3 Reasons Global Firms Should Keep Investing in India
A major debate has unfolded around India’s economic prospects. On the one hand, you have Prime Minister Modi declaring at the 2018 World Economic Forum that India’s economy, already the fifth largest in the world, will double, to $5 trillion, by 2025. On the other hand, you have the media pointing out the country’s shallow middle class, growing inequality and joblessness, and a trail of multinationals frustrated by the lack of China-like success in India.
While India remains a challenging market, there are at least three reasons global firms cannot overlook the country without consequences.
India has seen growth in infrastructure spending. The country has been increasing its spending on infrastructure such as airports, cities, hotels, ports, roads, bridges, hospitals, and power plants. During the past three years, for instance, the newly formed Andhra Pradesh State has made massive investments in building out its infrastructure. India has expanded its solar generating capacityeightfold since 2014 and achieved the target of 20GW of capacity four years ahead of schedule. India plans to catalyze $200–$300 billion of new investment in renewable energy infrastructure over the next decade.
Industrial companies like JCB, Cummins, AECOM, and General Electric and investors like Brookfield have successfully capitalized on India’s infrastructure investments. In fact, JCB makes half its global profits in India. It’s been estimated that India needs $5 trillion in infrastructure investment to sustain its economic growth, but local Indian companies lack the competencies needed. This means significant growth potential for multinationals who have core competencies in high-tech infrastructure solutions such as jet engines, turbines, CT scanners, and satellite communications.
India’s emerging middle class is strong. It’s true that India’s business environment poses challenges for all companies in the consumer economy. All the same, some global consumer companies, such as Unilever, Xiaomi, Suzuki, Hyundai, Honda, LG, Samsung, and Colgate, have been able to overcome challenges and constraints to do spectacularly well in the middle of the economic pyramid.
Consider two success stories in India’s consumer economy: Amazon and Renault’s ultra-low-cost Kwid car. Amazon entered India in 2013 when two local Indian companies, Flipkart and Snapdeal, had already established themselves as market leaders in e-commerce — and still rose to become the number one online retailer in India. The country has added new customers at the fastest rate for Amazon in its history of operations across the world, including the U.S.
Similarly, when Renault entered India and introduced Kwid in 2015, Maruti and Hyundai had almost 70% of India’s large and fast-growing subcompact car market. In a short two years, Kwid gained 15% of the market. More important, Renault has taken Kwid to many other markets, including South America.
Three things allow firms like Amazon and Renault to succeed in India’s consumer market. First, their CEOs have a strategic and long-term commitment to the market. Amazon CEO Jeff Bezos and Renault CEO Carlos Ghosn are in India for the long term, as a hub for middle-of-the-pyramid innovations that can serve all emerging, and even developed, markets. Second, they build strong local teams in India and shift resources and decision-making authority to India. Amazon’s India CEO Amit Agarwal and Renault’s India CEO Sumit Sawhney have considerable autonomy to innovate in India. Third, they evolve their business models and make products that are appealing, affordable, and accessible to the emerging middle class. Renault’s Kwid and Amazon’s e-commerce model are totally customized for the needs of the Indian middle class.
For comparison, this is the opposite of what Apple is doing in the world’s second-largest smartphone market. Apple’s iPhone has a 2% market share, while Samsung and Xiaomi lead the market with 23% each. One reason why is that Apple seems to be waiting for Indians to get wealthier and fit its business model, while competitors Samsung and Xiaomi are offering products and pricing customized for Indian consumers.
Challenging as India is, the bigger challenge for most global companies is learning to adapt their approaches to other markets rather than copying and pasting their developed market models across the world. To succeed in India, companies must be willing to take a clean sheet of paper and start designing to the middle of the pyramid.
The country is in a tech startup boom. The biggest reason why India should continue to matter to global firms is not the size of the market per se, but the opportunity to participate in one of the richest tech startup innovation ecosystems in the world. The startup ecosystem, now the world’s third largest, is maturing rapidly and is no longer dominated by copycat e-commerce companies. In fact, tech startups have attracted over $20 billion in the past three years.
Three factors are driving this boom.
The first is India’s investment in its technology infrastructure. Government agencies and tech volunteers have come together to create “India Stack” — a set of APIs giving governments, businesses, startups, and developers a common digital infrastructure on which they can build and deliver presence-less, paperless, and cashless services. For example, telecom companies and banks are now able to open new accounts in five minutes without a single paper document. Digital payments using a free API called UPI (Unified Payment Interface) have already exceeded all credit card transactions in little over a year. Internet wireless access has dramatically increased recently, especially after Reliance Jio’s 4G rollout (Reliance alone added 160 million new users in a year). Aadhaar, a 12-digit unique identity number issued to Indian citizens based on their biometric data, has 1.2 billion enrollees and was used to authenticate 9 billion transactions in 2017. The country has over 350 million smartphones, and this number is growing 25% CAGR.
The second factor is India’s vast number of consumers and its large, highly educated, and young talent base. In sheer numbers, India is hard to beat. India’s 10,000 engineering institutes produce more engineers than China and the U.S. combined, and India adds 10–12 million youngsters to its workforce every year.
The third factor is that India’s problems cannot be solved without leveraging technology. For example, India has a huge shortage of hospital beds and medical professionals relative to its population base of 1.2 billion. The education sector similarly suffers from too few teachers and universities. And in the legal system, it might take 30 years to clear the backlog of pending legal cases. Financial services, education, health care, justice, and several other services can only be delivered by effectively leveraging technology. This means huge opportunities for tech startups in these sectors, and we’re already seeing innovative tech companies enter the Indian market.
In conclusion, India is a paradox: mega opportunities and mega headaches. The mega headaches include: bureaucratic rules and regulations, strong labor unions, corruption, underdeveloped institutions, inadequate physical infrastructure, and difficulty in acquiring land. But if a company can overcome the challenges, the prize is huge. We’ve given several examples of multinationals that have cracked India’s code. More should follow their lead.
Courtesy : www.hbr.org