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Internationalisation of indian comapnies

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  • 1. What are the likely challenges for Indian companies tointernationalise at fast paceIntroduction:Globalisation is the new buzzword that has come to dominate the world since the nineties ofthe last century with the end of the cold war and the break-up of the former Soviet Union andthe global trend towards the rolling ball. The frontiers of the state with increased reliance onthe market economy and renewed faith in the private capital and resources, a process ofstructural adjustment spurred by the studies and influences of the World Bank and otherInternational organisations have started in many of the developing countries. AlsoGlobalisation has brought in new opportunities to developing countries. Greater access todeveloped country markets and technology transfer hold out promise improved productivityand higher living standard. But globalisation has also thrown up new challenges like growinginequality across and within nations, volatility in financial market and environmentaldeteriorations. Another negative aspect of globalisation is that a great majority of developingcountries remain removed from the process. Till the nineties the process of globalisation ofthe Indian economy was constrained by the barriers to trade and investment liberalisation oftrade, investment and financial flows initiated in the nineties has progressively lowered thebarriers to competition and hastened the pace of globalisationImpact on India:India opened up the economy in the early nineties following a major crisis that led by aforeign exchange crunch that dragged the economy close to defaulting on loans. Theresponse was a slew of Domestic and external sector policy measures partly prompted bythe immediate needs and partly by the demand of the multilateral organisations. The newpolicy regime radically pushed forward in favour of a more open and market orientedeconomy. Indians have been quick learners in internationalization both in scale and speed.With the domestic market fast catching up with the developed market, the learning has had amultiplier effect. With booming local economies, the emerging market multinationals arereaching for the stars .India is Global: For Asia and around the world, India is not simply emerging. India has emergedUS President, Barack Obama addressing the Indian parliament on 8th November, 2010. Inthe aftermath of the global financial crisis, the Western economies are under pressure astheir growth has either stalled or drastically slowed down and there is growing awarenessthat their dominance of the global economy might be under serious threat. They increasinglysee their future in the emerging markets. At the same time, major emerging economies,including China and India, are powering ahead and in the process are redefining the globaleconomic landscape. Multinational companies from emerging economies, particularly fromAsia, now account for 70 of the Fortune Global 500 list and according to the UnitedNations Conference on Trade and Development (UNCTAD), today account for over 16%of outward foreign direct investment (FDI).EPGDIB 2010-12 Roll No 25 - International Business Strategy Page 1
  • 2. With its increasing integration with the international economy and the burgeoning middleclass, Indian economy offers a fertile ground for international expansion for Westernmultinationals. As we see, Indian firms are fast internationalizing by investing abroadand employing locals. According to a Columbia University study, Indian firms haveinvested over $75 billion overseas in the past decade. A joint study by the University ofMaryland, India-US World Affairs and the Federation of Indian Chambers of Commerce andIndustry reported that over the last five years, Indian FDI projects in the US created about60,000 jobs with investment worth $26.6 billion. Similarly, according to the Confederationfor Indian Industry (CII), Indian firms are the second highest foreign employers inBritain, with Tata, the UK s largest foreign investor, employing over 47,000.Indian firms are rapidly going international- Made in India no longer liability -- increasingly asset- Indian firms are moving up the competitive value chain- Asia, Europe and the USA equally important regions- Increasing internationalisation boosts Indian firms performance- Implications for European companies: Indian competition will increase in Europe, NorthAmerica and AsiaOne of the core strengths of Indian firms is to extract maximum value from even ailingbusinesses by applying innovative and cost effective methods that they have developed overthe years in an extremely resource constrained and uncertain domestic environment. Theyhave a unique approach to their international growth that is grounded in their Indian heritageand culture. We call it compassionate capitalism and it manifests in several ways, such as apreference for sustainable growth, long-term commitment to their businesses despiteeconomic turbulences, faith in the management team of the acquired overseas companiesand commitment to employees in terms of job security and investment in training.Internationalization Process beginning by Indian CompaniesIndia s two most well known and established companies, the Aditya Birla Group and the TataGroup. Both of them have a strong Indian heritage and have contributed immensely to themodernization and globalization of India. They are firmly embedded in the psyche of thenation and instead of resting on their past laurels, they have reinvented themselves asmodern multinational corporations in a range of sectors, both manufacturing and services.The founder of Birla Corporation, Ghanshyam Das Birla, was a close associate ofMahatma Gandhi and the founder of the Tata Group, Jamshedji Tata was known for hisvision for India and established the nation building industries, from steel to chemicals tocement and aviation. While both the companies are still India centric, they have expandedoverseas rapidly and successfully.Aditya Birlas internationalization journey began in South East Asia in line with India s so-called First Wave of internationalization in the 1970s when the Government of India activelyencouraged South-South cooperation in foreign investment. At the time, the major Indianindustrial houses, including Tata and Birla, opted for Greenfield investments by pursuingjoint ventures with firms in the host countries and leveraged on their capability in reverseengineering by replicating foreign technologies in cost efficient modes, mostly in theEPGDIB 2010-12 Roll No 25 - International Business Strategy Page 2
  • 3. manufacturing sector. While 90% of Aditya Birla Group s income comes from the commoditybusiness, over 60% of its revenues are generated outside India.However, Birla chose the acquisition route to expand downstream aluminum business(Novelis in the USA) and the BPO business (Minnax in Canada) as these acquisitionsoffered big and sticky clients with marquee names . The current Chairman,Kumarmangalam Birla set the goal in 2003 to join the Fortune 500 league and havingachieved that his next goal is to join the Fortune 150 league which meant tripling thebusinesses.The international character of the Tata Group was evident more than 130 years ago whenits founder Jamshedji Tata employed foreign managers in Tata Steel and Tata Electric. Thepresent Chairman, Ratan Tata believes in the same philosophy. He says one of the reasonsI have been keen to find a way to really prepare the organization proliferated with othernationals is nothing changes the perspective quicker or deeper than in fact having to have acoexistence of cultures .Whilst like the Birlas, the Tata group is a conglomerate with multiple business lines, here wefocus on Tata Motors which has a dominant market share in trucks in India and theneighboring countries, including South Africa. Its product profile has traditionally suited the bottom of the pyramid emerging markets which is now changing with new world classproducts, such as pick-up trucks and prestige cars, being added. Global auto companies thatare coming to India are forging collaborations with Tata Motors. For example, the companyhas a joint venture with Marco Polo in Brazil for bus body building and distributes Fiat cars inIndia. It has been in the car market for only 10 years and already boasts an impressiverange of cars from Nano, the world s cheapest car to prestige global brands with theacquisition of Jaguar and Land Rover (JLR). It also recently acquired the truck business fromDaewoo.Internationalization Challenge being faced by Indian companiesFirms which are primarily involved on the exports of Indian merchandise or services toforeign countries face challenges in terms of : - Foreign Regulatory Environment - Non Tariff barrier and Phyto-sanitary barriers - Foreign Exchange conversion Rates - Very high transportation costs - Inspection and certification - Visa related issues - TaxationSome of the Debt / Cash management challenges are: - Valuation of foreign firm, which is being acquired are generally very high and the high premium paid of such acquisition doesn t easily translated into real benefits which in cash. - Most Indian firms are small in size and many of the target firms which are being acquired are much large size, posing challenges with assimilation of these firms - Raising debt/cash in Indian market is difficult and expensive , because of high interest rates and underdeveloped bond market in India.EPGDIB 2010-12 Roll No 25 - International Business Strategy Page 3
  • 4. - Underdeveloped Foreign exchange market in India pose another challenge as Indian currency is very volatile and leads to frequent forex losses for Indian firms - Indian Government s foreign exchange laws FEMA, which are not very supportive of Indian firm wanting to business abroad - Firms which are raising substantial portion of debt from abroad find it difficult to pay off debt because of foreign exchange volatility, which makes even this debt expensiveSome of the Integration related challenges are: - Because of cultural difference, it is difficult to integrate acquire firm fully in terms of workforce. Also inexperience of Indian Managers in this area is posing major challenges in fully integrating the facilities the abroad and real benefits of acquisition - Indian firm had never been leaders in Innovation and research, which is challenge to acquire firm which are innovation centricMarketing knowledge is dependent on the relevance and depth of marketing informationavailable to the firm. Firms that use relevant, accurate and timely information are in a betterposition to respond to export problems. Information about exporting and more specificallymarket information were mentioned as the most serious problem of manufacturing. Gettingconcrete information on respective foreign markets is essential before exporting can occur.Distribution is another major problem area in exporting. Many SMEs in developingcountries lack information about marketing channels and fail to establish marketingnetworks, pointed out that the lack of internationally recognized company brand names, andappropriate marketing and retail networks are export barriers to Taiwan.s indigenousmanufacturers. Researchers have also identified several other marketing barriers that caninhibit exporting, for instance, pricing of the product in the international market.Sound financial position is one of the keys to secure price advantage in the target market.Many SMEs in developing countries run into problems for lack of timely and adequateworking capital, which not only adds costs but can also endanger the entire productionoperation. The importance of financial barriers to exporting, such as difficulty in acquiring thenecessary funds to initiateQuality is often indicated as one of the most important conditions for entering and remainingin foreign markets and logistics management. It concerns packaging, meeting importersquality standards and establishing the suitable design and image for export markets. Thereare different quality standards in developing countries. However, many of the qualityproblems are the result of inadequate knowledge about market requirements, productcharacteristics and production technologies. A product, which sells well in a developingcountry, may not sell at all in a developed countrySeveral researchers indicated that local product standards, customer standards and buyinghabits may be unsuitable for foreign sales and may require adaptation. In most studiessuccessful firms adapt their products to foreign markets.Export market barriers are related to product requirements in the export market, thecountry of origin, cultural similarity and brand familiarity. Lack of similarity of legal andregulatory frameworks of the exporting and importing countries and lack of familiarity withmarket export procedures are also mentioned as export market barriers. These factors areregrouped into customer and procedural barriersEPGDIB 2010-12 Roll No 25 - International Business Strategy Page 4
  • 5. Export procedures. One of the most cited obstacles with regard to exporting concerns thetime and paperwork required to comply with foreign and domestic market regulations.Governments do not solely impose these procedural requirements. Also independentorganizations such as banks, shipping organizations and insurance companies, have theirown procedures. A firm that wishes to enter the export market or intends to increase itsexport activity will have to acquire the knowledge and skill to deal with administrativeprocedures. In particular for inexperienced managers foreign documentation and paper workmay appear very difficult to cope withExample : Suzlon Energy a Best example for Handling Challenges ofInternationalisationIntroductionSuzlon was founded in 1995 by Mr. Tulsi Tanti and his brothers when they were exploringalternative sources of power for their textile business in western India. The unreliableelectricity grid was then creating many inconveniences for the business, prompting the familyto explore wind energy as an alternative. After the family installed two windmills to powertheir textile business, Tanti and his brothers envisioned that they could actually make a veryprofitable business out of generating wind energy. Shifting focus away from textiles, the newforay of Suzlon into wind energy was financed with USD 600,000 put together through thesale of some family assets. Tulsi Tanti and his brothers bought ten turbines from Sudwind, asmall German company, assembled a group of former engineering classmates, rented afactory, and hired a German consultant for 90 days to teach them the business.When Sudwind went bust in 1997, the Tantis hired its engineers and created a R&D centerin Germany. In 1999, the company started selling its partly homegrown turbines in the Indianmarket Following this foray, Suzlon has grown over the last 10 years to become a top-5wind energy producer worldwide with sales of over USD 3.4 bn in 2008 and a globalfootprint.Suzlon todaySuzlon has a global market share in the wind-turbine business of about 10.5% (BTM, 2007).The company operates in 21 countries (Annual Report 2008, p. 3) and employs almost14,000 people from 15 nationalities The company derived 58% of its revenues in FY 2008from outside India against 34% the earlier year. The USA accounts for almost 20% of totalrevenues, while Europe and the rest of the world together account for about 27% ofrevenues.As part of its internationalization strategy, in 2006 the company acquired HansenTransmissions of Belgium for USD 565 mn . Hansen was the world s second largest gearboxmaker and Suzlon expects that the acquisition will give it manufacturing and technologydevelopment capability in wind gearboxes, and enable an integrated R&D approach todesign more efficient wind turbines. In May 2007, Suzlon acquired a 33.6% stake inREPower for USD 698 mn . RePower is one of the world s largest manufacturers of offshoreand onshore wind turbines and the acquisition is expected over the years to add to Suzlon stechnological capability, especially in the production of large wind turbinesEPGDIB 2010-12 Roll No 25 - International Business Strategy Page 5
  • 6. On the importance of international markets, Mr. Tanti expects about 40% of Suzlon s futurerevenues to come from Europe, 20% from the US, 10% each from India and China and thebalance from the rest of the worldCompany StructureSuzlon s global marketing center is located in Amsterdam, Netherlands; the internationalbusiness headquarters are based out of Aarhus, Denmark; while the Indian operation sheadquarters are in Pune, India As on 31 March 2008, Mr. Tulsi Tanti was the Chairman ofthe Board at Suzlon, while Mr. Toine van Megen, a Dutch national, was the CEO of the windenergy business at the company. In a subsequent reorganization in December 2008, TulsiTanti retook direct operational charge of the company s operations to better deal with thedifficult business environment, while Mr. van Megen shifted back to supervisoryresponsibilities at the Group level Suzlon seems to have been moving towards increaseddecentralization in the last few years. Until a few years back, Suzlon was a promoter-drivencompany.As a first step towards empowerment and increasing accountability, the promoters createdstrategic business units (SBUs) and appointed non-promoter heads of the SBUs. Thischange led to decentralization in the company. Additionally, individual functions gotembedded in the SBUs and the whole corporate paradigm shifted to the SBUs. Within theSBUs, there was a matrix structure, with about 70% weight to line manufacturing and about30% to the functional heads. This led to a need for balance, but since people with existingexperience within the company were sent to the SBUs, there was a common understandingof overall priorities, which facilitated the change to the SBU and matrix structure.The chief executive in Amsterdam is empowered to hire his own team for the internationaloperations. Some functions like CFO and CHRO are located at Amsterdam. The choice oflocation is decided upon what makes best sense for the business and what makes for themost effective way of working. Each country is responsible for creating its own deploymentstrategy, team, etc led mainly by respective country heads who could be of any nationality.Promoters have steadily decentralized decision-making autonomy to the global managementteam. This change to being more international is also changing the company culture to beingmore diverse. Professionalization is increasing at Suzlon.Human ResourcesSuzlon employs more than 14,000 people from 15 nationalities is a very strong financialbrand. The challenge lies in making it an employment brand . Green industry and thecompany s growth and success story give the company a strong pull.LeadershipAfter envisioning the future potential for wind energy, Tulsi Tanti and his brothers helpeddevelop a business model offering end-to-end and hassle-free solutions, and workedtowards impressing policymakers in India, and companies in India and abroad to go for theirwind-energy solutions . Suzlon has grown at twice the industry average over the last fewyears .Recognizing his efforts and success in the area of fostering renewable energy, Likemany family-owned businesses in India, leadership at Suzlon has so far been centeredEPGDIB 2010-12 Roll No 25 - International Business Strategy Page 6
  • 7. around the family patriarch Mr. Tulsi Tanti and the Tanti family. But, recognizing theimportance of introducing professional management and people with internationalexperience in the business, the family appears to be moving into the background andfocusing on more strategic roles according to Rao. As on 31 March 2008, the company hada Dutch national as its CEO. The Group Executive Council led by the CEO reports to theGroup Supervisory Council led by the promoters of the company in order to ensure effectivecorporate governance. The Board of Directors at Suzlon has a couple of members withseveral years of international banking experience.Culture Suzlon s corporate culture is undergoing a certain transformation as the companyinternationalizes. For instance, there has been an increasing call for greater transparency indecisionmaking as the company internationalizes, and international employees aredemanding greater empowerment. There is also a need to substitute promoter involvementwith process orientation. In order to facilitate this change, the company is conductingprograms for leadership development at its Corporate Learning Center.ConclusionSuzlon appears to be transforming itself from a family-owned and family-driven business toacquiring qualities of a professionally-run MNC. A part of Suzlon s success can be attributedto its being in the right place at the right time , in terms of the timing of its founding and thesudden international focus on renewable energy. At the same time, Suzlon s strategyemphasizing aggressive international expansion and organizational transformation mighthave played a role. Key features of organizational transformation and excellence at Suzloninclude:1. Decentralization and professionalization in its structure over the last year2. Investment in international R&D and innovation3. A change in focus towards performance-orientation in its HR and compensation policies4. Increased presence of international managers in its top management team5. Efforts to emphasize the binding and motivating effects of corporate cultureWhile Suzlon has achieved been successful in the international environment over the lastfew years, the fast growth track inevitably means that there will be occasional challenges inmanaging this growth such as quality issues faced by the company recently. To deal withsuch challenges, the company will have to work on keeping its current spirit of growth alivewhile constantly focusing on upgrading its organizational and operational excellence to worldstandards.Some of the major patterns and conclusions that the study converges upon are as follows: · From comparative to competitive advantage: With shift towards advantages based on availability, lower cost and skills of the technical and scientific manpower, Indian companies need to create complementary skills and the success are governed by competencies developed within a company and aspirations of its top management.EPGDIB 2010-12 Roll No 25 - International Business Strategy Page 7
  • 8. · Favourable push and pull conditions for overseas successes: For an increasing number of industries, Indian companies are reaching the point of having global advantages favourable factor conditions, domestic demand characteristics comparable to that overseas, presence of ancillary and supportive skills, and pervasive confidence for looking beyond domestic markets. On the pull side, from the situation of Indian origin being a handicap, the world has come to acknowledge India advantage. · Three strategy types for Indian companies in overseas markets: Outsourcing, where the domestic market is either very small or unattractive; Internationalization, where companies are aiming to expand market or balance business downturns and risks of domestic market; and, Multinationalization, where companies are aiming to create sustainable competitive position in several geographies. · Differing requirements of the institutional and the retail customers: Joint ventures are generally not viable for institutional customers, while being a useful option for reaching the latter with benefits related to local knowledge, capital, brand, and distribution. · Organizing for growth and capability building: Structure for the three strategy types is different and a dual-core model could balance requirements of risk-taking in new areas with efficiency in stabilized activities. While carrying Indian imprint, the culture will be company-specific and should be allowed to evolve in a directed way. · Critical role of conviction-laden leadership: This is a common element across all the Indian companies that have made overseas breakthroughs and the leadership traits of being clear, fundamentals oriented, and planned need to be supplemented with international orientation and preparedness for longer haul for success in overseas markets.EPGDIB 2010-12 Roll No 25 - International Business Strategy Page 8