Mncs in India free essay sample

MNCs in India By A V Vedpuriswar[1] Introduction With a GDP growth of almost 7 percent1, India is one of the most promising and fastest-growing economies in the world. But despite the huge potential of the country, the performance of Multinational Corporations (MNCs) in India has been decidedly mixed. Many MNCs which have succeeded remarkably elsewhere in the world have yet to make a significant impact in India. The market entry and penetration strategies that have worked so well for these companies in other countries have been for less successful in India. Many MNCs have struggled to understand Indian customers and come up with suitable products and services. At the same time, some MNCs have done pretty well for themselves. Why have some MNCs done so well where others have failed? This article is an attempt to provide an intuitive explanation of what determines success in the Indian market place. Background Today, virtually all the big MNCs in the world have operations in India. We will write a custom essay sample on Mncs in India or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page These include Unilever, BAT, Colgate Palmolive, Procter Gamble, General Electric, General Motors, Ford, Pepsi, IBM, Intel, Texas Instruments, Microsoft, Oracle and Coca-Cola. India is now considered by many MNCs to be a strategically important market. Historically, the main reason for the entry of MNCs into India was to jump the tariff wall. High import duties made it difficult if not impossible to export finished goods from the home country to India. On the other hand, once they entered the country and set up operations, the countrys high tariffs guaranteed adequate protection. In some cases, the need to customise products necessitated a strong local presence. Unilever set up its Indian subsidiary, Hindustan Lever and gave it full freedom to develop various products to suit local tastes and usage conditions. This would obviously not have been possible if Unilever had only been exporting its products to India. In recent times, other reasons have made India an attractive destination for MNCs. India has emerged as a low cost back office, manufacturing and research base, thanks to its skilled but relatively cheap manpower. In the computer software industry, many MNCs are establishing offshore development centres to tap local manpower. IBM, Accenture, EDS and Computer Associates have all been strengthening their presence in the country. Not only are Indian software workers among the best in the world, when it comes to technical skills but they are also more comfortable with English, compared to their counterparts in countries such as China. Dell and Deloitte have major back office operations in the country. General Electric (GE) is looking at India as an important R base which can contribute to their global knowledge pool. GEs local outfit has filed for several patents in the last couple of years. Nokia has set up three RD centres that work on next-generation packet-switched mobile technologies and communications solutions. Texas Instruments is also doing cutting edge RD work in the country. Varying degrees of success While several MNCs have entered India, not all of them are doing well. This is evident when performances are compared across industries. However, even within a given industry, some MNCs seem to be doing better than the others. Consider the automobile industry. Here, Suzuki and Hyundai are way ahead of formidable rivals such as General Motors, Honda and Ford. Similarly in the FMCG sector, even after allowing for its relative late entry, Procter Gamble (PG) remains a marginal player compared to Hindustan Lever. In some industries, the MNCs have been left high and dry by the local players. In the paint industry, the local player, Asian Paints has beaten the MNCs by a huge margin. Then, there is also the unique case of an MNC, Indian Aluminium (Indal), actually being taken over by an Indian company, Hindustan Aluminium. One must be careful while explaining the good performance of some MNCs and the poor performance of others. An important point to note here is that different MNCs have entered India at different points in time and responded to the needs of the environment accordingly. For example, MNCs which entered India since the 1990s have in general been more aggressive and proactive in a liberalised business environment, than those which began operations during the license Raj. Hyundai, Samsung and LG are good examples. The older MNCs like Bata have also been handicapped by the baggage accumulated over a period of time. Such companies are often at a disadvantage due to their bloated manpower and inefficient manufacturing facilities. Of the 50-plus[2] MNCs with a significant presence in India, the nine market leaders, including British American Tobacco (BAT), Hyundai Motor, Suzuki Motor, and Unilever, have an average return on capital employed of around 48 percent. Even the next 26 have an average ROCE of 36 percent. The most successful MNCs in India have some common characteristics. Resisting the instinct to transplant to India the best practices of other countries, they have treated the country as a strategic market. These companies have also taken a long term view. They have invested time and resources to understand local consumers and business conditions. They have understood that the price points that matter in India are different from those in other countries. In a country where the middle and lower-end segments are critically important, affordability is a crucial factor. At the same time, some of the successful MNCs have also realised that price is not the only factor driving purchase decisions. Value conscious consumers, will pay a premium if the benefits of superior features and quality are seen to far outweigh their cost. LG for example, has reengineered its TV product specifications in order to develop three offerings specifically for India, including a no-frills one to expand the market at the low end and a premium 21-inch flat TV for the middle segment. By keeping the price of the premium offering to within 10 percent of the price of TVs with conventional screens, LG has persuaded many consumers to buy it. These innovations have helped the company to establish a very strong competitive position in the countrys consumer durable-goods and electronics appliances market. The story of Unilever, Bata and Alcan Consider three of the earliest entrants into the Indian market Unilever, Bata and Alcan (India’s parent). The company which demonstrated the highest degree of early commitment to the Indian market was obviously Bata. The shoe major invested in a fairly elaborate distribution network with company owned retail shops in even small towns. Bata also took the bold step of targeting the mass markets instead of just milking the premium segments. It targeted middle class Indians with value-for-money products. Indeed, many Indians do not know that Bata is an MNC. In targeting up-market segments, however, Bata began to deviate from this strategy in the late 1980s. And even as it struggled to deal with the labour problems in its Calcutta factory, Bata saw its market share being rapidly eroded by nimble footed local players such as Liberty. Like Bata, Hindustan Lever Ltd (HLL) also displayed a clear intention from early on to take the Indian markets seriously. It set up a huge distribution network and developed a wide product range. HLL’s efforts to penetrate the rural markets have only taken off in recent times. Compared to local competitors like Nirma and Cavinkare, some of its products look overpriced. Yet, HLL has a strong presence in India that has inspired the awe of other MNCs. Despite struggling to grow in recent years, HLL dominates most of the product categories in which it competes. To give a comparative perspective, global rival Procter Gamble is way behind. HLL also continues to attract the best talent in the country. Today, HLL finds itself at a cross roads. To generate further growth, HLL will have to design from scratch, value-for-money products for the rural markets and further strengthen its rural marketing efforts. But there are signs that under new chairman, Harish Manwani and a new expatriate CEO, Douglas Baillie, HLL is poised for a rebound. Growth is back on top of the agenda. The case of Alcan is even more interesting. Unlike Bata and HLL, Alcan showed little inclination to invest and build its business in India. Essentially, Alcan looked at India as a cheap source of bauxite, the main raw material used in the manufacture of aluminium. It did not build captive power plants, despite being fully aware of the pitfalls involved in depending heavily on the countrys poorly managed State Electricity Boards. Alcan depended heavily on outsourced aluminium metal, having decided not to invest adequately in smelters and power plants, the heart of any aluminium manufacturing process. No wonder Hindustan Aluminium, the leading private sector player in the Indian aluminum industry, through its vertical integration strategy was not only able to maintain its competitiveness but even managed to take over Alcan. Today, HLL, despite its recent growth problems is one of India’s best managed MNCs and one of the star performers in the Unilever group. However, it is facing a distinct threat from cheaper brands. On . the other hand, Bata is attempting a turnaround, trying to regain its focus on the mass markets. This is a major correction from the misplaced strategies of the late 1980s and early 1990s. And Indal, no longer exists, having been taken over by Hindalco. The story of the three MNCs offers useful lessons which we shall summarise at the end of the article. Hyundai’s success If Unilever, Bata and Alcan represent the story of MNCs which entered India very early on, the Koreans symbolize the picture in case of companies which have entered the country in the post reforms era. Take the case of Hyundai, which chose to enter the Indian market, with a small car (Santro) which offers value for money to the countrys price sensitive consumers. Hyundai has also made very heavy investments in manufacturing facilities. After its initial success, Hyundai has started to widen its product range. Hyundai is one of the few MNCs to have established meaningful volumes in India in quick time. The company is among the top three car manufacturers in the country and is now emerging as a real threat to the market leader, Maruti in which Suzuki of Japan has a major stake. There are many lessons to be learnt from Hyundai. The company spent several months customizing Santro. Realising that Indian consumers attach much importance to lifetime ownership costs, Hyundai reduced the engine output of the Santro to keep its fuel efficiency high, priced its spare parts reasonably, and made various changes to the product specifications to suit Indian market conditions. In contrast, other global automakers have entered the market with vehicles with low gas mileage and high repair rates and after-sales service costs. Unlike many of the global auto manufacturers in India which source only about 60 to 70 percent of their components locally, Hyundai buys 90 percent. Hyundai has also plans to make India a global manufacturing hub that can serve other countries as the local market matures. Contrast Hyundai with players like Honda and Ford who have been very tentative about setting up full-fledged manufacturing facilities. The importance of commitment Commitment is important while competing in India. Commitment is often reflected in the entry strategy. Multinationals entering emerging markets often form joint ventures with local partners for a variety of reasons. These include their ability to influence public policy, to leverage existing products as well as marketing and sales capabilities, and to comply with regulatory requirements when foreign participation is restricted to less than 50 percent of a business. While joint ventures can facilitate quick access to important assets, especially in â€Å"strategic† industries like metals and mining and oil and gas, they often run into problems, down the line. As a recent McKinsey article[3] has mentioned, of the 25 major joint ventures established from 1993 to 2003, only 3 survive. Most ran into problems because the local partner couldnt invest enough resources to expand the business as quickly as the multinational had hoped. As a result, most of the multinationals that initially entered the market through joint ventures have disbanded them and pursued independent operations. The Korean multinationals, such as Hyundai and LG, have bypassed joint ventures entirely. They have retained management control and closely monitored the operations, making bold investments when the situation has demanded. By being on its own, LG has been able to move at a fast pace. After starting its operations, within a space of five months, it was able to complete its nationwide launch. Almost all companies took up to two years to complete their all-India launch. LG has the support of its parent not only for technology, but also for financial help. For instance, a substantial portion of the bill for sponsoring the 1999 World Cup cricket tournament was picked up by the parent company. The second aspect of commitment is the investments MNCs make in manufacturing facilities and other infrastructure such as distribution. LG has not hesitated to pump in money. By early 2000, it had invested almost $300 million with plans for investing another $100 million. In recent times, LG has been increasing its production capacity in India, for most products including colour televisions, washing machines, air conditioners, microwave ovens and refrigerators. Nokia is another MNC which has shown strong commitment to the Indian market by making necessary investments. From setting up a manufacturing base for handsets in India to creating financing options for cellphones, to working with cellular operators to reduce airtime costs, Nokia has launched various initiatives to lower the cost of owning and using a mobile phone. Nokia has also established a formidable distribution network that reaches over 25,000 dealers, a network that is about three times the size of Samsungs, six times that of Sony-Ericssons and one-fourth of Hindustan Lever’s (India’s largest fast moving consumer goods company). Nokia has built up this network from scratch by focusing on dealers of fast moving consumer goods (FMCGs) and consumer durables. Many of Nokia’s regional distributors are former FMCG middlemen who find the margins in the mobile phones business more attractive. In the infrastructure business, Nokia Networks has become a key supplier to all five GSM operators in the country; Bharti, BSNL, BPL, Hutchison, and IDEA. Nokia works closely with the operators to lower the total cost of ownership and usage for consumers. A third aspect of commitment is the amount of time and effort spent on understanding Indian consumers and then meeting their needs. LG has worked hard to understand Indian customers and identify features which appeal to Indian customers. LG televisions incorporate golden eye[4] technology and multilingual on-screen displays; refrigerators use preserve nutrition technology and washing machines the chaos punch plus three†[5] technology. LGs commitment to the Indian market can also be judged from its wide product range. In the case of washing machines, LG has been offering 6-kg equipment instead of its usual 4. kg models, to take into account the requirements of large Indian households. Such efforts have paid rich dividends for LG. The company ended 2004 with market shares of 24 % for color televisions, 33 % for washing machines, 41 % for microwave ovens, 26 % for refrigerators and 35 % for air conditioners[6]. With such high market shares, the company looks well placed to consoli date its presence in the country. A vast segment of India’s population resides in rural areas. So understanding the needs of rural customers is a huge issue. This argument is especially applicable to companies marketing consumer goods. But serving rural markets requires plenty of commitment in terms of understanding customer needs, developing products from the ground up and putting in place the necessary infrastructure especially distribution. LG is trying to build on its early success by aggressively penetrating the rural markets and by offering more value for money items. For the rural market, LG has launched a stripped down range of television sets called Sampoorna. Another company which has taken the rural markets seriously is Coca Cola. In the rural areas, Coca Cola has used a three-tier hub-and-spoke distribution model to ensure deeper penetration. The company depot supplies twice a week to large distributors who act as hubs. These distributors in turn supply goods to smaller distributors in adjoining areas. Large trucks are used to move stocks from the bottling plant to the â€Å"hubs†. Medium commercial vehicles are used to move stocks from the hub to the spokes. The small distributors have their own low-cost means like auto rickshaws and cycles, to reach the product to every nook and corner. Coca Cola provides retailers thermo-cool boxes while others with power connections have been offered cold storage facilities under an ‘own-your-asset’ scheme. The company has negotiated big discounts from refrigerator manufacturers and supplied 2. 5 lakh refrigerators to retail outlets in 2003. Finally, commitment is also reflected in the way MNCs deal with local government regulation. In emerging markets like India, where deregulation is still in progress in many industries and the regulatory authorities are themselves often not clear about what needs to be done, companies must be flexible and patient. Regulations governing the India mobile-telephony sector, for example, have been amended several times since 1994. The government had two licensed operators per region back then and now has as many as six. Although most multinationals left the sector when the regulations changed, Hutchison Whampoa continued to invest in India. Today, Hutchison Essar is one of the top three mobile services companies in the country in terms of market share. The most successful MNCs have invested much time and energy to identify and understand the key policy makers and even to suggest regulatory changes. They have resisted the temptation to appoint agents or joint venture partners to liaison with the bureaucrats involved in policy making. Conclusion The above experiences clearly bring home the point that success in the Indian market depends crucially on commitment. This implies a willingness to set up a fully owned subsidiary as opposed to a joint venture, in full fledged manufacturing facilities as opposed to the assembly of completely knocked down kits, in a widespread distribution network as opposed to a limited presence in the major cities and in customised products as opposed to standard offerings from the parent companys product range. It also implies an ability to work patiently within the constraints of the local regulatory framework. Commitment must be backed by flexibility. MNCs must keep fine-tuning their strategy till they have a winning formula in place. It is MNCs which show both commitment and flexibility that are most likely to succeed in India. References 1. â€Å"Hyundai Motors launches multifunctional small car ‘Santro,’ www. ipan. com, 13 January 1998. Mukerjea, BDN. â€Å"The GE  Juggernaut,† www. businessworldindia. com, 22 March 1999. 2. 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