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Key macro-economic challenges in India, impact on entry strategy for foreign firms. Potential pitfalls of manufacturing localization. Introduction to Indian culture characteristics. Brief case …

Key macro-economic challenges in India, impact on entry strategy for foreign firms. Potential pitfalls of manufacturing localization. Introduction to Indian culture characteristics. Brief case studies: automotive, first transformation of agriculture products

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  • 1. India: Now, tomorrow or never ? Turin, 12th April 2012 © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 1
  • 2. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Agenda Page 1. Introduction, major macro-economic challenges 3 2. Market entry: options, barriers 11 3. Manufacturing in India: some potential pitfalls 16 4. Introduction to Indian culture 24 5. Case studies 1. Local manufacturing case study: Automotive sector 28 2. Adapting to local demand and supply chain case study: Beer sector 36 INTELLECTUAL PROPERTY RIGHTS & DISCLAIMER This document is the exclusive property of InAlliance Consulting. It is intended solely to its primary recipient and may not be communicated, disseminated, reproduced, or copied in whole or in part without the prior consent of InAlliance Consulting. Concepts, tools, information represented herein are the result of the expertise of InAlliance Consulting. While this document has been produced with due professional care using data collected with our best attention, the recipient recognises that this document does not constitute recommendations, advice, or other suggestions to implement any of the ideas presented. In particular, financial, fiscal and legal information contained herein shall be verified by the recipient before attempting any implementation. This document shall not be complete without the accompanying verbal explanations by InAlliance Consulting. © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 2
  • 3. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies India takes increasing importance in European Union’s external trade as well as foreign investment due to very strong macro-economics Key figures Per capita GDP evolution India Italy Surface (km²) 3 287 263 301 340 Population (million, 2011) 1 210 61 1200 Population density (p. / km²) 367 202 1000 Median age (years) 26,2 43,5 800 Life expectancy (years) 64,7 81,86 600 Per capita GDP (PPP(1), US$) 3 703 30 165 400 2000 2001 2002 2003 2004 2005 2006 2007 2008 Per capita GDP (absolute(1), US$) 1 527 37 046 GDP (US$), India, 1990-2008 Source : United Nations US$ EU27 – India external trade Foreign direct investment into India M US$ M EUR 40 000 35 000 CAGR 2000-2008: +12,1% 3% 2,5 Share of India in trade with the EU: +4% CAGR 1999-2010 50 000 30 000 2 25 000 20 000 2010 FDI: ~ US$48 bn 60 000 40 000 FDI into India (all, EU27 included): +38% CAGR 1991-2011 1,5 30 000 15 000 1 10 000 Trade volumes: +10% CAGR 1999-2010 5 000 0 0,5 0 Importations Part importations Exportations Part exportations Liberalization of Indian economy 20 000 10 000 0 Source : Eurostats, Sherbrooke University, United Nations, McKinsey, Wikipedia, CIA factbook, InAlliance analysis © InAlliance Consulting – All rights reserved (1) Purchasing Power Parity, 2011 IMF figures FederManager - 2012 - Seminar 1 3
  • 4. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies However, besides the obvious opportunities, India also presents challenges that require a differentiated approach Inflation mitigates GDP growth’s benefits Large country,failing infrastructure Corruption remains a major challenge  Commodity basket index 3000 km Average inflation: +7,4% / yr 170 160 150 140 130 120 110 100 90 80 3000 km  3000 km FY '06- FY '07- FY '08- FY '09- FY '10- FY '11'07 '08 '09 '10 '11 '12 (est.)   Ranked 87th out of the 178 most corrupt countries in 2010, similar to Albania and Morocco 55% of all Indian citizens have at least once had to recourse to corruption In 2008, 120 members of parliament (out of 522) were under scrutiny in relation with criminal cases 1400bn US$ in grey Indian assets in Switzerland, more than grey assets from all other countries combined, 13 times the Indian national debt Cultural differences, although bridgeable, must be taken into account Power Distance 80 60 Long Term Orientation India Italy 40 20 Individualism Long Term Orientation 0 Uncertainty Avoidance Masculinity Uncertainty Avoidance Power Distance 100 80 60 40 20 0 USA Power Distance 80 China Individualism 60 Long Term Orientation Germany Italy 40 20 Individualism 0 Masculinity Uncertainty Avoidance Masculinity Source : Hofstede cross-cultural analysis, Office of Economic Advisor (India), Transparency International, Global Integrity, Association Suisse des Banquiers , InAlliance analysis FederManager - 2012 - Seminar 1 © InAlliance Consulting – All rights reserved 4
  • 5. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies India’s poor are fast climbing into the consuming classes, which are projected to account for over 600 million individuals by 2025, more than the entire population of EU27 Evolution of income distribution in India Population (Million) 1600 « Strivers »: US$ 47 000 to 94 000 household income « Globals »: Household income over US$ 94 000 2025, India: 607 million consumers 1400 1200 1000 2005, India: 55 million consumers 2010, India: 163 million consumers Seekers: US$ 19 000 to 47 000 household income 2025, EU27 519 million total population « Aspirers »: US$ 8 500 to 19 000 household income 800 600 400 « Deprived »: Household income under US$ 8 500 200 0 1985 1995 2005 Source: National Council of Applied Economics Research, McKinsey Global 2007, Eurostat, InAlliance analysis © InAlliance Consulting – All rights reserved 2015 2025 Note: Income brackets are yearly household incomes in purchasing power parity, using a constant 52 INR / USD exchange rate FederManager - 2012 - Seminar 1 5
  • 6. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Although India’s economy has grown much faster than Italy’s in the last decade, it will probably take another decade or so before India’s total national GDP reaches that of Italy GDP projections comparison US$ 000 bn 3,5E+12 3E+12 Intersection: 2020 2,5E+12 2E+12 Italy CAGR 2000-2010: +0,2% Italy India 1,5E+12 Linéaire (Italy) Linéaire (India) 1E+12 5E+11 India CAGR 2000-2010: +7,7% 0 Source: United Nations Statistics Division, InAlliance analysis © InAlliance Consulting – All rights reserved Note: Statistics based on 2005 constant prices and exchange rates, linear extrapolation FederManager - 2012 - Seminar 1 6
  • 7. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Like Europe, India has many different faces resulting from its rich history and wide array of geo-climatic environments South Block, Delhi The Himalayas Taj Mahal Rice paddy in SIkkim  New Delhi  Kolkata Thar Desert Victoria Palace, Kolkata  Mumbai  Hyderabad Bangalore  Mumbai by night Beaches of Goa Source: India Tourism Promotion Board © InAlliance Consulting – All rights reserved  Chennai Streets of Chennai Fishing villages of Kerala FederManager - 2012 - Seminar 1 7
  • 8. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Measured in figures, India’s disparities are even more obvious: India is not a homogeneous country when it comes to business or industrial environment either 8611m elevation (K2, Kashmere) -40°C (Drass, Kashmere) 40% of population below absolute poverty level (State of Bihar) €1600 average individual income (Chandigarh)  New Delhi >11m rainfall / yr (Mawsynram, Meghalya) <2cm rainfall / yr (Thar desert, Rajasthan)  Kolkata  Mumbai  Hyderabad €20 000 /m2 professional real estate (Nariman Point, Mumbai) +51°C (Purulia, W. Bengal) Bangalore   Chennai 100% literacy rate (Nagercoil, Tamil Nadu) Sources : Census of India, Wiki Answers, Times of India, InAlliance analysis © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 8
  • 9. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Indian agricultural crops depend heavily on the yearly monsoon for water and suitable temperatures Monsoon cycle in India Illustration - Rainfalls in Mumbai vs. Paris Winter monsoon (« Northeast Monsoon ») mm 700 600 500 400 Mumbai (2167mm/yr) Paris (585mm/yr) Mumbai receives more rainfall in the month of July (650mm) than Paris in the entire year (585mm) 300 New Delhi: approx. 15th July to late August 200  New Delhi 100 0  Kolkata Mumbai: monsoon starts approx. 5th June to late July The two seasons of Indian agriculture  Mumbai  Hyderabad Bangalore   Chennai Summer monsoon (« Southwest Monsoon ») 300 km Season Kolkata : Kolkata : July moussons en and November Juillet et monsoons Novembre Chennai : moussons June and December en Juin et monsoons Décembre Period Sowing Harvest Major Crops "Kharif" (summer) JuneNovember June-July: Presowing and preparatory tillage of the soil September December Jowar Rice Maize, Pulses Groundnut, Cotton, Soyabean Sugarcane "Rabi" (winter) Mid OctoberFebruary SeptemberNovember FebruaryMarch Wheat, Barley Mustard, Sesame Peas, Gram Safflower Source: MétéoFrance, «Hydrologie» (André Musy,Christophe Higy), Bloomberg Businessweek, desk research, InAlliance analysis © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 9
  • 10. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Agenda Page 1. Introduction, major macro-economic challenges 3 2. Market entry: options, barriers 11 3. Manufacturing in India: some potential pitfalls 16 4. Introduction to Indian culture 24 5. Case studies 1. Local manufacturing case study: Automotive sector 28 2. Adapting to local demand and supply chain case study: Beer sector 36 © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 10
  • 11. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies India is undoubtedly an attractive economy, but the specific market segment targetted may prove much less attractive than initially expected, and much less accessible too Illustration – Major challenges of Indian agriculture require highly specific approach in the agro-equipment sector Extremely fragmented land-holding Rural poverty Average farm size (ha) Rural India Population below poverty line (income < €6.5 / month) 469 349 287 197 73 32 31 42% 1,6 • High rural illiteracy Illiteracy, rural India (e.g. Bihar) Illiteracy, major city (e.g. Chandigarh) 13,6% 36,2% Low / slow / improper technology adoption • Very low budgets • High variability in harvest characteristics Lack of seed management According to various sources : • Only approximately 10% of cereal harvest in India results from managed seed multiplication • In 2009, the states of Orissa, Bihar, Uttar Pradesh had not yet adopted seed management techniques Source: FAO farm census, University of Sussex, National Census of India 2011, Tendulkar Committee 2009 on poverty, NeoFocus / InAlliance analysis © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 11
  • 12. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Market sizing and competition assessment can be a difficult exercise in India due to « unaccounted for cottage industry » and product definitions varying from western standards Illustration – Precisely assessing competition in the spirits market is virtually impossible Total spirits production estimate: 61,3 mhl White spirits; 0,3 mhl Illegal distillation: 64% Rum; 1,2 mhl Illicit country liquor; 12,3 mhl (3) Licensed country liquor; 11,2 mhl (3) Brandy; 3,1 mhl Indian-made Foreign Liquors (IMFL); 10,8 mhl (2) Fake IMFL ; 27,0 mhl (3) (1) (2) (3) Over 90% (1) made from sugar cane mollasses (does not qualify for “whisky” name outside India) “Whisky” 6,3 mhl No official data available. A 10% proportion is given by several unconfirmed sources but seems unrealistically high as it would imply a malt requirement of 60 to 80 kt per year, an unlikely amount considering malting barley availability 2008 figure Extrapolated from a health survey conducted in the State of Karnataka in 2005 Source: National Council of Applied Economics Research, RaboIndia Finance estimates, The Lancet, desk research, NeoFocus / InAlliance analysis © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 12
  • 13. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Motivated by external trade growth, India has continuously reduced import duties in the past decade, especially on industry consumables and production equipment Customs duty evolution since 2001 80% 67% 70% 2001 60% 2008 48% 50% 40% 2005 37% 37% 30% 39% 33% 27% 30% 40% 35% 33% 33% 33% 26% 21% 20% 20% 6% 10% 10% 9% 8% 7% 7% 0% Live Animals and Animal Products Vegetable Products Animal or Prepared Vegetable Fats Foodstuff, & Oils Beverages, etc. Mineral Products Miscellaneous Plastics & Manufactured Articles thereof Articles Products of Chemicals Base Metals & Machinery & Articles of Mechanical Base Metal Appliances Vehicles, Aircraft and Vessels Trade balance evolution since 1998 - +2 - 0 - -2 - -4 - -6 - -8 10 - - - 10 5- - - 12 40 35 30 - Exports Imports Products / equipments strategic to Indian industry 25 20 15 - 1998 2001 2004 2007 Trade balance 2011 Sources : Ministère Canadien des Affaires Etrangères, InAlliance analysis © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 13
  • 14. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies As a result, the competitive disadvantage on imported products has reduced significantly and does not always justify on its own a production localization Illustration – Imports vs. Local production of a major automotive sub-system IMPORT : EXW to DDP Rate depends on product, typically 7,5% Systematic « antidumping » tax Tax alligned on Central Excise Duty (levied on all national productions) State rate, figure depends on applicable State and product EUR Rate (1) 2000 (1) 110 (1) 23 2133 EXW INDIA PRICE Shipping Insurance C I F INDIA PRICE 7,50% 10,00% 2154 162 232 Assessable Value Basic Customs Duty Countervailing Duty Education CESS on BCD 3,00% Education CESS on CVD or CED 3,00% Additional Duty of Customs 4,00% 7 12 103 EXW EU PRICE Shipping Insurance C I F INDIA PRICE Assessable Value Basic Customs Duty Countervailing Duty Less: Refundable duties DDP INDIA COST Basic Excise Duty Specific Duty Cess NCCD Education & H Edu Cess Federal rate LOCALIZED : EXW to DDP Rate EUR (1) 2000 (1) 110 (1) 23 2133 0,00% 0,00% 2154 0 0 Education CESS on BCD 3,00% Education CESS on CVD or CED 3,00% Central Excise Duty 4,00% 0 0 86 Ex-showroom Price Less: Refundable duties DDP INDIA COST Basic Excise Duty Specific Duty 22% 0% -86 2133 469 0 0% 1% 3% 3 23 16 Cess NCCD Education & H Edu Cess 0% 1% 3% 3 21 15 2% 13% 3% Central Sales Tax Local Sales Tax / VAT Octroi / Local Body Tax 22% 0% -342 2307 507 0 57 364 98 2% 13% 3% 53 337 91 3375 Central Sales Tax Local Sales Tax / VAT Octroi / Local Body Tax Ex-showroom Price 3122 Applicable in certain cities only, rate depends on product Competitive disadvantage on imported product : 7,5% Sources : Indian Central Board of Customs and Excise, past client project, InAlliance analysis © InAlliance Consulting – All rights reserved (1) illustrative figures FederManager - 2012 - Seminar 1 14
  • 15. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Agenda Page 1. Introduction, major macro-economic challenges 3 2. Market entry: options, barriers 11 3. Manufacturing in India: some potential pitfalls 16 4. Introduction to Indian culture 24 5. Case studies 1. Local manufacturing case study: Automotive sector 28 2. Adapting to local demand and supply chain case study: Beer sector 36 © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 15
  • 16. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies While attractive at first sight, a decision to start manufacturing in India must fit company strategy and be preceded by extensive research India ? (localize production) Enter new markets, new clients ? Other markets better accessible from India ? What market(s) ? (Market driven) (localize and export) Europe ? Leverage skills ? • • Company objective(s) ? Improve production / production efficiency ? (re-locate & export back) Hard to retain May lack experience depth of (Process driven) Leverage low cost labour ? • Not necessarily lowest cost Secure supplies ? (Supply driven) What raw materials ? What benefit being local ? • • Source : InAlliance analysis © InAlliance Consulting – All rights reserved Logistics cost / kg ? Bargaining power ? FederManager - 2012 - Seminar 1 16
  • 17. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies The decision to set foot in India is often market driven, and a sound decision requires research to ensure strategic fit and not just opportunity-grabbing « Global product » ? • • India ? (localize production) Any conflict culture ? with Indian Loss of image if not « Made in Italy » ? Is your product « India proof » ? Mass product ? • Specificities of environment ? • Europe ? What market(s) ? (re-locate & export back) Is India likely to bring you the best competitive advantage sustainably ? Overkill ? • Indian Pricing ? Eastern Africa ? • • Probably medium to long term Leveraging various ties, geographical proximity, India’s higher skills Middle East ? Other markets better accessible from India ? • • (localize and export) Short term Leveraging geographical proximity, India’s lower cost Other Asian markets ? • • • © InAlliance Consulting – All rights reserved Short term Leveraging proximity geographical Will India remain low cost ? FederManager - 2012 - Seminar 1 17
  • 18. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies India’s high attrition across its entire industry presents businesses with specific overheads and HR strategy issues Attrition rates in various industries in India, 2007 60% 50% 40% Average attrition rate: > 30% / yr How critical to your business is individual know-how ? 30% 20% 10% 0% How much of your knowhow might they transfer to your competitor ? Out of 100 trained personnel, as much as 30 may leave each year Attrition rates comparison in IT and BPO, 2010 60% India: twice as much as China, 3 times as much as Brazil 50% Are your recruitment resources structured enough to take the challenge ? 40% Are your training budgets tailored for these attrition rates ? 30% 20% 10% 0% Chile Brazil US China India Source : ASSOCHAM, AT Kearney, Pragmatic Outsourcing, Compensation Force, InAlliance analysis © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 18
  • 19. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies The ease of communicating in English in India plays in favour of India as an outsourcing destination but is often greatly over-estimated Only 7 times more Indians than Italians actually speak English… … and 89% of the population do not speak or understand it at all 300000000 250000000 200000000 2nd language 3% 1st language 0,03% India: 125m As a foreign language 8% Italy: 17m 150000000 100000000 50000000 0 Not spoken 89% Additional language First language English is not evenly practiced in India English as a business language is much more common in South India than in the North, where the indigenous Hindi is usually the language of reference Terminology, meaning can differ from British or American English Sources : Graddol, Crystal, Census of India 2001, InAlliance analysis © InAlliance Consulting – All rights reserved  « We will consider » = « We agree » « Yes » = « we will do our best to achieve your requirement » « Tomorrow » = « not now »  « auto » = motorized 3-wheeler  « Rest-room » = toilet  English as a second language follows Indian societies socioprofessional stratification and is typical of upper-middle class, educated, urban India « It will be difficult » = « I will be unable to help you » ~ « No »      … FederManager - 2012 - Seminar 1 19
  • 20. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Logistics in India can be easily overlooked: the size of India is comparable to that of a small continent rather than to that of any single EU country, and major cities are just as far apart Size comparison: EU vs. India It takes longer, by train, car, or plane, to travel from Mumbai to Delhi than from Turin to London  Copenhagen  New Delhi  London  Berlin 3000 km  Paris  Kolkata  Mumbai  Hyderabad  Roma Bangalore   Lisbon 3000 km Source : Various airlines schedules, InAlliance Analysis © InAlliance Consulting – All rights reserved  Chennai 3000 km FederManager - 2012 - Seminar 1 20
  • 21. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Indian roads, amongst the world’s deadliest and most congested, suffer greatly from the effects of the monsoon and hardly suffice to move people and goods within the country Indian roads are often considered the most dangerous in the world: 86 000 deaths in 2003 (France: 5700) Sources : World Bank, Prévention Routière, InAlliance analysis © InAlliance Consulting – All rights reserved The third largest road network in the world is heavily limited in large and growing cities such as Mumbai, Chennai or New Delhi Monsoon causes gridlocks each year and renders some roads totally useless for months thereafter | Photos : The Hindu, bigfatcars.com, superstock.com, flickr.com, unep.org, New York Times FederManager - 2012 - Seminar 1 21
  • 22. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies State intervention has decreased substantially since liberalization in 1991 but still limits or bars foreign – or even private – direct investment in some sectors Broad sector-wise foreign direct investment (FDI) policy in India Government reserved sectors - Railways Some postal / courrier services Electricity distribution (1) Lottery / gambling Nuclear energy Higher education (1) … - Sectors with FDI caps and / or requiring specific government approval (2) Retail (51% FDI cap) Insurance (26%) Bank (49%) Mobile telephone networks (49%) Civil aviation (40%) Refineries (26%) Media (20 to 49%) Mining and quarries (49 to 74%) etc ... Sectors on automatic approval route (3) All other sectors, including: - Automotive - Mechanical engineering - Tourism - etc… Notes : (1) A few exceptions date back from before independence (2) Approval is granted on a case-by-case basis from Foreign Investment Promotion Board (3) Specific notice must however be made to Reserve Bank of India within 30 days after investment has been made Source : Indian Department of Industrial Policy & Promotion, InAlliance analysis © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 22
  • 23. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Agenda Page 1. Introduction, major macro-economic challenges 3 2. Market entry: options, barriers 11 3. Manufacturing in India: some potential pitfalls 16 4. Introduction to Indian culture 24 5. Case studies 1. Local manufacturing case study: Automotive sector 28 2. Adapting to local demand and supply chain case study: Beer sector 36 © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 23
  • 24. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Indian culture considers several foundation concepts very differently from Western culture, causing many misunderstandings and possible goal misalignments in cross-border projects Illustration – 3 major concepts seen from Western and Indian philosophical angles In Western philosophy   Origin: centred on a single messiah / prophet  Time concept Scale: human scale (years, centuries, a few millenia at most) Sequential, linear actions exclusively, rigid agenda In Hindu philosophy    Scale: much beyond mankind (perpetual repetition of “Yuga” cycles, 4,3m years each) Origin : none (cyclical) Parallel actions, indirect effects of actions, multi-tasking Individualism concept  Scale: a few decades  Scale: none  Limitations: physical birth and death  Limitations: none  Life concept Continuation : spiritual exclusively (heaven, hell, …)    Collectively, humans make up humanity, and by extension universe, which revolves around humans Individuals cluster into families, friends circles, nations, etc… for convenience, interest, or due to proximity or biological ties   Continuation: perpetual (reincarnation), both physically and spiritually Universe includes components humans, amongst many other Individuals exist by, and for, a complex apparatus which has a much more important meaning than the individual itself The individual only has one life to achieve the mission he has assigned to himself. Free will is key, destiny can be overcome. Participation to common effort, struggle towards goal of the community are the main roles assigned to individuals. Deadlines (including death), failures, successes are present at all times. Destiny is key, free will is bound by community interest. Failure or success are directly measured as a result. Source : Desk research, InAlliance observations during various client projects, InAlliance analysis © InAlliance Consulting – All rights reserved The meaning of an action is more important than its measurable success. Failure is a delay, not a definitive result. FederManager - 2012 - Seminar 1 24
  • 25. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Although castes are outlawed by constitution, they still structure much of Indian society, explain fatalism, and impact human resources management Origins Definition of the main castes Castes where originally codified in the Vedas, the founding texts of Hinduism and have structured Indian society for the past 3000 years. Society was considered to function similarly to the human body, and was therefore structured on the same model, each caste being assigned a set of roles similar to one of the parts of a human body Depending on regions and mode of religious conversion, “imported” religions (judaism, islam, christianism) have either rejected or adopted and adapted the caste system (e.g. Goa Christians). Traditionally, an individual born in a given caste would marry in the same caste and practice exclusively the trades assigned to his / her caste, ensuring perpetual reproduction of the existing social organization. Visible effects in today’s India Indian constitution and law abolished the caste system at India’s independence in 1947. However, tens of generations of soft skills and learnings passed from parents to children mean that yesterday’s caste system has often been transposed into company hierarchy: Brahmins often occupy strategic positions, “warriors” thrive in sales management position and Vaisyas in production management, Sudras abound on the shopfloor…and ”outcasts” are still likely to work in janitorial or refuse collection… Representation Caste / role Desirable soft skills Brahmins : Priests, intellectuals... Fundamental thinking, conceptualization Kshatriyas : Warriors, administrators… Competitiveness Resilience Authority Vaisyas Craftsmen, traders... Management Implementation Sudras Workers, farmers,... Physical strength, productivity, obedience Pariahs / Harijans / Dalit « Outcasts », or « untouchables »: any trade related to death, waste, dirt…. Source : Desk research, InAlliance Analysis © InAlliance Consulting – All rights reserved Obedience, fatalism… FederManager - 2012 - Seminar 1 25
  • 26. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Private or public, large or small, Indian companies model their corporate hierarchy on Indian society’s stratification Illustration – Typical hierarchy in a large Indian company Chairman & Executive Officer Managing Director Senior Executive Director Senior Executive Director Executive Director Executive Director General Manager Deputy General Manager Senior Manager Manager Senior Engineer Engineer General Manager Deputy General Manager Senior Manager Engineer Deputy General Manager Senior Manager Manager Senior Engineer Deputy General Manager Senior Manager Manager Senior Engineer Engineer General Manager Manager Senior Engineer Engineer Senior Manager Manager Senior Engineer Engineer Senior Engineer Engineer Engineer Sources :Corporate / Business Unit presentations of various indian companies mentioned , hierarchical structure of Indian Railways, clients projects, InAlliance analysis FederManager - 2012 - Seminar 1 © InAlliance Consulting – All rights reserved 26
  • 27. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Agenda Page 1. Introduction, major macro-economic challenges 3 2. Market entry: options, barriers 11 3. Manufacturing in India: some potential pitfalls 16 4. Introduction to Indian culture 24 5. Case studies 1. Local manufacturing case study: Automotive sector 28 2. Adapting to local demand and supply chain case study: Beer sector 36 © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 27
  • 28. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Socio-economic fundamentals point to a sustained demand for motor vehicles GDP growth, GDP (US$), India, 1990-2008 India, 1990-2008 (US$) Vehicle ownership in India, 2010 Source : United Nations 1200 No vehicle Car Motorbike Bicycle CAGR 2000-2008: +12,1% 1000 800 600 400 2000 2001 2002 2003 2004 2005 2006 2007 2008 Ownership rate: - car: 1% - Motorbike: 10% • 83000 millionaires ($) in India in 2009, 20% more than in 2008 • India’s growth could overtake China’s by 2015 • Average per capita income could overtake USA and EU by 2040 No motor vehicle: 89% Evolution of income distribution Household income, 2010, PPP Population by income bracket « Globals » : > € 80k « Strivers » : € 40k - 80k « Seekers » : € 15k - 40k « Aspirers » : € 7k - 15k « Deprived » : < € 7k 1985 1995 2005 2015 (e) Source : United Nations, Indian Finance Ministry, McKinsey Global Institute, InAlliance analysis © InAlliance Consulting – All rights reserved 2025 (e) FederManager - 2012 - Seminar 1 28
  • 29. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Fast growing sales of motor vehicles remain dominated by 2-wheeler sales, but this is about to change Total vehicle sales trends Sales by vehicle by vehicle type - India -leading to Oct. 2010 type, 12 months FY 2009-2010 Sales Total vehicles sales - India Source : SIAM, November 2010 Source : SIAM, November 2010 CAGR: +10,3% 14 000 000 12 000 000 Passenger Vehicles 1 949 776 Commercial Vehicles 531 195 10 000 000 Three Wheelers 440 368 8 000 000 6 000 000 4 000 000 2 000 000 Two Wheelers 9 371 231 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Car sales trends Passenger vehicles sales trends - India Source : SIAM, November 2010 2 500 000 • Sustained growth over the last decade • Automotive manufacturers in India make investment decisions based on estimates of continued growth up to 2020 or beyond 1 000 000 • Car sales overperform other vehicles’ sales 500 000 • 2-wheelers still represent 75% of the units sold 2 000 000 CAGR: +13.7% 1 500 000 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Source : Society of Indian Automotive Manufacturers, car manufacturers interviews, InAlliance analysis © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 29
  • 30. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Competitive structure in car manufacturing remains highly consolidated, leaving little room to European manufacturers Market shares distribution, Jan. 2010 Others Skoda Fiat Ford 2% 1% 1% 2% Toyota 3% Honda 3% GM 4% • The largest 4 car makers (Maruti, Hyundai, Tata, Mahindra) hold 83% of the market shares together • The next 4 (GM, Honda, Toyota, Ford) hold another 12% • 95% of the market is untouched by European car makers Mahindra 8% Maruti Suzuki 45% Tata 14% Hyundai 16% To fully leverage the Indian market’s potential, European Tier 1 and Tier 2 suppliers must be ready to enter clients usually totally unknown to them Source : Society of Indian Automotive Manufacturers, InAlliance analysis © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 30
  • 31. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Possible entry strategies vary greatly in scope, risk and returns and must therefore be closely evaluated beforehand Direct export ? Alone ? Total control No revenue sharing  Gain precise market knowledge  …. Slower ramp-up HR and finance hungry  ….  + + Transaction = sale of products    Local assembly ? With a local partner ? Faster ramp-up Lower investment  Access to partner's network  +  + Could create a competitor  Partner choice conditions success  Transaction = sale of components Local manufacturing ? Which location ? Northern cluster ? (Suzuki, Honda...) + + Transaction = Sale / licensing of know-how © InAlliance Consulting – All rights reserved Western cluster ? (EU manufacturers) Southern cluster ? (Ford, Hyundai...) FederManager - 2012 - Seminar 1 31
  • 32. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Until recently, European car-makers have mainly positionned themselves importing premium segment cars or performing minimum local assembly. Localization is now increasing as those car makers start to fight in the entry-level segments Some European manufacturers set-up Localisation and industrial model Dealerships Manufacturing Mercedes 35 CKD / SKD (Pune) BMW 17 CKD / SKD (Chennai) Audi 14 CKD / SKD (Pune) Skoda 62 CKD / SKD (Pune) Volkswagen 38 CKD / SKD (Pune) FIAT 110 Distribution network matches the wealthiest areas CKD / SKD (Pune) European brands dealers Wealthiest areas Import duty on complete cars (« CBU ») = 100% (2010) Import duty on SKD and CKD parts = 10% (2010) Source : Society of Indian Automotive Manufacturers, desk research, InAlliance analysis © InAlliance Consulting – All rights reserved Except for luxury vehicles (low volumes, less rivalry), the route to the Indian market for foreign manufacturers is either the KD model or complete localisation. FederManager - 2012 - Seminar 1 32
  • 33. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies SKD, CKD or maximum localization are proving profitable for foreign car-makers Illustration – C segment European vehicle launched in India in 2010 Indian context Industrial constraints Very attractive market mid/long term (population, GDP growth, product demand)  BUT premium segment demand still limited (estimate = 100 000 veh./yr)  Political will to promote local industry  High import duties on built-up vehicles (« CBU »)  Components collection CKD packing EXW price (1) € 11K Critical volumes for a complete assembly line: 800-2000 veh./day (250k to 600k / yr  Lack of locally available skills on some specific technologies (complex plastic omponents, high precision metallic panels, etc…)  DDP price (1) Final assembly (1) € 13k Cost: ~ EUR 700 60-100 veh./day Margin: (1) 20% Retail price : (1) € 18k Result: similar profit for the European car-maker with SKD or CKD than with CBU imports + better pricing lattitude + damper effect on European production lines (CKD / SKD demand partly fill European components lines) Source : European car makers interviews, desk research, InAlliance analysis © InAlliance Consulting – All rights reserved (1): indicative figures for confidentiality reasons FederManager - 2012 - Seminar 1 33
  • 34. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies European car-makers assembly lines are concentrated in the Western and Southern industrial clusters NCR – Punjab – Rajasthan Madhya Pradesh  New Delhi (non exhaustive) Pune – Mumbai – Nasik – Aurangabad - Gujarat  Kolkata  Mumbai  Hyderabad Chennai – Bangalore Hyderabad (non exhaustive) Bangalore   Chennai (non exhaustive) Source : Desk research, InAlliance analysis © InAlliance Consulting – All rights reserved (1): indicative figures for confidentiality reasons FederManager - 2012 - Seminar 1 34
  • 35. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Agenda Page 1. Introduction, major macro-economic challenges 3 2. Market entry: options, barriers 11 3. Manufacturing in India: some potential pitfalls 16 4. Introduction to Indian culture 24 5. Case studies 1. Local manufacturing case study: Automotive sector 28 2. Adapting to local demand and supply chain case study: Beer sector 36 © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 35
  • 36. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies The Indian beer market is highly consolidated but growing fast Indian beer market: size and trend Indian beer market: market shares Market shares FY11 Million hl Other players are quite fragmented (e.g. Mount Shivalik 4%, Diwan 3%). Others 16% 17,9 15,6 Carlsberg 5% 13,4 United Breweries 54% 12,1 10,7 SABMiller 25% FY 07 Source: annual reports, desk research, NeoFocus / InAlliance analysis © InAlliance Consulting – All rights reserved FY 08 FY 09 FY 10 FY 11 FederManager - 2012 - Seminar 1 36
  • 37. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies A major component of beer, malt, is elaborated from selected barley. Theoretical yields, proportional to those of wheat, can vary by a factor of 1 to 4 due to various natural challenges Wheat and barley growing zones of India North-Western Plains Zone (NWPZ) Weed and pests challenges 3,9 t/ha average wheat yield Northern Hills Zone (NHZ) Water stress challenge 1,7 t/ha average wheat yield Central Zone (CZ) Water stress challenge 2,4 t/ha average wheat yield Peninsular Zone (PZ) Water stress and pests challenges 3 t/ha average wheat yield North-Eastern Plains Zone (NEPZ) Weed and pests challenges 2,5 t/ha average wheat yield Southern Hills Zone (SHZ) Pests challenge 1 t/ha average wheat yield Source: Indian Ministry of Agriculture, Indian Council of Agricultural Research, NeoFocus / InAlliance analysis © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 37
  • 38. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies Barley yields and production in India are lower than the world average, have been growing faster recently thanks to better seed management, but still show much room for improvement Barley production and yield (2010, t/ha) Selected quotes on barley yield improvement 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0 t/ha 2,90 Wheat CAGR: 0,9% “Even though the government has partnered with private players for the purpose of seed management, a lot still needs to be done in this field: • A majority of certified/qualified seeds consumed were old seeds whose validity was re-notified beyond their use period • Additionally, states like Orissa, Bihar, Uttar Pradesh (…) have still not adopted seed management with no improvements in seed production and seed replacement rate” (« Flavours of Incredible India », FICCI / Ernst & Young, 2009) 2,70 2,50 2,30 Barley CAGR: 3,3% 2,10 1,90 All cereals CAGR: 2,1% 1,70 Source: Reserve Bank of India, Ministry of Agriculture, FAO, USDA, NeoFocus / InAlliance analysis © InAlliance Consulting – All rights reserved Note : figures may show discrepancies due to differing sources FederManager - 2012 - Seminar 1 38
  • 39. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies 85% of the Indian barley production is concentrated in the 3 north-eastern states of Rajasthan, Uttar Pradesh and Haryana, where yield is best and cost of production is lowest Barley production and yield in India (2008) Himachal Pradesh 2% Uttarakhand 1% Other states 3% Himachal Pradesh 29 kt Punjab 55 kt Punjab 3% Uttarakhand 22 kt Haryana 185 kt Madhya Pradesh 6% Rajasthan 878 kt Rajasthan 52% Haryana 11% Uttar Pradesh 376 kt Madhya Pradesh 102 kt Uttar Pradesh 22% Total barley production (2008-2009) : 1731 kt Area (000 ha) Cost of prod. (INR/t, wheat) (1) Yield (t/ha) Rajasthan 287 3,06 94,2 Uttar Pradesh 172 2,19 94,4 Haryana 53 3,49 97,6 Madhya Pradesh 81 1,26 113 Punjab 16 3,44 94 Himachal Pradesh 23 1,27 n.a. Uttarakhand 28 0,79 n.a. Source: Reserve Bank of India, Ministry of Agriculture, NeoFocus / InAlliance analysis © InAlliance Consulting – All rights reserved (1) Wheat cost estimates from Indian Ministry of Agriculture, for illustration purpose. 69 INR / EUR FederManager - 2012 - Seminar 1 39
  • 40. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies As a result of poor security of supply, major malt users United Breweries and SABMiller both had to resort to barley improvement programmes, two steps above their core business Malting barley catchment areas of United Breweries and SABMiller Punjab Partnership with Punjab Agro Industries Corporation, started in 2003 Estimated volume: 12 kt Major breed: VJM-315 (2003 information) United Breweries major catchment area, district name SABMiller major catchment area, district name Punjab xyz State Sangrur Punjab, Haryana, Uttarakhand Programme extension since 2007 2010: Procured 2,5 kt from 650 farmers Uttarakhand Patiala Sirsa Haryana Jhajjar New Delhi Rajasthan Programme started in 2005 Operates 15 barley purchase centres 2010: Procured 15,5 kt from 5600 farmers Major breed: K-551 Sikar Gurgaon Alwar Haryana Contract farming partnership with HAFED cooperative Estimated volume: 10 kt Major breed: DWRUB-52 Uttar Pradesh Jaipur Rajasthan Madhya Pradesh Source: Financial Express, Economic Times, Hindu Business Line, SABMiller Progress through Partnership programme, NeoFocus / InAlliance analysis FederManager - 2012 - Seminar 1 © InAlliance Consulting – All rights reserved 40
  • 41. 1 Introduction 2 Market entry 3 Manufacturing 4 Indian culture 5 Case studies SABMiller invested in structuring the supply chain in order to secure volumes and quality of its malting barley supplies Illustration - SABMiller’s involvement in the barley supply chain Specifications, malt user experience, (project management ?) Morarka Foundation Databank management, social projects Rajasthan Agricultural University Barley seed improvement programme Certified seeds R&D, field trials Certified seeds, chemicals, financial support, collection SABMiller « Progress through Partnership Centers” Kanpur University of Agriculture Programme Member farmers Malting barley Agri. Chemicals suppliers Micro-credit lenders Fertilizers, pesticides More, better quality malt Finance Maltings Source: SABMiller India annual reports, SABMiller website, SABMiller Progress through Partnership programme, NeoFocus / InAlliance analysis © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 41
  • 42. InAlliance Consulting, Indian market entry specialists www.inalliance.eu Paris (Head Office) InAlliance Consulting, 33 avenue Philippe Auguste 75 011 Paris, France Tel : +33 1 44 64 10 35 Fax : +33 1 44 64 10 36 E-mail : info@inalliance.eu Geneva area (Registered Office) InAlliance S.A.S., 7 Chemin de Moruel, 74200 Marin, France E-mail : admin@inalliance.eu Chennai (India Head Office) InAlliance Consulting, C/O Mr P.N. Subramanian A1/3 Century Enclave, 54 Kalakshetra Rd, Tiruvanmiyur, Chennai – 600 041, India Tel : +91 9380514778 E-mail : india@inalliance.eu Turin InAlliance Consulting, C/O Ing. Pietro Boggero, Via Pietro Bagetti 25 10138 Torino, Italy Tel : +39 011 447 5325 E-mail : italy@inalliance.eu London InAlliance Consulting, C/O Dr Deepak Singh 32 Woodsyre, Sydenham Hill, London, SE26 6SS, United Kingdom Tel : +44 794 9255476 Email: uk@inalliance.eu New Delhi InAlliance Consulting, C/O Mr Girish Kathuria 749/B, Sector 49 Faridabad – 121 001, India Tel : +91 9560823311 E-mail : delhi@inalliance.eu © InAlliance Consulting – All rights reserved FederManager - 2012 - Seminar 1 42

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