Doing Business in India

Transcription

1 Doing Business in India For US exporters of products and services This paper discusses the opportunities and challenges in India and provides recommendations for US businesses wanting to do business or invest there. Anand Divekar Eco-Bridge LLC. 4/7/2010 1

2 Taking stock: India as a business destination Growth Trajectory for the Indian Economy India is the second most populous country in the world (next to China) with a population (in 2009) of 1.16 billion people and GDP of $1.24 Trillion 1. Trade with the US in 2008 amounted to $63.6 billion of which US exports to India were $32.44 billion (an 85% increase from the previous year) and imports from India were $39.89 billion (a 65% increase from the previous year). 2 India s GDP, growing at 6.7% (for ), makes it one of the fastest growing economies in the world and the second fastest in Asia. India has potential for a sustained growth of 8-10% for the next few years. Some forecasts (including Goldman Sachs research) predict that by 2025, the Indian economy will be 60% of the size of the US economy. After reforms which started in 1991, the country has made huge strides in improving its financial condition. The country presents lucrative and diverse opportunities for US exporters with the right products, services, and commitment. India s requirements for equipments and services for major sectors such as energy, environmental, healthcare, high-tech, infrastructure, transportation, and defense will exceed tens of billions of dollars in the mid-term as the Indian economy further globalizes and expands. To meet growing domestic and export demands, Indian companies are increasingly manufacturing finished products and sourcing sophisticated, efficient products and equipment from the US. There is also a growing trend in utilizing U.S. expertise in the fields of education, energy, environmental, engineering consulting, management consulting, retail and telecommunication. 3 Challenges and Opportunities The World Bank ranks India 133 rd out of 183 countries 4 for Ease of doing business while China is ranked 89 th (other rankings: Singapore is #1 and the US is #4). Scores are based on a set of parameters 5 - one of these is Ease of trading across borders, for which India is ranked 94 th. Ongoing reforms across Indian cities have resulted in city rankings (see Fig. 1) which improve each year and provide useful indications of the level of progressiveness in different parts of the country. This has important implications for US businesses planning market entry and future growth, since modernization in policies and infrastructure are indicators of a desire to be part of the new India, a dream which is driving major investments by government. India is still working on several challenges some of which are listed below 6 : 1. Problems in the agricultural sector 1 India at a Glance: 2 US Commercial Service ( 3 Export.gov website: 4 URL: 5 Sub-parameters related to Ease of Doing Business include: starting a business, construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business. 6 Wikipedia

3 2. Highly restrictive and complex labor laws 3. Inadequate infrastructure, which is often a government monopoly 4. Failing education 5. Inefficient public sector 6. Inflation in basic consumable goods 7. Corruption Infrastructure issues are being addressed by the Government as well as public and private corporations who have allocated a budget of over $500 billion over the next five years toward highways, power generation, ports and airports as well as the retail infrastructure including the entire food distribution chain, from farm fields to store shelves 7. Enormous opportunities exist for foreign businesses/suppliers who participate in this infrastructure modernization initiative. Growth sectors with strong prospects for US exporters include 8 : Civil Nuclear Energy Renewable Energy Aerospace and Defense Mining and Coal Safety and Security Healthcare Retail: Beauty and Personal Care Franchising Competing with China Figure 1: Ease of doing business in India In 2009, India s exports amounted to $155 billion compared to China s $1.2 trillion. Indian imports totaled $232 billion compared to China s $921.5 billion. While China is obviously the larger economy, India has certain factors in its favor as a trading partner: With 80% of its population under 45, and 50% of its population under 25, and with a rapidly deregulating and reforming economy, Indian bureaucracy is slowly and surely declining. China on the other hand is aging faster than any other country in history, due to the one-child policy introduced in 1980 and runs the risk of getting old before it gets rich. 9 Democracy, rule of law and freedom of press are entrenched in the Indian political system while China fails on all 3 counts, making continuity and sustainability of growth, suspect. The Indian private sector has been in existence for many years. Entrepreneurship and profit motives in Indian businesses are encouraged and supported by a sound banking and monetary 7 Business Week, Mar 19, Export.gov website ( 9 The Economist, Mar 2005

4 system. The Indian Rupee floats freely on the global markets, although the Reserve Bank of India trades actively to impact the exchange rate. China has made rapid strides toward privatization (70% of its GDP comes from private companies) but the private sector has only existed for a few years. Politics and government still play a large part in capital markets and securities markets. The Chinese government has shown repeatedly that it can be heavy handed and inflexible in its dealings with foreign businesses and nationals, as evidenced by its recent treatment of Google s search business in China and Rio Tinto s executives, accused of bribery and theft of state secrets. India has established its willingness to protect intellectual property, while China is still struggling to prove it can meet the demands of the international community on this front. Recommendations for US businesses Gain experience by exporting to other countries first If you are just starting export operations, we recommend starting with another country such as Canada, Europe or Mexico. Both India and China present significant challenges for new exporters. Research the Indian market before you invest Understand the size, regional nature, market potential and price dynamics of Indian markets. Determine your market entry strategy - how and where you want to enter it. Make sure that your product or service is right for Indian conditions. Local partners can help with this research. Ensure management commitment and access to adequate resources to manage a business relationship in India Setting up and managing a business in India requires patience and persistence. Be certain that management is aware that there will be challenges to overcome before success is achievable. Focus on local (not national) markets India has 26 states and although the country is growing at around 7% (was 9% in 2007), not all states are participating equally in the evolving prosperity. There can be several localized markets even within a state, due to local cultures, languages and markets. Good localized information (say at the city level) is a key to success in such a large and diverse country. US businesses should plan on marketing and selling products/services at the local market level (e.g. by city), rather than nationally. Conduct market research to gauge demand for products and services (unless responding to specific enquiries from companies in India). Local business partners can help. Visit the market and build personal relationships. Follow up visits will likely be needed Plan on several trips to meet and get comfortable with potential business partners and associates (including lawyers, accountants, etc). Each market in India can have different characteristics and it is advisable to visit and meet partners to better understand the local dynamics prior to market entry. The expectation by Indian business owners to have personal meetings was reinforced in 2009 when (due to the global recession), European, Korean and Japanese businesses made frequent visits to explore business opportunities. Meetings are looked upon as a means of establishing trust and can result in lucrative partnership arrangements.

5 Be wary of cultural missteps Indians have traditionally looked upon Americans as aggressive, but over the years, have come to accept this behavior (at least in the major cities) as normal. It is advisable for US business representatives to review cultural guidelines (widely reported on the Internet as well as within various text books on the subject) prior to traveling to India, to enhance their cultural sensitivity and circumvent unintended consequences. Find reliable local partners, build relationships New businesses must get a handle on marketing practices, sales channels, distribution, pricing, labeling and protection of intellectual property. The right local partner/agent can be an invaluable asset in managing local issues. However, it is advisable not to volunteer any confidential information prior to signing a contract with a potential partner. Additionally, due diligence is strongly recommended during the identification and vetting of potential agents to assess risk, reliability, and capability 10. Personal meetings with potential agents are extremely important during the due diligence process and to establish trust. Market entry options include a subsidiary relationship, a joint venture with an Indian partner, or using a liaison, project, or branch office. Eco-Bridge partners in India can also assist with local research into markets, identification of agents and partners, establishing a presence in selected cities etc. Find a local lawyer Identify an Indian lawyer to work closely with your local US lawyer when the time comes for contract review, handling disputes, etc. A signed contract will only hold up in an Indian court if it meets the guidelines of the Indian judicial system. The legal system is robust but badly backlogged and cases can take years to be heard. If at all possible, try to stay away from litigation. If litigation does occur, recent changes allow cases to be fast tracked to get to court in 3 years or so. An Indian lawyer should be able to guide US clients through this process. Alternatively, mediation is highly recommended to settle out of court. Local lawyers will be needed to guide you through this process. Be prepared for clients demanding offsetting purchases Negotiations with Indian clients will frequently include discussion around the purchase of offsets by the US business. Offsets are reciprocal purchase arrangements agreed to by the US seller in exchange for the Indian client s purchase of US products/services. Offsets can be in the range of 30% of the total sale to the Indian partner. 10 The US Commercial Service provides such services for a fee ( Other service providers include the US Department of Commerce, the World Trade Club

6 About Eco-Bridge Eco-Bridge has strong ties to India and works with local partners in India positioned to help US businesses enter the Indian market and set up operations there. Our Indian partners provide services to help US businesses become successful in India, including market research, market entry strategies, partner and client identification, investment opportunities, setting up local presence, etc. Prospective clients in India are interested in setting up joint venture relationships with US based businesses. As examples, we have received inquiries about joint ventures with solar wafer manufacturers, manufacturers of plant utilities (such as compressed air, nitrogen, oxygen, cooling water, etc.). Others have requested assistance in finding investors to take an equity position in their business. We are happy to help US businesses interested in establishing a presence in India. Our contact information is on the next page. Please give us a call.

7 Eco-Bridge.com Eco-Bridge is a privately held management consulting and M&A Advisory firm with partner networks extending across USA and India. We provide business advisory services to help clients improve business performance, manage technology initiatives and risks. We also work with buyers and sellers to provide transaction support across various industries. Contact Eco-Bridge USA Anand Divekar NE 8th, Suite 900 Managing Principal Bellevue, WA P: Office: anand.divekar@eco-bridge.com Eco-Bridge India Shankar Rele 2 La Citadelle 99 MK Road Associate Principal Mumbai , India sales@eco-bridge.com