Challenges for Indian Multinationals (1)

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Challenges for Indian Multinationals

Pravin Wakle EPGDBM110311

Raghavendra DV EPGDBM110312

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Quote -Unquote

India today is in the mainstream of global consciousness. There is anewfound sense of self assuredness. The entrepreneurship and dynamismits corporate houses have shown over the last five years have been andcontinue to be quite remarkable. However, while the age of Indian

multinationals is undoubtedly here, we in India Inc. have a long way to go.

Kumar Mangalam Birla, Chairman, Aditya Birla Group

In this presentation, we will discuss the four challenges that Indiasmultinationals face on the journey from being National Champions tobeing GlobalPowerhouses.

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The key challenges

1. The India Challenge

2. The Brand India Challenge

3. The Cross Border Acquisition Challenge

4. The Talent Management Challenge

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Goading the Elephant towards Modernization

Companies are products of their environments, and Indias global powerhousesmust therefore grapple with both the advantages and disadvantages of operatingout of India.

The bureaucratic machinery of India, as reflected in its 10-millionstrong civil

service army, equaling the population of countries such as Belgium and CzechRepublic, is corroded with apathy and corruption.

The time it takes to obtain a business license in India ranges from 159 days to522 days depending on where you are located.

The 4 seasons hotel that was opened in Mumbai in 2008, required 165government permits including a special license for a vegetable weighingscale in the kitchen

India is ranked at 122 on the ease of doing business in different countries reportby world bank in 2009

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Ease of Doing Business-India

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Goading the Elephant towards Modernization

Part of the reason towards this unfriendly business environment is the reflexiveambivalence toward the west (refer British East India Company)

Political leaders pursuing modernization and liberalization by stealth

Many of the regulations become a source of revenue for corrupt administratorsand extra costs for businesses, without actually producing the intended benefits.

In Bihar (though it might be better now!) 5 to 10% of the project costs of setting upa new plant must be set aside for payments to local mafia, politicians andbureaucrats.

Infrastructure failures The lack of national policy in crucial areas, poortransportation infrastructure, woefully inadequate power generation capacity, andslow legal system

The autonomy of state governments adds to the confusion No single internal

market

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Goading the Elephant towards Modernization

An Indian subsidiary of a French multinational exporting to Korea from Chennai insouth India did an analysis of its transportation costs.

It costs more to transport the companys products from its factory near Chennai tothe Chennai port, a distance of 40 kms , than it costs to transport them the 5000kms from the Chennai port to Korea!

In addition, the average time to clear exports through customs in India is nearlysixteen days, in contrast to only six days in China or OECD (Organization forEconomic Cooperation and Development ) countries.

Acute power shortages have forced business in order to run their operations inan uninterrupted manner. To build captive power units. Having to build a powersource increases both the capital outlays and subsequent operating costs forindustrial plants.

Captive power costs 50 to 100 percent more than that from the grid.

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Goading the Elephant towards Modernization

The World Bank ranked India 173 out of 175 countries for contract enforcement in2006. It takes an average of 4 years to enforce a contract, compared with lessthan 10 months in China.

Indian multinationals have already started to examine options and move theirheadquarters or atleast significant part of their operations to more business friendly environments.

Headquarters of Indian global powerhouses like ArcelorMittal, Suzlon, andVedanta are located in Luxembourg, Denmark and London respectively rather thanIndia.

Takeaway - The challenging Indian business environment teaches IndianManagers to succeed in imperfect market conditions. Thus when they encounterother challenging environments in emerging markets , these managers operatequite effectively.

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More than Fakirs and Call Centers BrandIndia Constraints

IT sector, where India is uniquely claiming to be the back office of the world is theonly part of modern India that receives significant global press coverage.

Countries go through an evolution with respect to brand image as they developeconomically. The initial market entry strategy for a company from a developingcountry is usually based on offering cheaper products of acceptable ( sometimesbarely acceptable )quality.

Brand India has failed to evoke Awe except for outsourcing and IT industry

An exception is the example of brand Exotic India which has a positive

impact if on is selling ayurvedic medicines, spas, exotic foods, or fabrics.

In terms of hard power, India is poorer compared to China, its asian competitor onthe global stage. However, when it comes to soft power, Brand India with its largeprivate sector, history, democracy, free press stands out.

With the emergence of BRIC , this image is changing. In future, perceptions ofIndia being seen as a third world country will become weaker.

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Indias Soft power

The Indian Media & Entertainment Industry grew by US$ 12.9 billion in 2009 toUS$ 14.4 billion in 2010, a growth of 11 per cent, according to a report by theFederation of Indian Chambers of Commerce and Industry (FICCI) andresearch firm KPMG

Around 15 million Indian expatriates living in different parts of the world

account for over 65% of Bollywoods earnings.

Yoga tourism has been around for a while now, with Westerners floodingto a number of different ashrams for Yoga and spiritual healing

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Indias Soft power

Besides being popular among the India Diaspora, such far off locations asNigeria to Egypt to Senegal and to Russia generations of non-Indian fanshave grown up with Bollywood during the years, bearing witness to the cross-cultural appeal of Indian movies

India has more than 70,000 newspapers and over 500 satellite channels

(more than 80 are news channels) and is the biggest newspaper marketin the world - over 100 million copies sold each day

India has the third largest (based on thetotal number of fixed/mobile subscriber

lines) telecom network in the world andthe second largest mobile network with911 million subscribers while the totalnumber of telephone lines amounted to943 m at the end of February 2012

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What is India-Indian diversity

Our(indian) general elections, the biggest exercise in democratic franchisein human history. And the next one will be even bigger, because our votingpopulation keeps growing by 20 million a year. But, the fact is that the lastelections, five years ago, gave the world the extraordinary phenomenon ofan election being won by a woman political leader of Italian origin andRoman Catholic faith, Sonia Gandhi, who then made way for a Sikh,

Manmohan Singh, to be sworn in as prime minister, by a Muslim, PresidentAbdul Kalam, in a country 81 percent Hindu

Sashi Tharoor(2009)

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The CrossBorder Acquisition Challenge

In their hurry to become global powerhouses, Indian companies often prefer theacquisition route, for example, Dr. Reddys acquired Germanys Betapharm;

Videocon purchased Thompsons pictures tubes business.

The current nationalistic euphoria prevailing in India sometimes appears more likejingoism. It needs to be tempered as it can induce corporate overreach.

Challenges of acquisition:

Different business Norms

Management Style

Cultures

Communicating across long distances

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Some Acquisitions

In June 2011, the Aditya Birla Group announced its completion ofacquiring US based Columbian Chemicals, a 100 year old carbonblack maker company for an estimated 875 million dollar

Essar Energy completed its 350 million dollar acquisition of the UKbased Stanlow Refinery of Shell in August 2011

In Indias closely knit business community , it is almost becoming afashion statement for companies to make foreign acquisitions.

The result is Indian companies are on a acquisition spree backed byempire-building ambitions rather than solid commercial logic and carefulappraisal of investments returns.

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The CrossBorder Acquisition Challenge

The Indian Companies Act section 372A requires shareholder approval forinvestments above 60% of net worth, however many large acquisitionssuch as Tata SteelCorus, Bharti- Zain deal have been routed throughspecial purpose vehicles in which no shareholders consent was required.

This raises questions on protection of shareholder interests and their say

in large cross-border acquisitions.

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The CrossBorder Acquisition Challenge

Why RILs bid for Lyondell failed

Analysts and investors have since expressed relief at the falling through ofwhat they considered an over-priced deal. Goldman Sachs analysts NileshBanerjee and Nishant Baranwal, wrote on 2 March that the bid not goingthrough is a better outcome, as it saves RIL from getting drawn into abidding war and thus potentially over-paying for the assets.

Deal was more speculative from Reliance end.

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The ACQUISITION

Tata Steel was put on credit rating watch after it announced its foreignacquisition. India's largest private sector steel company with revenues of US$ 5.0billion

Corus Steel: Company is world's seventh largest and Europe's second largest

steel producer with revenues of 9 billion (approx. US$ 11.55 bn)

Brand India is efficiency centric and has to still integrate capabilities ofInnovation and Branding

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Human dimensionChanging mindset

The sad reality of India is that despite access to more than a billion people,Indian business is running out of talent.

World Economic Forum Has ranked India 114 out of 128 on gender ranking.

Rapid growth in last decade has weakened the cost disciplined, so salaries are

increasing leading to salaries almost equal to western levels.

Indians are regarded as hardworking, but suffer from hierarchal, individualisticattitude.

Multinationals pursue it as challenge to teach Indians to follow the process

They are used to jumping the queue.

In Mumbai, compensation in finance sector is more than in London, rental costabove newyork, electricity dearer than Japan.

Indian companies mind blockMicrosoft focuses on innovative

product(revenues $60 bn), Infosys Indian IT giant still focuses on services$4bn).

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Need from The Talented

Indians are needed to be more team oriented, process oriented andlearning oriented.

Biggest success of colonization was the colonization of our minds. It istime consuming to reverse that.

Increasingly Indians are unwilling to accept foreign asignments.So theglobal ambition of Indian companies is stunted.

Cultural differences are big, Integration of various nationality would be theway to go.

India: The next 21st-century power

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REFERENCES

http://www.doingbusiness.org

http://www.ted.com/talks/shashi_tharoor.html

Indian Global Power Houses Nirmalya Kumar

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Conclusion

These woods are lovely, dark and deep,But I have promises to keep,And miles to go before I sleep,And miles to go before I sleep.

Robert Frost

Thank You