Lessons for the Indian Market

So much about India seems so familiar. Unlike China, almost everyone in India who interacts with foreigners can speak English. The British introduced Western systems of government, education and judiciary processes, which remain today. And that—combined with a cultural proclivity toward saying yes when, in fact, like in China, the answer may be no—can make India seem deceptively comfortable or easy. It can cause normally wary international business managers to drop the guard they normally carry to unfamiliar terrain. It can also create a feeling that the market is easy to assess, as well as easily conquerable by transplanting business techniques and products that work elsewhere in the world.

Those assumptions can lead to critical errors for U.S. companies trying to get a foothold in the Indian market. “The biggest mistake is thinking there is a single India,” says Mumbai-based Rama Bijapurkar, one of India’s leading business strategy consultants and author of the new book Winning in the Indian Market. “The single biggest thing that confounds people about India is that everything you say about it, the opposite is also true. There are five-star hotels and abject poverty. We had Indira Gandhi as Prime Minister, but we also have [women killed over] dowry debts. It is a democracy with reasonable institutions, but there is not the same kind of culture of debate. These dichotomies are very hard.

“If you transplant your global strategy, you only get the tip of the iceberg,” she continues. Companies that see India’s economic growth rates of 8.5 percent annually for the last three years and believe that the country is on its way to becoming a developed market with the same characteristics of the West are in for disappointment. “Their biggest lesson is that they come in saying, ‘Who can resist progress?’ [They believe] that people will buy the same things as they do everywhere else. But people do resist progress,” says Bijapurkar.

The first step is breaking down the market. “If you’re a business, the first thing you need to ask is which India is your India,” she says. “The educated? The young rich? The poor babies? And then you need to think about and engage with India’s problems and provide solutions. Do you bring the global best practices here, or do you develop just for the Indian market?”

It’s definitely the latter, according to experts who have seen giant brands falter over the years before they figured out how to navigate India’s consumers. “I’ve seen company after company make the same mistake,” says Manvinder Singh Banga, who for years ran Hindustan Unilever’s operations in India and is now president of Unilever Foods in the U.S. “They overestimate the market.”

The failure stories are legendary: Kellogg, because Indians won’t eat cold cereal for breakfast; Mercedes, because it introduced an older, cheaper model when in fact Indian consumers wanted the latest cars, just at a lower price; Coca-Cola, because the bottles were too big, prices were too high and the brand was too American; Levi Strauss, whose jeans were seen as exorbitantly priced ($65 in 1995) compared to generic blue jeans, leaving it vulnerable to counterfeiting; and Novartis, which failed to sufficiently navigate regulatory hurdles and patent laws and found its Gleevec cancer drug unprotected from generic copies in the Indian market.

Though all of these companies have since revised their strategies, all of their problems were rooted in the failure to sufficiently understand the market and operating environment, to line up a good partner, and to develop and price products specifically for the Indian consumer. By contrast, companies that have gone in with a clear Indiaonly strategy of segmenting the market have done well.

L’Oreal at first targeted only the high-end segment with premium hair color rather than trying to reach the mass market with its shampoos, conditioners and other mass products. Now, it is spreading its reach, going after the lower-income segments by putting, for example, Garnier shampoo into individual-sized sachets that sell for a few rupees—a replication of the “bottom of the pyramid” strategy pioneered by Hindustan Unilever.

Reebok also started by targeting the premium segment. Since creating apparel at the entry level and widening its appeal to women, it has managed to nearly double sales from $59 million in 2004 to more than $100 million today—and managed to get consumers to climb up the value chain. From a majority of sales coming from products priced in the $20-$45 category then, today the bulk of sales come from products priced at $45-$90—in part based on the com pany’s decision to start appealing to women.

“We could have achieved a lot more if we had beefed up our product line or given a more exclusive focus to this segment,” Reebok’s India managing director Subhinder Singh Prem wrote in an essay for Rediff.com. “In 2004, we began to treat our women’s business initiative as if we were launching a new brand. We started promoting the category by opening women-only stores that would meet the special needs of our women customers.” Now Reebok has more than 500 stores in India, with a 51 percent market share. In September it opened Reebok’s largest store in the world, in the central Indian city of Hyderabad, home to India’s nascent biotech industry.

“Our learnings were clear: ‘Ask not what percentage of an existing market your brand can achieve. Ask how large a market your brand can create by putting resources behind creating a category,’” Prem wrote.

That conclusion goes directly to the point of addressing India’s problems with market solutions. That’s what Nokia did, developing affordable mobile phones with keypads that withstand water and dust conditions and pricing them for the mass market. It reported sales of 60 million mobile phones in the first half of 2007 alone. Nokia has built 70 percent market share, and India has displaced the U.S. as Nokia’s second- biggest market, behind China.

Coca-Cola and Pepsi, after seeing sales decline badly in 1999 when they raised prices by just one rupee, realized in 2002 that introducing smaller bottles (200 ml instead of 300 ml) and lowering the price can prompt a large increase in sales.  Coca-Cola’s cola business is  now centered around the smaller, returnable glass bottle, priced at five rupees (13 cents). But what it ultimately realized is that its main competition was not from Pepsi, but from water, tea, coffee and fruit juice. It is now concentrating its growth strategy on developing moderately priced non-carbonated beverages. “They didn’t want to accept that maybe Indians want to drink water, not Coke, and how unimportant a symbol of America is in this market,” says Bijapurkar, recalling Coca-Cola’s huge losses. “Arrogance is a deadly sin.”

It’s not just consumer products companies. B2B firms have had similar problems navigating in India. Auto desk, for example, started out trying to sell software services in India in 1993. “We were pricing too high for the market,” says Carol Bartz, Autodesk’s executive chairman and former CEO. At first, Autodesk charged clients similar rates to what it charged in the U.S.—which turned out to be a whole year’s rent for one customer who complained about the pricing, giving Bartz the answer as to why sales were so lackluster. So Autodesk repriced the software at about three months’ rent, and saw sales improve dramatically. The other problem was insufficient research, in part due to the choice of a business partner based in the south of India; Autodesk was targeting large companies in north India. “Frankly, we had the wrong partner,” Bartz says. “The biggest issue is just getting good people.”

A good local partner makes the difference between overcoming regulatory hurdles and understanding the Indian consumer mindset. Like Novartis with its drug regulatory hurdles, Yum Brands, which owns KFC, had to pull out of India in 1997 after three years because of regulatory problems and issues with its franchisee— as well as a number of violent attacks on KFC stores by anti-American and anti-globalization protestors. KFC went back to India three years ago after regulations changed to allow Yum company ownership of outlets. Now, with a good local operation run by Indian managers, KFC is experiencing a surge in popularity, according to Graham Allan, the London-based president of Yum Restaurants International. KFC has opened 25 outlets in India and expects to have 200 stores by 2012. (The company does not break out sales.) “We’ve identified India as one of several high-priority strategic markets for us,” says Allan. “India can be one of the biggest markets, if not the biggest market, in international someday.”

That kind of importance is clear just by looking at the numbers. By 2025, India’s consumer market— currently the 12th-largest in the world—is expected to become 5th, surpassing Germany and Italy, according to research by the Mc Kinsey

Global Institute. Household disposable income is forecast to triple, a compound annual growth rate of 5.5 percent compared to 3.6 percent growth over the last 20 years. “The question for companies today is not whether to be in India or not, it’s how to be in India,” says Nandan Nilekani, co-founder and co-chairman of Infosys Technologies in Bangalore (see interview, p. 51).

The middle class, defined as having an annual income of $4,400 to $21,000—which at 56 million is currently 5 percent of the population of more than 1.1 billion—is forecast by McKinsey to grow to an astounding 583 million, or 41 percent of the population, by 2025. Since 1985, the “deprived”—those who live on less than $1 per day—have fallen from 90 percent of the population to 54 percent as they move into a class called the “aspirers.” They want to own a color TV, a gas stove, a mobile phone and either a motorbike or car (see table, above).

That’s tremendous news for multinationals, and a reason that India—despite its hurdles—must remain on the top of any company’s international strategy. The key, of course, is to learn from the mistakes of the early entrants and get it right.

India Fast Facts

With respect to economic freedom, India was ranked 115th of 157 countries by the 2008 Index of Economic Freedom (www.heritage.org/Index/) with a score of 54.2, somewhat below the average score of 60.3. (Hong Kong ranked the most free at 90.3; North Korea, the least free, scored 3.0.) India’s challenges include heavy regulatory burdens, high trade barriers and corruption. Its judicial system is described as “erratic and clogged.” Nevertheless, the economy continues to grow on the strength of vibrant services and expanding manufacturing. Population: 1.1 billion GDP (purchasing power parity): $2.965 trillion (2007 est.) GDP (official exchange rate): $1.09 trillion (2007 est.) GDP (real growth rate): 8.5% (2007 est.) GDP (composition by sector): agriculture: 16.6% industry: 28.4% services: 55% (2007 est.) Labor force: 516.4 million (2007 est.) Labor force (by occupation): agriculture: 60% industry: 12% services: 28% (2003) Unemployment rate: 7.2% (2007 est.) Inflation rate (consumer prices): 5.9% (2007 est.) Overall inflation projected to decline from 5.6 percent in 2006-07 to 4.1 percent in 2007-08 – as per the official Indian Economic Survey. Investment (gross fixed): 31.8% of GDP (2007 est.) Budget: revenues: $145.2 billion expenditures: $182.4 billion (2007 est.) Public debt: 58.8% of GDP (federal and state debt combined) (2007 est.) Agriculture: rice, wheat, oilseed, cotton, jute, tea, sugarcane, potatoes, cattle, water buffalo, sheep, goats, poultry, fish Industries: textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, software Exports: $140.8 billion f.o.b. (2007 est.) commodities: petroleum products, textile goods, gems and jewelry, engineering goods, chemicals, leather products Exports (by country): China 5.3%, U.S. 13.7%, EU 21.4, UAE 10.3% - Economic Survey ’08 Imports: $224.1 billion f.o.b. (2007 est.) commodities: crude oil, machinery, gems, fertilizer, chemicals Imports (by country): China 11.2%, U.S. 5.8%, EU 14.5%, Saudi Arabia 7.2%—Economic Survey ’08 Reserves of foreign exchange and gold: $239.4 billion (31 December 2007 est.) Debt: external: $165.4 billion (30 June 2007) Foreign Direct Investment (FDI): $23 billion (2007) Market value of publicly traded shares: $818.9 billion (2006) Exchange rates: (Indian rupees per U.S. dollar) - 41.487 (2007), 45.3 (2006), 44.101 (2005), 45.317 (2004), 46.583 (2003)

The 16 People to know in India

Mukesh Ambani - Chairman & Managing Director, Reliance Industries India’s most valuable company in terms of market capitalization (Ambani is India’s richest man), Reliance holds interests in petroleum refining, chemicals, retail; world’s leading producer of polyester yarn and fiber. Rajiv Bajaj - Managing Director, Bajaj Auto India’s second-largest motorcycle maker developed a $3,000 car with Renault-Nissan and has made major cost-savings innovations.  Kumar Mangalam Birla - Chairman, Aditya Birla Group Birla expanded his father’s firm into financial services, telecom (Idea Cellular) and retail; acquired Canadian aluminum maker Novelis for $6 billion. A $24 billion corporation with a market cap of $31.5 billion, Aditya Birla Group’s 100,000 employees represent 25 different nationalities.  Baba Kalyani - Chairman, Bharat Forge Part of the $ 2.1 billion Kalyani Group and the world’s secondlargest forging company, Bharat Forge is based in Pune with factories in India, Europe, the U.S. and China. Customers for its forged and machined auto components include Ford, Toyota and BMW.  Chanda Kochhar - Executive Director, ICICI Bank India’s leading female banker; front-runner to be CEO of India’s largest private-sector bank in 2009 when CEO K.V. Kamath retires.  Anand Mahindra - Vice-Chairman & Managing Director, Mahindra & Mahindra India’s largest tractor and SUV maker, Mahindra & Mahindra plans to launch pickup trucks and SUVs in the U.S. in Spring of 2009. Last year its subsidiary, Mahindra Forgings Global Ltd, acquired a 90.47 percent stake in Schoneweiss & Co. GmbH, a leading German forging company, which supplies DaimlerChrysler Group, MAN, Scania and Volkswagen.  Sunil Mittal - Chairman & Managing Director, Bharti Enterprises Mittal founded Bharti Airtel, India’s largest mobile phone operator, with 50 million customers. He is a Wal-Mart joint-venture partner and has interests in insurance with AXA and in food with Del Monte.  Shiv Nadar - Chairman & Co-founder of HCL Technologies, India’s first computer-maker turned outsourcing and hardware firm with operations in 18 countries and clients that include Cisco, Boeing and IBM, HCL’s range of offerings spans product engineering, custom and package applications, BPO, IT infrastructure services, IT hardware, systems integration, and distribution of ICT products. HCL, along with its subsidiaries, had last-12-months (LTM) revenue of $1.65 billion and employed 47,954 professionals.  A.M. Naik - Chairman & Managing Director, Larsen & Toubro. Naik leads India’s largest construction and engineering conglomerate with vast operations in the Middle East. Larsen & Toubro also has interests in IT services.  Nandan Nilekani - Co-chairman & Co-founder, Infosys Technologies, Along with N.R. Narayana Murthy, Nilekani co-founded and has led the giant tech and consulting company, with more than 80,000 employees worldwide. He is best known for telling Thomas Friedman, “The world is flat.” Infosys, started in 1981 with $250, is today a global leader in the “next generation” of IT and consulting with revenues of more than $3 billion.  Azim Premji - Chairman & CEO, Wipro Infotech, Sourcing 70 percent of sales abroad, Wipro has kept up its rapid overseas expansion, including the priciest acquisition yet by an Indian software services company—of U.S.-based Infocrossing, for $600 million—and a joint venture with Cisco. It is the world’s first CMMi Level 5 certified software services company and the first outside the U.S. to receive the IEEE Software Process Award.   B. Ramalinga Raju Chairman & founder, Satyam Computer Services India’s fourth-largest software services exporter, with two European acquisitions last year, Satyam clients include 163 major U.S. corporations across 20 major industrial sectors.  Ayodhya Rami Reddy - Chairman, Ramky Group India’s leading environmental and waste management organization; Ramky today has a nationwide presence and revenue of approximately $250 million across three divisions: Ramky Infrastructure Ltd. (RIL), Ramky Enviro Engineers Ltd. (REEL) and Ramky Estates and Farms Pvt Ltd (REFPL). Malvinder Singh - CEO, Ranbaxy Laboratories India’s largest pharmaceutical company, Ranbaxy recently settled with GlaxoSmithKline over rights to the generic version of drug Valtrax. It ranks among the top 10 global generic companies and has a presence in 23 of the top 25 pharma markets of the world.  Ratan Tata - Chairman, Tata Group, Tata comprises 98 operating companies in seven business sectors: information systems and communications, engineering, materials, services, energy, consumer products, and chemicals, with total revenues of $28.8 billion, the equivalent of about 3.2 percent of the country’s GDP, and a market capitalization of $56.52 billion as of March ’08. Tata Motors is producing the world’s cheapest “People’s Car” (at $2,500) and recently bought the Land Rover and Jaguar brands from Ford Motor. Tata also owns TCS consulting and Taj hotels.  Gautam Thapar - Chairman, Thapar Group, Thapar’s Ballarpur Industries is India’s largest papermaker; other interests include chemicals, infrastructure, engineering and India’s first art auction house.

 

Further Readings

Important recently published readings on India, its history and economic development, and business opportunities. Think India—The Rise of the World’s Next Superpower and What It Means for Every American By Vinay Rai and William L. Simon (Dutton-Penguin) A highly readable one-volume summary of the country’s recent development, it contains useful examples of outside investors who successfully developed the home market. It also points out common pitfalls. India, the Emerging Giant By Arvind Panagariya (Oxford University Press) A comprehensive economic and statistically laden account, if somewhat burdened by academic prose, of India’s past, offering a reasoned analysis of why the country’s economic promise did not materialize sooner. India By Michael Wood (Basic Books) Best known for his TV documentaries (In the Footsteps of Alexander the Great, In Search of the Trojan War), this Oxonian BBC presenter and unabashed India-phile offers a compelling first-person narrative of India’s civilization, presented with sumptuous photography. India Arriving—How This Economic Powerhouse Is Redefining Global Business By Rafiq Dossani (Amacon) A concise historical and political overview written by an insider who helped introduce progressive reforms to the Indian government. Of value is the author’s chapter on non-resident Indians (NRIs) living in America. The Quest for Global Dominance (Chapter Nine: “Leveraging China and India for Global Dominance”) By Anil K. Gupta, Vijay Govindarajan and Haiyan Wang (Jossey-Bass) With the academic thoroughness without turgid academic prose, the authors, representatives of Maryland’s Smith School of Business, Dartmouth’s Tuck School and the China India Institute, set forth a concise overview of strategic developments and options for business leaders. A must-read.

The Next Frontier?

Nandan Nilekani, one of India’s most renowned business leaders, is cofounder and co-chairman of Infosys Technologies in Bangalore. Why should U.S. companies bother with India? India is the next frontier. India is going to go through a cycle of growth for many years to come. For a variety of reasons—because of the strength of our entrepreneurs, because of our technology, because of our comfort with globalization, because of our young population, global factors working in our favor—India is poised for a long cycle of growth. Also, India is a large consumer economy. Two-thirds of India’s economy is driven by the consumer. Any global company which is trying to grow globally and to outwit its competitors globally cannot afford to not be here. Having said that, it depends on the industry. There are a lot of industries in India where it’s a competitive free market, where 100 percent can be owned by the foreigner, like in our [technology] industry. In those free markets it’s a pure business play, where you’re deciding market, consumer, how to sell and distribution. In other markets it may not be advisable to come on your own and then look for a good partner, or the laws may not permit you to come 100 percent. The strategy depends on the context of the rules. What about all the seeming insurmountable challenges of doing business in India? It’s a demanding market; it’s a very tough market. Indian consumers are very demanding. The Indian consumer now has global access, he has seen global products. You have to create a superior value proposition. He’s well informed, he goes on the net. He demands the best, and he demands it at a very good price. It’s a demanding market, but I think it’s a fair market. It’s a genuine consumer market in that sense. There is a lot to be done. It’s a great time for global companies. Have a lot of companies gotten it wrong? Companies that have essentially just tried to duplicate their global strategy here, companies that have not looked at how to adapt their products to local needs, companies that have not looked at how to price in this market, companies that have not invested in brand building and distribution channels—there are many examples where they have not succeeded. It’s not that somebody stopped them, it’s just that their strategy was not resonating with the market. Are they getting smarter? Absolutely. I’ve seen a sea change. There was a time in large companies when India was the backwater. You didn’t build your global résumé by going to India. It was neither high on the investment criteria nor was it a great thing for an up-and-coming manager. Now it’s completely changed. It’s very, very high on the business agenda. It’s on the CEO agenda. And for a young manager in a global firm who wants to burnish his global credentials, it’s a great place to go and work. So I think both the CEO focus as well as the fact that the leaders coming here are among the best and the brightest, I think that’s making a big difference.