When it comes to India, most multinational companies, including well-managed corporations such as Apple (AAPL), Caterpillar (CAT), Daimler (DAI), and Toyota (TM), continue to take a risk-averse approach and cede leadership to more focused and committed competitors. They are part of a “One Percent Club,” considering that India continues to contribute an anemic 1 percent of global revenues and profits.
Take Apple. To protect its juicy margins, the company remains reluctant to develop lower-cost versions of its iPhone that would allow it to crack emerging markets. Asked about the market for its products in India, Apple Chief Executive Tim Cook remarked that while he “loves India,” the multilayer distribution structure really adds cost to getting product to market, and therefore, “in the intermediate term, there will be larger opportunities outside of there.”
Now consider Google (GOOG). The company behind Android, the software that powers most smartphones, is believed to be working on a new version, called “Key Lime Pie,” that will let phone manufacturers develop smartphones that cost much less than $100, enabling Google and its partners to push further into emerging markets such as India, which collectively represent billions of potential smartphone adopters.
Apple’s caution when it comes to India is hardly unique. India has always been a difficult market, and it has become even more challenging of late. A combination of corruption, a slowing economy, a sclerotic bureaucracy, policy uncertainty, and bad infrastructure is putting off all but the most committed companies. No wonder many companies believe this hardly feels like the time to make substantial investments in manufacturing, distribution, and brands.
Too many global companies wait for emerging markets to develop and fit their established business model rather than adapting to the local realities. Their “one-size-fits-all” approach means they sell to the affluent top of the market, so for a while they are successful by simply going to more countries. The hope is that eventually these markets will mature—with more affluent customers, policies, and regulations that give them free access, protection for intellectual property, modern infrastructure, and so on.
This is a risky assumption, and it has proven wrong in India, where Apple finds itself dominated by Samsung (005930), Caterpillar by JCB and Cummins (CMI), Daimler by Volvo (VOLVB), Toyota and Volkswagen (VOW) by Suzuki (7269) and Hyundai (005380), and Procter & Gamble (PG) by Unilever (UNA). Once this happens, clawing back market share becomes very difficult and expensive.
As companies such as Apple and Caterpillar approach India with a rigid and outdated model, other companies are committed to a long-term view. Samsung, Cummins, and McDonald’s (MCD) were willing to wait nearly a decade to see a return on their investments in building a local supply chain, local innovation capability, and deep distribution networks.
To succeed in India, these companies develop products that the local market wants and at disruptive price points. No one exemplifies this better than McDonald’s. By offering a completely Indian and largely vegetarian menu at a median price of 50¢, McDonald’s has created one of the fastest-growing restaurant chains in a country that is largely vegetarian and where the cow is sacred.
Companies like McDonald’s are adapting to the realities of India and using the country as a laboratory to develop successful models for other emerging markets. This is a critical point that is lost on most multinational companies, which see India as simply one more sales outlet for their global products.
For global companies, vibrant and chaotic India is not just a large economy; it may hold a vital key for succeeding in emerging markets.