Foreign Companies Catch Sight of “The Tomorrow Ahead” in India

Make in IndiaThis analysis is cross-posted on the website of Geoskope, a business intelligence firm focused on key emerging markets, at which I serve as chief knowledge officer.

The previous issue of Datapoints explored just how difficult the politics of economic reform are in India.  This point underscores one of Geoskope’s core messages about the country: The business climate is challenging to say the least.  It’s no surprise, for example, that a just-released survey by the World Economic Forum ranks India as one of the worst places in the world for small business owners.

Ditto for the judgment expressed last month by Gurcharan Das, a former CEO of Procter & Gamble India, that “India remains a hostile place to do business.”  Or that the World Bank’s country director for India stated just today that “the stark reality is that India remains a difficult place to do business.”

But it’s also worth noting that a number of high-profile foreign businesses in recent weeks have expressed confidence about India’s long-term opportunities.  Their example highlights another of Geoskope’s basic messages: Companies in search of future sources of growth cannot afford to overlook India.  As the global CEO of Roche, the giant Swiss pharmaceutical company, put it a few days ago: “We always keep India on our radar.  The country is so big that you cannot ignore it.”

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Leading the parade is Amazon, which is determined not to repeat its experience in China, where the online retailer failed to move fast enough and has now been crowded out by home-grown companies like Alibaba.  India, which has a booming e-commerce sector, is Amazon’s second biggest investment country after its U.S. home market, and Diego Piacentini, the company’s global consumer business chief, calls India key to its future success.  He states:

We need to look at the long term. The kind of massive infrastructure and partnerships we are building in this country is huge. The US and Europe after some point will have a different growth trajectory.

Jeffrey Immelt’s, GE’s chairman & CEO, seconds the thought, stating that “India is a growth engine for Asia, and we see huge potential for the country in the manufacturing space.”  GE has doubled its investment in the country over the past five years and is looking to do even more.

Virginia Rometty, IBM’s CEO, declares that “the 21st century will be the Indian century and will have technology at its heart.  I’m very optimistic about the tomorrow ahead and this is a fact-based optimism.”

CNBC quotes emerging markets guru Mark Mobius as saying “GDP will go higher in coming months; India will probably achieve what China did 5-8 years ago.”

And the head of the Indian unit of LG, the South Korean electronics giant, believes “there is huge potential that India can take business away from China and export products to other countries.”

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Confidence in the long-term future is reflected in surging levels of foreign direct investment.  Nomura, the Japanese brokerage, estimates that India will receive nearly $35 billion in FDI flows in the current fiscal year (April 2015- March 2016), a more than 60-percent jump from the previous year.  Much of the FDI funds have gone into the ecommerce and manufacturing sectors.

According to the global consulting firm Bain & Company, private equity investors channeled $9.5 billion into the ecommerce sector in the first half of this year.  Bain’s India chief states the inflow is “primarily because investors believe that India will get back on the growth cycle again and it represents an attractive destination compared to other large emerging markets.”

Amazon is reportedly pouring in an additional $5 billion to broaden its presence in India, after pledging an initial $2 billion just a year ago.  And the company last week announced that it has opened seven new fulfillment centers to help the sellers on its online platform in India stock products that are shipped to customers through the company.  With the addition of these new facilities, Amazon now operates 20 such centers spread across 10 states in India.

Baidu, the web services company that dominates the internet in China, is also making a concerted effort to raise its profile in India.  The company, which is often called the “Google of China,” says the number of its users in India is one of the highest outside of its home market.  One of its executives notes that “India is important to us, given its 1.25 billion people, 19-percent internet penetration, and government policies that are favorable to promoting internet penetration.”

The Business Standard newspaper reports that the ecommerce boom has just put four young-ish entrepreneurs into India’s billionaire club.  And a leading business association last month released a study projecting that the start-up sector, including online ventures, will likely produce at least a dozen billionaires and score of millionaires by 2020.

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The tech manufacturing sector is also receiving lots of foreign attention, with many companies taking advantage of the investment incentives offered by the “Make in India” initiative that New Delhi has set up with the aim of making India a global manufacturing hub.

Leading the way on this front is Foxconn.  The Taiwanese company, which is the world’s largest electronics manufacturing service provider, made its name assembling Apple gear in China.  It now has big plans for India, where it says it intends to set up 10-12 plants and employ a million workers by 2020.

Terry Gou, the company’s founder, stated in a recent interview that “India is so big.  Maybe in 10 years, we can have a factory in every” of the country’s 29 states.  He added that “We are not in India only for assembling, but we want to be in the whole supply chain, key components and technology transfer.”  Foxconn envisions the country as an export platform to Southeast Asia, the Middle East and Africa.

The company is one of the most aggressive foreign investors in India, pumping billions into the ecommerce and solar power sectors (see here and here).  Last month it announced a $5 billion investment to set up a semiconductor manufacturing facility in western India that would employ some 50,000 workers.

Xiaomi, the giant Chinese phone maker that is sometimes called the “Apple of China, signaled last month that it would launch, in partnership with Foxconn, a new smartphone plant to in southern India.  India is the world’s fastest-growing smartphone market and has rapidly become Xiaomi’s largest market outside of China.  Xiaomi’s India head, a former Google executive, says that India “will someday be as big as China.  We are coming into India with full force.”

Lenovo, a prominent Chinese tech company, announced plans to establish an assembly facility in eastern India that will produce up to six million smartphones a year and employ 1,500 workers.

Even Phicomm, a minor Chinese smartphone maker, is getting into the act, with plans to invest $1 billion over the next few years.  A senior executive explains that outside of China, “India is our second largest potential market and that’s the whole reason why we have decided to come with a full-fledged plan.”

And Sony, after a decade of relying on imports, has begun local manufacturing of Bravia televisions.  The company ended local manufacturing in 2004 when it concluded that the existing size of the Indian marketplace did not justify a production facility.

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Big things are happening in the auto manufacturing sector, too.  With its growing consumer class, India is expected to become the world’s third-largest car market by 2020.  Companies are also increasingly attracted to the country’s low-cost but skilled manufacturing workforce.

General Motors has signaled its plans to invest $1 billion over the next few years to turn India into a global export hub.  The company’s international operations chief says, “With this investment we plan to tap India’s potential as a market and as a low-cost manufacturing base for the future.”

U.S. auto company Ford is making India an export platform and plans to export over 200,000 cars by 2020 to countries in Europe, the Middle East, Africa and elsewhere in Asia.

The Swedish company Volvo announced plans to begin exporting buses to Europe by the end of 2015.

The Economic Times, an Indian business newspaper, reports that Mexico, which is itself an emerging global hub for auto manufacturing, has become the largest export market for the Indian auto industry.  Volkswagen, Europe’s largest carmakers, ships some 55,000 vehicles a year from India to Mexico, while General Motors sends some 45,000 units.

According to the Society of Indian Automobile Manufacturers, auto exports have doubled from 1.8 million units in 2009-10 to 3.57 million in 2014-15.

European car makers Mercedes Benz, BMW and Audi also have sharply ramped their sourcing of Indian-made component parts.  Per the Automotive Component Manufacturers’ Association of India, component exports have grown from $4.2 billion in 2009-10 to $11.2 billion in 2014-15.

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In related manufacturing news, Boeing announced earlier this month plans to markedly increase its sourcing of India-made products.

And Siemens, the German industrial conglomerate, unveiled plans to invest an additional one billion euros in India over the next few years and add some 4,000 jobs to its existing Indian workforce of 16,000.

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Modi really will need to be a Miracle Worker

If Narendra Modi ends up as the new prime minister of India, his reputation as an economic miracle worker will be put to a herculean test.  As several news items make clear, the country’s economic problems go way beyond bureaucratic lassitude and policy indecisiveness to include major structural challenges.  Unfortunately, Mr. Modi appears to believe that speedier decision-making is enough to pull India out of its doldrums. Speaking the other month at a seminar on economic policy, he exclaimed that “good governance is more potent than policies.”

One of the dominant narratives in recent decades has been about how the spectacular growth of an urban middle class in countries like China and India would reshape the global economic landscape.  A 2007 report by the McKinsey Global Institute estimated that the size of the Indian middle class would swell to some 580 million people (41 percent of the population) by 2025.  Similarly, a 2010 report by the Asian Development Bank reckoned that the middle class would grow to over 600 million by 2020, and to over 1 billion by 2030 – at which point, it would outnumber that in China.

Such mind-boggling numbers helped spawn the ubiquitously cited “BRICs” epic propagated by Goldman Sachs as well as Fareed Zakaria’s “Rise of the Rest” saga positing a “post-Amer­ican” world.  And as the 2008 global financial crisis unfolded, the U.S. National Intelligence Council concluded that growing prosperity in China and India had catalyzed a “global shift in relative wealth and economic power … [that] is without precedent in modern history.”  There was even talk of “economic decoupling” – the notion that the Asian regional economy, with the two countries at its core, had achieved enough critical mass so it was no longer dependent upon developed markets in the West.

The sense that a new global order was dawning also led to a rash of high-lev­el corporate redeployments.  The head of the HSBC financial conglomerate relocated from London to Hong Kong, while Cisco Systems, one of Silicon Valley’s premier companies, decided to establish its eastern hemi­sphere headquarters in Bangalore.

But a series of reports in the Financial Times (here and here) this week argues that the growth of a solid middle class in Asia is less certain than widely assumed, since many who have risen out of poverty in recent decades could slide back into it during a prolonged period of slow growth.  This point is buttressed by new data from the National Council for Applied Economic Research, a widely-respected institute in New Delhi.  It finds that the annual income of the Indian middle class remains relatively low.(The ADB report cited above also made similar points.)

The International Monetary Fund warned last week that the world could face years of below-par growth, while some experts, like Ruchir Sharma (here and here), argue that developing economies like China and India are unlikely to achieve the high-flying growth rates they experienced in the last decade.

The Financial Times quotes Kaushik Basu, the World Bank’s chief economist and formerly the chief economic adviser to the Indian government, as saying that developing countries “need to do more, much more, in terms of structural reforms” in order to return to the kind of poverty-reduction gains seen in recent decades.

One fundamental reform India needs to carry through is the shifting of unskilled workers from the unproductive agricultural sector to labor-intensive manufacturing, something which should be a huge comparative advantage for the country.   Another key is spurring the urbanization process, something which Mr. Modi has promised to do by building 100 new technologically-advanced cities and expanding existing metropolitan centers in smarter ways.

Goldman Sachs reckons in a new report that the urbanization rate in India was about 20 percent in 1980, a figure higher than that of China at the time.  Since then, however, China’s rate has zoomed to over 50 percent, while India’s has only moved to just over 30 percent.  The investment bank calculates that urbanization contributes 2-3 percentage points to GDP growth in China and believes that accelerated urbanization would add some 1.8 percentage points to Indian growth.  Indeed, Foreign Policy magazine estimates that the top 35 metropolitan areas in China contributed just under half of its economic activity in 2013.  Premier Li Keqiang, who calls urbanization a “huge engine” for growth, has just launched a high-profile effort to speed along the process. The Economist magazine figures that nearly 70 percent of the Chinese population will reside in urban areas by 2030.

But according to a new report in the Wall Street Journal, the urbanization process in India has stalled due to an array of factors, including the lack of manufacturing jobs, persistent high inflation, and populist social welfare programs that discourage the rural poor from moving to cities.  A study released earlier this year by Crisil, a Mumbai-based company providing financial market intelligence, finds that some 37 million people exited the agricultural workforce in the 2005-2012 period, lured by better opportunities in the manufacturing and service sectors.  But it estimates (here and here) that these sectors will create 25 percent fewer jobs in the 2012-2019 period, thus trapping many rural youth in a life of agrarian poverty.  The marked economic slowdown in the past two years has already caused the rural labor pool to grow again and Crisil estimates that the under-employed agricultural workforce will expand by 12 million people in the 2012-2019 period.

The next prime minister will confront monumental economic challenges that cannot be resolved by greater injections of bureaucratic efficiency.  We will soon see how ready the Indian political system is to accept this truth and bite the bullet of fundamental reform.

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