARKETS CASE STUDIES
PAGE 5
expertise of lending for airport projects. GMR’s top management team worked relentlessly
in making presentations about the project and shortlisted interested lenders during the
bidding stage itself. This ensured quicker raising of funds once the consortium was
awarded the contract for the airport.
The airport’s first phase of development was completed in record time of 36 months. The
consortium largely hired the same set of consultants and contractors with whom GMR
worked for the Hyderabad airport. GMR had built a good relationship with them and
managed to work seamlessly with them. It took the lead in the program management and
development of the airport. Its strong liaison with various government agencies played a
critical role in project execution.
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Along the lines of the Hyderabad airport project, JVs were formed by DIAL for most of the
businesses under commercial operations. Forming JVs for the commercial operations
ensured high service standards, enabled DIAL to ensure that it was able to draw the best
out of the partner, helped it to generate additional income in the form of profits and
provided greater opportunity to learn the nuances of the business. GMR also adopted a JV
model for commercial operations for its future projects (Exhibit 7).
The DIAL JV was governed through the board, which had representation from all the
partners in proportion to their shareholding. Both MAHB and Fraport deputed their experts
for JV operations. There was, however, ambiguity on the exact roles and responsibilities of
the experts. The JV did not face any significant relationship-related issues. GMR had a
clear majority in the JV, which enabled it to take the lead in strategic decision-making and
day-to-day functioning of the JV. However, having multiple partners slowed down
decision-making at times as all the partners had to reach a consensus.
DIAL consistently ranked amongst the top three airports globally in its category and
received several awards and accolades. Financially though, DIAL was in a spot of bother,
as it reported a net loss of $156m for the year ending 2012 on a revenue base of $293m.
The financial woes of DIAL were compounded by the delay in approval of a revised tariff by
the Airports Economic Regulatory Authority. The airport was expected to start generating
profits from financial year 2013.
Istanbul Sabiha Gokcen International Airport
In 2007, the consortium formed by GMR, Limak Holdings and MAHB won the bid to develop
and operate an international airport in Istanbul. GMR and Limak held equal stakes in the JV,
while MAHB owned 20 per cent. The project was awarded on a build, operate and transfer
basis. The bid conditions did not require shareholding of any government entity as was
required in case of airports in India. There was requirement of a minimum operating
experience, but there was no mandatory requirement of partnering with a local player.
GMR partnered with Limak Holdings, which was a strong player in the construction sector
in Turkey. It had a strong supply chain and significant local expertise for construction.
Limak also had local market knowledge, strong finance-raising capabilities and liaison with
the regulatory authorities in Turkey. Its strong credit standing facilitated fundraising from
financial institutions in Turkey. This is what Kamesh Rao, Director, Istanbul Sabiha Gokcen
Airport, had to say about the rationale for forming JV with Limak:
We brought in airport experience but we needed local knowledge of construction, local
construction industry practices and local knowledge. Further, in Turkey we would certainly have
had language issues. Communication was important for operating an airport, as we were a
service organization. So, it made solid sense to have a local partner to overcome those
limitations.
GMR was operating Delhi and Hyderabad airports when the opportunity to bid for the
Istanbul airport came by. It still did not have the required minimum operating expertise to
qualify for the bid. It roped in MAHB, which brought the required operational expertise for
PAGE 6 EMERALD EMERGING MARKETS CASE STUDIES
VOL. 6 NO. 1 2016
the bid. Fraport, GMR’s partner in the DIAL project, was part of a competing consortium
with Turkey-based, TAV Airport Holdings.
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In 2008, GMR formed its in-house engineering, procurement & construction (EPC) team.
The EPC team was expected to handle at least 20-30 per cent of construction work
in-house. GMR employed its EPC team in collaboration with its partner Limak for the
Istanbul airport project. The in-house EPC team resulted in cost savings of at least 8-12 per
cent and provided greater control over project execution. The partners managed to
complete the construction of the airport in a record time of 18 months – a feat that was
recognized in the Guinness Book of World Records.
The JV was managed through the board, which comprised five members each from GMR
and Limak and two from MAHB. According to Kamesh Rao, the focus of the board was to
manage the strategic- and relationship-related matters between the partners while they had
appointed a professional team to take care of performance and operations related matters.
The partners deputed their employees in the initial phase of the JV, but the management
team of the JV was externally hired. The partners wanted to protect their interests and thus,
wanted the management team to be completely independent and not representing any of
the partners. This is what A.S.K. Reddy, EVP & Chief Human Resource Officer, had to say
about the formation of the management team for the airport:
It was a common selection that happened. Nobody went from GMR, MAHB or Limak. Limak felt that
the people were available locally. Since, we didn’t have the majority stake, we could not push it.
Learning and knowledge transfer was a key part of the airport JV. Because the airport is a
service sector industry, the local partner handled a significant portion of the business. The
foreign partners transferred their airport operating expertise to the JV through trainings and
continuous guidance from the board and business steering committee comprising
shareholder nominees. Teams of JV executives were sent for on-site training to airports
operated by MAHB and GMR at various locations. This facilitated transfer of airport
operating expertise to the JV. The partners managed to protect their critical skills such as
bidding skills and strategic planning process of operating the airport, which were crucial to
operate in this sector.
The partners made an effort to have effective communication. They had a promoters’ forum,
where all the three partners met to decide on the long-term strategic plan for the JV. The
strategic plan provided direction for the operating plans for the JV such as addition of new
routes. Limak and GMR had a high degree of involvement in the JV. MAHB was an active
participant through the board, although not active in the day-to-day management after the
JV became operational.
According to Mr A.S.K. Reddy, the JV did not face any relationship issues between the
partners. It however, faced certain challenges at the operational level because of cultural
differences and language problems between the employees of different partner firms. GMR
engaged counselors for such employees and sent its head of departments from India once
in two months to supervise the situation and address the issues. In 2013, Limak led a
separate consortium and won the bid for developing another airport in Istanbul.
The Istanbul Sabiha airport faced operational challenges because of competition from the
older Kemal Ataturk International Airport, which was just 45 km away. Despite an
exponential growth of traffic from just 3 million in 2008 to over 14 million by end of 2011, the
airport reported a net loss of $109m[6] in 2011. It was estimated to report a loss in 2012 as
well. However, with Kemal Ataturk airport getting choked, it was widely believed that Sabiha
Gokcen would soon emerge as the gateway to Istanbul given its growth potential.
Male International Airport
GMR formed a consortium with MAHB to bid for the Male International Airport. The bidding
conditions required a minimum operating experience to qualify for the bid. There was no
VOL. 6 NO. 1 2016
EMERALD EMERGING MARKETS CASE STUDIES
PAGE 7
stipulation to have a local player as part of the consortium. MAHB provided the required
operational expertise, while GMR possessed the required project development
capabilities. In 2010, the consortium won the bid to build, modernize, expand and operate
the airport for a period of 25 years.
GMR and MAHB overtook the operation of the existing airport terminal and began work on
the new airport terminal. The consortium had till 2015 to complete the construction of the
new terminal. However, a new government came to power in Maldives in February 2012.
The new government undertook a systematic vilification campaign aimed at undermining
the concession process, and, in November 2012, unlawfully repudiated the contract
awarded to the GMR–MAHB consortium and took back the operations of Male airport.
GMR realized that not having a local partner was a major disadvantage that the
organization suffered. A local partner with strong liaison with government might have
helped in lobbying to protect its interests. Citing Pandey:
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If we were to do the deal again today, probably we would have looked for a partner who would
have provided us with the requisite hand holding in that territory.
The Mactan-Cebu International Airport project
The government of the Republic of Philippines invited bids for the renovation and
modernization of Mactan-Cebu International Airport. The project would be the Philippines’
first project under public–private partnership (PPP) model in the airport sector [http://
businesstoday.intoday.in/story/gmr-megawide-wins-$390-mn-airport-contract-inphilippines/1/204927.html (accessed 3 July 2015)]. The new Government of Philippines,
which came to power in 2010, was keen to use the PPP model for future airport projects as
well. As many as six airport projects were lined up for future PPP investment. The
Philippines was viewed as a risky investment destination by global investors. Several earlier
large projects, particularly in the transportation sector, were ridden with legal and political
issues [http://archive.sunstar.com.ph/breaking-news/2014/04/06/dotc-no-more-timewaste-upgrading-mactan-cebu-airport-336884 (accessed 20 October 2015)]. The new
administration emphasized on its commitment to boost foreign investor confidence by
providing a level-playing field, fair and transparent bidding process and legal protection to
the investment made.
The existing airport terminal had a capacity of 4.5 million passengers. The growth in
passenger traffic to more than 6 million passengers in 2011 [http://articles.economictimes.
indiatimes.com/2015-06-29/news/63937575_1_new-terminal-delhi-airport-megawidecebu-airport-corporation (accessed 14 July 2015)] necessitated the need for a new
terminal. The new airport terminal was expected to have a capacity to handle
approximately 16 million passengers. The existing airport was the second largest airport in
Philippines in terms of passenger traffic. It had direct flights from various popular tourist
destinations in South East Asia such as Hong Kong, Singapore and Tokyo [http://articles.
economictimes.indiatimes.com/2014-04-05/news/48887917_1_gmr-infrastructure-ltd-gmrmegawide-mactan-cebu-international-airport (accessed 17 July 2015)].
The airport operator winning the bid would be required to design, finance, construct and
operate the airport terminals for 25 years. It would be required to complete the construction
of the new terminal building within three years of the award of the contract while
simultaneously modernizing and operating the existing airport. It would be responsible for
terminal management, ground handling and aviation services (See Exhibit 8). Critical
airport operations such as communication navigation, surveillance facilities and air traffic
control would remain responsibilities of the government-owned, Mactan-Cebu International
Airport Authority [www.rappler.com/business/18340-gov-t-opens-bid-for-p20-b-mactancebu-airport-project (accessed 18 October 2015)]. The project would be awarded on a
build, operate and transfer basis.
PAGE 8 EMERALD EMERGING MARKETS CASE STUDIES
VOL. 6 NO. 1 2016
The project would require an investment of $700 million [http://articles.economictimes.
indiatimes.com/2014-04-05/news/48887917_1_gmr-infrastructure-ltd-gmr-megawidemactan-cebu-international-airport (accessed 30 June 2015)]. The bid regulations required
minimum five years of operating experience to be eligible for bidding for the airport. More
clarity on the bid conditions including any ceiling on the stake of foreign players was
awaited.
None of the local players in the region had prior expertise in airport operations. However,
several reputed local players from different sectors had expressed interest in participating
in the upcoming airport bid. These included players such as Megawide Construction Corp.
and Filinvest Development Corp from the construction sector, Metro Pacific Investments
Corp. from the infrastructure sector and diversified conglomerates such as San Miguel
Corp. and Gokongwei Group.
Downloaded by Chinese University of Hong Kong At 16:39 11 October 2016 (PT)
Initiatives for capability building
GMR adopted initiatives to formalize the process of partner selection, negotiation and
alliance management. The alliance formation process was largely carried in-house. The
group used services of external parties for legal matters, prospective partner search,
background check and due diligence. Alliance activity at the organization grew over the
years and more executives at the lower levels were involved at initial stages of alliance
formation. Initiatives such as checklists were taken to guide executives who were
interacting with prospective partners to facilitate appropriate partner selection. The
checklist listed the parameters for evaluation for partner selection. It was developed based
on previous alliance formation experience shared by the top management executives. The
organization didn’t have a formal rating system for partner evaluation but planned to
develop that for future.
GMR’s focus on learning and capability enabled it to enter new businesses. It used
alliances extensively for capability building by establishing processes to facilitate learning
and knowledge transfer. Airport operations were multi-faceted and required expertise
across different areas (See Exhibit 8). GMR initiated various capability-building measures
for the airport business. In areas where it wanted to internalize certain capabilities from its
alliance partners, it carefully selected the executives to be assigned to an alliance. It
assigned executives who had strategic outlook for identifying critical capabilities and could
build processes for transferring skills to the organization. It developed processes for cross
learning across different projects. For the airport JVs, it created forums internally so that the
top management was rotated across various airport projects. The head of departments
visited various group projects to understand and learn the best practices.
GMR formed a dedicated bidding team for each of its businesses. The bidding team for the
airport business comprised the top management executives including Group Chairman,
Chairman of the airport business, business head of finance and commercial and
construction functions. The bidding team played a crucial role in scanning potential
business opportunities, scouting and evaluating prospective partners and negotiating.
There was no regular stream of project opportunities in the sector. Thus, the team, which
worked for bidding in case of a particular project, was not always carried forward for
bidding for the next project. Bidding was a complex exercise that required significant
technical and financial expertise besides the knack of finding the right number. GMR
adopted a “Blue Book” to facilitate transfer of key learnings across teams and build
capability in bidding. The key learnings from bidding during a particular project were
recorded by the team in the Blue Book, which was shared with the bidding team for
subsequent projects.
It established an aviation academy in Hyderabad in 2009. The academy imparted training
to professionals in various fields of aviation. It catered to GMR’s employees in the airport
business and also outside professionals. It also provided a stream of trained professionals
VOL. 6 NO. 1 2016
EMERALD EMERGING MARKETS CASE STUDIES
PAGE 9
for its future airports projects. The academy received accreditation from various
international agencies and was a recipient of several awards and accolades globally.
GMR had built end-to-end capabilities in the airport business over the years. The
organization started providing consultancy services to airport companies in South East
Asia and Middle East. It provided on-site training to their staff on its existing airports
accompanied by training at its aviation academy [http://netindian.in/news/2015/06/17/000
34128/gmr-provide-training-consultancy-services-oman-airport-management-company
(accessed 2 August 2015)]. It offered consultancy services in the areas of program
management, testing, commissioning of airport systems and development of aeronautical
and non-aeronautical revenue streams. This enabled the organization to use its capabilities
for earning fee-based income while not needing to invest any capital. This is what Pandey
had to say about GMR’s capabilities in the airport business and the need for future alliance
activity:
Downloaded by Chinese University of Hong Kong At 16:39 11 October 2016 (PT)
Going forward we would need to think whether we would need a JV partner. The group now had
a five-year airport operating experience. So, the need to form an alliance in terms of getting
some operating expertise or commercial expertise might not be that relevant in today’s context.
We might want someone to see through the construction period and for facilitating local funding.
According to P. Sripathy, CEO, International Airports, the group might assume the role of
an operator for future projects. It might go without partners even for services such as retail
and cargo operations [www.forbes.com/2011/06/21/forbes-india-grandhi-mallikarjun-raoshattered-dreams.html (accessed 25 June 2015)]. With the top management team feeling
more confident of its capabilities in the airport business, should GMR go solo for its next
airport venture?
Notes
1. Source: 2013 Annual Report.
2. Source: 2013 Company Annual Report.
Keywords:
Diversification,
Corporate strategy,
Capability,
Public – private partnership,
Corporate growth
3. Source: Company website, accessed August 6, 2015.
4. 2013 Company Annual Report.
5. All figures have been converted at the rate of 1USD ⫽ Rs. 54.35, unless otherwise stated. “$”
represents US Dollar unless otherwise stated.
6. Converted from Euro to USD. Conversion rate: 1EUR ⫽ $1.3376
Reference
Duysters, D., Kok, G. and Vaandrager, M. (1999), “Crafting successful technology partnerships”, R&D
Management, Vol. 29 No. 4, pp. 343-351.
PAGE 10 EMERALD EMERGING MARKETS CASE STUDIES
VOL. 6 NO. 1 2016
Exhibit 1. Segment-wise revenue and profit breakup
Table EI
Particulars
(%)
Share in total revenue
Airport
Energy
Highways
EPC
Others
61
24
5
7
3
Share in total EBITDA
Airport
Highways
Others
75
15
10
Source: 2013 Company Annual Report
Downloaded by Chinese University of Hong Kong At 16:39 11 October 2016 (PT)
Exhibit 2. GMR’s airport portfolio
Figure E1
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EMERALD EMERGING MARKETS CASE STUDIES
PAGE 11
Exhibit 3. Consolidated balance sheet as at March 31, 2013
Table EII
31 March 2013
in $ million
31 March 2012
in $ million
Shareholders’ funds
Share capital
Reserves and surplus
Preference shares issued by subsidiaries
Minority interest
Non current liabilities
Long-term borrowings
Deferred tax liability (net)
Trade payables
Other long-term liabilities
Long-term provisions
Current liabilities
Short-term borrowings
Trade payables
Other current liabilities
Short-term provisions
Total
1,332
71
1,261
361
315
6,362
5,789
10
13
523
27
3,309
889
271
2,103
46
11,679
1,379
71
1,308
362
328
5,141
4,651
7
2
454
27
3,079
1,339
226
1,481
33
10,290
Assets
Non-current assets
Current assets
Cash and bank balances
Short-term loans and advances
Other current assets
Total
9,914
1,765
940
161
664
11,679
8,642
1,648
779
181
688
10,290
Income
Revenue from operations:
Sales/income from operations
Other operating income
Other income
Total–(A)
1,807
19
51
1,876
1,523
28
45
1,595
Expenses
Revenue share paid/payable to concessionaire grantors
Consumption of fuel
Cost of materials consumed
Purchase of traded goods
(Increase)/decrease in stock in trade
Sub-contracting expenses
Employee benefits expenses
Other expenses
Utilization fees
Depreciation and amortization expenses
Finance costs
Total–(B)
(Loss)/profit before exceptional item and tax expenses(A-B)
Exceptional items–(gains)/loss (net)
Profit/(loss) before tax
(Loss)/profit from continuing operations before tax expenses and minority interest
Tax (tax credit)
(Loss)/Profit after tax and before minority interest
Minority interest–share of (profit)/loss from continuing operations
(Loss)/profit after minority interest from continuing operations (C)
Profit/(loss) from discontinuing operations (D)
Profit/(loss) from continuing and discontinuing operations (C⫹D)
306
189
37
225
4
176
112
300
24
190
384
1,946
(70)
(142)
72
(81)
(44)
(125)
(16)
(141)
157
16
152
265
55
243
(5)
132
126
261
18
171
303
1,721
(126)
30
(155)
(176)
120
(210)
80
(130)
20
(110)
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Particulars
Source: 2013 Company Annual Report
PAGE 12 EMERALD EMERGING MARKETS CASE STUDIES
VOL. 6 NO. 1 2016
Exhibit 4. Organization structure
Figure E2
Group Chairman
G.M. Rao
Highways
& UI
Airports
Energy
Srinivas Bommidala
B.V.N Rao
G.B.S. Raju
IB &
Governance
P.M.Kumar
Corporate
Chairman & MD
Kiran Grandhi
CEO Airports
P.S. Nair
Head, Strategy
Planning
CFO, Airports
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Sidhartha Kapur
A.K. Pandey
Exhibit 5. Alliances for various businesses
Table EIII
Non-equity
alliances
JVs
Remarks
Airport
3
20
Energy
4
1
Non-equity alliances include technical collaboration for hotel,
fuel and training services
Non-equity alliances include collaboration for operations and
maintenance and supply of spares
Highways
–
5
Particulars
Source: Company data
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EMERALD EMERGING MARKETS CASE STUDIES
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Exhibit 6. JV partners for airport projects
Table EIV
Airport JV
GMR Hyderabad International
Airport Ltd
Delhi International Airport Pvt.
Ltd
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Istanbul Sabiha Gokcen
International Airport Ltd
GMR Male International
Airport Private Ltd
Year of
formation
of JV
JV partners (share in the JV
company)
GMR Group (63 per cent)
AAI (13 per cent)
Government of Andhra
Pradesh (13 per cent)
MAHB (10 per cent)
GMR Group (54 per cent)
AAI (26 per cent)
Fraport AG (10 per cent)
MAHB (10 per cent)
GMR Group (40 per cent)
Limak Holding (40 per cent)
MAHB (20 per cent)
GMR (77 per cent)
MAHB (23 per cent)
Remarks
2003
2006
2008
GMR was planning to sell its stake
in the project
2010
The Government of Maldives (GoM)
repudiated the concession
agreement in 2012; GMR and GoM
commenced arbitration proceedings
Source: Company website, accessed July 13, 2015
Exhibit 7. JVs for commercial operations
Table EV
Particulars
Duty free
Cargo
F&B
Advertising
Car park
Fuel farm
Hotel
MRO
IT
Aviation services
Ground handling
Delhi Airport
Hyderabad Airport
✓
✓
✓
✓
✓
✓
✓
✓a
✓
✓
✓
Istanbul Airport
✓
✓a
✓
✓
✓
✓
Notes: Ticks represent businesses for which GMR has formed JVs; athe group has 100 per cent
subsidiary for this business but was initially looking for alliances for the business
Source: Company data; ahttp://articles.economictimes.indiatimes.com/2014-04-05/news/48887917_
1_gmr-infrastructure-ltd-gmr-megawide-mactan-cebu-international-airport (accessed 30 June
2015)
PAGE 14 EMERALD EMERGING MARKETS CASE STUDIES
VOL. 6 NO. 1 2016
Exhibit 8. Airport operations
Table EVI
Particulars
Description
Terminal management
Includes terminal maintenance and commercial operations,
which include operating duty-free shops, car rental services
and restaurants and bars at the airport
Includes refueling, baggage handling, cargo handling,
passenger handling and parking stand allocation
Include aircraft maintenance, in-flight catering and freight
and cargo
Include landing and air traffic control system
Include airport security, counter-terror security and
passenger screening
Customs, immigration, quarantine and air traffic control
Ground handling
Aviation services
Air traffic services
Safety and security services
Sovereign Functions
Source: GMR’s Draft Red Herring Prospectus in 2006
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Corresponding author
Rita Dubey can be contacted at: ritadubey18@gmail.com
VOL. 6 NO. 1 2016
EMERALD EMERGING MARKETS CASE STUDIES
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Downloaded by Chinese University of Hong Kong At 16:39 11 October 2016 (PT)
Abstract
Title – Case B (Sequel) – GMR: deciding future alliance strategy for airports.
Subject area – General management/strategy.
Case overview – Case B: On April 4, 2013, the meeting of GMR’s Group Executive Council (GEC) was
scheduled to take place. Srinivas Bommidala, G.M. Rao’s son-in-law and Chairman of GMR’s airports
business, was gearing up for the meeting. The meeting was called to discuss a proposal for bidding for
an upcoming airport project in the Philippines. It had been more than a decade since GMR entered the
airport infrastructure sector. The organization had built substantial airport operating expertise during
that period. It adopted a joint venture (JV) model for expanding into the airport infrastructure business.
Until now the organization had always formed JVs for all its airport projects. JVs, with existing airport
operators, were necessitated by the bid conditions that required a certain minimum airport operating
experience for qualifying as a bidder for various projects. In some cases, JV with a local player helped
GMR with market knowledge for functioning in a foreign market. GMR also used JVs to access the
capabilities it lacked for operating in this sector and gradually learnt from its partners for building
capabilities in-house. The group now had the required operating expertise in the sector to qualify as a
bidder. One of the key issues the GEC was contemplating was: Whether GMR should continue to form
JV for bidding for the upcoming project or should it go solo? Further, if it had to form a JV then, in which
areas should it seek a partner?
Expected learning outcomes – Case B: To help students understand how companies use alliances
as growth strategies; to understand the rationale for formation of various alliances; to explore various
factors managers consider when deciding on alliance strategy of an organization; to understand the
challenges associated with using alliances as a strategic option; and to understand the pros and cons
of internal development (i.e. going solo) vis-à-vis strategic alliances.
Supplementary materials – Teaching notes are available for educators only. Please contact your
library to gain login details or email support@emeraldinsight.com to request teaching notes.
Subject code – CSS 11.
VOL. 6 NO. 1 2016
EMERALD EMERGING MARKETS CASE STUDIES
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