International -- Cover Story
INVESTING IN INDIA (int'l edition)
Its vast market potential lures foreign companies. But many have been tripped up by local consumers and rivals. Here are some lessons
It looked like a can't-lose proposition. In 1995, Mercedes-Benz opened a plant in India to manufacture its E-class sedan and win over India's new rich business class. Two years later, the plant is using only 10% of its 20,000-car capacity. Indians turned up their noses at the sedan--a model older than those sold in Europe. Now, Mercedes has to reassess its mistakes and start exporting excess cars to Africa and elsewhere.
The German carmaker isn't the only one stumbling. For foreign companies, doing business in India can be gut-wrenching. Its demanding consumers can be difficult to read, and local rivals can be surprisingly tough. Political squabbles, bureaucratic delays, infrastructure headaches, and unprofessional business practices create one obstacle after another. Foreign companies are often viewed with suspicion: For most of its postcolonial life, India has shut out the world, adhering to a socialist ideal of self-reliance. The nation's fragile unity came only after the British left in 1947 and at the expense of a tragic partition with Pakistan. Today, as the country celebrates its 50th anniversary of independence on Aug. 15, many Indians remain wary of anything that might pull the nation apart--even badly needed economic reform and foreign funds.
Yet policymakers have been struggling for the past six years to attract capital and ignite growth. In 1991, the government dramatically rejected its socialist past and admitted foreign investors. The idea was to enlist foreign companies' aid to turn India into another Asian Tiger, where cheap labor, an English-speaking workforce, a vast new middle class, and a democratic government would create a wave of prosperity.
NOT A "BARREN FIELD." Now, the international companies that ventured in after 1991 are tallying their profits and losses and wondering what the future holds for this market of 950 million people. What they have learned is that India, so far, has fallen short of its promise and that the task of reforming the economy is at best half-finished. Many companies have been burned by their own optimistic assumptions. Several, after researching the Indian market, have decided not to invest at all--at least for now. Only $2.6 billion was directly invested in India last year, a figure dwarfed by investment in China, which attracted $42 billion. To achieve growth of 7% to rival other economies in the region, India needs at least $10 billion a year in foreign investment. Growth now averages slightly more than 6%.
Yet there is a positive story to tell as well. Investors can make money if they enter cautiously and choose local partners carefully. General Electric Co., for example, has done quite well. The government, despite the turmoil of factional politics, presses on with reform. Foreign investment, still inadequate, is rising at double-digit rates. This year the Indian stock market has surged 35%--on hopes that the government will stick to its pledge to make India more attractive to business. That means agreeing to deregulate the economy even more and create a level playing field.
But overseas investors have to take action, too. They must examine the mistakes made by the first wave of investors and learn how this tricky market really works. Then they should apply those lessons carefully to their next moves in the subcontinent.
A primary lesson, especially for consumer-goods companies, is not to be dazzled by India's size. Many investors accepted government estimates that India's middle class numbered 250 million. But according to a recent survey of consumer patterns conducted by the National Council on Applied Economic Research in Delhi, India's consumer class probably totals 100 million at best--and there's much stratification among them. People in Madras, for example, have tastes vastly different from people in Punjab. "We are a culturally complex nation," says marketing consultant Rama Bijapurkar, who teaches at the Indian Institute of Management. "Different states have different consumption patterns and customs."
These complexities give entrenched players a big advantage. Anglo-Dutch conglomerate Unilever, for example, began selling soap and toothpaste in India in 1887, the heyday of the British Raj. Its India operation, called Hindustan Lever Ltd., has the distribution muscle of 3,500 wholesalers selling to 10 million small shops in rural India--figures to give any competitor pause.
Local brands feared they would lose out to new foreign competitors after the market opening of 1991. But they "overestimated the power of global brands," says C.K. Prahalad, business professor at the University of Michigan. Thus, Godrej soaps and Lakme cosmetics remain popular with Indians, with respective market shares of 10% and 65%. "Multinational corporations must not start with the assumption that this is a barren field," says Prahalad. "The trick is not to bet too big."
AUTO DREAMS. Consumer-products giants such as Kellogg Co., based in Battle Creek, Mich., have seen their brand power severely tested in India. Kellogg dreamed of 250 million cereal-eating Indians. So in September, 1994, with a $65 million investment, it launched Corn Flakes. The flakes did well initially, helping to double the market for breakfast cereals. But sales soon plummeted because a 500-gram box of Kellogg's product cost 33% more than its nearest competitor. And in a country where breakfast is usually a bowl of hot vegetables, cold cereal is a novelty--a one-time purchase. "It was just clumsy cultural homework," says Titoo Ahluwalia, chairman of market researcher ORG-MARG in Bombay. Kellogg has since introduced Wheat Flakes, Rice Flakes, Chocos chocolate puffs, and Frosties frosted flakes. A Kellogg spokesman says the company still has 55% of the cereal market and remains committed to India.
The same elusive dream of tapping many millions of consumers also lured the auto makers. After 1991, Ford, General Motors, Daewoo, Mercedes, Fiat, and Peugeot all quickly teamed up with domestic carmakers but were blocked out of the low-cost segment by Japan's Suzuki Motor, which, in collaboration with the government, has 80% of the passenger-car market.
So the new entrants all launched midsize cars priced too high for middle-class India. Ford's and GM's, for example, sell for $22,000 in a country where the average per capita purchasing power is $1,666. "They were forced to hit the premium end because they couldn't compete with Suzuki's quality and low cost," says Hormazd Sorabjee, editor of the leading car magazine, Auto India. So many plants have been built that capacity will be 1 million vehicles, way over the 600,000 estimated buyers, by 2000. Auto makers are now having to make fewer cars than they had planned and export the extras.
Foreign investors also underestimate the diversity of Indian society. India has 17 official languages and an ethnic diversity as wide as that from Britain to the Middle East--not to mention 25 states, dozens of castes, and six major religions. Yet on trips to scope out investments in India, foreign execs often visit only Bombay or New Delhi and meet well-educated, urbane, Westernized Indians. "It's easy to be deceived by that picture," says a Western insurance executive who has studied the country's consumption habits, cultural biases, and medical systems for a year and is still not sure he understands them. "You go back thinking, `Wow, what a great market.' But that's just 0.5% of the market. It's a thin veneer."
FAMILY FEUD. In other cases, a local partner turns out to be a liability. Germany's Lufthansa learned that the hard way with the $2 billion Modi Group, whose joint-venture partners include blue chips such as Walt Disney, Alcatel, Rank Xerox, and Revlon. Lufthansa signed an agreement with one Modi brother, S.K. Modi, in 1993 to launch a new domestic private airline, ModiLuft. But soon after, executives realized the Modi Group was not a smoothly functioning entity. Its five brothers were engaged in bitter feuds with one another.
The beleaguered airline went bust in 1996. And Lufthansa claims--in a lawsuit filed in Bombay last year--that S.K. Modi reneged on aircraft lease payments and technical assistance fees and used funds obtained from the German company in other ventures. Lufthansa is seeking $18.6 million plus the return of three planes it says Modi has kept. S.K. Modi, despite repeated attempts by BUSINESS WEEK over two months, could not be reached for a response. But according to the suit, Modi accused Lufthansa of charging too much and delivering defective planes.
Such tales are enough to deter many from testing India's market. But with persistence, other companies may come out winners, and potential investors can learn from these experiences, too.
The mother of all investment lessons comes from Houston's Enron Corp. Before it finally prevailed, Enron probably made things worse for itself with its aggressive stance. The company spent two years getting India's first private power project approved in a shifting political climate. It came in with a high profile and "both guns blazing," says one foreign executive--and alienated many. The project was dogged by controversy and got bogged down in 24 court cases--plus charges of corruption and allegations of environmental degradation. In trying to push through approval for a 2,015-megawatt power project in Maharashtra state, Enron backed a local government that suddenly found itself out of power. Undaunted, Enron pushed the opposition government into backing the deal.
Now construction has finally begun, making the plant the only one of India's eight "fast-track" power projects to get under way. "We've learned a lot of patience," says Sanjay Bhatnagar, Enron's country manager. And the Indian government now cites Enron's victory in all 24 lawsuits as proof that foreign investment is backed by the rule of law.
Other power companies have taken their cue from Enron's experience and staged successful but lower profile entries into India. Oil-and-gas giants such as Royal Dutch/Shell Group, have been painstakingly building alliances with Indian public-sector companies that dominate the oil-and-gas market. Says Shell's chairman in India, Vikram Singh Mehta, who has a joint venture with government-owned Bharat Petroleum Co.: "Only mutual interest will survive the long run."
"COMMANDO SQUAD." MCN Energy Group Inc., a large Detroit gas-distribution company with $4 billion in assets, made its first international foray in March--a $115 million investment in Torrent Group, a power company in Ahmedabad, Gujarat, India's second-most-industrialized state. MCN Chairman Alfred Glancy spent three years researching the Indian market before making an investment in a 100-megawatt project. Small projects don't require government approval--saving time and money. "We looked at Enron and came away with some lessons," says Glancy, who plans to increase his investment in several projects to $1 billion by 2000.
GE is sharing this cautious approach, with positive results. The U.S. conglomerate came to India in 1991, when Indian law had just started letting foreign investors set up wholly owned subsidiaries rather than have to find local joint-venture partners. Still, GE chose Indian appliance maker Godrej and sent a special team from the U.S. to determine Godrej's capability and market dominance. "The commando squad looked very sharply at our businesses," says Vijay Crishna, head of the Godrej-GE venture in Bombay that makes refrigerators and washing machines. Then, GE hired local managers and made them meet U.S. standards.
The tie-up benefited both companies. Godrej got GE's technology to upgrade its appliances; GE got Godrej's good reputation and distribution system. Godrej-GE now claims a 40% market share in consumer appliances, and GE uses India as a low-cost manufacturing base for such exports as lightbulbs and X-ray equipment. "We're here for the long term," says Scott Bayman, head of GE-India, who plans GE's total investment at $500 million by 2000. "There'll be bumps along the way, but these markets are not for the faint of heart."
San Francisco's Bechtel Group Inc. has been in India since 1993, constructing large projects for groups such as petrochemicals maker Reliance Industries Ltd. and even for Enron--all the while keeping a very low profile. Bechtel is one of the few foreign companies in post-liberalization India to turn a profit. Says country manager Earl James Reinsch: "India has an advantage in having the rule of law, which is very important in equity and financing." Reinsch says his goal "is to be viewed as a local company." The talents of the 500 engineers Bechtel employs in India will eventually be deployed in Bechtel ventures worldwide.
Smaller companies are starting to make money in India, too. Perfetti, a $700 million Milan chewing-gum maker and confectioner, sells its Brooklyn and Centerfresh gum brands in more than 20 countries worldwide. A 1992 study commissioned to explore India's potential showed an undeveloped market for chewing gum. So Perfetti spent $35 million to build a new factory north of New Delhi and a distribution system from scratch. Perfetti's bubble gum, which sells for 3 cents apiece, is now available throughout rural India. The company claims an estimated market share of 45%, growth rates of 80%, and revenues of $27 million. By next year, Managing Director Natolino Duo expects Perfetti India to become profitable.
Other investors could also profit as India keeps changing. Market reforms are increasing the transparency of financial statements. Indian companies such as Infosys and Reliance are starting to adopt international accounting standards used by global counterparts.
But there are always surprises. Coca-Cola Co., for example, bought the local maker of a popular brand of soda, Thums Up, and wanted to use its entrenched distribution system to build Coke's dominance. But Thums Up holds the No.1 spot, not Coke: Many Indians think Coke doesn't have enough fizz. That's how it can be in India--a surprise, but also an unexpected reward.By Manjeet Kripalani in BombayReturn to top