1. What are the likely challenges for Indian companies to
internationalise at fast pace
Introduction:
Globalisation is the new buzzword that has come to dominate the world since the nineties of
the last century with the end of the cold war and the break-up of the former Soviet Union and
the global trend towards the rolling ball. The frontiers of the state with increased reliance on
the market economy and renewed faith in the private capital and resources, a process of
structural adjustment spurred by the studies and influences of the World Bank and other
International organisations have started in many of the developing countries. Also
Globalisation has brought in new opportunities to developing countries. Greater access to
developed country markets and technology transfer hold out promise improved productivity
and higher living standard. But globalisation has also thrown up new challenges like growing
inequality across and within nations, volatility in financial market and environmental
deteriorations. Another negative aspect of globalisation is that a great majority of developing
countries remain removed from the process. Till the nineties the process of globalisation of
the Indian economy was constrained by the barriers to trade and investment liberalisation of
trade, investment and financial flows initiated in the nineties has progressively lowered the
barriers to competition and hastened the pace of globalisation
Impact on India:
India opened up the economy in the early nineties following a major crisis that led by a
foreign exchange crunch that dragged the economy close to defaulting on loans. The
response was a slew of Domestic and external sector policy measures partly prompted by
the immediate needs and partly by the demand of the multilateral organisations. The new
policy regime radically pushed forward in favour of a more open and market oriented
economy. Indians have been quick learners in internationalization both in scale and speed.
With the domestic market fast catching up with the developed market, the learning has had a
multiplier effect. With booming local economies, the emerging market multinationals are
reaching for the stars .
India is Global:
For Asia and around the world, India is not simply emerging. India has emerged
US President, Barack Obama addressing the Indian parliament on 8th November, 2010. In
the aftermath of the global financial crisis, the Western economies are under pressure as
their growth has either stalled or drastically slowed down and there is growing awareness
that their dominance of the global economy might be under serious threat. They increasingly
see their future in the emerging markets. At the same time, major emerging economies,
including China and India, are powering ahead and in the process are redefining the global
economic landscape. Multinational companies from emerging economies, particularly from
Asia, now account for 70 of the Fortune Global 500 list and according to the United
Nations Conference on Trade and Development (UNCTAD), today account for over 16%
of outward foreign direct investment (FDI).
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2. With its increasing integration with the international economy and the burgeoning middle
class, Indian economy offers a fertile ground for international expansion for Western
multinationals. As we see, Indian firms are fast internationalizing by investing abroad
and employing locals. According to a Columbia University study, Indian firms have
invested over $75 billion overseas in the past decade. A joint study by the University of
Maryland, India-US World Affairs and the Federation of Indian Chambers of Commerce and
Industry reported that over the last five years, Indian FDI projects in the US created about
60,000 jobs with investment worth $26.6 billion. Similarly, according to the Confederation
for Indian Industry (CII), Indian firms are the second highest foreign employers in
Britain, with Tata, the UK s largest foreign investor, employing over 47,000.
Indian firms are rapidly going international
- Made in India no longer liability -- increasingly asset
- Indian firms are moving up the competitive value chain
- Asia, Europe and the USA equally important regions
- Increasing internationalisation boosts Indian firms' performance
- Implications for European companies: Indian competition will increase in Europe, North
America and Asia
One of the core strengths of Indian firms is to extract maximum value from even ailing
businesses by applying innovative and cost effective methods that they have developed over
the years in an extremely resource constrained and uncertain domestic environment. They
have a unique approach to their international growth that is grounded in their Indian heritage
and culture. We call it compassionate capitalism and it manifests in several ways, such as a
preference for sustainable growth, long-term commitment to their businesses despite
economic turbulences, faith in the management team of the acquired overseas companies
and commitment to employees in terms of job security and investment in training.
Internationalization Process beginning by Indian Companies
India s two most well known and established companies, the Aditya Birla Group and the Tata
Group. Both of them have a strong Indian heritage and have contributed immensely to the
modernization and globalization of India. They are firmly embedded in the psyche of the
nation and instead of resting on their past laurels, they have reinvented themselves as
modern multinational corporations in a range of sectors, both manufacturing and services.
The founder of Birla Corporation, Ghanshyam Das Birla, was a close associate of
Mahatma Gandhi and the founder of the Tata Group, Jamshedji Tata was known for his
vision for India and established the nation building industries, from steel to chemicals to
cement and aviation. While both the companies are still India centric, they have expanded
overseas rapidly and successfully.
Aditya Birlas internationalization journey began in South East Asia in line with India s so-
called First Wave of internationalization in the 1970s when the Government of India actively
encouraged South-South cooperation in foreign investment. At the time, the major Indian
industrial houses, including Tata and Birla, opted for Greenfield investments by pursuing
joint ventures with firms in the host countries and leveraged on their capability in reverse
engineering by replicating foreign technologies in cost efficient modes, mostly in the
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3. manufacturing sector. While 90% of Aditya Birla Group s income comes from the commodity
business, over 60% of its revenues are generated outside India.
However, Birla chose the acquisition route to expand downstream aluminum business
(Novelis in the USA) and the BPO business (Minnax in Canada) as these acquisitions
offered big and sticky clients with marquee names . The current Chairman,
Kumarmangalam Birla set the goal in 2003 to join the Fortune 500 league and having
achieved that his next goal is to join the Fortune 150 league which meant tripling the
businesses.
The international character of the Tata Group was evident more than 130 years ago when
its founder Jamshedji Tata employed foreign managers in Tata Steel and Tata Electric. The
present Chairman, Ratan Tata believes in the same philosophy. He says one of the reasons
I have been keen to find a way to really prepare the organization proliferated with other
nationals is nothing changes the perspective quicker or deeper than in fact having to have a
coexistence of cultures .
Whilst like the Birlas, the Tata group is a conglomerate with multiple business lines, here we
focus on Tata Motors which has a dominant market share in trucks in India and the
neighboring countries, including South Africa. Its product profile has traditionally suited the
bottom of the pyramid emerging markets which is now changing with new world class
products, such as pick-up trucks and prestige cars, being added. Global auto companies that
are coming to India are forging collaborations with Tata Motors. For example, the company
has a joint venture with Marco Polo in Brazil for bus body building and distributes Fiat cars in
India. It has been in the car market for only 10 years and already boasts an impressive
range of cars from Nano, the world s cheapest car to prestige global brands with the
acquisition of Jaguar and Land Rover (JLR). It also recently acquired the truck business from
Daewoo.
Internationalization Challenge being faced by Indian companies
Firms which are primarily involved on the exports of Indian merchandise or services to
foreign countries face challenges in terms of :
- Foreign Regulatory Environment
- Non Tariff barrier and Phyto-sanitary barriers
- Foreign Exchange conversion Rates
- Very high transportation costs
- Inspection and certification
- Visa related issues
- Taxation
Some of the Debt / Cash management challenges are:
- Valuation of foreign firm, which is being acquired are generally very high and the high
premium paid of such acquisition doesn t easily translated into real benefits which in
cash.
- Most Indian firms are small in size and many of the target firms which are being
acquired are much large size, posing challenges with assimilation of these firms
- Raising debt/cash in Indian market is difficult and expensive , because of high
interest rates and underdeveloped bond market in India.
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4. - Underdeveloped Foreign exchange market in India pose another challenge as Indian
currency is very volatile and leads to frequent forex losses for Indian firms
- Indian Government s foreign exchange laws FEMA, which are not very supportive
of Indian firm wanting to business abroad
- Firms which are raising substantial portion of debt from abroad find it difficult to pay
off debt because of foreign exchange volatility, which makes even this debt
expensive
Some of the Integration related challenges are:
- Because of cultural difference, it is difficult to integrate acquire firm fully in terms of
workforce. Also inexperience of Indian Managers in this area is posing major
challenges in fully integrating the facilities the abroad and real benefits of acquisition
- Indian firm had never been leaders in Innovation and research, which is challenge to
acquire firm which are innovation centric
Marketing knowledge is dependent on the relevance and depth of marketing information
available to the firm. Firms that use relevant, accurate and timely information are in a better
position to respond to export problems. Information about exporting and more specifically
market information were mentioned as the most serious problem of manufacturing. Getting
concrete information on respective foreign markets is essential before exporting can occur.
Distribution is another major problem area in exporting. Many SMEs in developing
countries lack information about marketing channels and fail to establish marketing
networks, pointed out that the lack of internationally recognized company brand names, and
appropriate marketing and retail networks are export barriers to Taiwan.s indigenous
manufacturers. Researchers have also identified several other marketing barriers that can
inhibit exporting, for instance, pricing of the product in the international market.
Sound financial position is one of the keys to secure price advantage in the target market.
Many SMEs in developing countries run into problems for lack of timely and adequate
working capital, which not only adds costs but can also endanger the entire production
operation. The importance of financial barriers to exporting, such as difficulty in acquiring the
necessary funds to initiate
Quality is often indicated as one of the most important conditions for entering and remaining
in foreign markets and logistics management. It concerns packaging, meeting importers
quality standards and establishing the suitable design and image for export markets. There
are different quality standards in developing countries. However, many of the quality
problems are the result of inadequate knowledge about market requirements, product
characteristics and production technologies. A product, which sells well in a developing
country, may not sell at all in a developed country
Several researchers indicated that local product standards, customer standards and buying
habits may be unsuitable for foreign sales and may require adaptation. In most studies
successful firms adapt their products to foreign markets.
Export market barriers are related to product requirements in the export market, the
country of origin, cultural similarity and brand familiarity. Lack of similarity of legal and
regulatory frameworks of the exporting and importing countries and lack of familiarity with
market export procedures are also mentioned as export market barriers. These factors are
regrouped into customer and procedural barriers
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5. Export procedures. One of the most cited obstacles with regard to exporting concerns the
time and paperwork required to comply with foreign and domestic market regulations.
Governments do not solely impose these procedural requirements. Also independent
organizations such as banks, shipping organizations and insurance companies, have their
own procedures. A firm that wishes to enter the export market or intends to increase its
export activity will have to acquire the knowledge and skill to deal with administrative
procedures. In particular for inexperienced managers foreign documentation and paper work
may appear very difficult to cope with
Example : Suzlon Energy a Best example for Handling Challenges of
Internationalisation
Introduction
Suzlon was founded in 1995 by Mr. Tulsi Tanti and his brothers when they were exploring
alternative sources of power for their textile business in western India. The unreliable
electricity grid was then creating many inconveniences for the business, prompting the family
to explore wind energy as an alternative. After the family installed two windmills to power
their textile business, Tanti and his brothers envisioned that they could actually make a very
profitable business out of generating wind energy. Shifting focus away from textiles, the new
foray of Suzlon into wind energy was financed with USD 600,000 put together through the
sale of some family assets. Tulsi Tanti and his brothers bought ten turbines from Sudwind, a
small German company, assembled a group of former engineering classmates, rented a
factory, and hired a German consultant for 90 days to teach them the business.
When Sudwind went bust in 1997, the Tantis hired its engineers and created a R&D center
in Germany. In 1999, the company started selling its partly homegrown turbines in the Indian
market Following this foray, Suzlon has grown over the last 10 years to become a top-5
wind energy producer worldwide with sales of over USD 3.4 bn in 2008 and a global
footprint.
Suzlon today
Suzlon has a global market share in the wind-turbine business of about 10.5% (BTM, 2007).
The company operates in 21 countries (Annual Report 2008, p. 3) and employs almost
14,000 people from 15 nationalities The company derived 58% of its revenues in FY 2008
from outside India against 34% the earlier year. The USA accounts for almost 20% of total
revenues, while Europe and the rest of the world together account for about 27% of
revenues.
As part of its internationalization strategy, in 2006 the company acquired Hansen
Transmissions of Belgium for USD 565 mn . Hansen was the world s second largest gearbox
maker and Suzlon expects that the acquisition will give it manufacturing and technology
development capability in wind gearboxes, and enable an integrated R&D approach to
design more efficient wind turbines. In May 2007, Suzlon acquired a 33.6% stake in
REPower for USD 698 mn . RePower is one of the world s largest manufacturers of offshore
and onshore wind turbines and the acquisition is expected over the years to add to Suzlon s
technological capability, especially in the production of large wind turbines
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6. On the importance of international markets, Mr. Tanti expects about 40% of Suzlon s future
revenues to come from Europe, 20% from the US, 10% each from India and China and the
balance from the rest of the world
Company Structure
Suzlon s global marketing center is located in Amsterdam, Netherlands; the international
business headquarters are based out of Aarhus, Denmark; while the Indian operation s
headquarters are in Pune, India As on 31 March 2008, Mr. Tulsi Tanti was the Chairman of
the Board at Suzlon, while Mr. Toine van Megen, a Dutch national, was the CEO of the wind
energy business at the company. In a subsequent reorganization in December 2008, Tulsi
Tanti retook direct operational charge of the company s operations to better deal with the
difficult business environment, while Mr. van Megen shifted back to supervisory
responsibilities at the Group level Suzlon seems to have been moving towards increased
decentralization in the last few years. Until a few years back, Suzlon was a promoter-driven
company.
As a first step towards empowerment and increasing accountability, the promoters created
strategic business units (SBUs) and appointed non-promoter heads of the SBUs. This
change led to decentralization in the company. Additionally, individual functions got
embedded in the SBUs and the whole corporate paradigm shifted to the SBUs. Within the
SBUs, there was a matrix structure, with about 70% weight to line manufacturing and about
30% to the functional heads. This led to a need for balance, but since people with existing
experience within the company were sent to the SBUs, there was a common understanding
of overall priorities, which facilitated the change to the SBU and matrix structure.
The chief executive in Amsterdam is empowered to hire his own team for the international
operations. Some functions like CFO and CHRO are located at Amsterdam. The choice of
location is decided upon what makes best sense for the business and what makes for the
most effective way of working. Each country is responsible for creating its own deployment
strategy, team, etc led mainly by respective country heads who could be of any nationality.
Promoters have steadily decentralized decision-making autonomy to the global management
team. This change to being more international is also changing the company culture to being
more diverse. Professionalization is increasing at Suzlon.
Human Resources
Suzlon employs more than 14,000 people from 15 nationalities is a very strong financial
brand. The challenge lies in making it an employment brand . Green industry and the
company s growth and success story give the company a strong pull.
Leadership
After envisioning the future potential for wind energy, Tulsi Tanti and his brothers helped
develop a business model offering end-to-end and hassle-free solutions, and worked
towards impressing policymakers in India, and companies in India and abroad to go for their
wind-energy solutions . Suzlon has grown at twice the industry average over the last few
years .Recognizing his efforts and success in the area of fostering renewable energy, Like
many family-owned businesses in India, leadership at Suzlon has so far been centered
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7. around the family patriarch Mr. Tulsi Tanti and the Tanti family. But, recognizing the
importance of introducing professional management and people with international
experience in the business, the family appears to be moving into the background and
focusing on more strategic roles according to Rao. As on 31 March 2008, the company had
a Dutch national as its CEO. The Group Executive Council led by the CEO reports to the
Group Supervisory Council led by the promoters of the company in order to ensure effective
corporate governance. The Board of Directors at Suzlon has a couple of members with
several years of international banking experience.
Culture
Suzlon s corporate culture is undergoing a certain transformation as the company
internationalizes. For instance, there has been an increasing call for greater transparency in
decisionmaking as the company internationalizes, and international employees are
demanding greater empowerment. There is also a need to substitute promoter involvement
with process orientation. In order to facilitate this change, the company is conducting
programs for leadership development at its Corporate Learning Center.
Conclusion
Suzlon appears to be transforming itself from a family-owned and family-driven business to
acquiring qualities of a professionally-run MNC. A part of Suzlon s success can be attributed
to its being in the right place at the right time , in terms of the timing of its founding and the
sudden international focus on renewable energy. At the same time, Suzlon s strategy
emphasizing aggressive international expansion and organizational transformation might
have played a role. Key features of organizational transformation and excellence at Suzlon
include:
1. Decentralization and professionalization in its structure over the last year
2. Investment in international R&D and innovation
3. A change in focus towards performance-orientation in its HR and compensation policies
4. Increased presence of international managers in its top management team
5. Efforts to emphasize the binding and motivating effects of corporate culture
While Suzlon has achieved been successful in the international environment over the last
few years, the fast growth track inevitably means that there will be occasional challenges in
managing this growth such as quality issues faced by the company recently. To deal with
such challenges, the company will have to work on keeping its current spirit of growth alive
while constantly focusing on upgrading its organizational and operational excellence to world
standards.
Some of the major patterns and conclusions that the study converges upon are as follows:
· From comparative to competitive advantage: With shift towards advantages
based on availability, lower cost and skills of the technical and scientific manpower,
Indian companies need to create complementary skills and the success are
governed by competencies developed within a company and aspirations of its top
management.
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8. · Favourable push and pull conditions for overseas successes: For an
increasing number of industries, Indian companies are reaching the point of having
global advantages favourable factor conditions, domestic demand characteristics
comparable to that overseas, presence of ancillary and supportive skills, and
pervasive confidence for looking beyond domestic markets. On the pull side, from
the situation of Indian origin being a handicap, the world has come to acknowledge
India advantage.
· Three strategy types for Indian companies in overseas markets: Outsourcing,
where the domestic market is either very small or unattractive; Internationalization,
where companies are aiming to expand market or balance business downturns and
risks of domestic market; and, Multinationalization, where companies are aiming to
create sustainable competitive position in several geographies.
· Differing requirements of the institutional and the retail customers: Joint
ventures are generally not viable for institutional customers, while being a useful
option for reaching the latter with benefits related to local knowledge, capital, brand,
and distribution.
· Organizing for growth and capability building: Structure for the three strategy
types is different and a dual-core model could balance requirements of risk-taking in
new areas with efficiency in stabilized activities. While carrying Indian imprint, the
culture will be company-specific and should be allowed to evolve in a directed way.
· Critical role of conviction-laden leadership: This is a common element across all
the Indian companies that have made overseas breakthroughs and the leadership
traits of being clear, fundamentals oriented, and planned need to be supplemented
with international orientation and preparedness for longer haul for success in
overseas markets.
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