How global companies can better ride the India wave

4th October 2010, ECONOMIC TIMES “Think with a blank sheet of paper. Treat India as a multi-dimensional resource and not merely as a consuming market for your readily available technologies and products.”

4th October 2010, ECONOMIC TIMES

“Think with a blank sheet of paper. Treat India as a multi-dimensional resource and not merely as a consuming market for your readily available technologies and products.”

There is tremendous interest about India among global companies but they face dilemmas. Many have a global organizational structure, not country-oriented and this inhibits their ability to get the best out of India.

India is distinctive enough to be dealt with differently. For example, for over a decade, the general expectation has been that India’s retail trade will” modernize rapidly. But India has turned out different. During the mid 1970s, there were 2 million grocery/mom-and-pop shops for a population of 550 million. Today there are 8 million shops, catering to 1.2 billion people. Unique among countries, India has achieved a dispersion of retail trade.

Indian business leaders informally advise global companies about their India strategies. I reviewed the advice that they give and this is what I heard: “Think with a blank sheet of paper. Treat India as a multi-dimensional resource and not merely as a consuming market for your available technologies and products.“

I have listed five points to elaborate.

Come with the spirit of exploration

An explorer company enters India to develop all the possible business interests it can within that economy —buy, sell, develop new products etc. To be an explorer, a global company will compel its local leaders to take total business responsibility with the facility to tap expertise in global headquarters.

In contrast, a settler company treats India as one more opportunity to sell its products and to deploy its competencies. The settler has a sharp sense of his core business and appears narrow in the context of an emerging market. With good intent, the global parent connects its local leaders to cross-border support systems inadvertently resulting in a diffusion of responsibilities.

Here are examples of successful explorer companies in India.

Unilever long ago adopted a policy of Indianising its management, its capital, its research and its manufacturing technology. This policy stood the company in good stead for the long period for which it practised the policy.

Texas Instruments entered India in 1985 when the license permit Raj was still in existence. They placed a bet on Indian engineering talent in chip design and digital signal processing. Texas Instruments India has several break-through innovative offerings for the Indian and global markets. Texas Instruments did not come to India as a farmer, but explored India as a resource.

IBM re-entered India after liberalization. Within 20 years, IBM has 160,000 employees in India, a tad less than the USA. These employees are delivering software wage arbitrage as well as high level R&D work.

GE has research facilities here. Its Jack Welch Technology Centre employs 5,500 scientists, who have applied for 1,000 patents during the last 10 years. GE earlier was organized by SBUs with an ambassadorial country manager. In a dramatic move, GE has appointed a full line country head who responds directly to the global CEO.

Devolve more and clear local authority

In the past, global companies gave their India-based CEOs considerable autonomy and the space to disagree constructively. I see less of that in the last twenty years as India has liberalized. Global companies matrixed their organization precisely when autonomy and entrepreneurship could have play a positive role. From what I have seen and heard, many global companies in India have re-structured themselves into spaghetti of shared relationships and responsibilities with regional and global headquarters. It is often not clear to an observer who is responsible for what.

While interviewing managers of Indian subsidiaries of global companies, I have found that many are frustrated with their narrow jobs because the regional office does many things. In one case, a talented finance director resigned because he was basically a glorified book keeper. His only career growth was to accept an overseas posting.

In earlier days, a foreign posting had a cache; indeed a job in a global company was prestigious. Not any longer. The vigour of Indian companies acts as a lodestone for employees who feel the pulsating energy of 8-10 percent growth and the buzz of a ‘happening’ place when they work in India, and Indian companies are hugely attractive employers.

Further global companies paint all their subsidiaries with the same policy brush. For example, an Indian subsidiary had developed a very interesting ‘adjacent’ business as a growth initiative. After allowing the product to develop for 5 years, an edict was given to dispose of the adjacent business—not because it was losing money or not delivering, but because in a HQ re-appraisal, anything that did not fit into a defined ‘core business’ was to be eliminated!

In another case the Indian company had little freedom to make its extra cash work harder.

Use India as a significant frugal innovator

Because of history and culture, Indians are natural innovators, even though they are a bit undisciplined! As a visiting American Chinese entrepreneur from Silicon Valley recently told me, you need 4 C’s to be an innovative society—Chaos, Creativity, Communication and Channelization. India has plenty of the first three but lacks the fourth. Global companies bring the fourth skill. The combination can be terrific as the examples of Texas Instruments, GE and IBM demonstrate.

Someone has made ‘frugal innovation’ famous as a global world. Jeff Immelt and Vijay Govindarajan have coined the term ‘reverse innovation’. Clearly there is an opportunity.

In the environment of the global managers, it is not possible for them to think of an automobile priced at $2,500 with emissions less than a 2 wheeler! Or to design a 130 teraflop supercomputer for $30 million as the world’s first privately funded supercomputer. These are as unlikely as an Indian village scientist dreaming up a new racing car.

Emerging capital markets could become interesting in future.

The Credit Suisse Global Investment Returns Yearbook 2010 suggests that between over 25 years from 1985 to 2009, Indian equity markets yielded far greater returns than the stock markets in developed economies. The Indian stock market has a higher P/E ratio compared to many other markets, including Asian markets.

The Indian capital market is over $1 trillion, in excess of the GDP. Admittedly it is not sufficiently broad-based and deep, but it is efficient enough to do transaction settlements as fast as the fastest stock market in the world—what they call T+1.

In the future global companies can use this to advantage by listing their Indian subsidiaries here. To be a bit adventurous, even the global company can be listed here. This is no pipe dream or crazy idea.

To get more visibility and show commitment, Standard Chartered became the first foreign company to list the parent in India through an IDR issue. The bank was already listed in London and Hong Kong.

But what do I see around me? I see global companies trying to delist their companies from the stock market or buy back their shares. To be in one of the world’s fastest growing economies, which is attracting $60 billion of foreign investment every year, for a global subsidiary to buy back shares, suggests a lack of imagination. Surely there a missed opportunity!

I also believe that a listed company has a better chance of developing well-rounded managers. They gain a broader exposure to be general managers. Early in their career, they learn to deal with cash flows, balance sheets, multiple stakeholders and public concerns.

That is one reason why Unilever in India is perceived as a ‘CEO factory’. What is common among the following seven companies in India? Bosch, Cadbury, Glaxo, Lafarge, Nokia, Hindalco, Star News, Tata Sky and Tata Rallis? They all have Unilever alumni as CEOs!

Use independent directors on local boards more strategically

I have knowledge and experience of how Indian listed subsidiaries use their independent directors. The local board and listing disclosure requirements are treated as a ‘necessary chore’. Independent directors are sought to be engaged with sketchy board meetings and occasional dinners. Few global company CEOs seriously engage their talented independent directors in a strategic debate about how the Indian subsidiary can better benefit from a liberalizing India and then follow through with real action.

This denies the global leadership the opportunity to listen to embrace the diversity of opinion. You cannot miss out on listening to such talented directors if India really matters to your global company!