By Prema Nakra, Ph.D. email | bio

With Gross Domestic Product (GDP) growth more than double that of the United States and the United Kingdom during the past decade, India is one of the most promising and fastest growing economies in the world. Its skilled managerial and technical manpower and its enormous middle class, approximately 300 million strong, offer a value proposition that businesses across the globe find hard to resist. India’s time-tested institutions such as a free and vibrant press, a well established judiciary, a sophisticated accounting and legal system, and a user-friendly intellectual infrastructure offer foreign marketers and investors a transparent environment that is conducive to long-term success if the right business models are developed and implemented.

Global players that have successful outcomes have invested time and resources to understand local consumers and business conditions, tailored products to the entire market from the high end to the middle and lower-end segments, reengineered supply chains, and even skipped the joint venture route when necessary. The most successful multinationals in India, however, are those that have designed and tailored products and marketing strategies unique to this country’s diverse population and culture.

In this first of a series of articles on India, I will give some background on the country. In future articles, I will discuss India’s value proposition as well as the challenges and critical success factors for successful operations in India.

Introducing India

The Republic of India (India), the focal point of the global trend toward strategic off-shoring, is a constitutional federal democracy made up of 28 states and seven union territories. Its economy is the 12th largest in the world measured in nominal U.S. dollars, but rises to fourth largest when measured at purchasing power parity exchange rates, according to the Economist Intelligent Unit reports. India’s economy is divided between agriculture, which accounts for 25% of the gross national product; manufacturing, constituting another 25%; and the high-tech service sector, which now makes up 50% of the gross national product. India’s economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of support services.

The economic reforms that began in 1991 marked a turning point in India’s economic history. Under the program, the country successfully implemented strategies to transform itself from an agrarian, underdeveloped and closed economy into an open and progressive one that encourages foreign investment and draws wealth from services as well as industry. As the World Bank's Country Brief reports, structural reforms and stabilization programs during the 1990s have contributed to India’s sustainable economic growth, which has been relatively strong during past decades, averaging between five and 5.5% a year.

The removal of many import restrictions has brought foreign goods within reach of urban India. Business process outsourcing has given the middle class in many parts of India new job opportunities at wages that are significantly better than traditional ones. The largest Indian businesses are becoming world players, putting their capital at risk, forging alliances, finding joint ventures and operating within the disciplines of the marketplace.

Over the past decade, the evolution of knowledge sectors such as pharmaceuticals, biotech, and information technology (IT) services in India have been phenomenal. With large amounts of foreign direct investment (FDI) flowing into India, global best practices in various industries have also been imported. The Japanese concepts of just-in-time, kanban, kaizan and total product maintenance have proved successful in many industry sectors.

With an enormous population, a booming economy and increasing integration with the global marketplace, many industry sectors in India seem poised for impressive growth. India, however, has poor infrastructure, low literacy levels for many people, and labor inflexibilities. Hence high-volume manufacturing has not yet taken off significantly in India. Yet businesses are using technology and communication networks to build virtual, interconnected innovation ecosystems to overcome the gaps.

In 2007, U.S. exports to India increased by 73.4% over the previous year, according to U.S. government statistics. India is already among the top 20 trading partners of the United States. But the best is yet to come as Indian entrepreneurs unleash their prowess in coming years and decades. Multinationals willing to make the effort to source and manufacture products in India are likely to obtain first-mover advantages such as exclusive relationships with the best suppliers, access to the brightest talent, and government support.

World Re-Discovers India

Foreign companies have been active in India for decades. For example, DuPont India, a subsidiary of its American parent, began its operations in 1802 when it sent its first shipment of raw materials to DuPont (USA) to produce black powder for explosives. Today, DuPont India markets a wide range of products in varied market segments around the world. DuPont discovered India’s value proposition long before other multinationals discovered the unique powers of India.

Since 1991 import restrictions aimed at multinationals have been removed in nearly all sectors. Corporate giants including Sony, Samsung and Kellogg have entered India to take advantage of manufacturing and marketing opportunities. Citigroup, Hindustan Lever (Unilever's Indian arm) and ITC are among the successful multinationals with a long-term presence there. Other multinationals, Hutchison Whampoa, LG Electronics and Samsung, for instance, have built businesses with more than $1 billion in annual revenues in just a few years. Levels of FDI to India rose dramatically since the 1990s, when inflows increased from $2-3 billion a year to an estimated $41 billion in fiscal year 2008-09. India’s major imports included petroleum and petroleum-based products, electronic goods, non-electrical machinery, and gold and silver.

Attractive Industry Sectors

With a population of 1.148 billion and a gross domestic product of $1,225 billion, India promises a world of opportunities for domestic and international marketers in multiple industry sectors. Little wonder, global brand owners from luxury brands to telecommunications to food processing and infrastructure development have established a significant presence in India.

Now more than 500 major international companies have IT operations in Bangalore alone. Among the household names are Hewlett-Packard, Dell, IBM and Accenture. For Intel's John McClure, the company has no choice but to be in India. Intel's Indian development center played a key role in the company's strategy to develop new computer chips for computers with Microsoft's Vista operating system.

Toyota was the first automaker, in 2001, to see India as a source of components. The company invested almost $200 million in six joint ventures to help local suppliers develop scale in their manufacturing operations. Toyota also focused on localizing the content of its brands, Qualis and Corolla. Through economies of scale in manufacturing, Toyota then turned India into a regional sourcing hub. It now exports transmission assemblies, one of the most complex parts of any automobile, from India. Toyota has also invested significant amounts to bring Indian suppliers up to its global standards.

Of the 50 plus multinational companies with significance presence in India, the nine market leaders, including British American Tobacco, Hyundai Motor, Suzuki Motor and Unilever, have an average return on capital of around 48%. Even the next 26% have an average return on capital of 36%.

Shape of Things to Come

In the 2005 World Investment Report, India was ranked third after the United States and China as an R&D hot spot, which was defined as a place where companies can tap into existing networks of scientific and technical expertise with good links to academic research facilities and a commercial, pro-innovation environment. There is no doubt India is fast becoming an attractive destination for global R&D investments due to the large pool of qualified scientists and engineers and the excellent educational and R&D infrastructure, coupled with a regulated patent regime.

More than 125 Fortune 500 companies have opted to have their R&D base in India. The R&D scope is moving beyond the pharma and automobile sectors, and a large number of companies engaged in innovation and design work have also begun to move to India. General Electric, Delphi, Eli Lilly, Hewlett Packard, DaimlerChrysler, Microsoft and Oracle among others have already set up their R&D bases in India over the past few years. General Electric, for example, has almost 2,000 employees at its Global Research Center in Bangalore, India, where at least four of the 11 laboratories are engaged in chemical-related work.

According to UNCTAD's World Investment Report 2005, more than 50% of the 300 largest R&D spending firms in the world now conduct R&D in India and China. A recent survey of multinational companies by the consulting firm Booz, Allen, Hamilton and the French business school INSEAD indicated that 75% of new R&D sites planned over the next few years will be in these two countries.

When it comes to hardware manufacturing, Taiwan and China have been regarded as the top destinations. However, customers are justifiably concerned about single source supply and are beginning to look for alternatives to China and Taiwan. India is well poised to be an alternate hardware manufacturing destination.

Although foreign direct investment in India has gone up significantly in the past two decades, it remains well below the rate in China, Southeast Asia or other countries in the immediate neighborhood. The future of India’s economic place under the sun looks bright due to its unique value proposition, which I will discuss in my next article.

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