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Executive Report on Strategies in India
ICON Group International, June 2007, Pages: 394
How to Strategically Evaluate India
Perhaps the most efficient way of evaluating India is to consider key dimensions which themselves are composites of multiple factors. Composite portfolio approaches have long been used by strategic planners. The biggest challenge in this approach is to choose the appropriate factors that are the most relevant to international planning. The two measures of greatest relevance are “latent demand” and “market accessibility”. The figure below summarizes the key dimensions and recommendations of such an approach. Using these two composites, one can prioritize all countries of the world. Countries of high latent demand and high relative accessibility (e.g. easier entry for one firm compared to other firms) are given highest priority. The figure below shows two different scenarios. Accessibility is defined as a firm’s ease of entering or supplying from or to a market (the “supply side”), and latent demand is an indicator of the potential in serving from or to the market (the “demand side”).
Framework for Prioritizing Countries
Demand/Market Potential Driven Firm
Relative Accessibility
Accessibility/Supply Averse Firm
Relative Accessibility
In the top figure, the firm is driven by market potential, whereas the bottom figure represents a firm that is driven by costs or by an aversion to difficult markets. This report treats the reader as coming from a “generic firm” approaching the global market - neither a market-driven nor a cost-driven company. Planners must therefore augment this report with their own company-specific factors that might change the priorities.
Latent Demand and Accessibility in India
This report provides an extremely detailed overview of factors driving latent demand and accessibility in India. Latent demand is largely driven by economic fundamentals. But, latent demand only represents half of the picture. A country may at first sight appear to be attractive due to a high latent demand, but it is often less attractive when one considers at the macro level how easy it might be to serve that entire potential and/or general business risks.
Chapter 2 deals with macro-accessibility. While accessibility will always vary from one company to another for a given country, the following domains are typically considered when evaluating macro-accessibility in India:
Openness to Trade in India
Openness to Direct Investment in India
Local Marketing and Entry Strategy Alternatives
Local Human Resources
Local Risks
Across these domains, a number of not-so-obvious factors can affect accessibility and risk. These are also covered in Chapter 2, which is presented from the perspective of an American firm, though it is equally applicable to most firms entering India. This chapter has been authored by local offices of the U.S. Government. I have included a number of edits to clarify the provided information as it relates to the general strategic framework.
In Chapter 3, I summarize the economic potential for India over the next five years for hundreds of industries, categories, and products. The goal of this chapter is to report my findings on the real economic potential, or latent demand, represented by India when defined as an area of dominant influence. The data presented are the result of various spatial econometric and time-series forecasting models which, for each category presented, are applied to forecast and allocate latent demand across all countries of the world and major distribution centers or centers of dominant influence within each country. This is accomplished knowing that economic fundamentals (e.g. income) generally vary from one country to another within a given country over time. In this chapter, I report the allocation for each category for India as an area of dominant influence in Asia and, potentially, the world.
The report concludes with trade indicators for India. Often, the amount of trade flowing into and out of a country is a strong indicator of trading partners, trade openness, and related latent demand. Trade indicators are purely statistical in nature. Although international trade is not a direct measure of latent demand, it does provide an indicator of general market conditions with respect to trade flows and trade openness in India.
As a whole, this report presents a strategic assessment of India by considering an extremely broad set of factors affecting both latent demand and accessibility, as outlined in the following chapters.
MACRO-ACCESSIBILITY IN INDIA
Dynamic Markets
Agriculture
Agriculture is about 25 percent of GDP and employs 62 percent of the work force. India has one of the largest agricultural sectors among the more important emerging markets. By mid-2002, northern India was experiencing a very weak and uneven monsoon, portending lower agricultural output in the months ahead. In July, the Farm Ministry said that India faces the most widespread drought in 15 years. The central Government maintains a costly price support system for wheat and rice, and also subsidizes fertilizer. State governments provide farmers with free or subsidized electricity and irrigation water. Laws are still on the books inhibiting inter-state commerce in key commodities and hampering agricultural exports. The cumulative effect of these interventions has been to distort prices, planting patterns, and marketing. For example, because of price supports the Governments strategic stocks of wheat and rice were 62 million tons in July 2002. Critics say much of those stores are wasted by spoilage. The Government is trying to remedy this situation by boosting the target for rice and wheat exports in 2002-03 to 15 million tons, up from 7.6 million tons in the previous year. Nonetheless, observers point to the economic benefit of higher rural incomes and increased demand when there are good harvests. Farm output grew by 7.2 percent in 2001-02, helping to buoy an otherwise lackluster economic performance.
Industry
The industrial sector, about 25 percent of GDP, is dominated by large, inefficient public-sector companies. Even in the private sector, manufacturing tends to be dominated by family conglomerates, where management can be lethargic. The sector needs further restructuring. The public and private sectors are evenly weighted, each accounting for about 45 percent of gross industrial sales, with the remaining 10 percent going to foreign-owned operations. Studies indicate that Indian industrys competitiveness continues to deteriorate, with lackluster measures on such variables as manufactured exports per capita and manufacturing value-added per capita. Some 550 products are set aside for small-scale industries exclusively, a restriction that hampers industrial efficiency. Business confidence showed a modest improvement in mid-2002 compared to a year earlier. Output in mid-2002 was rising at about 3.5 percent on a yearly basis, up from the 2.7 percent annual growth in 2001-02, the worst performance for industry since 1991. By contrast, industrial output grew 5 percent in 2000. Despite the apparent rebound, new net investment in manufacturing is sluggish. The production of capital goods actually fell by a negative 4 percent in 2001-02, compared to 1.7 percent positive growth in 2000-01. Industrialists point to weak global demand as the source of the slowdown.
Oil
Oil is a key part of the industrial sector. India has recoverable crude reserves of 645 million tons, which have declined since 1991 when they peaked at 806 million tons. Crude oil production was about 32 million tons in early 2002, a 1.2 percent decline from the year earlier. At current production, known reserves are expected to last for the next 21 years. Consumption of petroleum products has risen 5-6 percent yearly for the last two and a half decades. With domestic production meeting only 37 percent of demand, India imports 85-90 million tons of crude oil a year. About 61 percent of Indias total oil needs come from the Middle East. Refining capacity is 110 million tons of crude a year, but more capacity is coming on line. Refinery output is expected to reach 135 million tons in three years. State-owned oil companies contribute almost 25 percent of the total government revenue. The Oil and Natural Gas Corporation is the biggest producer, but private sector/joint ventures have recently entered the scene. They now account for about 12.5 percent of total production
Services
Services (trade, tourism, banking, transport and communications) comprise slightly more than 50 percent of GDP and have greatly benefited from the decade-old process of economic liberalization. Although growth in services continues to sustain overall GDP growth, the quality is subject to question because of the large government services component. Services grew 6.5 percent in 2001-02, a decline from 7 percent growth in the previous year. Telecommunications and software services are two of the fastest growing segments of the economy. The following are summaries of other key service industries.
Banking
State-owned banks control 80 percent of the banking systems total assets. In general, their profits are weak. Foreign and private domestic banks are relatively smaller players. The system is characterized by a high level of bad debts; political interference in the form of 'directed lending;' over-regulation; poor services and management; weak profits and undercapitalization; opaque or non-existent credit-rating policies; competition from post-office savings schemes; and barriers to entry to foreign investors. Public-sector banks are reducing their payrolls through voluntary retirement schemes. FDI is slowly being liberalized: the foreign investment equity ceiling has been raised to 49 percent from 20 percent. Foreign banks may set up subsidiaries as an alternate to branches of the parent company.
Insurance
Pointing to Indias population of one billion people and low insurance penetration rate, market players are optimistic about future prospects. Life or health insurance covers less than two percent of the population. Indians save about 25 percent of their incomes, but less than five percent of savings is put into insurance. Nonetheless, the market has begun to move, with several private players forming joint ventures with foreign insurance companies. FDI in the insurance industry is capped at 26 percent of equity. Increasing that cap would help deepen Indias capital markets.
Healthcare
India’s healthcare industry, about 4 percent of GDP, is a $15 billion business. Its strengths include low costs and a large rained labor pool of healthcare professionals. Although health insurance coverage is low, per capita spending on healthcare has been rising. This increased demand has created a national shortage of hospital beds. A WHO report states that India needs to add 80,000 hospital beds each year to meet the demand of its population The Government permits 100 percent FDI in hospitals and other healthcare activities.
Pharmaceuticals
India has 20,000 drug manufacturers, accounting for nearly 3 percent of GDP. The industry is dominated by the private sector (only five state-owned companies manufacture drugs). Industry output meets about 95 percent of domestic demand. Over 60 percent of India’s bulk drug production is exported. Imports are generally limited to a small number of life-saving and newer drugs. A sectoral weakness is the lack of effective legal protection for product patents. The unauthorized local production of patented products is widespread. Several multinational drug companies operate import bulk drugs from the parent company and formulate them for the local market. India is self-sufficient in terms of formulation technology, including those for sulpha drugs, vitamins, hormones and a number of new synthetic drugs.
Broadcasting
The rapid growth in recent years of Indias cable TV industry illustrates the power of a liberalized regulatory regime. India has some 79 million television sets, of which 38 million are connected to cable TV (about 209 million viewers). There are over 30,000 cable operators with about 1,000 subscribers each. The industrys revenue is estimated at 57 billion rupees ($1.17 billion) and is growing 10-12 percent annually in terms of declared revenue. Non-cable TVs receive programming the three state-owned Doordarsahn channels, compared to the 90 channels available by cable nationwide. (The operators are required to carry the Doordarshan channels in their packages.) Cable TV represents a large potential for broadband Internet connections to the home. Several cable operators have already begun to offer such service. Under parliamentary pressure in mid-2002, the Government withdrew the Cable Television Networks (Regulation) Bill, which would offer pay-per-view service, thus breaking the cable operators programming monopoly. Direct-to-home digital satellite radio broadcasting was launched in February 2002, with direct foreign investment capped at 49 percent. Radio reaches 98 percent of the population. The dominate broadcaster is the state-owned All India Radio. The sector is opening up to the private sector and several privately owned FM radio operations are now in business. The FM radio industry has advertising revenues of about 1.6 billion rupees ($33 million).
Software Services
The software industry is one of the fastest growing sectors of the economy. For the year ending March 31, 2002, the industry grossed $10.1 billion in revenue, compared to $8.4 billion in 2000-01. Gross revenue is projected to increase 22 percent to $12.3 billion in 2002-03. In 2001, the software industry was about 1.4 percent of GDP, but the industrys trade association expects that relative weight to increase to about 8 percent of the economy by 2008, representing a $87 billion industry with $50 billion in exports. Some 700 software companies export their services. Exports are currently growing faster than the industry as a whole (they were $6.2 billion in 2001-02), and have helped give India its first current account surplus in decades. Domestic e-commerce is small but expected to be a $5.4 billion industry in 2005 from $0.1 billion in 2001. E-commerce solutions are becoming an important part of Indias software export mix, and are projected to be $2 billion in 2002. Duties on imported IT and telecom equipment is 15 percent, but the Government has signaled its intention to eliminate the tariff in two years.
Economic Fundamentals and Dynamics
Government Intervention Risks
Despite a decade of economic reform, the Government still has a heavy hand in many key aspects of the economy, as illustrated by the following:
The public sector. At least 250 companies are owned by the central government and hundreds others by state governments. They dominate many industries, especially banking and infrastructure, receive preferential policy treatment, and hamper private investment. The Governments privatization program has made some progress, but much more needs to be done.
Regulation. Despite liberalization, many industries are still heavily regulated, which skews incentives and promotes inefficiencies. Business start-up procedures are cumbersome, for both domestic and foreign investors alike.
Indias 28 states may tax goods 'imported' from other states. In principle, the power to tax inter-state commerce fragments key sectors of the economy, especially trade in agricultural goods
Free electricity and irrigation water for farmers distorts true agricultural costs and has led to the uneconomic cultivation of rice and wheat.
Some 550 goods are 'reserved' by law for 'small-scale industry.' This has hampered local firms, such as in textiles and toy making, from developing economies of scale, marketing techniques, and even foreign markets.
Directed lending. The central government requires all banks to make 40 percent of their loans to identified groups, such as farmers and small businesses. In principle, this means the nations stock of investment capital is not efficiently employed.
Even though the power-generation business is open to private companies, individual state electricity boards are the sole legal buyers of electricity. Many of them are insolvent. Large industrial companies have increasingly opted out of the national grid in favor of their own captive power-generation units. Government reform efforts are now centered on power transmission and distribution.
Railroad freight tariffs have long been used to subsidize passenger rail traffic. These higher rates have re-directed freight onto the nations inadequate road system
Infrastructure Development
Outlook
Problems with the countrys roads, railroads, ports, airports, power grid, and telecommunications hamper economic growth. Nonetheless, a slow process of liberalization in these areas has been underway, including a more liberal environment for telecom and information technology, and greater roles for the private sector in ports and roads. The power sector remains the most problem-plagued.
Power
The power sector is largely under the control of the state governments, which offer free or low cost power to the agricultural industry. Demand for power is growing at three percent a year. Because of governmental intrusion, the industry is inefficient and unprofitable. Although private companies may own and operate power generation plants, state electricity boards are still the only legal purchasers of electrical power. However, many of them are financially weak and are in arrears on payments to the power producers. This in turn has caused a slowdown in new investment in the sector by private companies. Foreign investors appear to be leaving the sector. The unauthorized off-take of power equal is as high as 50 percent in some places. Power shortages are common in many parts of the country. The lack of independent state regulators is another factor hampering new investment. At the national level, a new Electricity Bill is under review in Parliament. It envisions dismantling the 'single buyer' system, allowing generators to sell to the market. The central Government is encouraging reform at the state level, offering state government financial incentives in exchange for power-sector reforms, such as universal metering of users.
Roads
With three million kilometers of roads, India has the worlds third largest road network. Half of the roads are not surfaced. Only 58,000 kms of highway are suitable for high-speed traffic. National highways are 1.4 percent of total road length, but carry nearly 40 percent of the countrys road traffic. Road traffic is increasing 8-10 percent a year. Although 92 percent of the villages with populations over 1,500 are serviced by roads, only 37 percent of villages with less than 1,000 inhabitants are connected.
Railways
Indian Railways (founded 1851) is one of the Worlds largest. The country has seven railway zones, operating a network of 63,028 kilometers, 24 percent of which is electrified. Seventy-five percent of the network is only single track. Narrow-gauge lines are being converted to broad gauge (about 70 percent of the system). The central government is trying to control the loss-making subsidy system in which high freight rates (about 67 percent of revenue) subsidizes passenger traffic. High tariffs for freight has caused the diversion of cargo onto the nations inadequate road system.
Ports
Indian ports are struggling with inadequate storage space and out-dated handling equipment. The country has 12 major ports, under the control of the central Government, handling 90 percent of foreign trade. One of them, Ennore Port Ltd., is under private management. The central Government has opened up the following port activities to the private sector: leasing out existing assets, port construction, dredging, captive power plants, captive facilities for port-based industries, and supply and maintenance. State governments are following suite with some 160 minor ports. Ship idle times continue to be longer than the accepted norms. A National Tribunal in the Ministry of Labor adjudicates port labor issues.
Airports
India has 12 international airports (under central Government control) and 83 domestic airports (under state government control). All but 10 of them are reportedly unprofitable, including the countrys sole privately operated airport in Cochin. The domestic airline market is growing faster than international traffic. The four largest international airports are located in New Delhi, Calcutta, Chennai and Mumbai. The GOI is exploring options for turning their management over to the private sector. Unlike most international airports, which make 60 percent of their revenue from non-flight business, Indian airports remain heavily dependent on flight-related activities for earning revenue. This is due in part because many international flights depart India at night or in early morning darkness, thus leaving relatively few passengers in the airport halls during the day. In south India, new greenfield airports are on the drawing boards for Bangalore and Hyderabad. The Government is finalizing the financial terms with the foreign companies that won the construction contracts.
Telecommunications
Unlike some other infrastructure sectors, Indias mobile phone industry has been built up entirely by the private sector, which has sunk some $6 billion in capital equipment into the market in recent years. As a result, India today has a world-class cell phone system, although other aspects of the telecom infrastructure (fixed-line, e.g.) are still sub-standard. The industry is regulated by the Telecommunications Regulatory Authority of India (TRAI). Although the regulatory environment has improved, private telecom firms have raised concerns about TRAIs weak enforcement powers and about the apparent conflicts of interest arising out of the Governments ownership interest in some telecom companies. A telecommunications Convergence Bill is pending in Parliament, which aims to bring telecommunications, information technology and broadcasting under the purview of one regulatory body. Tariff rates and prices for handsets continue to fall.
Mumbai is the largest market with over 17 percent of all subscribers. India has only 30 million fixed-line telephone connections, a very low rate of telephone penetration, amounting to less than four percent of the population. More than 970 million Indians do not have access to a telephone. Still the number of metered calls showed rapid growth in the 1990s, up 64 percent a year, compared to the 18 percent growth rates in the 1980s.
Information Technology
Although India has become a major player in international software outsourcing and services, Internet and PC ownership penetration rates are very low. India has about 3.5-4 million PCs, less than one-half a percent of population. The GOI estimates there are 3.3 million Internet subscribers in India, but users are about three times that figure. Internet cafes provide accessibility to millions of citizens who cannot afford the cost of a PC or the monthly Internet billing charge. Despite these bottlenecks, India has abundant skilled manpower for virtually all types of IT-enabled services and a progressive info tech regulatory environment. Its time-zone location is also an advantage to North American companies seeking outsourcing services. Many Indian state governments offer special incentives to private companies to set up IT enabled services. Privately owned ISPs may set up Internet gateways by both satellite and submarine optical fiber cable. The Information Technology Act of 2000, provides the legal framework to facilitate e-commerce, and also stipulates penalties for cyber crime.
Regional Economic Integration
Regional trade and economic integration do not have a significant effect on Indias trade patterns. Indias largest single-country trading partner is the United States, with two-way trade at about $12 billion, or 13 percent of Indias total trade. Two-way trade with the EU is about $21 billion, by far eclipsing trade with any combination of South Asian countries. India is a member of several regional groupings, the most important of which is the South Asian Association for Regional Cooperation (SAARC), but the potential for greater regional cooperation has not yet been realized.
Political Risks
Economic Relationship with the United States
The United States and India share common interests that extend beyond trade and commerce. Relations between the two countries are now broader and stronger than during any previous period in their 54-year history. Increased trade, investment and commercial ties between the worlds two largest democracies have spurred the two governments to cooperate on difficult bilateral and global issues, such as nuclear nonproliferation, climate change, counter-terrorism, and peacekeeping.
A New Start to U.S.-India Relations
Following India’s nuclear tests in May 1998, sanctions had seriously complicated trade flows, development aid, and the implementation of our common agenda. Loans by international financial institutions for projects not related to basic human needs were curtailed. India’s credit rating dropped and borrowing costs for businesses increased. On the other hand, the BJP government approved a number of pending large-scale projects, including several proposals from the United States, in record time, presumably to signal that business would proceed as usual. While the USG lifted many of the sanctions after 9/11, a number remain in place and important political constituencies in the U.S. continue to watch non-proliferation issues very closely.
Political Risks
Opposition by a variety of leftist and other parties to reducing subsidies, further privatization and labor law reforms remain important inhibitions to modernizing the Indian economy. Other factors that mitigate usually generally 'business-friendly' national policy include: Indias stultifying and largely unreformed bureaucracy, as well as social tensions (some manifested violently) in a huge and extremely diverse population, much of which suffers from extreme poverty and the burdens of underdevelopment.
In India, enormous social diversity and democracy give rise to many voices of dissent. Many major decisions generate vigorous debate along caste, ethnic/linguistic, religious, regional, urban/rural, socio-economic, and ideological lines. Disagreements and hard bargaining between the federal and state governments are common, and changes in government often lead to changes in rules. The slow pace of economic reform is in part a result of the need to mediate among competing interests both within the party and among coalition partners. U.S. firms are advised to be patient and take a long-term view in the Indian market.
India’s dynamic, growing and influential private sector will not give up the gains in liberalization it has achieved. Some BJP leaders espouse policies of economic nationalism, have attempted to return to the “swadeshi” (nationalist) agenda of previous decades, and have called for “India to be built by Indians.” These politicians, however, generally do not wish to antagonize foreign investors and traders, but rather seek policies that are fair and consistent, and that address India’s economic needs. On balance, India’s business environment is improving and most industrialized nations are expanding their commercial presence in the country.
The Political System
India is a multi-ethnic, multi-religious, federal republic of 28 states and 7 union territories. The country has a bicameral parliament, including the indirectly-elected Upper House, the Rajya Sabha (government assembly), and the directly-elected Lower House, the Lok Sabha (peoples assembly). The judiciary is independent and the legal system is based on English common law.
National and state legislatures are elected for five-year terms, although terms may be extended in an emergency and elections held early if a government is unable to maintain the confidence of Parliament.
Marketing Strategies
Distribution Channel Options
Following the 1991 economic reforms, Indias international trade environment has been liberalized. Gaining access to Indias markets requires careful analysis of consumer preferences, existing sales channels, and changes in distribution and marketing practices that are continually evolving.
India is a subcontinent, nearly 2,000 miles from north to south and 1,800 miles from east to west. Its coastline is 3,800 miles long and its area is 1.3 million square miles. Vast distances separate the most populous cities. The urban population centers are widely dispersed and nationwide distribution is imperative for many classes of consumer products. For instance, a leading manufacturer of cosmetics and personal care products sells to 250 million Indians through a network of 100,000 retail outlets across the country.
Rural India constitutes approximately 70 percent of the country’s population. Although in terms of buying power urban India would rate higher, the rural market has been showing rapid growth in recent years. The main reason for such growth, apart from awareness created by various media, has been the increased availability of products in rural areas. The adaptation of distribution channels to the needs of the rural market has been the major factor contributing to the growth of the rural market. A good example of innovative distribution has been the availability of products in the traditional weekly market, which often caters to multiple villages.
Most Indian manufacturers use a three-tier selling and distribution structure that has evolved over the years: distributor, wholesaler and retailer. As general examples, a company operating on an all-India basis could have between 400-2,300 distributors. The retailers served directly by a company’s distributors may similarly be between 250,000-750,000. Depending on how a company chooses to manage and supervise these relationships, its sales staff could vary between 75 to 500 in number. Wholesaling is profitable by maintaining low costs and high turnover. Many wholesalers operate out of wholesale markets. India has approximately 12 million retailers, mostly family-owned or family-run businesses. In urban areas, the more enterprising retailers provide credit and home-delivery.
In recent years, there has been an increased interest by companies to improve their distribution logistics in their effort to address a fiercely competitive market. This in turn has led to the emergence of independent distribution and logistics agencies to handle this important function. Marketers are increasingly out-sourcing some of the key functions in the distribution and logistics areas to courier and logistics companies and searching for more efficient ways to reach the consumer. The courier network in India now spreads to Class IV towns (towns with populations less than 50,000).
Most fast moving consumer goods (FMCG) and pharmaceutical companies use Clearing and Forwarding (C&F) agents for their distribution and each C&F agent services stockists in an area, typically a state. It is also important to note that duty structures vary among states for the same product, thus creating disparate pricing. With the cost of establishing warehouses becoming extremely high, C&F agents are fast becoming the norm. Innovative trends have also been seen in recent years where companies utilize distribution channels for products with complementary characteristics.
While there are no major national store chains, departmental stores, branded stores, specialty stores, malls and supermarkets are mushrooming in many large and medium-sized cities in India. Most cities have well-known market districts. Retail sales outlets are almost always locally owned. The current trend for shopping centers in major Indian cities is integration of shopping with entertainment and leisure activities. Buying and selling is often a process of bargaining and negotiation. Outside the major metropolitan areas, India is an intricate network of rural villages. Poor roads make many rural districts inaccessible. Although villages may have satellite TV, moving goods to rural markets can present real challenges.
The current volume of organized retailing is very small. Large industry groups in India are now pursuing organized retailing as a business opportu
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