India a Fortune 500 success
story By Swati Lodh Kundu
BANGALORE - Fortune 500 companies have a
long history in India, probably more than 200
years. The Indo-American Chamber of Commerce was
curious to find out what makes them tick in the
South Asian country, so they took an in-depth
look. A recent study by the chamber found that
currently about 220 of the Fortune 500 companies
from countries such as the US, United Kingdom,
Germany, France, Japan, Netherlands, South Korea,
Switzerland, Canada and Sweden are present in
India.
Today, these countries account for
more than 65.2% of the global economy.
Interestingly, the two-way bilateral trade
(exports and imports) between India and these
countries had increased to
US$39.26 billion in 2002-03,
from $32.38 billion in 1998-99. That represents a
compound annual growth rate (CAGR) of 4.9%. In
2002-03, these countries together accounted for
34.4% of India's total trade.
Fortune 500
companies have invested in India across a spectrum
of sectors: food and beverages (Coca-Cola,
PepsiCo), consumer durables (Samsung, Philips, LG,
Canon, Electrolux), automotives (General Motors,
Ford, Toyota, Bosch, Visteon), computers and
software services (IBM, Sun, Honeywell),
pharmaceuticals (GlaxoSmithKline, Pfizer),
consumer products (Unilever), financial services
(Citigroup, HSBC), insurance (Allianz,
Prudential), engineering (Siemens, ABB, Alstom,
Bombardier), logistics (FedEx) and petrochemicals
and chemicals (BP, Shell, BASF).
On the
other hand, about 250 of the Fortune 500 companies
are clients of Indian Information Technology (IT)
companies. The Indian IT Industry had sales of $14
billion in 2003. 40%, or more than 200, of the
Fortune 500 companies are currently outsourcing
their service and support services to India. The
trend is likely to continue, as a global survey
carried out by Hewitt Associates showed. This
survey reported that more than 60% of Fortune 500
companies favored outsourcing to India, and of
those companies not currently using an off-shoring
model, 71% intend to do so sooner rather than
later.
India offers several advantages
that can be and have been effectively leveraged by
global companies to derive business gains. India
is the world's largest democracy and the 12th
largest economy (4th largest based on purchasing
power parity). India has experienced robust growth
and has a positive outlook (strong and stable
gross domestic product growth rate, strong
economic-reforms process, reduction in external
debt as a percentage of GDP and strong foreign
direct investment or FDI inflows). Several leading
multinational companies have invested in setting
up large-scale operations in the country.
The strategies that have been undertaken
are explained below:
Expanding to serve
the domestic market
Expanding in the domestic market by getting
into additional segments (launching new products
and services), and/or increasing market share in
existing ones
Increasing investments for capacity expansion
and improving technology, processes, people and
infrastructure
Increasing acquisitions to fuel growth and
acquire new capabilities
Developing
products for the domestic and global
markets Apart from catering to the growing
domestic market, Fortune 500 companies are
leveraging India's large domestic market to
develop products for global consumers. The
following are some examples of companies
developing products in India for global
markets:
Ford India exported 28,000 Ford Ikons in
completely knocked down (CKD) form to South
Africa, Mexico and Brazil in 2003. Ford has also
exported Ford Ikon components worth more than $10
million per annum to China since 2002. At a sales
growth of 30%, Ford India recorded its best-ever
performance in India in 2004, and already, in a
period of less than five years, the company's
operations in India have started generating
positive cash flows.
Saint-Gobain has been aggressive on the
exports front, especially in the case of float
glass. Saint-Gobain Glass started exporting within
55 days of beginning production at its plant in
Sriperumbudur. By December 2000, almost 40% of the
production was being exported to markets across
the world. While focusing on the domestic market,
the company has proactively approached exports as
an opportunity to not only grow volumes, but also
improve itself by competing in global markets.
MICO is the second-largest auto component
exporter in India. It exports components for the
complete range of fuel-injection equipment, parts
for gasoline engines, spark plugs and auto
electricals.
Volvo exports components from India for Volvo,
Renault and Mack trucks, as well as completely
built units (CBU) buses to South Asian Association
for Regional Cooperation (SAARC) countries.
Whirlpool is exporting refrigerators and
washing machines to South Asia, Asia-Pacific,
Latin America and West Asia. It also exports small
kitchen appliances under its KitchenAid brand to
the US market.
Toyota manufactures multi-utility vehicles
(MUVs) in India and recently launched a
manufacturing unit to produce transmission
components (gear boxes) for its global operations.
Growing through acquisitions The
large and emerging domestic market is attracting
Fortune 500 companies, across sectors, to grow
through acquisitions of incumbent Indian
companies, to get a quick presence. The following
are some examples of companies growing through
acquisitions:
Following its global strategy of growth
through acquisitions, Pfizer India has acquired
businesses in India as well, resulting in growth
and augmentation of its capabilities.
BASF has consolidated its presence in India by
making certain strategic acquisitions. It acquired
Dr Beck India's original equipment manufacturing
(OEM) division, making it a significant producer
of OEM coatings and industrial coatings. BASF also
acquired the polystyrene business of the
Chatterjee Group in 2000.
Lafarge increased its presence in India
through the acquisition route, by buying the
cement business of Tata Steel and then following
it with the acquisition of Raymond's cement
facility.
Anticipating a boom in retail banking in
India, HSBC acquired the Non-Fund Activities from
Gujarat Lease Financing Ltd in 1999. In the year
2000, the bank acquired the Chandigarh branch
license from Deutsche Bank. In 2002, the bank
acquired retail banking business from BNP Paribas
and the retail banking operations in Kolkata from
Bank of Tokyo-Mitsubishi. Currently HSBC has 37
branches across 18 cities.
Clinical
trials India's large geographic spread,
varied climatic conditions and rich biodiversity
make it one of the best places in the world for
conducting clinical research on a variety of
health conditions. Examples of some companies
leveraging this advantage include:
Pfizer is using its Indian facility for
clinical studies. The company has invested $12.5
million since 1995 in India on clinical trials.
GlaxoSmithKline PLC's leveraging of India's
process chemistry skills, product development
capability and manufacturing strengths. For GSK,
India's rich biodiversity and doctor base, make it
a promising clinical-trials destination for GSK
innovations. GSK conducts high-end statistical
data analysis for clinical trials from its center
in India.
Shared services
centers Fortune 500 companies are setting
up their own shared-services centers in India to
offer services such as financial/accounting
services, payroll processing and taxation, among
others. The following are some examples of
companies with shared-services centers in India:
Citigroup has established a company in India
for its business process outsourcing (BPO)
activities. The company handles all the
cash-management and trade-finance transaction
processing for Citibank India, Sri Lanka and
Bangladesh; credit cards services for the Eastern
Europe, Middle East and Africa regions of Citibank
and private bank back-office processing work for
Citibank in Europe.
HSBC Group has started outsourcing its
back-office transaction-processing and
software-development activities to India in order
to maintain its profitability levels, streamline
its costs, improve productivity and cut
bureaucracy.
Prudential PLC set up a center in Mumbai in
2003 called Prudential Process Management Services
(India) Pvt Ltd (PPMS). A third of the operations
at PPMS comprise call center services, two-thirds
are business-process related.
ABN AMRO has outsourced business processes
from about 18 countries to its back offices in
Chennai, Mumbai and Delhi. The head count in these
centers is about 1,200.
R&D,
engineering and software-development
centers To leverage India's intellectual
capital, Fortune 500 companies are setting up
R&D, engineering and software-development
centers in India; some of them are their
respective companies' largest centers outside
their corporate headquarters in terms of
investment and staffing levels. These teams work
collaboratively with their counterparts worldwide
on cutting-edge technology. The following are
examples of companies that have set up such
centers in India:
Philips Software Center Private Limited (PSC)
meets the need for high-quality, cost-effective
software-development capacity within the Philips
organization worldwide.
Canon India's Software Development Center
(SDC) in India is one of the six such cutting-edge
technology centers of its kind. SDC undertakes
contract software development from Canon Inc,
Canon Development Americas and Canon Information
Systems Research, Australia.
ABB's Indian operations are increasingly being
leveraged as a regional and global hub for
projects, products, services and R&D for the
entire group.
United Kingdom-based Allianz Cornhill
Insurance PLC (an Allianz Group Company) has set
up an Indian subsidiary, Allianz Cornhill
Information Services, for software-development and
business-process outsourcing. The center currently
employs about 100 people and is expected to
increase its head count to 400 by end of year
2005.
DuPont's activities in India include an
R&D center that conducts field trials for
crop-protection products and nationwide R&D
centers for Pioneer seed research for development
of hybrids relevant to different crops in India.
LG has set up R&D facilities in India at
Bangalore and is setting up another at Pune. Both
the units carry out R&D work for the domestic
market as well as the parent company. They also
undertake customized R&D for specific
countries to which the company exports its
products.
Intel set up its first R&D center (Intel
India Development Center - IIDC) in Bangalore in
1999. Intel is using this facility to work in
e-business applications, networking and
communications, microprocessor and chipset design,
manufacturing automation and systems software.
Managerial talent Fortune 500
companies are leveraging India as a source of
high-quality managerial talent. These managers are
trained and subsequently assigned to global
positions:
Unilever considers India a vast reservoir of
managerial talent for global posting.
GlaxoSmithKline (GSK) PLC, the pharmaceutical
giant, regularly promotes managers from India to
other geographies of GSK.
Personnel from Citigroup India are routinely
assigned to global positions at Citigroup.
In Prudential, Indian managerial talent is
well regarded and personnel from India have moved
on to regional roles in Asia.
Johnson & Johnson's (J & J) Indian
R&D and testing centers provide services to
J&J worldwide. Jansen Cilag (the pharma
division of J&J) has a stability center in
India. Indian managers are constantly promoted to
overseas operations. An Indian team is also
managing the supply-chain planning for the Asia
Pacific region.
Sourcing
base Fortune 500 companies are leveraging
the availability of a wide range of raw materials
as they reduce the cost of inputs for
manufacturing. They are also exploiting economies
of scale and their bargaining power (on account of
bulk purchases) in India:
Coca-Cola India exports commodities and
materials such as tea, coffee, polyethylene
terepthalate polyester (PET) resin, closures,
crowns and labels to its global operations.
Localizing the supply chain To
compete effectively on cost, Fortune 500 companies
are setting up operating structures involving
various degrees of localization of the supply
chain. For example, local manufacturing is
allowing Fortune 500 companies to avoid paying
high import duties, in addition to leveraging
India's low-cost and productive workforce. Many
Fortune 500 companies are also leveraging the
initiatives taken up by various state governments
to attract investments, such as those related to
improvements (business environment, resource
availability), incentives (tax holidays, policy
support) and investments (joint development). The
following are some examples of how Fortune 500
companies are localizing the supply chain to
minimize import duties, in addition to leveraging
India's low cost and productive workforce:
LG manufactures PC monitors and refrigerators
in India to overcome high import duties and to
leverage Indian benefits.
To derive Indian advantages and overcome high
import duties, Samsung India has manufacturing
facilities for color TVs, microwave ovens, washing
machines and air conditioners in India.
BASF has adopted a strategy of manufacturing
its products in India in order to exploit the cost
advantages of the country. The group aims to
derive 70% of its sales from local manufacturing
facilities in India.
A high degree of localization has enabled Ford
to keep its manufacturing costs low. Ford India's
localization program crossed the 90% mark in 2003.
Meanwhile, as for the American
multinationals in particular, the study reveals
that they're all making money. A majority of US
firms with a presence in India have been reporting
double-digit year-on-year growth. According to a
study conducted by the Boston Consulting Group,
the Indian arms of two American banks, Citibank
and Bank of America, are more profitable in India
than their global average.
General
Electric did $1 billion in business here three
years ago and continues to maintain the same pace.
It has so far invested $600 million in India; this
money has brought domestic earnings of $1 billion
and exports worth another $1 billion. In other
words, GE has recouped more than three times its
investments.
Indeed, the American
multinationals are scaling up as if there's no
tomorrow. India is already Reebok's fastest
growing market in the Asia Pacific. Reebok India
plans to open a new store in India every week
until the end of 2005. India is also Motorola's
third-largest market. Ford arrived in India at the
turn of the millennium with 12 dealerships in
eight cities; today it has 90 dealers in 70
cities. The US auto major has recently completed
what it calls "its best-ever year" in terms of
sales. While many US companies are benefiting from
the growing size of the domestic market, others
are being rewarded for making India their hub. The
US automotive systems company, Visteon, makes
automobile starters and alternators for the
European market. With $43 million in sales,
Visteon is the largest exporter of alternators out
of India.
The rapid growth is not
restricted to IT or manufacturing. American
companies also are making important inroads in
India's massive farm sector, which employs 70% of
the population either directly or indirectly. The
US agrochemical giant, Monsanto, started selling
Bt cotton seeds in India barely two years ago. In
the first year (2003) about 75,000 farmers
supported Bt cotton. The number was 300,000 in
2004 and in 2005 about 500,000 farmers are
expected to cultivate the crop.
For US
investors who bought into the India story in the
1990s - when others were still restricting their
Asian forays to China - the mood is upbeat. A
study conducted a few years ago by the Xerox
Corporation and consulting firm Inter-Link India
revealed that about 70% of all American companies
reported better than expected market share, market
growth, product launches and profits. Only 14%
were worried about sovereign guarantees. Almost
all those surveyed said they would not scrap their
venture in India.
More than 93% rated the
business climate in the states they were located
in as fair to excellent. In segments such as
information technology and software, an
overwhelming 83% of American companies said they
were very happy with their experience in India.
This hardly comes as a surprise. Nine out of the
top 20 Indian IT firms are from United States.
These firms make up more than 37% of the turnover
of the top 20 firms operating in India. And
they're making hay. Oracle started its Indian
operations in August 1993. Its Indian subsidiary
has achieved a CAGR of about 40% since its
inception and sells more call-center software in
India than the rest of Asia Pacific combined.
Between September and November 2004, Oracle
India's earnings per share increased 35%, net
income grew 32% and operating margin at 41%, the
highest ever. At another level, IBM led India's
server market in 2004 with a 30% market share.
PepsiCo India - which is expecting a
15-20% increase in sales in 2005, according to its
India head, Rajeev Bakshi - has 19 company-owned
factories and 21 franchisees. The company has set
up eight greenfield sites and is planning an
investment of about $150 million in the next two
to three years. Similarly, from 1993 to 2003,
Coca-Cola invested more than $1 billion in India,
making it one of the country's top international
investors. By 2003, the Atlanta giant's Indian arm
had won the prestigious Woodruff Cup from among 22
divisions of the company based on three broad
parameters of volume, profitability and quality.
Meanwhile, in less than a decade the US fast food
chains, McDonald's, Pizza Hut and KFC, have
established a strong presence in urban India by
putting together recipes made for palates of
Indians. KFC came to India in 1995; they opened 70
restaurants over the next eight years. Last year,
they opened 30 more, for a total of 100. Their
target in 2014: 1,000 restaurants.
The
bigger the company the larger the potential for
growth. Citigroup of New York, for instance, makes
money in retail banking, corporate banking, wealth
management, services for non-resident Indians
(NRIs) and a host of other channels. GE also makes
money in India in 31 different businesses. "There
isn't a better destination, frankly, than India
just because of [the] scale of [the] population
and [the] availability of employees," said Pramod
Bhasin of GE India. "Right now every one of our
manufacturing businesses has a significant
engineering operation here," added Scott Bayman,
GE India's CEO. Two years ago, revenues and orders
of the US giant exceeded $1 billion in India. GE
now employs more than 22,000 people in India.
But nowhere has the performance of
American companies been more profound than in
technology. In terms of investment and growth, US
companies such as Cognizant Technologies, IBM,
Oracle, GE, Cisco, Compaq, and Intel, among others
lead the multinational corporations (MNCs) in the
information technology (IT) sector.
Nine
out of the top 20 Indian IT firms are from the
United States. These account for more than 37% of
the turnover of the top 20 firms operating in
India. These companies are doing well because they
bet on India early on. In 1991, Motorola set up
its first software center in Bangalore. In 1999,
the American tech giant added two chip-designing
units around Delhi and a third one in Hyderabad.
India is now well-established as a source of
software and chip design and as a source of
excellent capital for Motorola globally. The
number of software engineers employed by Motorola
in India has gone from 100 to a current level of
2000 engineers. As a key growth market for
Motorola, India has reached a critical inflection
point. Even American companies outsourcing work to
India have grown in complexity. Seeking simple
cost advantages in the form of call centers is
passe. Many now seek the expertise of Indian
fashion professionals. India for example, is now a
major sourcing hub for Reebok International's golf
apparel and the accessories brand, Greg Norman
Collection. The $100 million brand, which retails
at $60 to $90 apiece globally, sources about
30-40% of its total apparel needs from India.
The ultimate reason why the presence of
MNCs will only grow in India is this: If
globalization is inevitable, so is a presence in
India, one of the largest markets and economies of
the future.
Swati Lodh Kundu has
a Masters in Economics from the University of
Calcutta.
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