MNC’s in India

I happened to read an article from the Harward Business review. “Does Your Company Have an India Strategy?”.

Does Your Company Have an India Strategy? (hbr.org)

The article had a very interesting take on how the Price to book ratio of Indian subsidiaries of MNCs are much higher than their parent company by investors. The examples given are HUL parent company had a P/B ratio of 6 and the same number for their Indian subsidiary was 12. Nestle Switzerland P/B ratio is at 6 but their Indian subsidiary is at 82, 3M USA has a P/B ratio of 4.2, Indian subsidiary has a P/B ratio of 12.7, the German Parent of BASF has a P/B ratio of 1 and its Indian subsidiary has a P/B of 4. The difference is so huge that the Indian subsidiary can be valued at more than the parent on a standalone basis.

According to the authors of the article the reasons for this is that the Indian subsidiaries have better growth prospects, more profitable operations, and more efficient utilization of assets.

But is this true for all multinationals? Have all of them cracked the India strategy or are some of them struggling.

Why India

India is one to the fastest growing large economies in the world. India will be a USD 4 trillion economy by the end of 2023-24 and a USD 10 trillion economy by 2030. By 2075 China, India and the US are expected to be the largest economies in the world, in that order.

The India growth is powered by its growing middle class. The Indian middle class has been growing in both absolute and percentage terms rising at 6.3% per year between 1995 and 2021. It now represents 31 percent of the population and is expected to be 38% by 2031 and 60 percent in 2047 based on the PRICE ICE 3600 survey. Hence the most consequential consumption will come from the Indian middle class. China will be the world largest middle class. Another important growth center will be Indonesia which will be the 4th largest middle class consumption center.

The other area India is making major strides is its digital infrastructure and adoption. India has become the world's largest unified software and digital infrastructure. The entire country operates on presence less, cashless, and paperless delivery systems.

With all this data presented it is obvious that India is the place to be in the next 2 decades.

Areas to Consider

The above data shows that India is at the happy convergence of circumstances that will attract many more Multinationals to explore the potential of India. But there are few things to consider before looking at India.

India is a very diverse country and there is no one strategy that can fit the entire country. Each region operates as a different country and hence will need to have an entry strategy for every region. The differences are not just regional but are further complicated by culture, religion, difference in language, dialects etc. Over and above this a rural consumer and urban consumer behaves differently. There are also many intermediate segments in the market to be understood. Hence one size fits all do not apply to India. All products and services must be customized to the regional market.

The middle class in India though growing rapidly is not a singular segment but must be further divided and the requirements of each section of the middle class is different with different capacities to buy and different interest. Hence any company coming into India needs to understand what segment of middle class it is trying to address; will that size be enough to hit the growth potential it is looking at to justify its investments.

All the companies which are successful in India has understood that the advantage of India is its lower cost of production and distribution. This is a key aspect of being successful in India.

Strategy for India

Any MNC planning to come into India must have the following considerations in mind.

1)????? The company must be ready to be flexible and agile in its approach in India. Not just for the country, but each region will have to operate differently to address the market in that area.

2)????? Sharp segmentation is required to understand the consumer better. The addressable market must be clear else the size of the middle class can sometimes be misleading.

3)????? Take advantage of the lower cost of production and distribution in India. This should not be an afterthought but a planned strategy before entering the market. All nuts and bolts to be in place else once the perception is made it is very difficult to reverse it. Significant investments will have to be made in India with local product designs, manufacturing, and marketing capabilities.

4)????? India is highly digital when it comes to all transactions. India is miles ahead of the west in terms of usage of digital technology. Hence please have the digital infrastructure in place to take advantage of the ecosystem in India.

Most companies coming into India fall into the trap of following the successful model elsewhere and trying to copy paste the same in India and they soon realize that it may not necessarily work. Hence it is important to have a clear understanding of the market, understand the segment that the company is going to address and local infrastructure to take advantage of the cost benefits in the country.