Why multinational companies should stick out Indian markets
Asked late last year about the market for Apple Inc. products in India, chief executive officer Tim Cook more or less wrote off the huge country.
He blamed a multilayer distribution structure for making it too hard to reach consumers beyond elites in cities such as Mumbai and Bangalore. Apple would look elsewhere for growth: In the intermediate term there will be larger opportunities outside there, Cook said. Today, India—with a middle class the size of the US population—accounts for less than 1% of Apple’s global sales.
By contrast, Samsung Electronics Co. Ltd saw plenty of opportunity in the subcontinent. The Korean company invested massively in its brand and distribution in India. Rather than waiting for the country to become rich enough to buy top-end smartphones such as the Galaxy S4, Samsung developed and sold a range of devices at different price points. The company now dominates one of the fastest-growing smartphone markets in the world, outpacing not just Apple but Nokia Oyj, BlackBerry and others. Apple’s stock, meanwhile, has swooned.
I don’t mean to pick on Cook and Apple. Well-run and well-respected companies including Sony Corp., Toyota Motor Corp., Daimler AG and Caterpillar Inc. have similarly missed opportunities in India, writing it off as too poor, too corrupt, too hard. Always a difficult market, India has lately become even more challenging. Huge corruption scandals have virtually paralyzed the Congress Party government. A sclerotic bureaucracy and judicial system, primitive infrastructure and a gut- wrenching uncertainty around policies have killed any enthusiasm for investment. Growth has slowed to less than 5%.
Before, companies that were daunted by India focused on China, instead. Now, with the Chinese economy also shifting into low gear, they are looking even further afield—to Africa, Indonesia, even Myanmar. In each place, they typically encounter an initial burst in sales and enthusiasm. When that fades, they look for the next hot emerging market.
Companies that decide to pass on India, however, are making a big mistake. For one thing, they are leaving money on the table. Faced with the same chaotic environment as Apple, not just Samsung but companies such as Unilever NV, Schneider Electric SA, J.C. Bamford Excavators Ltd (JCB), Cummins Inc., Hyundai Motor Co. and even McDonald’s Corp. are thriving in India. The country now accounts for one-third of JCB’s global sales and even more of its profit. Cummins derives 10% to 15% of its profit from the subcontinent.
Secondly, chaos and corruption are hardly unique to India. They are a defining feature of most emerging markets, and companies that think they are going to have an easier ride elsewhere are in for a rude surprise.
To succeed in any emerging market, companies have to develop resilience. They have to learn to thrive in chaos. Where better to do so than in India? The country has huge potential—it’s already one of the world’s top five economies in purchasing-parity terms—as well as good managerial and technical talent and reasonable institutions, which many smaller countries lack. The lessons learned here can be applied across the young, ambitious societies of the developing world.
The first thing to learn is to take a long-term approach to the market. Firms such as Samsung, Cummins and McDonald’s were willing to wait almost a decade to see a return on their investments in local supply chains, local innovation capability and deep distribution networks.
At the same time, foreign brands must develop products that the local market wants and sell them at disruptive price points. Engine manufacturer Cummins, for instance, confronted an unforgiving market. Indian drivers routinely overload trucks, dilute diesel with cheaper kerosene, fill their radiators with muddy river water instead of coolant, and short out the electronics by ignoring instructions. Yet they still expect the engines to perform and to last as long as they do in the US. And they are willing to pay only half as much for the technology.
When I led Cummins in India, we radically modified our truck engines to withstand tremendous abuse and to cost much less, and the company is now thriving in what has become the world’s second-largest truck market in unit terms. Success in India helped Cummins develop expertise in frugal engineering, in managing joint ventures, and in creating a capable, low-cost supply chain. All those skills are now serving the company well globally.
Companies such as Cummins, JCB and Samsung don’t wait for the market to resemble what they are familiar with; instead they adapt to the realities of the market. This is a critical point lost on multinationals that see India as simply one more sales outlet for their products. Those companies wait for policies, regulation, infrastructure or the consumer to evolve to fit their well-tested global models. We’ll be back is the common refrain. We’ll be back when India respects patents, say pharmaceutical-company CEOs. Others have different benchmarks: When Indians stop pirating, when India has more efficient distribution, when more Indians start eating meat.
This approach is risky, not prudent. It will be a long time before India looks like a developed market or even a terribly welcoming place. It may even evolve in a fundamentally different direction: Indian consumers, for instance, are bypassing personal computers in favour of smartphones and the mobile Internet. They are leapfrogging from a no-PC world to a post-PC world. Where does that leave companies such as Microsoft Corp., Intel Corp., Dell Inc. or Hewlett-Packard Co.?
By the time companies turn their attention back to India, a competitor will probably have taken an unassailable lead. This is the position that automobile makers, including Toyota, Volkswagen AG and Nissan Motor Co. are in; they are now locked in an expensive battle to claw back market share from Suzuki Motor Corp., Hyundai and Mahindra and Mahindra Ltd. This is what Caterpillar faces against the likes of JCB and Cummins, and it is what Procter and Gamble Co. is up against in competing with Unilever.
Companies shouldn’t be beguiled by the romance of the next hot market. To thrive in the 21st century, getting past India’s 19th-century problems is a critical first step.
Source : Bloomberg.
Author : Ravi Venkatesan.
Ravi Venkatesan is the former chairman of Microsoft India and Cummins India. His book, Conquering the Chaos: Win in India, Win Everywhere, is out this week from Harvard Business Review Press.