India, with its expanding population and growing economy, is a tempting market for foreign companies. Stories of multinationals entering Asia’s third largest economy are common. And yet the 25 biggest locally-listed affiliates of multinationals in India contributed just 2 per cent to their parent companies’ global revenues and profitsin 2011, according to McKinsey.
Ravi Ventakesan, who has worked as chairman of Microsoft India and of Cummins India, the engine producer, told beyondbrics it is a half-hearted approach to entering the market that really inhibits success here. In his new book, “Conquering the Chaos”, Venkatesan dishes out advice on succeeding in this tricky country.
As a business leader, the easiest option is to cream off the top of the market, the high-end customers demanding products much like those you already sell in the western world at similar prices.
But he says these very attractions mean that’s a weak strategy; the top end of the market in any emerging economy fast becomes saturated with multinational competitors. It’s what Venkatesan calls the “midway trap”. To find real growth you have to straddle all consumer brackets with innovative products adapted to local demand across the whole spectrum of price-points.
In 2004, Microsoft set about breaking into the tip of the pyramid which then consisted of 50m wealthy consumers and 2,500 large and medium sized enterprises. Between 2005 and 2009 the company saw revenues grow by up to 50 per cent every year, and Microsoft India soon matched Microsoft Australia in size.
But the big challenge now, according to the former chairman, is cracking the middle market – the 50m middle-class households and 8m small and medium sized enterprises dispersed over smaller towns, a demographic where the use of pirated software is around 85 per cent.
The solution lies in commitment, adaptation and localisation. In particular, Venkatesan tells beyondbrics that JCB, the British excavator maker, has got it right. The company adapted its models for India, focusing on fuel efficiency where the rest of the industry was working on speed and productivity, understanding that thrift takes precedence over state-of-the-art technology in a developing economy. And it quickly developed a local supply chain.
When the financial crisis reached its zenith in 2008, JCB persevered with plans to invest $100m in manufacturing in India and even set up an equipment financing program to help customers. Its peers had frozen investment into India at the time, so when the recovery hit JCB was ready to consolidate its lead.
Venkatesan also gives the example of McDonald’s. Theoretically, a restaurant famous for serving beef and pork shouldn’t work in India. But the US fast-food chain adapted to the local environment using empowered franchises. A special menu was developed and in response to differing safety standards, costs were cut with simplified equipment. McDonald’s spent a total of nine years getting its head around the market and fostering suppliers before opening shop.
To back an emerging market with this much investment, Venkatesan says you need a leader in head office willing to “play the long game”.
Venkatesan makes the controversial statement that you need a “Clive figure” for country head. That’s a reference to Robert Clive who is said to have led the East India Company to conquering large parts of India. Of course, his point is less provocative than it sounds –he includes himself in this bracket and says it’s a “buccaneering” type with Clive’s “entrepreneurial” spirit and “local” strategy you need at the helm.
In his opinion, you don’t need a country head who’s from India. “You can get the wrong Indian and the right Brit”, he told beyondbrics.
It sounds like a lot of risk and investment into one market. But as the subtitle to Venkatesan’s book – “Win in India, win everywhere” – suggests, if you can make a business work here you have a template to replicate across other emerging economies.
India records slowest growth in a decade, FT
Indian economy: An unfinished project, FT
Indian power shortage is Achilles heel of economy, FT
Investment: Big population propels India to the centre of attention, FT Special Reports
Get alerts on Emerging markets when a new story is published