INVESTING IN INDIA
An Introduction for Chinese Companies The fundamentals that make India attractive to investors are its high potential of the domestic market driven pool of talent of an emerging middle class. The country’s domestic demand-driven growth model is playing the catalyst in attracting foreign investments in the country. Although the on-going global uncertainty stemming from recessionary concerns and sovereign debt crisis has, to some extent, prompted some discomfort among global investors regarding long-term commitments, yet India’s inherent advantages and its proven resilience to counter macro-economic challenges far outweigh these concerns. Most research reports see India among the world’s leading three destinations for manufacturing by 2020. In the given scenario, China has become India’s largest trading partner, with Sino-Indian trade touching the $75 billion mark. Santosh Pai
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ndia is transitioning into the next phase of the growth cycle. Manufacturing is likely to play a leading role in this growth trajectory. The new National Manufacturing Policy introduced by the Government
of India (GoI) is expected to further boost manufacturing activities in the country. Thus any foreign investor who wishes to undertake business in India ZLOO ¿QG WUHPHQGRXV RSSRUWXQLWLHV The Industrial Policy offers a great deal of freedom to business houses and entrepreneurs to make their own investment decisions. India has
gone through almost two decades of economic reforms. Continuity in the economic liberalization process and the political consensus that economic change necessitates has placed India on a growth path. The country ranks higher than many countries in key parameters such as market size (3rd) and innovation
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(38th ,W DOVR KDV D VRXQG ¿QDQFLDO market, which is ranked 21st in the world. The Gross Domestic Product (GDP) in India was worth 1,841 billion US dollars in 2012 as against 1,684 billion US dollars in 2011. (See Table: India’s Growth Story) India: An Attractive Investment Destination India is poised to cash in on the demographic advantage. It is projected that by the year 2035, the population will reach 1.5 billion. A 65% working age population will make India, the world’s largest human resource base. The young talent pool, with median age of 25 years, is expected to continue till 2025. The rural market is currently home to 790 million consumers. India KDV WKH WKLUG ODUJHVW SRRO RI VFLHQWL¿F and technical manpower in the world. With over 380 universities (11,200 colleges), 1,500 research institutions and 9,000 PhDs, there is no dearth of talent. Every year, over 200,000 engineering graduates, 250,000 post graduates and 2,000,000 graduates pass out of these colleges and institutions. A large English-speaking workforce and democratic regime makes India an attractive destination for
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manufacturers. The national manuIDFWXULQJ SROLF\ LV EHLQJ ¿QDOL]HG would focus on increasing the manufacturing sector’s share in GDP from 15% to 25% by 2022. The story of India has attracted a lot of foreign companies to make long term investment commitments in the country. x Singapore Airlines’ decision to launch a full service carrier in India with the Tata’s as its majority partner, following UAE national
THERE IS A GROWING APPETITE FOR CHINESE PRODUCTS IN INDIA. HOWEVER, INDIAN MANUFACTURERS, WHO ARE WORRIED AT THE RISING SALES OF CHINESE COMPANIES, HAVE SUCCEEDED IN GETTING DUTIES IMPOSED ON IMPORTS OF CHINESE PRODUCTS. THIS CLUBBED WITH THE DEPRECIATING RUPEE, IS ADDING PRESSURE ON THE COST OF IMPORTS, AND MAKING THEM LESS ATTRACTIVE.
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carrier Etihad Airways recent acquisition of 24% stake in Jet Airways, signals the willingness of foreign carriers to do business in India, especially with a long-term perspective. Wal-Mart entered into a joint venture with India’s Bharti Enterprises to get a toe hold in the booming Indian retail market. Diageo Plc. acquired a 53.4% stake in United Spirits for about USD 2 billion as it sought to improve its performance in India. BP Plc. is making one of the biggest foreign direct investments in India, with a USD 7.2 billion tie-up with Reliance Industries to explore deepwater oil and gas resources. Vodafone entered India in 2007, paying USD 11.1 billion to buy a 67% controlling stake in Hutchison Whampoa’s mobile business in India, in which India’s Essar Group is a partner. The deal is the largest inbound foreign direct investment to be completed. Japanese drug maker Daiichi Sankyo paid up to USD 4.6 billion in 2008 for control over India’s Ranbaxy Laboratories NTT DoCoMo Inc. agreed to pay
India’s Growth Story Particulars
2012-13
2011-12
2010-11
GDP In USD billion Growth %
1,844 5.40%
1,841 6.50%
1,684 8.40%
Index of Industrial Production – Growth %
3.20%
3.40%
7.20%
Agricultural Sector – Growth %
0.50%
2.80%
7.00%
Service Sector – Growth %
7.50%
8.90%
9.30%
Exports In USD billion Growth %
291.2 -6.0%
309.80 23.62%
250.60 40.50%
Imports In USD billion Growth %
479.6 -4.0%
499.5 31.07%
381.1 28.20%
Balance of Payments (in USD billion)
1.7
-12.8
13.1
Foreign exchange reserves
292.0
294.4
304.8
Source: Ministry of Finance, Central Statistics Organization
Differentiators Between Greenfield and Acquisition in India Parameter
Greenfield Project
Acquisition
Permissions & Approvals
All the approvals for setting up new manufacturing facility may take between 3 to 6 months
No new approvals required as the existing set-up will have all the relevant approvals for manufacturing
Land acquisitions
Land acquisition for setting up new projects is a rigorous time consuming exercise
Ready availability of land along with related permissions
Environmental clearances
Challenging and time consuming
Ready availability of all clearances
Lead time for set up
Lead time for starting production in India will be 18 to 24 months
Significantly lower time than that required in case of Greenfield project
Market Competition
Faces competition before it is setup
Ready market share. Reduce competition by taking over rivals, and existing goodwill of the acquired business.
Corporate Culture
Relatively easy to build the Company’s corporate culture in the new entity
Relatively difficult to change the existing corporate culture of the acquired company to align the same with that of the parent company
Synergies
Possibility of realizing synergies is absent
Mergers and joint ventures differ from Greenfield investment, because they offer the participating firms the possibility to realize synergies
Marketing Network
The new entity will have to develop its own marketing & distribution network from ground level
Ready availability of existing company’s marketing & distribution network
USD 2.7 billion in 2008 for a 26% VWDNH LQ ,QGLDQ WHOHFRPV ¿UP 7DWD Teleservices, giving Japan’s top mobile operator a foothold in the world’s fastest-growing major mobile market. An analysis of Indian manufacturing reveals that the sector will conWLQXH WR EHQH¿W IURP LWV GHPRJUDSKLF dividend and domestic consumption. Open access to export markets and government procurement will help Indian manufacturers to achieve economies of scale and mitigate demand volatility to some extent. &KLQD ,QGLD 7UDGH *UHHQ¿HOG vs. Mergers & Acquisitions Over the years China has become India’s largest trading partner. SinoIndian trade is touching $75 billion. China had a whopping $39 billion WUDGH VXUSOXV ZLWK ,QGLD LQ WKH ¿QDQcial year ending March 31 2013. Taking a clue from other multinationals operating in India, Chinese companies are now opening up with the idea of putting their manufacturing set ups in India. Over the past decade many Chinese companies have entered India. However, many have failed to realize their potential. Over all most of the manufacturing companies which have opted to enter India WKURXJK WKH LQGHSHQGHQW µJUHHQ¿HOG¶ route have not had very encouraging experiences. The experience of a leading commercial vehicle manufacturing company is a glaring example: the company had acquired land over two years back. However, its project is yet WR WDNH VKDSH $ µJUHHQ¿HOG¶ EXVLQHVV is favourable in situations where businesses can gain government-related EHQH¿WV E\ VWDUWLQJ XS IURP VFUDWFK In India, the Governments at various levels provide subsidies, tax breaks or RWKHU EHQH¿WV LQ RUGHU WR SURPRWH WKH country as a good location for foreign direct investment (FDI). If the company is seeking to enter a market where there are already wellestablished incumbent enterprises, and where global competitors are also interested in establishing a presence, January 2014 India-China Chronicle |47|
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Reliance Industries and BP announced the incorporation of India Gas Solutions Pvt. Ltd., a 50:50 joint venture company which will focus on global sourcing and marketing of natural gas in India.
India’s foreign investment panel approved plans by Singapore Airlines and the giant Tata Group to start a new airline.
it may be good for the company to enter via an acquisition. In such cirFXPVWDQFHV D ¾JUHHQ¿HOGœ LQYHVWPHQW may be too slow to establish a sizeable presence. While both methods usually accomplish the goal of extending a company’s operations to a new foreign market, there are several reasons why a company might choose one over the other. Businesses may be more inclined to opt for acquiring an existing foreign business in situations where it LV GLI¿FXOW WR HQWHU D IRUHLJQ PDUNHW %X\LQJ IRUHLJQ EXVLQHVVHV VLPSOL¿HV a lot of potentially tedious details. For example, the purchased business will already have its own personnel (both labour and management), allowing the acquiring company to avoid having to hire and train new employees. Further more, the purchased company may already have a good brand name and other intangible assets, ensuring that the company will start off with a good customer base. Purchasing a foreign company can also provide the parent company with easier access to ¿QDQFLQJ EHFDXVH WKHUH PD\ EH OHVV red tape to navigate around. Finally, if a foreign market is at or near its saturation point, buying an existing company may be the only viable way to enter a foreign market. )UDXJKW ZLWK 3UREOHPV *UHHQ¿HOG 3URMHFWV LQ ,QGLD 7KH FKRLFH EHWZHHQ 0 $ DQG ¾JUHHQ¿HOGœ ,QYHVWPHQW LV QRW DQ HDV\ one to make. Both modes have their advantages and disadvantages. Here DUH D IHZ LVVXHV ZLWK ¾JUHHQ¿HOGœ projects.
Managing Director of India's Bharti Enterprises Rajan Bharti Mittal (L) shakes hands with President of US Wal-Mart's operations in India. |48| India-China Chronicle ƒ January 2014
Land acquisition 7KH ÂżUVW KXUGOH WRZDUGV VHWWLQJ XS of a manufacturing set up in India is land acquisition. Most of the land in India is privately owned and as such acquiring the same is a tedious task. The core issues that surround the acquisition of land in India are: x Litigations due to inheritance x Multiple sales which have not been properly recorded x Pledging of land to local money lenders
x Fragmented holdings x Requirement of cash while dealing with sellers x 'LIÂżFXOW\ LQ REWDLQLQJ FRQWLJXRXV land x Land ceiling laws x Tough resettlement and rehabilitation laws As things stand now, land acquisition in India is full of tough regulations and complexities. (QYLURQPHQWDO FOHDUDQFH Securing environmental clearances for new projects have been a key roadblock for investors in the past due to long delays and social hurdles. The present clearance process with its sequential hurdles either forces a project proponent to give up the venture, as is reportedly the case with major road projects of late, or burdens the project with time and cost over-runs. Over time, the instrument of Public Interest Litigations (PIL) has spawned scores of green Non-Governmental Organizations (NGOs) and interest groups and generated much media attention. This has had an impact on those charged with the clearance process and made them overcautious. 0XOWL WLHU UHJXODWRU\ IUDPHZRUN DQG FRPSOH[ SURFHGXUHV Multi-tier regulatory frameworks and complex procedures, prevailing at the central, state and local jurisdictions, increase the burden on investors and deter them from venturing into capital intensive projects. For example, according to the World Bank’s ‘Doing Business 2012’ survey (on overall ease of doing business across the world) the procedures and costs for starting a manufacturing business in India are among the most cumbersome. /DERU UHODWHG LVVXHV A major concern for manufacturers is managing rigid and archaic labor laws. In India, there are 45 laws at the national level and close to four times that at the level of state governments that monitor the functioning of labor markets.
The VEICET (Vodafone Essar-IIT Centre of Excellence in Telecommunications) MOU made between the IIT Kharagpur, Vodafone-Essar Ltd, and Goverenment of India.
INDIA HAS A MULTI-TIER REGULATORY STRUCTURE FOR INVESTORS. A MANUFACTURER HAS TO COMPLY WITH ALMOST 70 REGULATIONS AND FILE 100 RETURNS A YEAR. RECENT ATTEMPTS TO STREAMLINE PROCEDURES FOR BRINGING DOWN COMPLIANCE REQUIREMENTS (VIZ. SINGLE WINDOW SYSTEMS) HAVE ONLY BEEN PARTIALLY SUCCESSFUL. $GYDQWDJHV RI 3DUWQHULQJ D /RFDO &RPSDQ\ LQ WKH ,QGLDQ 0DUNHW ,Q HQWHULQJ ,QGLD RQH RI WKH ÂżUVW considerations of a Chinese company LV KRZ WR HQVXUH ÂżQDQFLDO VXFFHVV LQ DQ unfamiliar market. Local partners are often sought to assist in this pursuit, and particularly for maneuvering around the inherent challenges in the Indian environment. A local partner brings along its working knowledge of the particular industry’s business practices, the governing statutes and regulations. It also brings in the knowledge related to obtaining permits. An idea of the company’s standing within the local community surrounding the particular project in that country is another advantage. Chinese companies willing to work in India gets to sense an ‘instant brand’
RI ,QGLD ZLWK PLQLPDO ÂżQDQFLDO exposure and risk. An Indian company that is strong in each of these areas can ensure the success of a project. An alliance with an Indian company whether by way of a Joint Venture or an acquisition will offer the Chinese company: x an immediate 'in country' presence; x DQ HOHYDWHG WUDGLQJ SURÂżOH DQG IDVW track marketplace penetration; x utilization ofalready developed trade links and networks; x use of existing plants and / or machinery; x UHGXFWLRQ RIÂżQDQFLDO H[SRVXUH x circumnavigation ofsome of the inevitable ‘red tape’ that could otherwise be both prohibitive and time consuming India has an exponentially growing middle class that is reaping WKH ÂżQDQFLDO UHZDUGV RI KLJK JURZWK So the domestic market is almost straining with opportunities for ambitious Chinese companies. ‰
Santosh Pai is a Partner at DH Law Associates, which is the only Indian law firm to have an active China practice since 2010. He is based in Beijing and can be reached at santosh@dhlawassociates.com
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