MUMBAI - India has emerged as an attractive
destination for foreign investors and is today home of
subsidiaries of many global majors, including a large
number of Fortune 500 companies. Every foreign venture
in the country may not have been an unqualified hit, but
success stories do abound.
Historically, the
main reason for the entry of multinational corporations
(MNCs) into India was to jump the tariff wall. High
import duties ruled out the option of exporting finished
goods from the home country to India. On the other hand,
the MNCs were guaranteed adequate protection by the
country's high tariffs once they entered India and set
up operations.
In some cases, the need to
customize products necessitated a strong local presence.
Over the years, Unilever's Indian subsidiary, Hindustan
Lever, has developed various products to suit local
tastes. This would obviously not have been possible if
Unilever had only exported its products to India. In
recent times, other reasons have become equally
important, most notably the skilled but relatively cheap
manpower. In the computer software industry, many MNCs
are establishing Indian bases to tap this rich labor
pool. An added advantage for Indian software workers is
their knowledge of the English language compared to
their counterparts in countries such as China. Companies
like General Electric and Texas Instruments are also
looking at India as an important research and
development base that can contribute to their global
knowledge base.
Indian subsidiaries of many MNCs
have been the best-performing units compared to other
global operations. A recent study by a leading financial
paper shows that the Indian arms of a number of MNCs
have been earning margins much higher that that of their
parents. The study compared the operating profit margins
of the MNC subsidiaries with their parent companies
after averaging the margins for the past three financial
years to smooth out any extraordinary business year. The
calculation also excluded interest, depreciation, taxes,
goodwill amortization and other exceptional items.
Operating margins
Company
Parent
(%)
Indian Subsidiary
(%))
ABB
4.0
12.9
Unilever
10.9
22.8
Cummins
2.2
18.3
Whirlpool
5.5
6.9
ICI
8.3
20.9
Asahi
Glass
5.5
23.1
Pfizer
34.5
18.4
Hyundai
8.1
17.4
Suzuki
3.8
10.3
Alfa
Laval
9.4
24.1
Nestle
14.2
19.0
As
one can see, most Indian companies earn margins that are
multiples of the ones earned by their parents. The
exceedingly successful Indo-German companies are a case
in point. Backed by strong German technology and a sharp
focus on efficiency through cost and manpower
rationalization, better supply chain management and
improvement of productivity, the 24 Indo-German
companies listed on the Indian stock exchanges have
recorded 56% growth in their net profit for the quarter
ending March 2004, with a 16.65% growth in sales. More
importantly, this growth has come on the back of a 62%
rise in net profit for the same period in the previous
year.
The performance of the Indo German Chamber
of Commerce (IGCC) 15 index clearly bears this out. IGCC
15 is possibly the first such bilateral index anywhere
in the world. It's an index of 15 Indo-German companies
with German shareholding of 25%. Since its inception in
January 2002, IGCC 15 has appreciated by a whopping 282%
(till September 22, 2004). In contrast, the Sensex (the
premier index of the Indian stock market) was up by only
73% during the same period, while the Nifty (the index
of the National Stock Exchange of India) was up by
66.20%.
Led by companies like Siemens
(subsidiary of Siemens AG), MICO (subsidiary of Robert
Bosch GmbH), BASF (subsidiary of BASF AG) and Thomas
Cook (subsidiary of Thomas Cook AG), the performance of
the Indian units vis-a-vis their German parents has been
outstanding. If the annual performance of Indian
companies over the past three years is compared with
that of their respective German parents, the results are
even more startling.
*
While Degussa Germany has been making loss in two out of
the last three years, its Indian subsidiary Insilco has been
making profit, though the level has
declined.
Clearly, major German
companies have integrated well with the Indian market.
This is also borne out by another recent survey
undertaken by the IGCC. The survey, based on data made
available by the Centre for Monitoring Indian Economy
(CMIE), studies the market share of Indo-German
companies. It covers 51 product groups in the
manufacturing sector and 43 existing Indo-German
collaborations (German presence has been considered
either by way of technical-cum-financial participation
or only by technical participation in the particular
product group under consideration).
This study
reveals that in 2001-02, Indo-German companies were
market leaders in as many as 21 product groups. These
were followed by 17 companies that occupied the second
spot in the respective industries and another seven that
ran third. Expectedly, more than half of them were
engineering companies, followed by electronic and
electrical. Of the 43 companies covered, as many as 23
have German shareholding. Of these, 17 have a greater
than 25% stake in the Indian joint venture and 10 have a
50% or more stake.
Not surprisingly, some of the
existing Indo-German companies have announced plans of
new investments in India. Bosch recently said it plans
to invest about Rs10 billion (US$218.5 million) in India
over the next four years. It will also invest about
Rs850 million in its Indian software company, Robert
Bosch India Ltd. Siemens has announced plans to invest
another Rs1 billion by 2005. Adidas Solomon plans to set
up an apparel-manufacturing unit in India and invest
heavily in new stores and manpower. Among the unlisted
companies, Sap Lab India, one of the fastest-growing
subsidiaries of SAP AG in the world, has announced plans
to invest $24 million and double manpower to 3,000,
while Sap Ventures (its venture capital company) plans
to invest in other Indian technology companies.
Kunal Kumar Kundu is a senior
economist with a leading bilateral Chamber of Commerce
in India. He has a master's in economics with
specialization in econometrics from the University of
Calcutta.
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