Is India really the new China for budding Australian exporters? Darren Baguley examines this complex trading partner and wonders whether establishing a foothold on the sub-continent is as difficult as some entrepreneurs are led to believe.
To most Australians, India is synonymous with curry, cricket and outsourcing, but the country is also shaping up as a major export market for Australia.
In 2006, India was Australia’s sixth largest export market, with $8.18 billion in goods and services heading across the Indian Ocean and growing at 26.4 percent. Australia is India’s fifth largest import partner and, with a total population of 1.1 billion people, a burgeoning 241 million-strong middle class and economic growth hovering around eight to nine percent, the opportunities are huge.
Nevertheless, just like that other emerging economic giant, China; there are considerable challenges to doing business in India. “The two main challenges are the regulatory environment, particularly the informal trade barriers, and the infrastructure deficiencies,” says Austrade’s New Delhi-based Trade Commissioner, Tony Burchill.
“The infrastructure deficiency that really hurts foodstuffs and beverages – a classic area of Australian strength – is that there isn’t a sophisticated cold storage chain in India yet.”
India is also verging on an energy crisis. It’s desperately looking at new sources – nuclear, hydro-electric and gas pipelines from Iran – but blackouts and brownouts occur several times a day and both foreign and local firms rely on diesel generators for backup power.
“Regulation and bureaucracy are also big issues,” says Burchill. “India has a strong federal system. Dealing with the central government is quite rational most of the time, but many companies don’t realise they have to deal with state legislation and decision-makers as well, and the states are often not as sophisticated as their federal counterparts.”
GET ON THE GROUND
One of the first Australian companies to open an Indian office was mining software outfit Surpac Minex(now part of Gemcom software). Asia-Pacific CEO Andrew Pyne knows all about infrastructure deficiencies. After talking about the company’s technology at an Indian conference, a Coal India delegate spoke up. ‘That sounds great, but we’ve been using your software for 10 years and you guys don’t support us.’
“We had been trying to run the business remotely,” says Pyne. “Our agent wasn’t looking after our clients’ interests so we had big customers that weren’t satisfied. It became quite clear that if we were going to build the business in India, the only course of action was to set up an office. We started the process in late 2000 and opened in 2002.”
Pyne also believed passionately that India was going to be the next emerging tiger economy and that it would be in the company’s interests to be in the first wave. The sales and distribution office grew to include an R&D lab two years later as part of a Chinese translation project, but initially Pyne experienced all the highs and lows that doing business in India has to offer.
So was anything easy when it came to doing business in India?
“We expected everything to be difficult and it was all pretty much hard slog. What we have been pleased with is the quality of the mining professionals we’ve recruited. We expected to find good ones, but we’ve found some really great people. We’re a very attractive employer there so the best guys love working for us,” says Pyne.
Source: Tim Harcourt, Chief Economist, Austrade
SPOT AN OPPORTUNITY… AND POUNCE!
Exporting Australian wine to India is not an obvious fit, as Howling Wolves Wines managing partner Damian Knowles finds whenever he mentions it in conversation.
“The first question people ask me is: ‘Why India?’ In November 2004 we went to the Wine for Asia event in Singapore and met an Indian company there that loved our brand. We got to know them, they came to Margaret River and we went to India and had a look around.
“They own a distillery that makes about 10 million cases of spirits every year. They could see the opportunity for growth in wine sales in India – 40 percent a year now – so they wanted a wine brand and we now have an exclusive arrangement with them in India,” says Knowles.
As well as exporting Margaret River-produced wines, Howling Wolves is developing a hundred-acre vineyard in an area called Shreepur, 300km south of Mumbai.
Knowles says India is easier to do business in than China. However, he believes the key to success is to work with a good local partner. “We didn’t really have any problems because of the quality of the people we partnered with in India. Because they’re in the liquor trade they’re quite well connected, so if there was any red tape they tended to be able to cut through because they’re on the ground and in the market.”
There were still challenges. “Nothing we expected to be hard was easy,” says Knowles. “When we go over there, it’s expensive and just booking a hotel room is difficult. If something should take a month, in India it will take two months.
“The only thing that was easier than anticipated was working with the vineyard people and environment. The soil and the climate are really good where we are and, despite the language barrier, I am totally confident our vineyard manager really knows his business.”
LICENCE TO SUCCEED
John Price, Rye Pharmaceuticals
The necessity of partnering wisely when doing business in India is echoed by Rye Pharmaceuticals managing director John Price. “We’ve set up a licensing arrangement with an Indian pharmaceutical company because the price point we need to be successful in the Indian market is impossible to achieve out of Australia. And there were other issues, such as special runs of smaller sized product with English and Urdu labelling to suit the Indian market, so it made sense to make it locally where it’s more price competitive.”
According to Price, apart from getting visas, the main challenge is the unknown. “You’re flying a bit blind, you don’t have a lot to go on and it’s hard to know what accepted business practice in India is.”
Price’s other major concern was intellectual property rights protection. “When you’re manufacturing, you’re giving people the whole box and dice. Our product is not something we could patent so the key was to carefully select the right partner. The company we eventually selected was a substantial company with a good reputation over many years of honouring licensing agreements, so that gave us a level of comfort.
“There have been some minor issues with the famed Indian bureaucracy, but our business partner has done all the licensing over there so they know how to deal with it. We had some issues sourcing equivalent packaging materials and raw materials, so we had to do some reformulation for the Indian market. It slowed everything down but we worked our way through it. India has a highly educated workforce so there are some very good resources to call on over there.”
KEEP IT SIMPLE
For all of the complexity of doing business in a developing economy such as India, the best advice is to simplify it down to a few key relationships. Business in India might be foreign to most Australian entrepreneurs, but it is quite structured and hinges on the same attention to detail that defines business relationships across the globe.
“The Indian government has controls on the amount of royalty or licensing fees you can take out, so to a certain extent that shapes your agreement,” says Price. “There are ways to work around it, but sometimes you’re better off keeping it simple. There’s no point in getting too complicated.”
Darren Baguley is a freelance writer.
DOING BUSINESS IN INDIA: KEY FACTS
FORMING JOINT VENTURES
By Rohini Kapur
Why is it that the rising popularity of joint ventures in recent years has not been matched by a corresponding satisfaction with outcomes? Although companies see value in such joint venture strategies, they find it difficult to manage them.
Most joint ventures (JVs) focus on the market opportunity and potential outcomes of the collaboration rather than on the process of making the collaboration between the organisations work.
A few Australian companies have embarked on the journey of entering into a JV with an Indian company. It takes a considerable amount of time (in excess of one year) to build true understanding between the personalities and unique systems that create value within organisations. The mutual integration of people and processes often takes the shape of several visits, dinners, joint workshops and a growing spirit of collaboration towards exploiting a mutually recognised market opportunity. Those that have made a quick decision to acquire a company will also describe the challenges of integration.
To understand what makes JVs work, it is worthwhile considering various aspects of the collaboration.
The two approaches towards managing a JV are contract-centred (focused on contractual mechanisms) and relationship-centred (focused on trust and co-operative interactions).
The contract-centred approach concentrates narrowly on the economic and transactional aspects of exchange and neglects the human and social context of the relationship.
The relationship-centred approach focuses more on the positive and leans heavily on trust and the history of prior interactions. The emphasis here is on value creation rather than the mere prevention of value depletion.
Trust is a crucial component of inter-company relationships and provides a framework within which companies can interact with ease and frequency, creating efficiencies, reducing friction and enhancing co-ordination. The greater the trust, the broader the "band of tolerance" for interaction.
This is especially true of collaborations with Indian companies and between SMEs, where individuals control the destiny of the organisations (rather than systems, processes and multiple stakeholders).
Sustained interaction can also lead to distrust, by simultaneously creating scope for conflict and providing the incentive to create greater contractual controls.
Operating on trust alone when venturing into India is decidedly risky. Where cultural differences exist, what may present as trustworthy behaviour may in fact prove to be the reverse. It is advisable to confirm your analysis and instincts through active reference checking with local companies and advisors. However, undeniably, a relationship is more than a mere contract. The contract is the skeleton on which the social aspects of the relationship are built. Trust does not replace other forms of governance, but complements them and can be combined with them to govern economic exchange.
Mutual need is one of the most critical factors underpinning compatibility between the JV partners.
Compatibility of profiles is important on a number of counts. Significant differences in company size have been seen to cause JV instability, mainly due to a clash between different systems and cultures. Size disparities also create differences in financial strength that result in variable tolerance for losses and, by extension, ability for expansion.
Credibility is like virginity. Once gone, it cannot be restored. A partner’s credibility and reputation is especially important where there is lack of familiarity. Prior interaction creates the foundation for trust and credibility. It’s similar to a period of engagement before marriage, where parties get a feel for each other before engaging in a more involved form of commitment. Conducting the necessary research before and during this period can prevent future conflict.
The contract plays the role of a safety net in case intractable differences arise and the relationship fails. The contracting parties recognise the importance of being fair to both parties’ interests during the negotiating process and therefore providing the best deal for both. However, once contracted, there is a shift of emphasis and the relationship is sustained through mutual orientation.
Where the human aspects of the relationship are strong and functioning effectively, the contractual mechanisms become less important.
Most JVs fail because the partners enter into agreement too hastily. Mutual need, mutual understanding and a positive orientation towards one another is a good start, however it needs to be supplemented with contractual mechanisms that capture the essence and spirit of the agreement, while putting in place mechanisms for a fair exit for both parties in the unfortunate event of a divorce. This is true for JVs in any part of the world.
Rohini Kapur is Managing Director of Oyster, a boutique consultancy focused on facilitating cross-border mergers and acquisitions between Indian and Australia. Oyster has formed a joint venture with Business Strategies International to create the BSI India Gateway. Ph: 0419 44 1234. Email [email protected]