Building a Global Company in India | Dr Jairam Varadaraj, MD, Elgi Equipments

ELI5/TLDR

Elgi makes air compressors — machines that produce compressed air, an industrial utility that does jobs electricity can’t. The company is one of the world’s largest, run from Coimbatore by Dr Jairam Varadaraj, who came home from a US PhD in 1987 having written a thesis on why Indian companies never become globally competitive. His answer: it was too easy to make money behind import tariffs, so nobody bothered to get good. The interview is his attempt to disprove his own thesis — build a world-class manufacturer out of India, defined not by export revenue but by whether the company could survive anywhere on earth without cheap Indian labour.

The Full Story

Compressed air is the hero; the compressor is incidental

Varadaraj opens by reframing his own product. The compressor is a means; compressed air is the point. It is a form of energy, like electricity, but it cannot be generated centrally and piped efficiently — it has to be made on site. So every factory needs its own machine. It does jobs electricity can’t: in a textile mill, when spinning yarn snaps, a puff of compressed air re-threads the fibre back into place. “You’re the only man who can put the toothpaste into the tube,” the interviewer offers. Roughly, yes.

The thesis: India was too comfortable to get good

The most interesting thread is autobiographical. Varadaraj went to Michigan to become a professor, found academic research “so devoid of reality” that he couldn’t face a career of it, and wrote his 1987 thesis on why Indian firms hadn’t gone global when Japan and Korea had — three countries that started from the same post-war, post-independence starting block and licensed technology from the same Western firms. Japan and Korea took it somewhere; India stayed put.

His conclusion is blunt and unflattering:

The real reason why we didn’t build global companies is it’s too easy to make money in India. You navigate the corridors of power, you get your license… supply and demand was moderated for you.

Protection bred what he calls an oligarchy and “extreme mediocrity” — cars with five-year waiting lists, two-wheelers with thirteen. When liberalisation arrived in 1991 and the 60% import duty on compressors was set to vanish, Elgi had to dump its licence-era diversification, clean up the portfolio, and start competing for real. On whether “Made in India” is yet an asset abroad, he is unsentimental: not yet. India is a services country; on manufacturing it hasn’t built scale or invested enough in technology, and capital has been “frugal.”

Two parallel tracks: the current art and the next art

Asked how you anticipate customer needs, he sides with Henry Ford’s faster-horse line. Customers can only ask for better versions of what exists — Blackberry users wanted bigger buttons, not a touchscreen, because the touchscreen was outside their imagination. So a company runs two tracks at once: be the best at the current art (which customers can describe), while inventing the next art (which they can’t). His Indian example is the one-rupee shampoo sachet from Velvette — not a cheaper shampoo, but a reimagining of how a cash-constrained customer could afford the same product. He frames the opportunity as sitting inside what the customer calls “fate”: the energy a compressor burns, the oil it uses, the price — all accepted as unchangeable. In that fate is the next product.

Quality as a hostage situation

Elgi’s claim to be the best rests on energy efficiency — the dominant cost over a compressor’s 10–15 year life — where it says it leads on most models. But the sharper point is about reputation asymmetry. A European or American brand that fails gets forgiven; an unknown Indian brand that fails does not. So quality has to run “far far higher than profit.” The proof he offers isn’t a boast but a balance-sheet wager: the longest warranties in the world (lifetime in the US, ten years in Europe, six in India, versus one year for rivals) combined with among the lowest warranty costs in the industry. Long warranty plus low warranty spend is the only honest signal that the machines actually don’t break.

What “global” actually means

He rejects the usual definitions — number of countries, share of foreign revenue. For him a global enterprise is country-agnostic: it can operate anywhere and still compete. By that test, he says, no Indian company qualifies, because all of them lean on cheap Indian labour. His chosen yardstick is startling: Elgi should be able to pay its Coimbatore shop-floor workers what it pays them in its Italian factory — 30 lakhs a year against 10 today. Most Indian firms chase low-cost locations; he is deliberately chasing a high-cost one, because only then is the company genuinely portable. Paying the salary is the easy bit; building the technology, brand and products that can afford it is the strategy.

The 32x covenant

Alongside this sits a view on pay equity. The ratio of highest to lowest pay is “obscene” — around 360 in the US, 350 in India, ~90 in Japan. Elgi targets 32, derived mechanically: six levels in the hierarchy, salary doubling at each, lands at a multiple of 32. The lever isn’t capping the top, it’s raising the bottom.

That bottom is governed by an unusual arrangement. No union, no wage agreement — instead a “settlement” protecting employees’ standard of living, defined as 367 elements of consumption co-created with workers and their families: tomatoes, a vacation, school uniforms, a laptop, Wi-Fi, even a line for spirituality. Each March employees check real prices in real shops; that becomes the new salary in fifteen minutes flat. The company has honoured this covenant through every downturn since 1996 — the logic being that the German economy souring is not an individual worker’s problem to absorb.

Culture you live, not laminate

You can’t build culture with wallpaper and posters… there has to be a certain genuineness to it.

The interviewer’s anecdote — a sprawling campus where, over hours, not one person jaywalked outside the zebra crossing, in India, where almost nobody is a stickler for rules — sets up Varadaraj’s metaphor. Outside the gate, society runs on broad tolerance: traffic ignores lanes, power and water fail, life goes on anyway. Inside the factory, you demand micron precision. The disconnect is real, and the bridge is responsibility: the tight tolerance is going to someone who put hard-earned money on the table. Defects get surfaced publicly inside the company; even vice-presidents have been let go via an anonymous, no-download, scan-and-report whistleblower app.

Why China never took the compressor market

A genuinely good business-strategy answer. Chinese manufacturers win by commoditising and going cheap — playing to the ~20% of buyers who choose on price. But in compressors, where efficiency over a 15-year life dominates, ~80% buy on value, and that value cohort demands quality, brand, and the credibility to still be around supplying parts in a decade. A cheap-product playbook can’t serve a long-service-life product. Elgi itself spent 10–12 years in China and pulled out. He concedes the game is open — Haier proved a Chinese firm can build a premium feel — but it’s a long game, not a short one.

Swimming against the tide

His Covid story is the capital-allocation centrepiece. March 2020, factory shut, no one knew the depth. They studied the Spanish flu, modelled a one-year V or a three-year U, decided either way no one would lose a job or take a pay cut — and then asked how to fund that promise. The answer: the family would dilute its own equity and raise private-equity capital to bankroll a year of survival. They started the process; recovery arrived in three months and the PE investors were slow, so the dilution never happened. But the willingness was real. He can’t quantify the payoff — “some bricks have been added to the building, you don’t know where, but you know it has been.”

Intensity, in service of the flag

Asked how his kids would describe him: “intense.” The intensity flows from a conviction that an Indian company cannot fail, must give no one the chance to criticise it. His signature habit is reducing everything to price per kilo — when a 15-crore machine prices out far higher per kilo than the compressor it builds, he interrogates whether it’s the right machine. The closing note ties it to the Sony/Toshiba postwar generation, who wanted Japan to be the cornerstone of global manufacturing. Varadaraj’s version: change how an Indian is perceived walking into a room, not by beating your chest, but by being the best. A journey, he says, without a destination.

Key Takeaways

Compressed air is a non-transportable utility — it can’t be generated centrally and piped efficiently like electricity, so every facility needs its own compressor. The machine is incidental; the air is the product.
Varadaraj’s 1987 thesis: Indian firms didn’t globalise because protected markets made money too easy to earn, breeding mediocrity — not because government actively prevented it.
Pre-liberalisation context: 60% import duty on compressors, import licensing, cars on 5-year waitlists, two-wheelers on 13-year ones. 1991 forced the cleanup.
Stated needs vs unstated wants — two parallel R&D tracks: be best at the current art (customer-describable) while inventing the next art (customer-unimaginable, e.g. touchscreen vs bigger buttons).
Reputation asymmetry: an unknown Indian brand that fails is unforgiven where a known Western brand would be excused — so quality runs above profit.
Warranty as honest signal: longest warranties in the world (US lifetime, Europe 10yr, India 6yr vs rivals’ 1yr) plus among the lowest warranty costs = genuinely low defect rates.
“Global” = country-agnostic, not foreign-revenue share. Test: could the company operate competitively without cheap Indian labour? By that test, he says no Indian company is global.
Pay-equity target of 32x (six levels, salary doubling each), versus ~360 in US, ~350 India, ~90 Japan. Raise the bottom, don’t cap the top.
367 elements of consumption define shop-floor pay; repriced annually from real shops each March; no union, honoured every year since 1996.
China stayed out of compressors because their cheap/commodity playbook serves the ~20% price-buyers, while ~80% of this long-life-cycle market buys on value, quality, brand, and aftermarket credibility.
Covid response: committed to no layoffs/no pay cuts, prepared to dilute family equity and raise PE to fund a year of survival; recovery came before they had to.
“Price per kilo” is his go-to diagnostic for interrogating capital expenditure.
Elgi: ~3,000 crore revenue, ~18,000 crore market cap (at recording), 120+ countries, founded 1960s, builds its own “mother machines.”

Claude’s Take

This is a good one — a founder-operator interview that mostly resists the genre’s usual self-congratulation. Varadaraj’s framings are unusually crisp: the current-art/next-art split, the country-agnostic definition of “global,” and the warranty-cost-plus-warranty-length proof of quality are all things you could actually use to evaluate any manufacturer. The China answer is the kind of segmentation insight that’s obvious only after someone says it.

The BS filter does want flagging on a few points. The 367-consumption-elements scheme and the no-jaywalking campus are presented entirely through management’s lens; we hear nothing from a worker, and “we have no union” can read very differently from the shop floor than from the corner office. The 32x equity target is admirable as stated, but it’s a target — he doesn’t say where Elgi actually sits today, and a stated aspiration is cheap. The Covid story is genuinely to his credit, but note the convenient ending: recovery arrived before the equity dilution was tested, so the most painful version of the promise never had to be honoured. And the whole “we must not let India down” motif, while sincere-sounding, is also exactly the flattering frame a thoughtful MD would choose for a public interview.

None of that is disqualifying — it’s a substantive, idea-dense conversation with a genuinely independent thinker who has built something real and verifiable. Krish Kothari asks sharp questions and lets the answers breathe. An 8: high signal, a couple of insights worth keeping, lightly discounted for being a one-sided portrait.