Chapter Excerpt

CHAPTER 1
The Big Opportunities

For the astute and prudent company, India today can be a gold mine. There is money to be made in the most unexpected places, if you look carefully and plan right While major risks and significant pitfalls surely exist, a self-assured India now welcomes Western executives to its free market on fair terms in a vibrant and complex democracy.

Much of American media would have you believe that business in India equates to outsourcing and American job loss. Call centers near Delhi and computer programmers in Bangalore continue to be the staple of many news stories. But that's only a fraction of global business based in India that we hear about. Western companies that successfully sell products and services in India seldom receive equal press coverage. For example, it's been little reported that General Electric sold $3 billion of goods and services in India in 2006 and has publicly stated that its goal is $8 billion by 2010.

Let's take a look at some current mega-trends— manufacturing, defense, infrastructure, consumer goods, and finally knowledge-based services—as well as some emerging trends that show signs of taking off in the near future.

Manufacturing

Every year, the Union of Japanese Scientists and Engineers selects a few companies for its prestigious Deming Application Prize for quality, named after the famous American management consultant who helped transform Japanese companies with the principles of statistical quality control. Until 1997, not a single factory in India had ever won a Deming, which has been called the Nobel Prize of manufacturing. Just nine years later, sixteen Indian companies, mostly in the automotive business, had won Deming awards, including Rane Brake, Sundaram Clayton, the seat division of Krishna Maruti, Rane Engine Valves, Rane TRW Steering Systems, Brakes India, and TVS Motors. That's more winners than any country outside Japan.

Ten years ago, most of the industrial world did not regard India as a manufacturing powerhouse, but since then a number of remarkable accomplishments have made the nation one of the world's top destinations for manufacturing.

Here's a quick survey: $58 billion Korean carmaker Hyundai established a presence in India in 1996 and is now the country's second largest. A few years later, Hyundai began exporting cars made in Chennai, India, to markets in Europe, Africa, the Middle East, and Latin America. In 2008, Hyundai plans to export three hundred thousand cars from India. India is one of the few countries that features homegrown automotive companies. Tata Motors gained the world's attention at the 2008 Delhi Auto Show, when it showed the world's least expensive car the Nano, but it has been selling the Indica, a hatchback, followed by the Indigo, a sedan, for several years. All three models were designed entirely by Tata. Mahindra and Mahindra, whom we will also meet later on in the book, produces a sports utility vehicle called the Scorpio.

At the same time, spurred by strong domestic markets and smart management, automotive suppliers in India began improving their quality and productivity. Batteries, radiators, alternators, and other automotive components made in India are routinely exported to North America. Recently, I was invited to visit the world's largest singlelocation metal-forging facility, located in Pune about 120 miles from Mumbai. I was surprised and impressed to tour the factory, owned by Bharat Forge Ltd. Robotic assembly lines start with steel billets at one end and finish with completed crankshafts for cars and trucks ready to load onto pallets at the other, without any routine human intervention.

India's manufacturing transformation is not limited to the automobile industry. Overall industrial production rose by 12.5 percent in fiscal year 2007 compared with the previous year. In the global pharmaceutical industry, it is not easy to receive manufacturing approval from the US Food and Drug Administration (FDA). Yet India now boasts seventy-five FDA-approved facilities, more than any country outside the United States; Italy is next with fifty-five FDAapproved facilities, and China is third with twenty-seven.

If you want to understand the future of India, you should know about the city of Jamnagar, in western India. In 2000, the world's third largest refinery, with a capacity of 660,000 barrels per day, began operations here. American companies such as Bechtel provided construction expertise. Others, including General Electric, Foxboro, and Rockwell Automation, provided equipment. Owned and operated by India's largest private-sector company, Reliance Industries Ltd., the Jamnagar complex was built in less than three years and has won numerous industry awards in its six years of operations; it was named the most energy-efficient refinery in 2004 by Shell Global Solutions, and Refiner of the Year in 2005 by Hart Energy Publishing. A port and a power plant were built specifically to support the refinery.

Reliance is now building the world's sixth largest refinery, a $6.1 billion plant next to its existing refinery. California-based Chevron Corporation decided to invest $300 million in return for 5 percent ownership. At this new refinery, ExxonMobil's research and engineering unit provided the technology for the world's largest sulfuric acid alkylation plant. Much of the new refinery's product is meant for export to Europe and the United States. When the 580,000-barrel-per-day refinery is completed at about the time this book goes to press, it will make Jamnagar the world's largest petroleum-refining hub.

You should also know about hundred-year-old Tata Steel, which recently transformed itself to become the lowest-cost producer of steel on the planet. World Steel Dynamics ranked it the best steelmaker in 2005 and 2006—and soon it will be one of the biggest. Not only is Tata's principal Indian facility—located in Jamshedpur, and with a capacity of five million tons per year—undergoing a significant expansion, but three new locations are also being planned in the Indian states of Jharkhand, Orissa, and Chhattisgarh, with capacities of twelve, six, and five million tons per year, respectively. In a later chapter, we will look at Tata Steel's remarkable overseas acquisitions.

There are other signs of strength in manufacturing in India from diverse sources. The world's second largest producer of blank CDs and DVDs, Moser Baer, is located near New Delhi. If the manhole covers in your city are imported, chances are good that they were manufactured at a foundry in India. Swiss engineering giant ABB Group is in the midst of a $200 million expansion in India. Its president of global markets, Ravi Uppal, summed it up when he told BusinessWeek in October 2007, "Manufacturing is where India's future lies; this is the real economy."

The boom in manufacturing in India brings about three types of opportunities. First of all, if your company supplies any products, equipment, or services to manufacturers, you may find a very ready market in India. Second, if you want to benefit from India's manufacturing prowess, you may find a good vendor partner. Third, your company may benefit from setting up its own facilities in-country.

Defense

India has the world's largest military that depends primarily on imported equipment. More than 1.1 million people serve in its all-volunteer armed services, and the country spends over 2.5 percent of its GDP on defense. The vast majority of its current installed base of hardware was purchased from the former Soviet Union, with some armaments provided by British, French, and Swedish entities.

But the future may not be like the past; in fact, it could be radically different.

In the wake of President George W. Bush's war on terror, India and the United States see each other as allies fighting the same immediate enemy. Military planners in India view their strategic interests spanning the Indian Ocean littoral from Africa to the Straits of Malacca; they want its aircraft to be able to reach Central Asia and its ballistic missiles to be a threat to more than just Pakistan.

Fifty thousand vessels a year pass through the Straits of Malacca, south of Singapore, making up one-quarter of all oceanic trade worldwide. At one point, the navigable channel is just a few miles wide. The Nicobar Islands, six hundred miles east of Chennai in the Bay of Bengal, are part of India and offer an excellent potential choke point for this trade. Some people refer to the island of Car Nicobar as India's stationary aircraft carrier, standing sentinel over these vital lanes. Economic growth and increased trade make India eager to defend shipping lanes from the Persian Gulf toward East Asia. In this, the United States and India are aligned.

Perhaps driven by frustrations that former Soviet vendors are now spread across Russia, Ukraine, Georgia, and other countries, and perhaps by a desire to align more closely with geopolitical realities, the Indian government has broadened its sourcing plans.

The best evidence of this is Israel. India and Israel did not even have full diplomatic relations until 1992. By 2006, however, Israel had leapt into place as India's second largest military supplier, and India has become Israel's largest customer of defense products and services.

The United States has made some progress in winning defense contracts as well. India ordered about $150 million of Raytheon Corporation weapons-locating radars in 2002, and purchased the former USS Trenton warship from the US Navy for $48 million in 2006. In September 2007, when the country released its largest-ever request for proposals—126 modern aircraft—both the Boeing Company and Lockheed Martin Corporation were invited to bid on the $10.5 billion program. In the near future, India plans to buy field artillery guns, airborne early warning systems, long-range maritime surveillance aircraft, several kinds of helicopters, and unmanned aerial vehicles (UAVs). It plans to spend $30 to $50 billion on defense purchases in the coming decade. Western companies can bid freely for most of these contracts. Will there be substantial wins? No one knows for sure. But it's a huge new opening.

Infrastructure

To many visitors, India's infrastructure in the twentyfirst century looks like it was transplanted from the nineteenth century. On city streets, you might see cows, camels, donkeys, mules, horses, and an occasional elephant competing with automobile traffic. In rural areas, paved roads are a luxury. Local trains in Mumbai run overfull and don't even have doors for safety. Electric power plants are inadequate and outdated; they suffer high failure rates. Power to homes, offices, and factories continues to be unreliable across the country. Educated people hesitate to drink the municipal water unless it is boiled or filtered first. A growing population and a booming economy only add stress to the creaky infrastructure.

You could complain about these challenges and give up on India. Or you could look upon each of them as a business opportunity. Let's look at some recent examples.

When India decided to build a world-class metro train system in the capital, Delhi, one of the five consulting companies hired for the massive project was Parsons Brinckerhoff (PB) of New York. The first phase of the train system was completed and operational well ahead of schedule. Delhi's trains are air-conditioned and sleek, its stations are modern, and the system is transforming the way many people work and live. After seven years as an expatriate, John Triplett, who led Parsons India before becoming an independent consultant, believes the country has a great future. "I think that US companies, with the proper attitude and direction, can be very successful here. When I arrived in India, many people thought that Parsons Brinckerhoff was British." PB is now well known and respected in India as a US company.

A thirty-year contract to improve, operate, and manage Delhi Airport was awarded in January 2006 to a public– private partnership (PPP) that includes Germany's Fraport, for its operations expertise, and Malaysia's Eraman for its background in airport retailing. Each has 10 percent, whereas India's GMR Infrastructure Ltd. controls just over half. The government of India controls about a quarter through the Airport Authority of India. When completed, the airport will have the capacity to handle a hundred million passengers a year. In southern India, Hyderabad's brand-new airport, with a starting capacity of twelve million passengers, is also a PPP owned by GMR. Malaysia's Airports Holding Berhad is an 11 percent partner. The ultimate annual capacity of this airport might be forty million passengers. Mumbai's airport is the busiest in India. It was privatized and handed over to a similar PPP led by GVK Industries Ltd. of India, which includes two overseas partners from South Africa, conglomerate Bidvest Group, and stateowned Airports Company, SA. In addition to the minority foreign investors in the PPPs, dozens of additional overseas vendors stand to gain as they sell the hundreds of millions of dollars of imported products and services that will be required to develop and operate these and other airports.

While several American companies have shied away from infrastructure opportunities in India, more than twentyeight hundred employees of the Bechtel Corporation, with headquarters in San Francisco, have been working on the engineering, procurement, project management, and construction consulting for the $6 billion expansion to Reliance's refinery in Jamnagar in western India since January 2005.

Chances to participate in improving India's infrastructure will increase over time. It's seldom easy to win business deals that involve any government. It is even harder when the victory involves an Indian joint-venture partner that holds a majority stake. However, in the next decade, the railways, highways, bridges, seaports, power plants, and refineries of India will need hundreds of billions of dollars of upgrades to keep up with economic progress. Western firms can hardly afford to sit out the dance.

Consumer Goods

On July 24, 2006, a new character entered the world of Archie Comics. Raj Patel was featured in a story called "Out-raj-eous Behavior." In case you have forgotten, Archie and his friends Betty, Veronica, Jughead, and Reggie are students at the fictional Riverdale High School. The small New York company that publishes the comics is run by the sons of two of the original founders. While the comics might be past their prime in the West, they are immensely popular among Indian middle-class schoolchildren. The debut of Raj Patel was front-page news—because he is Indian.

Penguin India, publisher of J. K. Rowling's Harry Potter and the Deathly Hallows, reported more than 252,000 advance orders for the new title in 2007. Tent-pole Hollywood movies are often released at the same time in India and are being dubbed into local languages. American media giants including MTV, CNN, Google, Yahoo!, and MSN are all popular in India.

The Western media in all its forms infl uences and shapes Indian middle-class opinions and expectations. The Washington, DC–based Pew Research Center found in successive surveys (2002, 2005, and 2006) that most Indians have a positive view of the United States. In Russia and China, two other large markets with economic growth potential, most citizens view America negatively according to Pew's 2006 findings. Many American companies have an opportunity to leverage this attitude into business.

A growing population, rising per-capita income, and an expanding middle class have created a "perfect storm" of increasing demand for almost every type of consumer product or service imaginable. Whether your company sells consumables, durables, or services, few locations will let you grow your top line to the extent that you can in India over the next decade. We will explore this further in chapter 5, "Marketing in India."

Knowledge-Based Services

If your company has any work that is to be performed using a computer or a telephone for Western customers or for in-house use, chances are you might benefit by having some of that work performed in India. The correct term for this process is offshoring.

You may have this work performed by a subsidiary of your own company. Citibank, Texas Instruments, and General Electric were among the earliest American companies to recognize how to profit from such an Indian operation. More commonly, such work is sent to a vendor with operations in India; this is properly called offshore outsourcing. In some cases, your outsourcing vendor is a Western company that has an Indian back end, such as Accenture, IBM, EDS, Cognizant, ACS, CSC, Hewlett-Packard, or the like. In other situations, you may find it expedient to use an Indian vendor directly. India's largest offshore outsourcing vendors are Tata Consultancy Services, Infosys, Wipro, Satyam, and HCL. Hundreds of smaller Indian vendors thrive today, most by specializing in an industry, such as banking, video games, or pharmaceuticals, or in a function like customer contact, data analytics, quality assurance, or accounts payable. In common parlance, all such initiatives are lumped under the catchall of outsourcing.

An alphabet soup of acronyms describes these processes further, including information technology outsourcing (ITO), business process outsourcing (BPO), knowledge process outsourcing (KPO), legal process outsourcing (LPO), transcription outsourcing (TO), contract research outsourcing (CRO), information technology enabled services (ITES) . . . and the list goes on.

It is a mistake to think that this opportunity is only about labor arbitrage. In fact, the initial impetus for the information technology outsourcing business in India came about because there simply weren't enough programmers in the West to cope with correcting software systems to meet Y2K requirements. The lower cost was gravy.

"Selecting a vendor is no longer about simply finding the best price. Western clients now look at the vendor's focus area," says Arjun Malhotra—who founded one of India's top IT companies, Hindustan Computers Ltd., and built its US operations to $100 million in annual revenues in the 1990s. "They also look for companies that can add value to the business issues that are of central concern to their own company's needs." Malhotra now runs Headstrong, Inc., in Fairfax, Virgina, an IT and management consultancy.

Today, smart Western companies continue to use India for knowledge work to save money and expand capacity. But the really smart ones are those who also leverage resources in India to reduce time to market, to increase the rate at which new products can be launched, to free their onshore staff for more critical projects, and to be able to address Asian and third-world markets. In short, they use India as a strategic advantage against their competitors.

This is not painless, of course. Globalizing knowledgebased work has its pitfalls—and we will examine several of them in this book. But those companies that figure out how to do it well have become addicted to globalization. That is why direct employment in this field in India continues to grow at more than 20 percent per year. The best-run companies are growing in India at faster than 30 percent per year as of this writing.

Real Estate

Property prices in urban areas rose rapidly between 2004 and 2007. While subject to short-term hiccups, property is generally a good investment for Indians. Indian developers have been very successful in raising capital on domestic markets.

According to Karun Verma, the Bangalore-based local director of real estate services firm Jones Lang LaSalle Meghraj, India is different from other markets at this time because commercial real estate generally leads retail and residential development. Each square foot of commercial construction is followed by two to three square feet of retail and eventually seven to ten square feet of residential construction.

Verma states, "While construction, building sales, and tenancy practices are all at world levels in India, land acquisition continues to be a hazy process." Foreign companies can buy land and build for their own use, but cannot speculate in real estate. Many foreign companies prefer to lease rather than buy. India still limits foreign investment in real estate, although rules were relaxed somewhat in 2005.

As of this writing, foreign investors can only invest in "greenfield" projects with minimum thresholds sometimes in excess of one hundred thousand square yards; there are several other rules as well. Most American investment interest has come from private-equity firms such as Starwood Capital Group and Walton Street Capital, both of which announced participation in a billion-dollar, twentymillion- square-foot township in Kolkata. Also active is Morgan Stanley, which closed a $150 million investment into Oberoi Construction—a builder of apartments and commercial properties. The world's largest pension fund, Cal- PERS, which manages the retirement funds for California government employees, has announced that it is investing $400 million in Indian real estate.

If the Indian government allows free and open investment in most forms of real estate, this could become a much larger opportunity for Western firms.

Training and Education

Of foreign students in the United States, the largest number are from India. This tells you something both about the attractiveness of American university brands and about Indian spending power.

At present, foreign universities are allowed very limited access into India. But as we will see in chapter 4, "Human Resources," limitations on the availability of education continue to hold back hundreds of millions of young Indians. As the ecosystem allows more foreign participation on the ground, Western educational and training organizations will have an excellent opportunity to accelerate their presence in India. Rising aspirations in corporate India and among middle-class consumers could fuel explosive growth as tens of millions of citizens start to benefit from Western training and educational practices.

This can benefit foreign universities, once they are allowed to set up campuses in-country. It can also benefit companies and associations that provide training, learning, and job-related skills.

Conclusion

There is plenty of "white space" for Western companies to expand their revenues in India. There is also considerable opportunity to improve the productivity of funds deployed by leveraging Indian resources. Your head of sales and your CFO will love the Indian opportunity. Your marketing and human resource team will definitely have to stretch. And you may need to hire many biculturally savvy project managers, depending on your business.

But the real treasures will go to the CEOs who can transform their companies—and to the managers who show the way. Fortunately, the course is not as risky or murky as it was ten years ago when some bold American companies embarked upon this journey.

And it's worth noting a caution from John Triplett, the American executive based in Delhi for seven years: "More than one person in charge of a foreign company in India here has mentioned to me that the corporate office back home—be it the US, Europe, or Asia—does not understand why it takes so long to accomplish things here, why things go wrong, why regulations can change quickly here. Corporate should accept that the slow process of the system also works in their favor in that people here expect things to take time to resolve. The person in charge on the ground here in India needs support, not criticism. They need to internalize that patience is a necessity here, and that India is a commitment, not a fancy."

Copyright © 2008 by Gunjan Bagla