Tips for effective business with India

Key to the success of India investment

Entry into India

There are several ways to enter the market/do business with India.

• Technical Collaboration
• Joint Venture (The share of investment depends on several factors) A 26% shareholding under the Companies Act, allows the shareholder voting rights, on issues concerning his stake.  
• M&A (Merger & Acquisition)
• Setting up a Liaison Office / Branch Office / Project Office
• Setting-up a 100% owned Subsidiary (local laws dictate the allowance limit of FDI/investment in specific industries, with sectoral caps. For Example, in Automotive 100% investment is allowed, while in Multi-brand retail, 51% is allowed. Allowance may evolve as FDI policy changes.
• Limited Liability Partnership – A foreign entity can invest in a Limited Liability Partnership.  100% foreign investment is allowed under the automatic route without any investment linked performance conditions.  This may be beneficial to those that wish to invest with fewer compliance requirements and a lower tax burden.

Entry Trends

Small to medium-sized companies are inclined to form a technology transfer with a royalty and fee structure via the Joint Venture route, or localize by setting up a sales office or Joint Liaison Office.

M&A is usually expensive and rather cumbersome. All forms of due diligence – Financial, Legal and Managerial are very important and then there is an issue of localization and managing the business in another country.  This can be more challenging and therefore such an approach calls for more clarity before execution.  

Kokuyo, the Japanese stationery manufacturer, acquired Camlin in India, creating Kokuyo Camlin India.  They took the acquisition route, acquiring 51%, because they purchased into the entire supply chain network and distribution network in India.

This is a good decision by KOKUYO. As alternatively, building a broad supply chain and network would be very costly, and time-consuming. Also, building their brand presence in a cost-competitive market by themselves would have been a major challenge. 

Setting up a 100% Subsidiary is a good way under the new Special Economic Zone (SEZ) schemes and with local Japanese and Indian government support schemes (tax benefits, support in land acquisition and with Infrastructural set-up), and many such new Special Economic Zones have been set up catering specifically to Japanese companies.  However, doing business alone in India is not easy.  The labor laws and management philosophy and culture are different, so it is best to start small and take a step-by-step approach to growth. 

Key to the success

When Japanese SMEs enter India, they start with market research and local visits to assess applications of products and services and to study local pricing and consumer preferences. Market research is important to narrow in and to focus on the market.  The most challenging and intangible area is Managerial Due Diligence and effective communication. 

Ready for India

Many companies tend to get attracted to a potential partner due to their technological superiority, their local connections, or their customer list. In the meantime, India is a foreign country for the Japanese and the norms are different from Japan. Little goes smoothly and you may encounter speed bumps along the way. However, when you find a solution to the issue, and things go well, you get a big reward. The first priority is to find the right application in the Indian market.  

The Indian market may have a population of 1.3 billion or more people, yet, the middle class can be divided into several subclasses and the market has to be further segmented to truly understand the need within the market.  Simply looking at the broad term middle-class would be overestimating and overstating the actual market with real purchasing power. 

When selling to an OEM or to a Tier 1 or Tier 2 maker/supplier, a firm understanding of the end-user needs and their costing is important.  Also, the upper class and the rich are well-traveled and they have seen the World, so marketing to the niche rich class can also be compelling given the right product and the right strategy to go to market. 

Don’t do it alone

You can surely do it all on your own. However, it may be wiser and more sensible not to do it all alone. Rely on local people and develop trust over time.  Although it takes some time to develop a good relationship, this will help you and in the long run, it may be more cost-effective for your budgets and allow for fast decision making with clarity on what to focus on.

Understand each other

It is important to understand that when two countries, two companies, and two markets come together, “there is no win-win”.  It is about clear communication, cultural understanding, localization, adaptability, flexibility and sacrifice with a long-term vision towards a common goal. These are indispensable for your success.  You have to be willing to make some changes, be flexible and adapt along the way. 

The difference in the way of communication

When Japanese show their diligence and modesty, they say things like

“Dekiru to Omoimasu” (We guess we can do it),

“Dato Omoimasu” (We guess so),

“Kakunin Shimasu” (We will check it) to some questions that are regarded as simple, with answers that are expected as standard. The engineering team is back in Japan or back at Headquarters, so everything needs confirmation, even matters relating to actual real case experience. These face-to-face meetings are an opportunity to build credibility  so you should not be afraid to give estimates or examples of other experiences.

For example, a potential Indian client may ask – what is the tool life or the tendency of wear and tear of this material? You can answer this by giving an example of other experiences with this, or even give an estimate based on proper usage factors such as “with proper preventive maintenance”, what may be possible in ideal factory conditions. Some Japanese Companies reply, “well it depends on local factory conditions and usage conditions, so we cannot say”.  It is better to give a case example and give an estimate, and say, “about this much, but let me confirm and we will get back to you on this with more specific detail.  Indians have a tendency to be very academic and they ask a lot of questions.

Many Indian’s complain that Japanese brochures, marketing materials and websites, unlike the brochures of Germans or Swiss precision manufacturers, do not provide enough information and that they are not made well enough to effectively market products to foreign entities.

“Indo no Koto ha Wakarimasen ga Nihon dewa..” (We don’t know about India but in Japan..).

Such responses can be considered and taken as lack of confidence and a weak attitude. Indians communicate a bit more directly.  Better preparation is therefore needed for such meetings.  It may only be an issue of perception, but by global standards, some decision making from Japan Inc has been viewed as slow, conservative and even archaic.  Yet, on the whole, India has great respect and a high regard for Japanese people, technology and manufacturing excellence. Also, Japan and India have no war history or any major political issues, so business can be overcome through better management practices. 

It is also true that many Japanese Companies do not have a high degree of credibility on Indian commitment levels, even when the Indian side says it is 100%.  Sometimes, they over-promise and underperform. However, to deal with India and Indians, a change of mentality is also necessary.  Why an average Indian communicates with such overconfidence or overpromise can also be cultural and due to pressure and dynamics to get things done in India.   For the most part, it is not because Indians are not committed, but it is how they tend to communicate in a highly populated and competitive Country where there is a lot of pressure to succeed and to get ahead. It would be sensible to communicate and to actively follow up.  

Issues of Japanese companies

Tendency of Japanese companies

A lot of Japanese companies are heavily tied to, and dependent on their Japanese customers or business networks (Nikkei Kigyo). They have worked together in Japan and outside Japan for a long time. It works well, but sometimes this co-dependency can work against effective decision making  when dealing with “non-Japanese” entities, as the systems of doing business outside Japan Inc or outside Nikkei Kigyo is very different. 

Going as a supplier to a Japanese company is a safe way to enter the market.  The relationships are a true testament to the success of Japan Inc.  Yet, it is still important to understand how to adapt to local pricing and demand. Simply relying on the Japanese OEM to buy from you is a one-sided approach and creates a lot of dependency. This approach needs to be one of many possible approaches to the market, depending on your long-term vision. 

Even Japanese OEMs put tremendous price pressure to meet local market pricing and once they find a suitable local partner to supply products to them, they may source local products or import from elsewhere.  To keep costs in control, or to reduce cost over time, Companies utilize Kaizen, and “Jugaad”, which is an Indian management methodology and an innovative way that Indian Companies make improvements or problem-solve by utilizing finite or limited resources to get work done in a price-sensitive market.  Sooner or later, companies want to find a local partner and local customers. 

Characteristics of the Indian market

India is very price sensitive. If your price point is high, then you have to devise your plan and strategy on that basis, to know why it is OK to charge those prices, and know the market’s needs and application relative to your prices, and the prices of your competition. A brand in Japan or in Asia may not have the same brand recognition in India, so it may require educating the local market on your products.   

The market is also very competitive. There are many International brands present and there are also many local indigenous brands. The use of the right distribution channels and business networks is needed to compete aggressively.  It is a long-term play. A short-term approach generally fails.

WHAT IS GENERAL FEEDBACK FROM JAPANESE ON BUSINESS IN INDIA

Listed below are some main points that we have heard from Japanese doing business in India. 

1. Wages continue to rise, even with inflation. 
2. The Infrastructure is still considered to be relatively poor (although improving and developing)
3. Sourcing raw materials and parts locally may not be easy for some products
4. India still faces blackouts and power shortage although the situation has improved a lot, especially in the major cities. 
5. India is a highly competitive and price-sensitive market
6. Ease of doing business still needs to improve, although India is fast coming up in the global rankings. There is better transparency and the government is making efforts to crackdown on corruption. 
7. The level of vocational skills or technical trade skills is still relatively low.  
8. A lot of skills training programs need to be implemented to raise the levels. Vocational skills are important in many industries in sectors like manufacturing and operations. 

LEARNING FROM BUSINESS CASES

LARGE SCALE case

Daiichi-Sankyo Pharmaceutical and Ranbaxy is one of the largest failed Japanese investment and acquisition in India.  In June 2008 Daiichi-Sankyo invested in Ranbaxy, one of the largest generic drug manufacturers from India for a sum of approximately US$4.6 billion. Soon after the acquisition, Ranbaxy’s factory was under suspicion and being audited by the US Food and Drug Administration (FDA) for submitting fraudulent quality data, and all imports were subsequently stopped.  Ranbaxy was developing the generic drugs without the required protocols and safeguards and quality controls, and a whistleblower reported their violations to the FDA. 

Daiichi-Sankyo acquired Ranbaxy because generics and bioequivalents of brand name drugs is a big scale and profitable business. You can manufacture at low cost and sell for  very good profit margins.  An estimated  40% of America’s generic drugs at the time came from India. Additionally, almost 80% of active ingredients for drugs in the United States, for both brand name and generic drugs, are either from India or from China, so Daiichi-Sankyo saw Ranbaxy as a huge opportunity to diversify business. 

As per media reports, Ranbaxy was acquired by Sun Pharma. As a part of the deal, Daiichi got a stake of 8.9% in Sun Pharma, and later sold these shares for US$3.6 billion, upon exiting the Indian market. In financial terms, Daiichi was able to recover most of its sunk cost in the overall deal. However, Daiichi had a sunk cost which was not well utilized for business growth, and though mostly recovered, Daiichi’s biggest loss here was time, human resource and the opportunity cost of capital.  

Daiichi Sankyo’s investment into Ranbaxy was at a time when investor sentiment in emerging markets was high. And Daiichi may have rushed into the deal overlooking many important and vital details. 

It is clear that although some information may have been hidden or not clear, Daiichi Sankyo did not do their due diligence properly with regards to 1. Repeated Factory inspection and testing of the active ingredients and the generic medicine on a large scale 2. Frequent and detailed communication with the FDA to follow up on customer reports in the USA. Daiichi did not seem to have a clear objective and as an afterthought, they missed many situations that would highlight that something is not right.   The whole transaction was a failure in Managerial Due Diligence. 

Moreover, the dispute between Daiichi and Ranbaxy resulted in confusion with regards to responsibility, and this made matters worse, and prolonged the whole debacle. 

Daiichi-Sankyo may have been able to avoid the failure if they took more time to conduct managerial due diligence and conducted detailed legal checks and testing of generic drugs based on customer bioequivalent specification.

GENERAL OVERVIEW

Some companies are too slow in developing a strategy and therefore they lose the window of opportunity to really do something. In the past years, they had been too busy with investments and resources on business in China, Indonesia, and elsewhere, and with their home-based customers. However, competitors and the Market do not wait for you. It is for you to develop and to approach it with an intention to create the opportunity. 

The market may be limited for some companies

India may be a huge market based on population, but for most Japanese products, the actual market size is relative to each market segment. For example, ROYCE (chocolate) & YOKU MOKU (Confectionery) are in India, however they are specifically targeted for a growing niche upper class market. MUJI has also entered India, however, they are doing a lot of test marketing and even after developing local sourcing.  MUJI India’s prices will be largely catered for the higher upper middle class. The majority of Indians still cannot afford these brands, and they seek other local alternatives. 

Therefore, market sizing, pricing, target marketing and developing an effective marketing strategy need to be done well. It is good to spend some money here as you devise how you can utilize a network and strategy to approach and narrow down on the market. Once you decide to go to the market, you want to set up your business quickly, and with more in-depth knowledge.

Why Maruti Suzuki succeeded

Suzuki entered India early, at a crucial time when the automobile and passenger vehicle market in India was very nascent.  The stately Ambassador, made by Hindustan Motors and the Premier Padmini (under license from Fiat) were some of the more visible models on the road. Other than that you would mostly see bicycles, rickshaws, scooters, motorcycles, trucks and busses. And yes, even lots of cattle. Cars were for the well to do, and foreign brands had not made a big entry into the Indian market. 

In the early 1980s, as a personal project overseen by Sanjay Gandhi, the son of Indira Gandhi (of the Nehru-Gandhi family), Maruti Suzuki received preferential treatment which included access to scarce capital, easier access to capacity constraints, as a preferred supplier with formal access to local resources for indigenization, to develop a mass-market vehicle. On top of this, they received protection from competition. By the time the market was open to competition from abroad, Maruti Suzuki was ready to capitalize on this opportunity. 

Suzuki focused on the small car market and with rather reasonable and affordable models. Parts were widely available in every corner of the country, at modest prices, and Suzuki worked well with local suppliers and partners.  In fact, they developed local sources over time, and this has been key to their overall success, and also to the success of their sourcing partners, who were able to expand and become large global automotive suppliers

The factory also had very high capacity utilization levels, which was optimized to meet the large scale market needs of developing India.  

Suzuki raised its stake in Maruti Suzuki to 56% in 2013, and India can be regarded as its most successful market. It is also one of the most recognized brands in India today, with a very high market share. 

After Suzuki, the Korean brand, Hyundai also makes smaller mass-market models that are priced well with a very effective marketing strategy. They make all-inclusive model cars with critical important features built-in to the base price, because they know Indians expect certain things all-included and not optionally priced. Hyundai is reliable and the designs were well appreciated by the Indian customers. Hyundai also has a high market share after Suzuki and for Hyundai, India is also a major market where they make vehicles and export them from India.  

As Suzuki is weak in  “connected vehicles” and “electrification technology”, Toyota will be a major technology partner to Suzuki in India. Toyota will likely take a larger share in India, and they will help transition Suzuki for the future of Indian mobility. 

How to solve an issue (cost reduction)

Examples

•  A machine manufacturer company A sells the bare minimum machine, with critical precision component assembly from Japan to a customer. The fixture design and the fixture/ jigs manufacturing are done by a local company in Bangalore and the automation is done by a company in Pune, India. A complete turn-key solution is sold to the OEM buyer in India, utilizing the strengths of both countries and better cost management. This is possible and it is being done. 

•  A trading company B imports German machines, brings the critical precision components from Germany and buys less critical components in India, or Japanese components and electric units available and distributed locally in India. They assemble the entire machine in India. Also, all the machine try-out, commissioning and servicing are done in India, so this saves greatly on hotel cost, back and forth travel cost of engineers, and the long-term costs of marketing equipment.  

• Consumer goods company C makes its supplies in China, Indonesia, Thailand, or Vietnam, and markets through an Indian partner in India to reduce the cost.  The material costs can be just as reasonable from South East Asia or China, however, there is a risk of FX (Foreign Exchange) fluctuations and political risk in this strategy, as economics policy may change, but it could be a first step before rolling out local　production/manufacturing in India. 

• Understand local market needs, and manufacture a product specification for the Localized Indian market and for neighboring markets. This is a smaller and more specified approach to build your Company’s brand locally, and this may also allow you to protect your know-how by starting with 1-2 smaller projects, and then growing gradually.  The local specification can be developed by speaking to industry and marketing experts on the field in India, and by conducting good market research. The R&D can be done in Japan, and with approved drawings, the product for Indian market specifications can be partially made and fully assembled India. 

Each methodology above requires a trusted partner and a long-term approach in business. However, the cost merit transferred to the end customer can make you win in the local market, and it will also improve the marketability of your brand in the local market.

A key point is that India should NOT only be seen as a stand-alone market but with the new ‘Make in India’ government policy and initiative, India should be used as a local export base for several countries such as the Middle East, Africa, Sri Lanka, the United States, and Europe.  The wider approach, to utilizing manpower, the talents and the democratic benefits of India, but with a focus beyond the Indian market will allow for better risk hedging and a more balanced strategy. 

As an example, Daikin India makes Air Conditioning units in India. However, based on value addition in the Indian market, they also develop and manufacture for markets in the  Middle East and Africa. This is a “Make in India Plus Strategy” for better risk management and better utilization of company resources. 

8 Important Takeaway Points to increase your chance of success in India:

1. Focus on your own strength
2. Know your competition (foreign and local)
3. Have a clear vision of what customers want
4. Plan their go to market strategy
5. Utilize a good local partner (build trust)
6. Conduct legal, and financial due diligence of the Partner, but most importantly,  Managerial Due Diligence to truly know the business partner – “the people”
7. Make the solution available locally, or localize and manufacture a specification more fitted for the local market
8. Lastly, localize in India, but also view India as a market to globalize, utilizing the Manpower, youth, and skills present in India. 

There is a young working population, many trainable talented engineers, a large local market, but also a vision from the top of the country to make India a manufacturing hub.  

Very few Japanese companies work effectively to create such localized solutions. They focus on Japanese companies as a partner or supply products and equipment that are too expensive for a price sensitive growing economy.   

They do not localize their marketing efforts enough to really compete in India, despite the fact that the Japanese have the technology and capital as they think their know-how might get stolen or they may get cheated. These concerns are valid, but some risk hedging and utilizing of local resources can protect Japanese business interests as they plan and execute. 

Lastly, the fear of communication and particularly English, leads to not employing the best or most suited manpower for a project for India.  Just because someone speaks English does not mean that they will have the most effective communication ability to deal in business. It is important to remember that English is only a tool of communication, it is not business.  

Japan and India surely have a lot to share and to benefit from each other.  Indian manpower and skill, Japanese discipline and technology, two great cultures, can build bridges that will help both economies gain.