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Over the next two decades, India should figure increasingly in Canadian firms’ global growth strategies. In a recent study that received much publicity, two economists at Goldman Sachs forecast India’s economy to surpass Italy’s by 2016, France’s by 2019, the United Kingdom’s by 2022, Germany’s by 2023 and Japan’s by 2032. Knowing what works based on the experiences of Canadian firms active in the Indian market will be crucial to success in such a large and complex market, especially given the dearth of good information on various sectors of the Indian economy.
The dynamics of conducting business in the Indian market can be very different from how business is done in other countries. Companies must develop legal means to get around foreign-exchange restrictions; infrastructure can be a challenge; good talent may be hard to find and keep; local government regulations differ across jurisdictions; and market information is sparse. The essential commercial problem is creating certainty.
Based on our interviews and field observations, we have developed a 10-point check-list that firms might find helpful when thinking about their entry and growth strategies for India.
Partnership Has its Payoffs
If there is one piece of advice that firms should keep in mind, it is that partnership is key to operational success in India. This is true regardless of whether your firm is a goods supplier, a services provider or a solutionsbased organization. The key to success in India is to build a network of contacts across the spectrum of the Indian business market. Building these networks will take time. One executive we interviewed mentioned that he has been going to India for over 20 years (at least twice a year). In the process, he has developed a very strong understanding of the Indian market in his sector and built personal friendships with key industry players.
Strategize Your Entry
The type of goods and services you want to sell and the market that you want to target will determine how you choose to conduct your business in India. If you see yourself as primarily a goods exporter targeting the B2C market in India, partnership with a good Indian distributor with connections that will sell your product may be sufficient to get you started in the Indian market. This is particularly important for SMEs that may not have the resources to establish a dedicated distribution network of their own. In fact, during our interviews we received many requests to help SMEs establish good contacts with Indian distributors capable of selling products locally.
If, on the other hand, your firm is a B2B provider of services or solutions, private-sector Indian clients demand high-quality service. Most of the firms we interviewed had a core sales team reporting to HQ in Canada or regionally with a country manager as the operational leader. The provision of service was almost always done in-house or through frequent trips from regional or North American support centres.
The B2G market segment needs different entry strategies. The bidding process on Indian government and multilateral aid contracts tends to be quite competitive. All of the firms involved in this market that we interviewed had project offices in India to keep an ear to the ground. Further, all of the firms were involved in consortia with Indian and foreign partners. Again, keeping ahead of the curve through partnerships will be key to success in the B2G market segment.
Seek Professional Advice
In the six weeks that our researchers spent in India, we received numerous solicitations for office rental space, potential export opportunities, legal and accounting advice for entry into India. Having a good India-based lawyer, accountant, and a real estate agent is a crucial first step to better understanding the intricacies of the Indian regulatory environment. India-based professionals who work with foreign clients tend to be of high quality and should be the first point of contact when deciding to enter the market. They also provide a valuable filter to distinguish the wheat from the chaff.
Quality Field Presence is Crucial
If India is going to be part of your firm’s global growth strategy, it will be important to establish and nurture a quality field presence. Ideally, this field presence should be headed by a country manager who should be a company employee reporting directly to senior management. The role of the India country manager cannot be over-emphasized. He or she will be the company’s face, eyes, ears and legs in the country. Business relationships will be made or broken depending on the abilities of the country manager to establish relationships with Indian clients.
In our interviews, we found that the quality of interaction between the country manager and senior management varied considerably. One country manager felt rather out of touch with HQ. This firm also did not appear to have a strategy in place to grow the Indian market. Another was intimately involved in the planning process at the senior management level. This firm has grown its India and regional portfolio considerably in the past few years. Again, in our view, getting a good country manager and making him or her a vital part of the strategic planning process will be key to long-term success in India.
View India as a Hub
Many of the service-based companies we interviewed saw India not so much as a cost-centre but as a hub that could be used for regional growth strategies. Many firms were poised to increase their staff capacity in India with a view to making it a regional hub servicing Far Eastern, South Asian and Middle Eastern markets. Firms that mentioned this point included: Mahindra Acres Consulting Engineers, Eftia OSS Solutions, Hummingbird Ltd. and International Road Dynamics among others. Establishing flexible operations in India within the context of a regional growth strategy could lead to significant future payoffs. Again, the role of country managers and the team that they build around them would be key.
Costs Matter
If you are a firm thinking about using India as a cost centre, you need to keep some trade-offs in mind. We interviewed XStream Software Inc that decided to establish operations in Thiruvananthapuram (in India’s far south) primarily because of the high cost of labour and land in more established urban markets. The average cost of purchasing commercial real estate in Thiruvananthapuram was Rs 4700 per square foot (approximately $138) while the cost of acquiring commercial property in south Mumbai was up to 2.5 times as much averaging Rs 10,900 (about $320).
Another technology firm we interviewed - Eftia OSS Solutions - mentioned the de-bonding requirements needed if a firm wants to relocate out of a software technology park. Such requirements range from customs duties that must be paid on capital goods, office equipment, captive power plants, captive generators, etc. India’s Software Technology Parks scheme also imposes a warehousing charge of 20 percent per annum on export obligations that are not fulfilled by a firm. Further, clearance of obsolete machinery in the case of de-bonding is decided by the Central Board of Excise and Customs on a case-by-case basis with firms required to give particulars of machines such as descriptions, use, dates of use, import details and disposal details.
Firms that serviced the technology needs of business clients in India felt that India’s tariff rates on equipment with high price tags made it onerous to grow their operations in the Indian market. For example, Memotec’s end-user prices of telecommunication equipment can be in the $100,000 range while Indian tariffs on such products are around 30 percent. Shipping a product, even for demonstration purposes, immediately adds an extra $30,000 – not an insignificant cost for small firms. All of these costs need to be kept in mind before a firm decides to choose a location within the Indian market.
Expect Competition to be Fierce
We were surprised by the quality of India’s management, its dynamism and the degree of competition that existed in various sectors. Almost all of the firms we interviewed had some comment to make about the “price sensitive” nature of the market or the competition they faced.
New Canadian entrants need to be prepared to adapt to cut-throat Indian pricing structures. Nowhere was this clearer than in consulting contracts with various levels of government. Most consulting tenders have a lump-sum pricing structure with travel, fees and overheads included in the lump-sum price. Under such circumstances, firms with a foreign partner are priced out of the market because the inclusion of international travel increases overall costs. Further, the technical component of a government bid is usually rated on a pass-fail basis while the financial component is indexed to the lowest bidder. Since “India-only” consortia tend to have much lower fees and may be marginally competent to pass the technical criteria, consortia with international partners generally tend to miss out on consulting contracts. While structuring contracts in this manner is common international practice, these issues provide examples of the type of obstacles Canadian firms are likely to face in the Indian market.
Innovation is Valued by Indian Partners
In our interviews with Indian firms that formed JVs with Canadian partners, we found that the primary reason for partnering was the technology that Canadian firms can bring to the partnership. We found that the Indian partners valued this contribution and were prepared to dedicate resources to market it in India. In developing business relationships, the technology value added that Canadian firms can bring could be crucial in clinching contracts.
Follow-through
One observation from our field research was that partnerships that worked needed commitment and follow-through by Canadian companies at the highest levels. We saw examples of JVs and strategic alliances that did not have much to show in terms of sales. We also saw examples of JVs doing groundbreaking work in the Indian market. A significant difference was that successful partnerships had commitment at the highest levels by executives on both the Indian and Canadian sides.
Give it Time
Most Canadian firms we interviewed recognized the importance of longer-term planning horizons to nurture their India markets. The advice given by firms that were in India for longer than five years was simple: don’t expect quick returns, while the rewards can be substantial in the longer term.
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