A Director’s Guide to India
from
January/February 2007
by John J. Curran
Anxious over the impending contraction of American consumer spending, the bulging trade deficit, the sustainability of corporate profit growth? Perhaps it’s time to make India a bigger part of your income statement. Glimmering new business hubs, a burgeoning middle class, a sizzling social scene, low labor costs, and an energized nation of young people keep India’s growth rate in high gear.
Though its economy has been expanding at a 5% annual clip over much of the past decade, the growth rate is now north of 7%, driven by foreign investment, rising domestic consumption, and ongoing (if frustratingly slow) deregulation. With that kind of wind at your back, double-digit earnings gains are no pipe dream, which is why companies like Citigroup, GE, and IBM are planting billions of dollars there.
None of these big spenders dismiss India’s still-considerable problems—maddening bureaucracy, a dizzying tax code, poor infrastructure, persistent though declining mass poverty, even bouts of terrorism. But they are swayed by the alluring demographics (including an average age of just 26), trustworthy property rights, a common language, and the sheer market potential that makes India worth the bet. Indeed, some of the country’s biggest problems are now becoming the juiciest opportunities: to sell Indians everything from pipelines to power plants to security systems. General Electric CEO Jeffrey Immelt knows what that means for his company’s future. He recently labeled GE’s India ambition “8 by 8 by 10,” meaning that the corporation intends to have $8 billion in assets in India and an equal amount of India-derived annual revenue by 2010. GE currently gets about $1 billion a year from India.
Even for midsize and smaller companies, Indian opportunities are too great to ignore, whether you’re looking at a chance to lower costs with an India-based call center or data-processing operation, or to position yourself to market tomorrow’s consumer durables—sales of which Boston Consulting Group expects to hit $9.7 billion by 2010, more than double the 2005 level. At an annual 18% increase, the market for apparel is growing even faster and is expected to reach $45 billion by 2010, an opportunity for both apparel manufacturers and retailers. You can see this booming economy in action in the trendy restaurants of Mumbai, New Delhi, or one of the up-and-coming business hubs like Bangalore in southern India, where cell phones are ubiquitous, dress fashionable, and the air thick with commercial chatter. Notes the
Times of India
: “It’s party time for people in India’s upper class.”
The spending splurge is expected to extend to big-ticket items as well. According to a study by Deutsche Bank, Indian consumers are more inclined than other Asian consumers to buy cars. Only one Indian family in 20 owns one, but that number will double by 2015, according to the National Center for Supplied Economic Research in New Delhi. This helps explain why there are roughly 400 auto-parts manufacturers in India, according to a recent KPMG study, all of them geared up for decades of sustained demand.
Tantalizing as India’s consumer market is, companies looking to participate need to understand—and ultimately surmount—the country’s considerable challenges. For example, some 70% of Indians still live in small villages that do not have year-round access by road. For distributors, that puts many rural consumers out of reach. In urban areas, fragmented distribution is the big issue—chain stores make up less than 5% of total retailing. Protectionist regulations have blocked many foreign retailers from making much headway. In November, however, Wal-Mart reached an agreement with Bharti Enterprises, which is run by one of the scions of India’s business dynasties portrayed on these pages, to build and operate several hundred stores bearing the Wal-Mart name.
Adding to the challenge, Westerners who want to scout opportunities will find it’s not cheap to travel in India. Rooms at big hotels in places like Mumbai or Delhi can run $500 a night. Rattan Keswani, executive vice president of India’s elite Oberoi Hotel chain, concedes, “There’s a tremendous need for budget hotels in India’s big commercial cities.” U.S. hotel companies thinking about filling that demand will find land expensive. In Mumbai’s most popular business areas, for instance, a good site for a new hotel would cost roughly $50 million.
Penetrating India with your products means adapting your company’s plans—no matter how successful they are elsewhere, including China—to India’s unique character. Stymied by the lack of infrastructure? Limit product-rollout plans to minimize logistical problems, perhaps by first concentrating on a couple of large cities or focusing on just one of India’s 29 states. This will minimize transport headaches and maximize state tax benefits. (For more on taxes, see the box on the opposite page.) Your Indian consumers are not embracing your most popular Western products? Customize, which is what Korea-based LG Electronics, the India market leader in televisions, did. “It put bigger speakers in its sets after it found out that Indian consumers value sound quality more than most,” says Vikram Bhalla of Boston Consulting Group’s Mumbai office. And what of those astronomical real estate costs? Oberoi’s Rattan Keswani, a veteran of the industry, believes that opportunities beckon to build affordable hotels in newer hot spots like Chennai and Bangalore, where land is cheaper and business is booming.
Odd juxtapositions are part and parcel of India’s progress. Most obvious is the disquieting contrast between the country’s booming economy and its intense poverty, often found side by side. Roughly one-quarter of India’s 1.1 billion people are considered middle-class—that’s nearly equal to the entire population of the U.S. Yet while average household incomes are edging up (see the chart on the facing page), India’s per capita income is still just $3,300, less than half of China’s. On a GDP-per-capita basis, it ranks below the Philippines, Indonesia, and many other third-world nations. Nearly half of the country’s population lacks basic sewerage.
This is why the biggest India opportunities to date for U.S. companies have not involved catering to consumers, but rather hiring operators, programmers, and other back-office support personnel. India handles about $10 billion a year of this business-process outsourcing, including call centers and order processing. And that should rise exponentially as even more Western companies make the shift. By one estimate, once Western outfits truly rethink their operations and identify outsourcing opportunities, the potential demand for such services could surpass $150 billion.
Driving India’s service-sector growth is an ever-expanding definition of what Indians are able to do. Outsourcing services now run the gamut from cold-call marketing to computer programming to technology-infrastructure management to medical services that include reading X-rays overnight, even to R&D. On the low-tech business-process front in particular, India’s cost advantages remain considerable. Operators are paid about $250 per month, versus roughly $1,800 per month in the U.S. Programmers and highly educated employees earn more but are still much less expensive than their American counterparts.
The extent to which the West has come to depend on these services not only has created a sizable business-services industry in India but also has made many of its major players prominent names around the business world. Among them: HCL, Satyam, Tata Consulting, Wipro, and Infosys, the firm made famous in columnist Thomas L. Friedman’s best-selling book
The World Is Flat
.
Their awesome growth—more than 30% last year at Infosys, for example—reflects the broad range of services these companies and their peers offer. Infosys engages in basic business-process outsourcing and also does software reengineering, application development, even management consulting. HCL, which describes itself as “one of India’s original IT garage start-ups,” manages more than half a million servers around the world.
So strong are the employment draw and relative pay of these companies that Indian universities are pumping out over 400,000 engineers per year to fill the need, compared with about 120,000 in the U.S. Colleges are addressing the increasing demands of the business-process-outsourcing industry: Some offer courses in accent modulation (so American consumers, for example, can’t tell that they’re speaking with an Indian) and even personality development (it takes training to deal with a disgruntled and combative Western consumer). On the engineering side, the fight among companies to have the best workforce is intense. In 2005 Wipro spent $100 million training its troops.
Foreign corporate customers aren’t always happy with India’s local help, however. In one survey they complained, among other things, of poorly trained local staff and the concomitant need to send managers to India to run operations, which costs a lot. In June, Apple Computer scrapped plans to build a customer-service center in India. The company never said why, but the message may well be that businesses considering this path need to look past the wage differential and carefully examine the resources required to manage a global IT supply chain.
India’s big outsourcing companies are experiencing another side effect of success: wage inflation. Pay at the biggest third-party suppliers of such services, like Infosys and Wipro, is rising at double-digit rates as competition for skilled programmers grows intense. These companies are competing not only with one another but with foreign outfits that run their own call centers, and with other operations in India. IBM, which recently announced plans to triple its investment in the country to $6 billion, is hiring aggressively. For new entrants—companies hiring Indians for their own operations or to outsource—this probably portends lower margins on India operations. But experienced global players are mostly past the days when cost savings were their primary reason for choosing India.
The encouraging news: Your company’s negotiating power in new outsourcing deals may briefly improve because of a shakedown among businesses that provide these services. Some $100 billion in contracts expired in 2006 or will do so this year, according to AMR Research, an outsourcing consulting firm. “Companies are now taking a best-of-breed approach to outsourcing,” notes AMR’s Lance Travis. What that means is that organizations like General Motors are moving from long contracts with one provider to multiple bids across a range of services. While the big winners are likely to be India’s IT giants, the movement of accounts could give smaller U.S. companies the opportunity to strike a good deal.
As India’s service capabilities ramp up, the limitations mainly lie with Western companies and their own flexibility, or lack of it. In commercial banking, for example, Janmejaya Sinha, managing director in Boston Consulting Group’s Mumbai office, estimates that 26% to 35% of the jobs in a traditional Western bank could be sent offshore—way above current levels. “That’s profound, as that level of offshoring will totally change your economics,” Sinha says. “It will require thinking globally and managing globally, as opposed to a U.S.-centric view. And there are very few companies that do that today.”
Part of the decision to move certain operations offshore is the question of whether to manage them yourself, keeping your India operations captive, or to outsource to a third-party provider. While captive operations are appropriate for companies seeking tight control and confidentiality, they present their own challenges, like the lack of sufficient career paths for talented managers. Some companies find success with a hybrid model, in which they retain core functions—activities early in the value chain, like market research, for instance—but outsource later stages of product development, like product testing. Lehman Brothers, the investment bank, does software development, where confidentiality is critical, through its captive operation but outsources some database management.
Sometimes captive operations can take on a life of their own. GE began setting up one of these in India in 1997. As the operation grew—it reached 17,000 employees serving 1,000 GE operations worldwide by 2004—GE realized it had a separate company on its hands. It then sold a majority stake to two investment companies, General Atlantic Partners and Oak Hill Capital Partners, which together paid $500 million for 60%. The deal allowed GE to harvest some of the value it had created while continuing to outsource its IT and business processes. The new owners have secured new contracts and made the company, since renamed Genpact, India’s largest business-process outsourcer.
For every success story in India, there is a tale of frustration. One area that is statistically lush but still largely off limits is the country’s financial industry. As Bank of America CEO Kenneth Lewis delicately opined to the
Wall Street Journal
recently, explaining why he stays out, “If someday things change in India…and there were opportunities, we’d look at it.” He’s not alone in his reluctance to commit major capital to a still overly regulated industry. GE is believed to be holding back on major investments in financial services until deregulation gets further along. The aggregate numbers tell the story: Though India’s stock market is 160 years old—CNBC has frequent market coverage—the government still funnels some 70% of Indian savings into the public sector, much of that diversion accomplished through heavy-handed control of banking.
An extensive study of India’s financial industry by McKinsey & Co., released in August, contends that improved allocation of capital, more efficient use of savings, and reduction of operating inefficiencies across the financial sector could raise India’s projected annual GDP growth by three percentage points. That may speak to India’s shortcomings, but it also illustrates its enormous potential.
