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India is now Home to Fortune 500 Companies

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  • India is now Home to Fortune 500 Companies

    Fortune 500 companies have a long history in India, probably more than 200 years. The Indo-American Chamber of Commerce was curious to find out what makes them tick in the South Asian country, so they took an in-depth look. A recent study by the chamber found that currently about 220 of the Fortune 500 companies from countries such as the US, United Kingdom, Germany, France, Japan, Netherlands, South Korea, Switzerland, Canada and Sweden are present in India.

    Today, these countries account for more than 65.2% of the global economy. Interestingly, the two-way bilateral trade (exports and imports) between India and these countries had increased to US$39.26 billion in 2002-03, from $32.38 billion in 1998-99. That represents a compound annual growth rate (CAGR) of 4.9%. In 2002-03, these countries together accounted for 34.4% of India's total trade.

    Fortune 500 companies have invested in India across a spectrum of sectors: food and beverages (Coca-Cola, PepsiCo), consumer durables (Samsung, Philips, LG, Canon, Electrolux), automotives (General Motors, Ford, Toyota, Bosch, Visteon), computers and software services (IBM, Sun, Honeywell), pharmaceuticals (GlaxoSmithKline, Pfizer), consumer products (Unilever), financial services (Citigroup, HSBC), insurance (Allianz, Prudential), engineering (Siemens, ABB, Alstom, Bombardier), logistics (FedEx) and petrochemicals and chemicals (BP, Shell, BASF).

    On the other hand, about 250 of the Fortune 500 companies are clients of Indian Information Technology (IT) companies. The Indian IT Industry had sales of $14 billion in 2003. 40%, or more than 200, of the Fortune 500 companies are currently outsourcing their service and support services to India. The trend is likely to continue, as a global survey carried out by Hewitt Associates showed. This survey reported that more than 60% of Fortune 500 companies favored outsourcing to India, and of those companies not currently using an off-shoring model, 71% intend to do so sooner rather than later.

    India offers several advantages that can be and have been effectively leveraged by global companies to derive business gains. India is the world's largest democracy and the 12th largest economy (4th largest based on purchasing power parity). India has experienced robust growth and has a positive outlook (strong and stable gross domestic product growth rate, strong economic-reforms process, reduction in external debt as a percentage of GDP and strong foreign direct investment or FDI inflows). Several leading multinational companies have invested in setting up large-scale operations in the country.

    The strategies that have been undertaken are explained below:

    Expanding to serve the domestic market

    Expanding in the domestic market by getting into additional segments (launching new products and services), and/or increasing market share in existing ones
    Increasing investments for capacity expansion and improving technology, processes, people and infrastructure
    Increasing acquisitions to fuel growth and acquire new capabilities

    Developing products for the domestic and global markets
    Apart from catering to the growing domestic market, Fortune 500 companies are leveraging India's large domestic market to develop products for global consumers. The following are some examples of companies developing products in India for global markets:

    Ford India exported 28,000 Ford Ikons in completely knocked down (CKD) form to South Africa, Mexico and Brazil in 2003. Ford has also exported Ford Ikon components worth more than $10 million per annum to China since 2002. At a sales growth of 30%, Ford India recorded its best-ever performance in India in 2004, and already, in a period of less than five years, the company's operations in India have started generating positive cash flows.
    Saint-Gobain has been aggressive on the exports front, especially in the case of float glass. Saint-Gobain Glass started exporting within 55 days of beginning production at its plant in Sriperumbudur. By December 2000, almost 40% of the production was being exported to markets across the world. While focusing on the domestic market, the company has proactively approached exports as an opportunity to not only grow volumes, but also improve itself by competing in global markets.

    MICO is the second-largest auto component exporter in India. It exports components for the complete range of fuel-injection equipment, parts for gasoline engines, spark plugs and auto electricals.

    Volvo exports components from India for Volvo, Renault and Mack trucks, as well as completely built units (CBU) buses to South Asian Association for Regional Cooperation (SAARC) countries.

    Whirlpool is exporting refrigerators and washing machines to South Asia, Asia-Pacific, Latin America and West Asia. It also exports small ******* appliances under its *******Aid brand to the US market.

    Toyota manufactures multi-utility vehicles (MUVs) in India and recently launched a manufacturing unit to produce transmission components (gear boxes) for its global operations.

    Growing through acquisitions

    The large and emerging domestic market is attracting Fortune 500 companies, across sectors, to grow through acquisitions of incumbent Indian companies, to get a quick presence. The following are some examples of companies growing through acquisitions:
    Following its global strategy of growth through acquisitions, Pfizer India has acquired businesses in India as well, resulting in growth and augmentation of its capabilities.
    BASF has consolidated its presence in India by making certain strategic acquisitions. It acquired Dr Beck India's original equipment manufacturing (OEM) division, making it a significant producer of OEM coatings and industrial coatings. BASF also acquired the polystyrene business of the Chatterjee Group in 2000.
    Lafarge increased its presence in India through the acquisition route, by buying the cement business of Tata Steel and then following it with the acquisition of Raymond's cement facility.

    Anticipating a boom in retail banking in India, HSBC acquired the Non-Fund Activities from Gujarat Lease Financing Ltd in 1999. In the year 2000, the bank acquired the Chandigarh branch license from Deutsche Bank. In 2002, the bank acquired retail banking business from BNP Paribas and the retail banking operations in Kolkata from Bank of Tokyo-Mitsubishi. Currently HSBC has 37 branches across 18 cities.

    Clinical trials

    India's large geographic spread, varied climatic conditions and rich biodiversity make it one of the best places in the world for conducting clinical research on a variety of health conditions. Examples of some companies leveraging this advantage include:
    Pfizer is using its Indian facility for clinical studies. The company has invested $12.5 million since 1995 in India on clinical trials.

    GlaxoSmithKline PLC's leveraging of India's process chemistry skills, product development capability and manufacturing strengths. For GSK, India's rich biodiversity and doctor base, make it a promising clinical-trials destination for GSK innovations. GSK conducts high-end statistical data analysis for clinical trials from its center in India.

    Shared services centers

    Fortune 500 companies are setting up their own shared-services centers in India to offer services such as financial/accounting services, payroll processing and taxation, among others. The following are some examples of companies with shared-services centers in India:

    Citigroup has established a company in India for its business process outsourcing (BPO) activities. The company handles all the cash-management and trade-finance transaction processing for Citibank India, Sri Lanka and Bangladesh; credit cards services for the Eastern Europe, Middle East and Africa regions of Citibank and private bank back-office processing work for Citibank in Europe.

    HSBC Group has started outsourcing its back-office transaction-processing and software-development activities to India in order to maintain its profitability levels, streamline its costs, improve productivity and cut bureaucracy.

    Prudential PLC set up a center in Mumbai in 2003 called Prudential Process Management Services (India) Pvt Ltd (PPMS). A third of the operations at PPMS comprise call center services, two-thirds are business-process related.

    ABN AMRO has outsourced business processes from about 18 countries to its back offices in Chennai, Mumbai and Delhi. The head count in these centers is about 1,200.

    R&D, engineering and software-development centers

    To leverage India's intellectual capital, Fortune 500 companies are setting up R&D, engineering and software-development centers in India; some of them are their respective companies' largest centers outside their corporate headquarters in terms of investment and staffing levels. These teams work collaboratively with their counterparts worldwide on cutting-edge technology. The following are examples of companies that have set up such centers in India:

    Philips Software Center Private Limited (PSC) meets the need for high-quality, cost-effective software-development capacity within the Philips organization worldwide.
    Canon India's Software Development Center (SDC) in India is one of the six such cutting-edge technology centers of its kind. SDC undertakes contract software development from Canon Inc, Canon Development Americas and Canon Information Systems Research, Australia.

    ABB's Indian operations are increasingly being leveraged as a regional and global hub for projects, products, services and R&D for the entire group.

    United Kingdom-based Allianz Cornhill Insurance PLC (an Allianz Group Company) has set up an Indian subsidiary, Allianz Cornhill Information Services, for software-development and business-process outsourcing. The center currently employs about 100 people and is expected to increase its head count to 400 by end of year 2005.

    DuPont's activities in India include an R&D center that conducts field trials for crop-protection products and nationwide R&D centers for Pioneer seed research for development of hybrids relevant to different crops in India.

    LG has set up R&D facilities in India at Bangalore and is setting up another at Pune. Both the units carry out R&D work for the domestic market as well as the parent company. They also undertake customized R&D for specific countries to which the company exports its products.

    Intel set up its first R&D center (Intel India Development Center - IIDC) in Bangalore in 1999. Intel is using this facility to work in e-business applications, networking and communications, microprocessor and chipset design, manufacturing automation and systems software.

    Managerial talent

    Fortune 500 companies are leveraging India as a source of high-quality managerial talent. These managers are trained and subsequently assigned to global positions:
    Unilever considers India a vast reservoir of managerial talent for global posting.
    GlaxoSmithKline (GSK) PLC, the pharmaceutical giant, regularly promotes managers from India to other geographies of GSK.

    Personnel from Citigroup India are routinely assigned to global positions at Citigroup.
    In Prudential, Indian managerial talent is well regarded and personnel from India have moved on to regional roles in Asia.

    Johnson & Johnson's (J & J) Indian R&D and testing centers provide services to J&J worldwide. Jansen Cilag (the pharma division of J&J) has a stability center in India. Indian managers are constantly promoted to overseas operations. An Indian team is also managing the supply-chain planning for the Asia Pacific region.

    Sourcing base

    Fortune 500 companies are leveraging the availability of a wide range of raw materials as they reduce the cost of inputs for manufacturing. They are also exploiting economies of scale and their bargaining power (on account of bulk purchases) in India:
    Coca-Cola India exports commodities and materials such as tea, coffee, polyethylene terepthalate polyester (PET) resin, closures, crowns and labels to its global operations.
    Localizing the supply chain

    To compete effectively on cost, Fortune 500 companies are setting up operating structures involving various degrees of localization of the supply chain. For example, local manufacturing is allowing Fortune 500 companies to avoid paying high import duties, in addition to leveraging India's low-cost and productive workforce. Many Fortune 500 companies are also leveraging the initiatives taken up by various state governments to attract investments, such as those related to improvements (business environment, resource availability), incentives (tax holidays, policy support) and investments (joint development). The following are some examples of how Fortune 500 companies are localizing the supply chain to minimize import duties, in addition to leveraging India's low cost and productive workforce:

    LG manufactures PC monitors and refrigerators in India to overcome high import duties and to leverage Indian benefits.

    To derive Indian advantages and overcome high import duties, Samsung India has manufacturing facilities for color TVs, microwave ovens, washing machines and air conditioners in India.

    Meanwhile, as for the American multinationals in particular, the study reveals that they're all making money. A majority of US firms with a presence in India have been reporting double-digit year-on-year growth. According to a study conducted by the Boston Consulting Group, the Indian arms of two American banks, Citibank and Bank of America, are more profitable in India than their global average.

    General Electric did $1 billion in business here three years ago and continues to maintain the same pace. It has so far invested $600 million in India; this money has brought domestic earnings of $1 billion and exports worth another $1 billion. In other words, GE has recouped more than three times its investments.

    Indeed, the American multinationals are scaling up as if there's no tomorrow. India is already Reebok's fastest growing market in the Asia Pacific. Reebok India plans to open a new store in India every week until the end of 2005. India is also Motorola's third-largest market. Ford arrived in India at the turn of the millennium with 12 dealerships in eight cities; today it has 90 dealers in 70 cities. The US auto major has recently completed what it calls "its best-ever year" in terms of sales. While many US companies are benefiting from the growing size of the domestic market, others are being rewarded for making India their hub. The US automotive systems company, Visteon, makes automobile starters and alternators for the European market. With $43 million in sales, Visteon is the largest exporter of alternators out of India.

    The rapid growth is not restricted to IT or manufacturing. American companies also are making important inroads in India's massive farm sector, which employs 70% of the population either directly or indirectly. The US agrochemical giant, Monsanto, started selling Bt cotton seeds in India barely two years ago. In the first year (2003) about 75,000 farmers supported Bt cotton. The number was 300,000 in 2004 and in 2005 about 500,000 farmers are expected to cultivate the crop.

    For US investors who bought into the India story in the 1990s - when others were still restricting their Asian forays to China - the mood is upbeat. A study conducted a few years ago by the Xerox Corporation and consulting firm Inter-Link India revealed that about 70% of all American companies reported better than expected market share, market growth, product launches and profits. Only 14% were worried about sovereign guarantees. Almost all those surveyed said they would not scrap their venture in India.

    More than 93% rated the business climate in the states they were located in as fair to excellent. In segments such as information technology and software, an overwhelming 83% of American companies said they were very happy with their experience in India. This hardly comes as a surprise. Nine out of the top 20 Indian IT firms are from United States. These firms make up more than 37% of the turnover of the top 20 firms operating in India. And they're making hay. Oracle started its Indian operations in August 1993. Its Indian subsidiary has achieved a CAGR of about 40% since its inception and sells more call-center software in India than the rest of Asia Pacific combined. Between September and November 2004, Oracle India's earnings per share increased 35%, net income grew 32% and operating margin at 41%, the highest ever. At another level, IBM led India's server market in 2004 with a 30% market share.

    PepsiCo India - which is expecting a 15-20% increase in sales in 2005, according to its India head, Rajeev Bakshi - has 19 company-owned factories and 21 franchisees. The company has set up eight greenfield sites and is planning an investment of about $150 million in the next two to three years. Similarly, from 1993 to 2003, Coca-Cola invested more than $1 billion in India, making it one of the country's top international investors. By 2003, the Atlanta giant's Indian arm had won the prestigious Woodruff Cup from among 22 divisions of the company based on three broad parameters of volume, profitability and quality. Meanwhile, in less than a decade the US fast food chains, McDonald's, Pizza Hut and KFC, have established a strong presence in urban India by putting together recipes made for palates of Indians. KFC came to India in 1995; they opened 70 restaurants over the next eight years. Last year, they opened 30 more, for a total of 100. Their target in 2014: 1,000 restaurants.

    The bigger the company the larger the potential for growth. Citigroup of New York, for instance, makes money in retail banking, corporate banking, wealth management, services for non-resident Indians (NRIs) and a host of other channels. GE also makes money in India in 31 different businesses. "There isn't a better destination, frankly, than India just because of [the] scale of [the] population and [the] availability of employees," said Pramod Bhasin of GE India. "Right now every one of our manufacturing businesses has a significant engineering operation here," added Scott Bayman, GE India's CEO. Two years ago, revenues and orders of the US giant exceeded $1 billion in India. GE now employs more than 22,000 people in India.

    Nine out of the top 20 Indian IT firms are from the United States. These account for more than 37% of the turnover of the top 20 firms operating in India. These companies are doing well because they bet on India early on. In 1991, Motorola set up its first software center in Bangalore. In 1999, the American tech giant added two chip-designing units around Delhi and a third one in Hyderabad. India is now well-established as a source of software and chip design and as a source of excellent capital for Motorola globally. The number of software engineers employed by Motorola in India has gone from 100 to a current level of 2000 engineers. As a key growth market for Motorola, India has reached a critical inflection point. Even American companies outsourcing work to India have grown in complexity. Seeking simple cost advantages in the form of call centers is passe. Many now seek the expertise of Indian fashion professionals. India for example, is now a major sourcing hub for Reebok International's golf apparel and the accessories brand, Greg Norman Collection. The $100 million brand, which retails at $60 to $90 apiece globally, sources about 30-40% of its total apparel needs from India.

    The ultimate reason why the presence of MNCs will only grow in India is this: If globalization is inevitable, so is a presence in India, one of the largest markets and economies of the future.
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