NRB Bearings versus Negative Lollapalooza

How does an Anthropology major from Wellesley college create a remarkable research-oriented organization whose products are present in more than 80% of vehicles on Indian roads? How does a woman start from the shop floor in an auto component firm and build a business that has 70% of the domestic market share in its niche?

Harshbeena Zaveri did it by countering an exceptionally strong negative lollapalooza arrayed against her. NRB Bearings was doing quite well supported by the strong relationships it had with its technology partners when she decided that it should have its own R&D set-up.

She went to her Board with the suggestion and was denied outright. The Board, which included her own father, thought she was crazy.

This particular feature of reluctance against owned R&D was present across many Indian businesses. Even TTK Prestige went through something similar. Let us try and understand why there existed this pattern of antagonism among Indian companies towards own R&D facilities. This strong resistance was a result of a negative lollapalooza effect.

Charlie Munger coined the term ‘lollapalooza effect’ to describe extraordinary outcomes. In this talk, he states that

“In messy social sciences if the result you are observing is a lollapalooza, look for a confluence of multiple forces and causes operating in the same direction.”

He also taught us to take the big ideas from the big disciplines to explain the multiple forces causing the lollapalooza effect. In the spirit of fun, let us attempt to apply the mental models taught by him to understand why there was such a strong and widespread resistance to setting up an R&D department at NRB.

Classical conditioning: India was under the yoke of the British rule for hundreds of years. In these hundreds of years, it was pounded into the Indian citizens’ brains that they were nowhere near as good as the West. Their confidence in self was systematically crushed through variety of measures. Given majority of the Board at NRB (including the father) were brought up at a time when British still ruled India, the idea that they could come up with something technologically advanced by themselves was simply bizarre to them. Technology and research was automatically associated with Europe, Japan or the US.

“Of course it would be stupid to try this on our own. Where would we even begin?”

Authority bias: The foreign technology partners were considered authority figures by the Indian counterparts. One generally holds one’s mentors and authority figures in awe. When you are in awe, you tend to admire from afar and tend to think the feats achieved by them are beyond our own capabilities. Rather than inspiring one to action, excessive hero-worship can lead to inaction.

Another downside to authority bias is that we tend to accept as law the received wisdom from our authority figures. There is a willing suspension of disbelief and critiquing. In the current context, it led to the belief that there is no further improvement possible as if there were it would already have been done by the partners.

Social proofing or Monkey-see-monkey-do: All bearing companies in India were either multi-nationals with long history or were Indian companies with foreign partners. To stand out of the crowd by attempting to have its own R&D was simply too bold and uncomfortable a move to be considered.

Intuitive understanding of compounding: If there is one major lesson of the world that we live in, it would be that a small edge over a long period of time can result in considerable advantages. Compounding is perhaps the most powerful force in the universe. The foreign players had long history of R&D and thus were way ahead. It was folly to even think of catching up.

Newton’s first law / Aversion to change: Newton’s first law states that a body in motion or rest remains in motion or rest until an external force acts on it. Man is a creature of habit. In NRB’s context, the current system of partnering with a foreign player and just focusing on manufacturing worked well for it. There was no need to change. Harshbeena Zaveri’s insistence on an R&D was just an irritating external force.

The impact of the above forces is evident in this excerpt from a Forbes article:

She noticed a divide between supervisors and workers and says there was a “colonial mindset where people looked up to our joint venture partner, Nadella”. When she questioned why things were done in a certain manner, pat came the answer: That’s the way the partner did it.*

Lack of capital: At the time Harshbeena Zaveri wanted to set-up an R&D facility, the company’s sales was around $15 million and profits were ~$2 million. This small size of operations too played a role in creating a mental barrier against R&D.

Uncertainty: Money spent on research need not necessarily lead to desired results. Results are not given, there is reasonable probability that the results would not bear fruit. While larger companies could afford to experiment and expose themselves to positive black swans, NRB did not have the resources to do so. We all know how much human beings in general despise uncertainty - pursuing uncertainty at a time when resources are scarce is simply suicidal.

While the senior people in the company were constrained by the confluence of above factors, Harshbeena’s mind was unfettered. She was born in independent India and had graduated from Wellesley; this ensured that she was not prey to the classical conditioning and other biases plaguing others. Also, she was quite involved in the business moving across diverse responsibilities ranging from the shop floor, quality, marketing, and others.

So what finally happened? Not willing to take a chance, the board told her it didn’t have the Rs. 12-20 crore ($2 million) she needed. Undeterred, she decided to renegotiate NRB’s royalty agreement with her partners and use the money saved to set up the centre.

And the result - a 23% CAGR in the market cap since 2001.

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