Investing In BRIC Countries The Case Of India

A Presentation By Ace Global

INDIA : Growth through economic liberalisation Source: RBI Statistics Current Period Post Reform Period Pre Reform Period In spite of the Global slowdown, the Economy is expected to grow at a modest 6.5 % & 6.7 % during FY 09 & FY 10 External debt mainly corporate commercial borrowings

Global events and links with India
Overheating of financial markets:
Commodities: high inflation in India; oil and food subsidies
Equities: Expansion of convertible debt/ pvt. equity
Realty: quickly restrained by Reserve Bank, ECBs frozen
US, EU recession: softening of low tech exports
Financial crisis:
mass withdrawal of FII funds, equity markets collapse
costly debt redemption, liquidity freeze : Indian banks

How the meltdown affected India... Govt. Source: RBI Statistics ,Press Article Decline in exports resulted in layoffs in labour intensive sectors Growth in % Soaring Oil Prices High inflation, Govt. subsidies Fiscal deficits rose to 6% (target 3%)

How the meltdown affected India … Pvt. sector. Source: RBI Statistics , Press Article During the meltdown, FIIs pulled out $12.2 billion out of the Indian Stock Market Collapse of the Equity Market, devaluation, and reduced access to debt Investment led Expansion dropped; warrants redemption difficult. Govt. swiftly arrested debt flows into construction, real estate sectors based on subprime links and inflation effects.

US, EU and Japan Source: IMF, Respective countries official government sources Recovery not likely before 2010 New drivers of global growth? BRICs

The short term outlook on BRICs Source: IMF, Respective countries official government sources
China :
Economic recovery linked critically to exports to key markets.
Slow down in Exports (37% of GDP in 2007-08) has hit China hard; resulted in labor unrest and unemployment Limits the scope for consumption led growth.
Russia :
Has been hit hard due to the bust cycle in energy commodities.
Investment led growth has declined.
Fiscal Position has worsened limiting its options for stimulus.
Brazil :
Suffered most from its heavy dependency on US economy (37% of trade).
Major bio fuel investments ($30-40 billion) at risk with fall in oil prices.
India :
Less dependent on export recovery and FDI, gains from oil price reduction, likely to recover first .

For Liquidity … Commodities boom over, Inflation under control More room to cut lending rates Increased Money Supply in the Domestic Economy Govt. borrowing can crowd out private sector Private sector banks would have enough liquidity for the Private sector RBI may expand its balance sheet to lend to Government For Investment… 1.3 50 billion $ in investments Government fiscal packages totaled up to Rs 1.2 trillion during the last fiscal year (4% of GDP) Fiscal deficit rose to 6% against the 3% target Oil prices back to pre-boom levels, and govt. recovering the subsidies. Fiscal deficit is narrowing.

India to recover in Q3 2009 Source: IMF, Respective countries official government sources McKinsey Global Survey Results – April 2009 “ A Sizeable Majority (53%) expect India will emerge from the crisis economically stronger” “ Low dependence on exports (15% of GDP) has cushioned the impact of global slow down” “ Low oil prices and domestic investment growth will help India recover in Q3 2009” Election results and new budget may affect pace

The long term argument

Evolution in the India Story Pre Liberalization and Post liberalization first wave FDI Adjustments to global integration amid falling trade and investment barriers Next wave FDI: new global growth axes Market seeking, Tariff jumping model Factor seeking, Flying geese model Market making, Blue ocean model

Advantage India
Small Batch Competitiveness
Knowledge sectors
Intellectual property regime
English language
Rule of law (but slow)
Developed financial markets
Highly liberal FDI regime
Entrepreneurial/ Managerial Talent
Western cultural affinity/aspiration
Favorable demographics

101.1 91.3 10.9 2.4 1.2 74.1 106 55.1 5.5 3.3 49.9 93.1 94.9 33.1 9.5 11.4 3.8 14.6 15.2 3.8 6.3 2.6 13.7 30.6 20.9 21.7 Definition of household income brackets based on annual household income: Globals (more than INR 1,000,000), Strivers (INR 500,000 to 1,000,000), Seekers (200,000 to 500,000), Aspirers (90,000 to 200,000), Deprived (less than 90,000) Middle Class India’s real GDP growth in % Source: MGI Household income brackets 2005 E 2015 F 2025 F Number of Households, (in million) Aggregate disposable income–2000 (in INR trillion)

Promising Domestic Sectors
Infrastructure: Energy, trade, transportation, telecoms
Construction: Machinery, building materials, minerals and metals; urban housing and commercial/industrial construction
Knowledge Sectors: ICT, Biotechnology, Healthcare, Education
Others: Food, Automotive, Media/Entertainment, Retail
In each of these, there is considerable FDI potential
Already, EU companies are leaders in some sectors.

BRIC Report, Goldman Sachs Daniel J Magoon, Director Indian Business Development, Transportation & Security Solutions Lockheed Martin Jack Welch General Electric Peter Loescher President and Chief Executive Siemens Travyn Rhall, ACNielsen Michael Maedel President JWT Worldwide Mr Paul de Voijs Managing Director Volvo Car India “ India is a very exciting market and the luxury car segment is growing exponentially here”. India is a long term bet with stability… China is a short term bet with volatility Head of sales & Marketing BMW AG

Business Environment
Overall, increasingly open market conditions
It is easy to work with Indians
Many states are business-friendly
Well laid legal systems/ processes, however, overloaded and slow
Taxes are high, procedures are complex
Expediency and speed money exist but do not pervade

India’s challenges
Inclusive growth: 24% of population is poor
Taxes, tariffs and deficits
State of public services: education, primary health care , water and sanitation
Connectivity infrastructure
Energy balance
Unstable neighbourhood

Lessons from experiences

Business Models: East vs. West
Looked at India as an incremental emerging market
Tried to clone India to their world view.
Focused only on small segments
Did not invest aggressively in manufacturing scale
Entered India in face of big crisis at home- burnt bridges.
Launched their latest products in India
Made aggressive investments across all segments
‘ Indianized’ their brands and blended into the local culture.
EU and US MNCs Japanese and Korean MNCs

Useful Business Advice
Deal with India on its own terms, don’t clone other models
India is poly cultural; each region is different.
Invest long term. Be prepared to burn your bridges.
Be willing to learn than teach. Be willing to Indianize.
Adapt to the Indian ‘fatalism’, expect the unexpected.

Indians are astute and tenacious negotiators.
Inorganic routes can be expensive: valuations are steep.
Agreements are not cast in stone, intent more important than content. Clauses get amended and re-negotiated.
Show cautious optimism; test the promises at times.
Partnerships need delicate handling, disagreements can get personal.
Seek guidance of compatriots and local advisors
Useful Business Advice- Negotiations

Perceptions of EU companies
India is a market
where you have to
be, but…
You need to know the rules. Most EU companies are satisfied with their experiences in India, and expect to increase their investments..... (EU FDI survey in India)

Building Your INDIA Business

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Investing In BRIC Countries The Case Of India

by Ace Global Consulting LLP on Feb 22, 2010

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Investing In BRIC Countries The Case Of India — Presentation Transcript