CHALLENGES LIKELY TO BE FACED BY THE BUSINESSES IN THE EMERGING ECONOMIES IN ADAPTING INTERNATIONALIZING AT A FAST PACE.

2015

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).

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 AsiaOne 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 reverseengineering by replicating foreign technologies in cost efficient modes, mostly in the 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

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:

Human Resources

Perhaps the single most important challenge that emerging market MNEs face relates to their human resources. Building a successful, integrated international production network is a formidable challenge in and by itself. To do so through the successful integration of acquired firms is an additional challenge. It places considerable demands on their human resources, in particular on their managerial skills and capacity. Moreover, the scale of the challenge is relatively greater for emerging market MNEs: internationalizing often at an early stage in their development, they have had less time to develop such skills and capacities.

Emerging markets MNEs that have undertaken OFDI more recently are less likely to have built up expertise and capacity in integrating acquisitions and managing foreign affiliates. This skill and expertise gap may be further compounded by an unwillingness to hire non-national managers. Levels of foreign employment among leading Brazilian MNEs are almost half those of the 100 largest developing countrymen‘s. This low level is the result of a combination of two factors: family controlled MNEs seeking to avoid any dilution of their control and high levels of ―in-group collectivism‖. Such limitations in building an international management network do not bode well for the ability of those MNEs to create integrated international production networks. There are also broader challenges. MNEs face the continuous challenge of balancing opportunities and risks. The rapid pace of globalization and industry consolidation has led in many cases to a mind-set of ―hunt or be hunted‖ (PriceWaterhouseCoopers 2007, 5). One illustrative industry in this respect is mining, where record commodity prices facilitated the paying down of debt incurred to pursue acquisitions. Industry players saw consolidation as essential to achieving economies of scale and synergies in operations. Today, however, the dominance of resource based firms in the OFDI of a number of emerging markets brings its own set of challenges: natural-resource-based firms account for four-fifths of the foreign assets of the top twenty-five Russian MNEs, and their rapid expansion took place on the back of high commodity prices. High levels of debt coupled with falling commodity prices make for an uncertain future, in which divestiture and further industry consolidation may be the only options available.

ENVIRONMENT – POLITICAL & ECONOMICAL

Having developed in riskier political and economic environments, emerging marketmen‘s‘ notions of risk can be very different from those of developed countries‘MNEs. The greater the level of political risk in the home country, it appears, the greater the tolerance for risk that MNEs develop. The Multilateral Investment Guaranty Agency (MIGA) outlines the factors that shape perceptions of political risk for ―south based MNEs. These include the location, sector and size of an investment, as well as the home country environment and the MNEs‘ experience and history in outward investment. Interestingly, in terms of entry mode, while Greenfield investments are considered economically more desirable and less politically risky in developed countries, emerging market MNEs consider them more risky in other emerging markets since ―the presence of a domestic partner tends to reduce risk perceptions.

The means by which MNEs may balance their increasingly important role in economic development with their growing responsibilities toward the country in which they operate, is another area that presents potential challenges for emerging market MNEs. As George Kill and John Gerard Ruggie stated (1999, 15),

Globalization may be a fact of life, but it remains highly fragile. Embedding global

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

Lack Of Innovation and Support : 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

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

BUSINESS IMPLICATIONS FOR EMERGING-MARKET MULTINATIONALS:

EMMs should follow an M&A model that builds on the respective strengths of each party through adaptation rather than prescription. Given their relative inexperience, some EMMs also should seek expertise in M&A to identify targets, structure deals and capture post transaction synergies.

1. Master corporate governance:

As EMMs globalize and become more exposed to sophisticated markets and consumers, attention will increasingly focus on transparent fiscal reporting systems, organizational operations and investor relations. This is particularly pertinent for those seeking to list on international stock exchanges or raise capital in international markets. Public relations expertise will be necessary to manage interactions with external stakeholders and sustain market position.

2. Organize for growth:

Beyond corporate governance EMMs will need to maintain the right mix of cultures, management frameworks and leadership styles to sustain their growth without encountering serious difficulties.

3. Operate within an evolving regulatory framework:

Going global requires learning how to maneuver through a myriad of regional and international rules and regulations governing trade and investment, as well as sector-specific and environmental requirements in both regional and developed markets.

4. Manage protectionist backlash:

Waves of protectionist pressure may hinder the capacity for multinationals to expand, particularly in strategic sectors such as energy. Consequently, multinationals may need to explore different expansion strategies. The uncertainty raised by the role of governments as owners and investors signals the potential for further protectionist pressure.

Example : Suzlon Energy a Best example for Handling Challenges of Internationalisation

IntroductionSuzlon 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

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 StructureSuzlon’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 about30% 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 ResourcesSuzlon 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 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.

ConclusionSuzlon 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 year2. Investment in international R&D and innovation3. A change in focus towards performance-orientation in its HR and compensation policies4. Increased presence of international managers in its top management team5. 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.

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.

MBA 2012-15 Roll No – 8 - International Business Strategy