India Inc. charts the global path
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The ‘India story’ has seen a profound shift in gear and direction since 1991. This period has seen the arrival of India as a shaping force in the global markets. This is particularly evident in the powerful new trend towards overseas acquisitions by Indian companies. Buoyed by the inroads made abroad by its software, biotech, auto ancillaries and oil companies,India has dropped the tag of being just a foreign direct investment destination, and is increasingly donning the mantle of a major foreign direct investor. These investments span not only across the developing world, but extend even to developed nations such as the US, the UK and Germany.
Access to markets, natural resources, distribution networks, foreign technologies and strategic assets, such as brand names, are the main motivations for companies. The liberalisation of government policies and the relaxation of regulations on FDI abroad have also helped. Indeed, the emergence of developing countries as sources of outward FDI is a new phenomenon. It suggests that enterprises in developing countries are building up capabilities to compete in international markets.
A number of factors account for this trend toward ‘internationalisation’ – factors that do not differ significantly from those driving firms in developed countries to invest overseas. The first one is the need to secure markets abroad. Indian Information Technology (IT) and pharmaceutical companies have been investing abroad for market-related reasons. Tata Tea’s acquisition of Tetley of the UK falls under the same category. In the past, firms in developing countries have only invested in setting up trading outposts and distribution channels abroad, but they are now increasingly undertaking manufacturing activities there.
Another reason for this trend has been the quest to gain access to technologies and knowledge. There is the increased desire to secure long-term supplies of natural resources (particularly oil and natural gas, iron ore and other minerals) to meet domestic industrial demand. Thus, for example, the Indian state-owned company, Oil and Natural Gas Commission (ONGC), has invested in an oil field in Sudan and in the Sakhalin oil and gas field in the Russian Federation.[PAGE BREAK]
Indian firms have been investing abroad for many years. However, it is only since the late 1990s that outward foreign direct investment (FDI) flows have risen rapidly, albeit from low levels. The country’s outward FDI stock has grown from USD 600 million in 1996 to USD 43 billion in 2010-11. Most Indian FDI is in manufacturing, but has begun to grow rapidly in IT services, particularly through mergers and acquisitions.
Over the last 12 months, Mukesh Ambani’s Reliance Industries has already invested USD 5 billion in Africa and the US. Reliance Industries expects to double its investments abroad in four years’ time. Anil Ambani’s Reliance-ADAG has invested USD 3 billion globally in 2011, including in mining projects in Indonesia. He expects to more than double that to USD 7 billion in 2015. Ratan Tata, whose group already draws 65 per cent of its revenues overseas, has invested more than USD 1 billion internationally this year. The Ruia-promoted Essar Group expects to invest USD 6 billion overseas by 2015. Sunil Mittal’s Bharti Airtel spent USD 8.2 billion acquiring Middle East-based telecom firm Zain’s Africa operations last year, even as his competitors in India battled the fallout of the 2G scam.
Factors Triggering Indian MNCs
India’s economic liberalisation in 1991 sparked fears that the country would be overrun by foreign multinationals. However, Indian companies have not only managed to fight off competitors on their home ground, but have also taken the commercial battle abroad. There are many factors which triggered this wind of change, primary among which are -
The Need To Capture New Markets
A key motivation for going global was to find new markets to sustain topline growth, and this has been helped by a string of mergers and acquisitions (M&A). Entry to overseas markets via M&A may be attractive for reasons that include increased proximity to customers, access to resources, competition at home and domestic regulatory barriers.
The Need To Expand Capabilities And Assets
Many Indian companies are seeking to expand their distinctive capabilities by acquiring specific skills, knowledge and technology abroad, which are either unavailable or of inadequate quality at home. Sun Pharmaceutical Industries, for example, acquired Able Laboratories Inc. of New Jersey for USD 23.15 million in December 2005 to gain its in-house manufacturing and development capabilities for generic pharmaceutical products.
The Need To Expand The Product/Service Portfolio
A significant number of Indian companies are endeavouring to increase their market share by building the size of their product and service portfolios. This is particularly true of the pharmaceutical sector.
The Pressures Of Domestic Competition
As much as they are pursuing the desire to enter new markets for competitive advantage, some companies are also being ‘pushed away’ from India by increasingly stiff domestic competition. In some cases, this has encouraged companies to explore opportunities in less competitive markets, thereby spreading their risk across geographies. Although India’s operating environment is unrecognisable from that of a decade ago, some companies still look outside India to avoid domestic obstacles.[PAGE BREAK]
The Mergers & Acquisitions Trend
As already stated, the main factor driving Indian cross-border M&A is the search for topline revenue growth through new capabilities and assets, product diversification and market entry. This trend is not driven purely by opportunistic factors: Indian companies are, in many cases, motivated to look abroad in response to newly competitive, complex or risky domestic markets, or to find capabilities and assets that are lacking in India.
The steep increase in the number of major cross-border transactions in recent years has been facilitated by the relaxation of regulations on overseas capital movements as well as a more supportive political and economic environment, including deeper currency reserves and easier access to debt financing, both at home and from international banks.
This M&A trend is a key factor that is helping Indian companies to emerge on the global stage. Eight Indian companies feature in the Fortune Global 500 list of the biggest companies in the world. Among these are Indian Oil, Reliance Industries, Bharat Petroleum, Hindustan Petroleum, ONGC and the State Bank of India.
The strategy by which many Indian companies are expanding globally is also distinctive. As the Indian companies are relatively small by the standards of global multinationals, their cross border acquisitions also tend to be smaller. These deals are, therefore, often carried out as part of a broader globalisation drive involving a string of strategically-targeted acquisitions. This is particularly the case for India’s larger corporate groups, like the Tatas, that look to strengthen specific parts of their value chain and develop globally integrated offerings.
The locations of the acquisitions also reflect the strategies of India’s globalisers. Attracted by the markets and higher-value offerings of developed economies, Indian companies are striking the vast majority of their deals in North America, Europe and the more developed economies in Asia, with the transactions equally distributed between these locations.
The Future Looks Bright!
Until the 1990s, not many Indian companies had contemplated spreading their wings abroad. An Indian corporate or group company acquiring a business in Europe or the UK seemed possible only in the realm of fantasy.[PAGE BREAK]
The reasons for overseas acquisitions are becoming increasingly common are many. The reforms era and the march of globalisation obviously made the environment more conducive. Globalisation changed the rules of the game forever. Indian entrepreneurs had gained the confidence to compete with well-established multinationals from abroad in the domestic market place. It was only a matter of time before some of them would shift their focus beyond the Indian shores, not just in selling their products but in setting up manufacturing facilities as well. Now, a whole range of companies in fields such as pharmaceuticals, automobile ancillaries, IT, banking and steel have ventured abroad. In general, the factor favouring foreign forays in most cases is the availability of affordable human resources willing to adapt to the global scenario.
The contribution of economic reforms at home to the outward focus of companies can hardly be overstated. For instance, the rupee’s exchange rate is market determined, and all current account transactions have been freed from controls. Indian businessmen too have chosen to invest abroad through acquisitions, albeit more slowly than those in the West. The good news is that what started as a trickle in the 1990s has been growing in size. Today, the outward fund flows from India almost match those coming in from abroad.
The Next Chapter
The speed of India’s entrance into the global markets illustrates the natural urge of Indian businesses to take part in the global economy. Globalisation has allowed the country to achieve great success in low-cost sourcing and services, but it promises to deliver much more for India.
The next challenge is to build higher-value markets and to give Indian companies the capabilities with which to contend against international competitors. The increasing scale and geographic scope of investment by Indian companies will in turn be a catalyst for wider industry and economic changes, such as:
- Consolidation in key industries, e.g. Information Technology, Pharmaceuticals, Steel
- Intensification of competition in many industries, as Indian companies apply their low-cost business models in the Western markets
- Greater interdependence between economies, as investment flows become more complex and multidirectional
Thus, after years of anticipation, Indian companies have finally arrived and seem set to leave a lasting impression on the global markets and competition in the decade ahead.