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India: Now, tomorrow or never ? Turin, 12th April 2012
1 FederManager - 2012 - Seminar 1
© InAlliance Consulting – All rights reserved
Agenda Page
2 FederManager - 2012 - Seminar 1
1. Introduction, major macro-economic challenges 3
2. Market entry: options, barriers 11
3. Manufacturing in India: some potential pitfalls 16
4. Introduction to Indian culture 24
5. Case studies
1. Local manufacturing case study: Automotive sector 28
2. Adapting to local demand and supply chain case study: Beer sector 36
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Introduction Market entry Manufacturing Indian culture Case studies
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© InAlliance Consulting – All rights reserved
EU27 – India external trade
0
0,5
1
1,5
2
2,5
3
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
40 000
Importations Exportations
Part importations Part exportations
%
M EUR
Trade volumes: +10% CAGR 1999-2010
Share of India in trade with the EU:
+4% CAGR 1999-2010
India takes increasing importance in European Union’s external trade as well as foreign investment due to very strong macro-economics
FederManager - 2012 - Seminar 1 3
Source : Eurostats, Sherbrooke University, United Nations, McKinsey, Wikipedia, CIA factbook, InAlliance analysis (1) Purchasing Power Parity, 2011 IMF figures
0
10 000
20 000
30 000
40 000
50 000
60 000
Foreign direct investment into India M US$
Liberalization of Indian economy
FDI into India (all, EU27 included):
+38% CAGR 1991-2011
200820072006200520042003200220012000
400
600
800
1000
1200
GDP (US$), India, 1990-2008
Source : United Nations
CAGR 2000-2008: +12,1%
US$
Per capita GDP evolution
2010 FDI: ~ US$48 bn
Key figures
India Italy
Surface (km²) 3 287 263 301 340
Population (million, 2011) 1 210 61
Population density (p. / km²) 367 202
Median age (years) 26,2 43,5
Life expectancy (years) 64,7 81,86
Per capita GDP (PPP(1), US$) 3 703 30 165
Per capita GDP (absolute(1), US$) 1 527 37 046
Introduction Market entry Manufacturing Indian culture Case studies
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© InAlliance Consulting – All rights reserved
However, besides the obvious opportunities, India also presents challenges that require a differentiated approach
4 FederManager - 2012 - Seminar 1
Source : Hofstede cross-cultural analysis, Office of Economic Advisor (India), Transparency International, Global Integrity, Association Suisse des Banquiers , InAlliance analysis
8090
100110120130140150160170
FY '06-'07
FY '07-'08
FY '08-'09
FY '09-'10
FY '10-'11
FY '11-'12
(est.)
Average inflation: +7,4% / yr
Inflation mitigates GDP growth’s benefits
Commodity
basket index
Large country,failing infrastructure
Ranked 87th out of the 178 most
corrupt countries in 2010, similar to
Albania and Morocco
55% of all Indian citizens have at least
once had to recourse to corruption
In 2008, 120 members of parliament
(out of 522) were under scrutiny in
relation with criminal cases
1400bn US$ in grey Indian assets in
Switzerland, more than grey assets from
all other countries combined, 13 times
the Indian national debt
Corruption remains a major challenge
0
20
40
60
80Power Distance
Individualism
MasculinityUncertaintyAvoidance
Long TermOrientation
India
Italy
Cultural differences, although bridgeable, must be taken into account
0
20
40
60
80
100Power Distance
Individualism
MasculinityUncertaintyAvoidance
Long TermOrientation
USA
China
0
20
40
60
80Power Distance
Individualism
MasculinityUncertaintyAvoidance
Long TermOrientation
Germany
Italy
Introduction Market entry Manufacturing Indian culture Case studies
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3000 km
3000 k
m
3000 km
© InAlliance Consulting – All rights reserved
India’s poor are fast climbing into the consuming classes, which are projected to account for over 600 million individuals by 2025, more than the entire population of EU27
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Source: National Council of Applied Economics Research, McKinsey Global 2007, Eurostat, InAlliance analysis
Note: Income brackets are yearly household incomes in purchasing
power parity, using a constant 52 INR / USD exchange rate
0
200
400
600
800
1000
1200
1400
1600
1985 1995 2005 2015 2025
Population
(Million)
« Deprived »:
Household income
under US$ 8 500
« Aspirers »:
US$ 8 500 to 19 000
household income
Seekers:
US$ 19 000 to 47 000
household income
« Strivers »:
US$ 47 000 to 94 000
household income
« Globals »:
Household income
over US$ 94 000
Evolution of income distribution in India
2025, India:
607 million
consumers
2010, India:
163 million
consumers
2025, EU27
519 million total
population
2005, India:
55 million
consumers
Introduction Market entry Manufacturing Indian culture Case studies
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Although India’s economy has grown much faster than Italy’s in the last decade, it will probably take another decade or so before India’s total national GDP reaches that of Italy
FederManager - 2012 - Seminar 1 6
GDP projections comparison
Source: United Nations Statistics Division, InAlliance analysis Note: Statistics based on 2005 constant prices and exchange rates, linear extrapolation
0
5E+11
1E+12
1,5E+12
2E+12
2,5E+12
3E+12
3,5E+12
Italy
India
Linéaire (Italy)
Linéaire (India)
Italy
CAGR 2000-2010:
+0,2%
Intersection:
2020
India
CAGR 2000-2010:
+7,7%
US$
000 bn
Introduction Market entry Manufacturing Indian culture Case studies
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© InAlliance Consulting – All rights reserved
New Delhi
Mumbai
Bangalore
Hyderabad
Kolkata
Chennai
Like Europe, India has many different faces resulting from its rich history and wide array of geo-climatic environments
FederManager - 2012 - Seminar 1 7
Source: India Tourism Promotion Board
Thar Desert
Mumbai by night
Beaches of Goa Fishing villages of Kerala
Streets of Chennai
Victoria Palace, Kolkata
Taj Mahal
South Block, Delhi The Himalayas
Rice paddy in SIkkim
Introduction Market entry Manufacturing Indian culture Case studies
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© InAlliance Consulting – All rights reserved
New Delhi
Mumbai
Bangalore
Hyderabad
Kolkata
Chennai
Measured in figures, India’s disparities are even more obvious: India is not a homogeneous country when it comes to business or industrial environment either
FederManager - 2012 - Seminar 1 8
-40°C
(Drass, Kashmere)
+51°C
(Purulia, W. Bengal)
>11m rainfall / yr (Mawsynram, Meghalya)
40% of population below absolute poverty level (State of Bihar)
€20 000 /m2 professional real estate
(Nariman Point, Mumbai)
100% literacy rate (Nagercoil, Tamil Nadu)
€1600 average individual income (Chandigarh)
8611m elevation (K2, Kashmere)
<2cm rainfall / yr (Thar desert, Rajasthan)
Sources : Census of India, Wiki Answers, Times of India, InAlliance analysis
Introduction Market entry Manufacturing Indian culture Case studies
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New Delhi
Indian agricultural crops depend heavily on the yearly monsoon for water and suitable temperatures
FederManager - 2012 - Seminar 1 9
Monsoon cycle in India
Source: MétéoFrance, «Hydrologie» (André Musy,Christophe Higy), Bloomberg Businessweek, desk research, InAlliance analysis
Summer monsoon
(« Southwest Monsoon »)
Mumbai: monsoon
starts approx. 5th June to
late July
New Delhi: approx. 15th July to late
August
Winter monsoon (« Northeast Monsoon »)
Kolkata : moussons en
Juillet et Novembre
Kolkata : July and November
monsoons
Chennai : moussons en Juin et Décembre
Chennai : June and December monsoons
Mumbai
Bangalore
Hyderabad
Kolkata
Chennai
Illustration - Rainfalls in Mumbai vs. Paris
0
100
200
300
400
500
600
700 Mumbai (2167mm/yr)
Paris (585mm/yr)
mm
Mumbai receives more rainfall in the month of
July (650mm) than Paris in the entire year
(585mm)
The two seasons of Indian agriculture
Season Period Sowing Harvest Major Crops
"Kharif"
(summer)
June-
November
June-July:
Presowing
and preparatory
tillage of the soil
September -
December
Jowar Rice
Maize, Pulses
Groundnut,
Cotton,
Soyabean
Sugarcane
"Rabi"
(winter)
Mid October-
February
September-
November
February-
March
Wheat, Barley
Mustard, Sesame
Peas, Gram
Safflower
300 km
Introduction Market entry Manufacturing Indian culture Case studies
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© InAlliance Consulting – All rights reserved
Agenda Page
10 FederManager - 2012 - Seminar 1
1. Introduction, major macro-economic challenges 3
2. Market entry: options, barriers 11
3. Manufacturing in India: some potential pitfalls 16
4. Introduction to Indian culture 24
5. Case studies
1. Local manufacturing case study: Automotive sector 28
2. Adapting to local demand and supply chain case study: Beer sector 36
Introduction Market entry Manufacturing Indian culture Case studies
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© InAlliance Consulting – All rights reserved
India is undoubtedly an attractive economy, but the specific market segment targetted may prove much less attractive than initially expected, and much less accessible too
FederManager - 2012 - Seminar 1 11
Illustration – Major challenges of Indian agriculture require highly specific approach in the agro-equipment sector
Source: FAO farm census, University of Sussex, National Census of India 2011, Tendulkar Committee 2009 on poverty, NeoFocus / InAlliance analysis
469
349 287
197
73 32 31 1,6
Average farm size (ha)
Extremely fragmented land-holding
High rural illiteracy
36,2%
Illiteracy, rural India (e.g. Bihar)
13,6%
Illiteracy, major city (e.g. Chandigarh)
• Low / slow / improper
technology adoption
• Very low budgets
• High variability in
harvest characteristics
Lack of seed management
According to various sources :
• Only approximately 10% of cereal harvest in India
results from managed seed multiplication
• In 2009, the states of Orissa, Bihar, Uttar
Pradesh had not yet adopted seed management
techniques
Rural poverty
42%
Rural India Population below poverty line
(income < €6.5 / month)
Introduction Market entry Manufacturing Indian culture Case studies
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Market sizing and competition assessment can be a difficult exercise in India due to « unaccounted for cottage industry » and product definitions varying from western standards
FederManager - 2012 - Seminar 1 12
Source: National Council of Applied Economics Research, RaboIndia Finance estimates, The Lancet, desk research, NeoFocus / InAlliance analysis
Illustration – Precisely assessing competition in the spirits market is virtually impossible
Indian-made Foreign
Liquors (IMFL); 10,8 mhl (2)
Fake IMFL ; 27,0 mhl (3)
Illicit country liquor;
12,3 mhl (3)
Licensed country liquor;
11,2 mhl (3)
“Whisky”6,3 mhl
Brandy; 3,1 mhl
Rum; 1,2 mhl
White spirits; 0,3 mhl
Illegal distillation: 64%
Total spirits production estimate: 61,3 mhl
Over 90% (1) made from
sugar cane mollasses (does
not qualify for “whisky” name
outside India)
(1) No official data available. A 10% proportion is given by several unconfirmed sources but seems unrealistically high as it would imply a malt requirement of 60 to 80 kt per year, an unlikely
amount considering malting barley availability
(2) 2008 figure
(3) Extrapolated from a health survey conducted in the State of Karnataka in 2005
Introduction Market entry Manufacturing Indian culture Case studies
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Motivated by external trade growth, India has continuously reduced import duties in the past decade, especially on industry consumables and production equipment
FederManager - 2012 - Seminar 1 13
Sources : Ministère Canadien des Affaires Etrangères, InAlliance analysis
37% 37%
67%
48%
21%
33% 35% 33% 33% 26%
40%
30% 33% 27%
39%
6% 10% 9% 8% 7% 7%
20%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Live Animalsand AnimalProducts
VegetableProducts
Animal orVegetable Fats
& Oils
PreparedFoodstuff,
Beverages,etc.
MineralProducts
MiscellaneousManufactured
Articles
Plastics &Articles thereof
Products ofChemicals
Base Metals &Articles of
Base Metal
Machinery &MechanicalAppliances
Vehicles,Aircraft and
Vessels
2001 2005 2008
Customs duty evolution since 2001
40 -
35 -
30 -
25 -
20 -
15 -
10 -
5 - 1998 2001 2004 2007 2011
- +2
- 0
- - 2
- - 4
- - 6
- - 8
- - 10
- - 12
Trade balance evolution since 1998
Exports Imports Trade balance
Products / equipments strategic to Indian
industry
Introduction Market entry Manufacturing Indian culture Case studies
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As a result, the competitive disadvantage on imported products has reduced significantly and does not always justify on its own a production localization
FederManager - 2012 - Seminar 1 14
Rate EUR Rate EUR
EXW EU PRICE 2000 EXW INDIA PRICE 2000
Shipping 110 Shipping 110
Insurance 23 Insurance 23
C I F INDIA PRICE 2133 C I F INDIA PRICE 2133
Assessable Value 2154 Assessable Value 2154
Basic Customs Duty 7,50% 162 Basic Customs Duty 0,00% 0
Countervailing Duty 10,00% 232 Countervailing Duty 0,00% 0
Education CESS on BCD 3,00% 7 Education CESS on BCD 3,00% 0
Education CESS on CVD or CED3,00% 12 Education CESS on CVD or CED3,00% 0
Additional Duty of Customs 4,00% 103 Central Excise Duty 4,00% 86
Less: Refundable duties -342 Less: Refundable duties -86
DDP INDIA COST 2307 DDP INDIA COST 2133
Basic Excise Duty 22% 507 Basic Excise Duty 22% 469
Specific Duty 0% 0 Specific Duty 0% 0
Cess 0% 3 Cess 0% 3
NCCD 1% 23 NCCD 1% 21
Education & H Edu Cess 3% 16 Education & H Edu Cess 3% 15
Central Sales Tax 2% 57 Central Sales Tax 2% 53
Local Sales Tax / VAT 13% 364 Local Sales Tax / VAT 13% 337
Octroi / Local Body Tax 3% 98 Octroi / Local Body Tax 3% 91
Ex-showroom Price 3375 Ex-showroom Price 3122
IMPORT : EXW to DDP LOCALIZED : EXW to DDP
Illustration – Imports vs. Local production of a major automotive sub-system
Competitive disadvantage on imported product : 7,5%
Sources : Indian Central Board of Customs and Excise, past client project, InAlliance analysis (1) illustrative figures
Applicable in certain cities only, rate
depends on product
State rate, figure depends on applicable
State and product
Federal rate
Systematic « anti-dumping » tax
Tax alligned on Central Excise Duty (levied on
all national productions)
Rate depends on product, typically 7,5%
(1)
(1)
(1)
(1)
(1)
(1)
Introduction Market entry Manufacturing Indian culture Case studies
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Agenda Page
15 FederManager - 2012 - Seminar 1
1. Introduction, major macro-economic challenges 3
2. Market entry: options, barriers 11
3. Manufacturing in India: some potential pitfalls 16
4. Introduction to Indian culture 24
5. Case studies
1. Local manufacturing case study: Automotive sector 28
2. Adapting to local demand and supply chain case study: Beer sector 36
Introduction Market entry Manufacturing Indian culture Case studies
2 3 4 5 1
© InAlliance Consulting – All rights reserved
While attractive at first sight, a decision to start manufacturing in India must fit company strategy and be preceded by extensive research
16 FederManager - 2012 - Seminar 1
Improve production /
production efficiency ?
(Process driven)
Company objective(s) ?
What market(s) ?
India ?
(localize production)
Europe ?
(re-locate & export back)
Other markets better
accessible from India ?
(localize and export)
Enter new markets, new
clients ?
(Market driven)
Secure supplies ?
(Supply driven)
Leverage low cost labour
?
• Not necessarily lowest
cost
Leverage skills ?
• Hard to retain
• May lack depth of
experience
Source : InAlliance analysis
What raw materials ?
What benefit being local
?
• Logistics cost / kg ?
• Bargaining power ?
Introduction Market entry Manufacturing Indian culture Case studies
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The decision to set foot in India is often market driven, and a sound decision requires research to ensure strategic fit and not just opportunity-grabbing
17 FederManager - 2012 - Seminar 1
India ?
(localize production)
Europe ?
(re-locate & export back)
Eastern Africa ?
• Probably medium to long term
• Leveraging various ties,
geographical proximity,
India’s higher skills
Other markets better
accessible from India ?
(localize and export)
Middle East ?
• Short term
• Leveraging geographical
proximity, India’s lower cost
Other Asian markets ?
• Short term
• Leveraging geographical
proximity
• Will India remain low cost ?
Is your product « India proof » ?
What market(s) ?
« Global product » ?
• Any conflict with Indian
culture ?
• Loss of image if not « Made
in Italy » ?
Mass product ?
• Specificities of Indian
environment ?
• Overkill ?
• Pricing ? Is India likely to bring you the
best competitive advantage
sustainably ?
Introduction Market entry Manufacturing Indian culture Case studies
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India’s high attrition across its entire industry presents businesses with specific overheads and HR strategy issues
18 FederManager - 2012 - Seminar 1
0%
10%
20%
30%
40%
50%
60%
Average attrition rate: > 30% / yr
0%
10%
20%
30%
40%
50%
60%
Chile Brazil US China India
India: twice as much as China, 3 times as
much as Brazil
Source : ASSOCHAM, AT Kearney, Pragmatic Outsourcing, Compensation Force, InAlliance analysis
Attrition rates in various industries in India, 2007
Attrition rates comparison in IT and BPO, 2010
Out of 100 trained
personnel, as
much as 30 may
leave each year
How much of your know-
how might they transfer
to your competitor ?
Are your training
budgets tailored for
these attrition rates ?
How critical to your
business is individual
know-how ?
Are your recruitment
resources structured
enough to take the
challenge ?
Introduction Market entry Manufacturing Indian culture Case studies
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The ease of communicating in English in India plays in favour of India as an outsourcing destination but is often greatly over-estimated
FederManager - 2012 - Seminar 1 19
English as a business language is much more common in South
India than in the North, where the indigenous Hindi is usually the
language of reference
English as a second language follows Indian societies socio-
professional stratification and is typical of upper-middle class,
educated, urban India
English is not evenly practiced in India
Sources : Graddol, Crystal, Census of India 2001, InAlliance analysis
« It will be difficult » = « I will be unable to help you » ~ « No »
« We will consider » = « We agree »
« Yes » = « we will do our best to achieve your requirement »
« Tomorrow » = « not now »
« auto » = motorized 3-wheeler
« Rest-room » = toilet
…
Terminology, meaning can differ from British or American English
0
50000000
100000000
150000000
200000000
250000000
300000000
Additional language First language
… and 89% of the population do not speak or understand it at all Only 7 times more Indians than Italians actually speak English…
1st language 0,03%
2nd language 3%
As a foreign language
8%
Not spoken 89%
Introduction Market entry Manufacturing Indian culture Case studies
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Italy: 17m
India: 125m
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Logistics in India can be easily overlooked: the size of India is comparable to that of a small continent rather than to that of any single EU country, and major cities are just as far apart
FederManager - 2012 - Seminar 1 20
New Delhi
Mumbai
Bangalore
Hyderabad
Kolkata
Chennai
Paris
London
Lisbon
Copenhagen
3000 km 3000 km
3000 k
m
Size comparison: EU vs. India
Berlin
Source : Various airlines schedules, InAlliance Analysis
Roma
It takes longer, by train, car, or plane, to travel from Mumbai to Delhi than
from Turin to London
Introduction Market entry Manufacturing Indian culture Case studies
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Indian roads, amongst the world’s deadliest and most congested, suffer greatly from the effects of the monsoon and hardly suffice to move people and goods within the country
FederManager - 2012 - Seminar 1 21
Indian roads are often considered the most
dangerous in the world:
86 000 deaths in 2003 (France: 5700)
Sources : World Bank, Prévention Routière, InAlliance analysis | Photos : The Hindu, bigfatcars.com, superstock.com, flickr.com, unep.org, New York Times
The third largest road network in the world is
heavily limited in large and growing cities
such as Mumbai, Chennai or New Delhi
Monsoon causes gridlocks each year and
renders some roads totally useless for
months thereafter
Introduction Market entry Manufacturing Indian culture Case studies
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State intervention has decreased substantially since liberalization in 1991 but still limits or bars foreign – or even private – direct investment in some sectors
FederManager - 2012 - Seminar 1 22
- Railways
- Some postal / courrier services
- Electricity distribution (1)
- Lottery / gambling
- Nuclear energy
- Higher education (1)
- …
Government reserved sectors
Sectors with FDI caps and / or
requiring specific government
approval (2)
Sectors on automatic approval route (3)
- Retail (51% FDI cap)
- Insurance (26%)
- Bank (49%)
- Mobile telephone networks (49%)
- Civil aviation (40%)
- Refineries (26%)
- Media (20 to 49%)
- Mining and quarries (49 to 74%)
- etc ...
All other sectors, including:
- Automotive
- Mechanical engineering
- Tourism
- etc…
Source : Indian Department of Industrial Policy & Promotion, InAlliance analysis
Notes : (1) A few exceptions date back from before independence (2) Approval is granted on a case-by-case basis from Foreign Investment Promotion Board (3) Specific notice must however be made to Reserve Bank of India within 30 days after investment has been made
Broad sector-wise foreign direct investment (FDI) policy in India
Introduction Market entry Manufacturing Indian culture Case studies
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Agenda Page
23 FederManager - 2012 - Seminar 1
1. Introduction, major macro-economic challenges 3
2. Market entry: options, barriers 11
3. Manufacturing in India: some potential pitfalls 16
4. Introduction to Indian culture 24
5. Case studies
1. Local manufacturing case study: Automotive sector 28
2. Adapting to local demand and supply chain case study: Beer sector 36
Introduction Market entry Manufacturing Indian culture Case studies
2 3 4 5 1
© InAlliance Consulting – All rights reserved
Indian culture considers several foundation concepts very differently from Western culture, causing many misunderstandings and possible goal misalignments in cross-border projects
24 FederManager - 2012 - Seminar 1
In Western philosophy In Hindu philosophy
Scale: human scale (years, centuries, a few millenia at most)
Origin: centred on a single messiah / prophet
Sequential, linear actions exclusively, rigid agenda
Scale: much beyond mankind (perpetual
repetition of “Yuga” cycles, 4,3m years each)
Origin : none (cyclical)
Parallel actions, indirect effects of actions,
multi-tasking
Scale: a few decades
Limitations: physical birth and death
Continuation : spiritual exclusively (heaven, hell, …)
Scale: none
Limitations: none
Continuation: perpetual (reincarnation), both physically and
spiritually
Collectively, humans make up humanity, and by extension
universe, which revolves around humans
Individuals cluster into families, friends circles, nations, etc…
for convenience, interest, or due to proximity or biological ties
Universe includes humans, amongst many other
components
Individuals exist by, and for, a complex apparatus which
has a much more important meaning than the individual
itself
The individual only has one life to achieve the mission he has
assigned to himself. Free will is key, destiny can be overcome.
Deadlines (including death), failures, successes are present at all
times.
Failure or success are directly measured as a result.
Participation to common effort, struggle towards goal of the
community are the main roles assigned to individuals.
Destiny is key, free will is bound by community interest.
The meaning of an action is more important than its measurable
success. Failure is a delay, not a definitive result.
Time
concept
Life
concept
Individualism
concept
Source : Desk research, InAlliance observations during various client projects, InAlliance analysis
Illustration – 3 major concepts seen from Western and Indian philosophical angles
Introduction Market entry Manufacturing Indian culture Case studies
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Although castes are outlawed by constitution, they still structure much of Indian society, explain fatalism, and impact human resources management
FederManager - 2012 - Seminar 1 25
Indian constitution and law abolished the caste system at India’s
independence in 1947.
However, tens of generations of soft skills and learnings passed from
parents to children mean that yesterday’s caste system has often been
transposed into company hierarchy: Brahmins often occupy strategic
positions, “warriors” thrive in sales management position and Vaisyas in
production management, Sudras abound on the shopfloor…and ”outcasts”
are still likely to work in janitorial or refuse collection…
Castes where originally codified in the Vedas, the founding texts of
Hinduism and have structured Indian society for the past 3000 years.
Depending on regions and mode of religious conversion, “imported”
religions (judaism, islam, christianism) have either rejected or adopted and
adapted the caste system (e.g. Goa Christians).
Traditionally, an individual born in a given caste would marry in the same
caste and practice exclusively the trades assigned to his / her caste,
ensuring perpetual reproduction of the existing social organization.
Source : Desk research, InAlliance Analysis
Origins
Visible effects in today’s India
Brahmins :
Priests,
intellectuals...
Kshatriyas :
Warriors,
administrators…
Vaisyas
Craftsmen,
traders...
Sudras
Workers,
farmers,...
Pariahs / Harijans / Dalit
« Outcasts », or « untouchables »:
any trade related to death, waste,
dirt….
Management
Implementation
Competitiveness
Resilience
Authority
Fundamental
thinking,
conceptualization
Physical strength,
productivity,
obedience
Obedience,
fatalism…
Representation Caste / role Desirable soft skills
Definition of the main castes
Society was considered to function similarly to the human body, and was
therefore structured on the same model, each caste being assigned a set of
roles similar to one of the parts of a human body
Introduction Market entry Manufacturing Indian culture Case studies
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Private or public, large or small, Indian companies model their corporate hierarchy on Indian society’s stratification
FederManager - 2012 - Seminar 1 26
Executive Director
Manager
Senior Engineer
Engineer
Managing Director
Chairman & Executive Officer
Senior Executive Director
General Manager
Deputy General Manager
Senior Manager
Engineer Engineer
Senior Executive Director
Executive Director
General Manager
Deputy General Manager
Senior Manager
Manager
Senior Engineer
Engineer Engineer Engineer Engineer
Senior Engineer
Senior Engineer
Senior Engineer
Senior Engineer
Manager Manager Manager
Senior Manager
Senior Manager
Senior Manager
General Manager
Deputy General Manager
Deputy General Manager
Illustration – Typical hierarchy in a large Indian company
Sources :Corporate / Business Unit presentations of various indian companies mentioned , hierarchical structure of Indian Railways, clients projects, InAlliance analysis
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Agenda Page
27 FederManager - 2012 - Seminar 1
1. Introduction, major macro-economic challenges 3
2. Market entry: options, barriers 11
3. Manufacturing in India: some potential pitfalls 16
4. Introduction to Indian culture 24
5. Case studies
1. Local manufacturing case study: Automotive sector 28
2. Adapting to local demand and supply chain case study: Beer sector 36
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Socio-economic fundamentals point to a sustained demand for motor vehicles
FederManager - 2012 - Seminar 1 28
No vehicle
Car
Motorbike
Bicycle
Ownership rate:
- car: 1%
- Motorbike: 10%
1985 1995 2005 2015 (e) 2025 (e)
« Globals » : > € 80k
« Strivers » : € 40k - 80k
« Seekers » : € 15k - 40k
« Aspirers » : € 7k - 15k
« Deprived » : < € 7k
Household income, 2010,
PPP Population by income bracket
No motor
vehicle:
89%
Source : United Nations, Indian Finance Ministry, McKinsey Global Institute, InAlliance analysis
• 83000 millionaires ($) in India in 2009, 20% more than in 2008
• India’s growth could overtake China’s by 2015
• Average per capita income could overtake USA and EU by 2040
200820072006200520042003200220012000
400
600
800
1000
1200
GDP (US$), India, 1990-2008
Source : United Nations
CAGR 2000-2008: +12,1%
GDP growth, India, 1990-2008 (US$) Vehicle ownership in India, 2010
Evolution of income distribution
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Fast growing sales of motor vehicles remain dominated by 2-wheeler sales, but this is about to change
FederManager - 2012 - Seminar 1 29
Source : Society of Indian Automotive Manufacturers, car manufacturers interviews, InAlliance analysis
• Sustained growth over the last decade
• Automotive manufacturers in India make investment decisions
based on estimates of continued growth up to 2020 or
beyond
• Car sales overperform other vehicles’ sales
• 2-wheelers still represent 75% of the units sold
Passenger Vehicles1 949 776
Commercial Vehicles531 195
Three Wheelers440 368
Two Wheelers9 371 231
Sales by vehicle type - India - FY 2009-2010
Source : SIAM, November 2010
Sales by vehicle type, 12 months leading to Oct. 2010
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
0
500 000
1 000 000
1 500 000
2 000 000
2 500 000
Passenger vehicles sales trends - India
Source : SIAM, November 2010
Car sales trends
CAGR: +13.7%
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
0
2 000 000
4 000 000
6 000 000
8 000 000
10 000 000
12 000 000
14 000 000
Total vehicles sales - India
Source : SIAM, November 2010
Total vehicle sales trends
CAGR: +10,3%
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Competitive structure in car manufacturing remains highly consolidated, leaving little room to European manufacturers
FederManager - 2012 - Seminar 1 30
Source : Society of Indian Automotive Manufacturers, InAlliance analysis
Maruti Suzuki
45%
Hyundai
16%
Tata
14%
Mahindra
8%
GM
4%
Honda
3%
Toyota
3%
Ford
2%
Fiat
1%
Skoda
1%
Others
2%
Market shares distribution, Jan. 2010
• The largest 4 car makers (Maruti,
Hyundai, Tata, Mahindra) hold
83% of the market shares together
• The next 4 (GM, Honda, Toyota,
Ford) hold another 12%
• 95% of the market is untouched
by European car makers
To fully leverage the Indian market’s
potential, European Tier 1 and Tier 2
suppliers must be ready to enter
clients usually totally unknown to
them
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Possible entry strategies vary greatly in scope, risk and returns and must therefore be closely evaluated beforehand
FederManager - 2012 - Seminar 1 31
Which location ?
Northern cluster ?
(Suzuki, Honda...)
Western cluster ?
(EU manufacturers)
Southern cluster ?
(Ford, Hyundai...)
Local assembly ?
Transaction =
sale of components
+ +
Direct export ?
Transaction =
sale of products
+ +
Local manufacturing ?
Transaction = Sale /
licensing of know-how
+ +
Alone ?
Slower ramp-up
HR and finance
hungry
….
Total control
No revenue
sharing
Gain precise
market knowledge
….
With a local partner ?
Could create a
competitor
Partner choice
conditions success
Faster ramp-up
Lower investment
Access to partner's
network
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Until recently, European car-makers have mainly positionned themselves importing premium segment cars or performing minimum local assembly. Localization is now increasing as those car makers start to fight in the entry-level segments
FederManager - 2012 - Seminar 1 32
Import duty on complete cars
(« CBU ») = 100% (2010)
Import duty on SKD and CKD
parts = 10% (2010)
European brands dealers
Wealthiest areas
Distribution network matches the wealthiest areas
Dealerships Manufacturing
Mercedes 35 CKD / SKD (Pune)
BMW 17 CKD / SKD (Chennai)
Audi 14 CKD / SKD (Pune)
Skoda 62 CKD / SKD (Pune)
Volkswagen 38 CKD / SKD (Pune)
FIAT 110 CKD / SKD (Pune)
Some European manufacturers set-upLocalisation and industrial model
Except for luxury
vehicles (low volumes,
less rivalry), the route
to the Indian market for
foreign manufacturers
is either the KD model
or complete
localisation.
Source : Society of Indian Automotive Manufacturers, desk research, InAlliance analysis
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SKD, CKD or maximum localization are proving profitable for foreign car-makers
FederManager - 2012 - Seminar 1 33
Indian context
Very attractive market mid/long term (population, GDP
growth, product demand)
BUT premium segment demand still limited (estimate =
100 000 veh./yr)
Political will to promote local industry
High import duties on built-up vehicles (« CBU »)
Industrial constraints
Critical volumes for a complete assembly line: 800-2000
veh./day (250k to 600k / yr
Lack of locally available skills on some specific
technologies (complex plastic omponents, high precision
metallic panels, etc…)
Result: similar profit for the European car-maker with SKD or CKD than with CBU imports + better pricing lattitude + damper effect on European
production lines (CKD / SKD demand partly fill European components lines)
CKD packing Components
collection
DDP price
€ 13k
EXW price
€ 11K
Final assembly
Cost: ~ EUR 700
60-100 veh./day
Retail price :
€ 18k
Margin:
20%
Illustration – C segment European vehicle launched in India in 2010
Source : European car makers interviews, desk research, InAlliance analysis (1): indicative figures for confidentiality reasons
(1) (1) (1) (1) (1)
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Hyderabad
European car-makers assembly lines are concentrated in the Western and Southern industrial clusters
FederManager - 2012 - Seminar 1 34
Pune – Mumbai – Nasik –
Aurangabad - Gujarat
(non exhaustive)
Chennai – Bangalore -
Hyderabad
(non exhaustive)
NCR – Punjab – Rajasthan -
Madhya Pradesh
(non exhaustive)
Source : Desk research, InAlliance analysis (1): indicative figures for confidentiality reasons
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New Delhi
Mumbai
Bangalore
Kolkata
Chennai
© InAlliance Consulting – All rights reserved
Agenda Page
35 FederManager - 2012 - Seminar 1
1. Introduction, major macro-economic challenges 3
2. Market entry: options, barriers 11
3. Manufacturing in India: some potential pitfalls 16
4. Introduction to Indian culture 24
5. Case studies
1. Local manufacturing case study: Automotive sector 28
2. Adapting to local demand and supply chain case study: Beer sector 36
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The Indian beer market is highly consolidated but growing fast
36 FederManager - 2012 - Seminar 1
Indian beer market: market shares
Source: annual reports, desk research, NeoFocus / InAlliance analysis
United Breweries
54%
SABMiller 25%
Carlsberg 5%
Others 16%
Other players are quite
fragmented (e.g. Mount
Shivalik 4%, Diwan 3%).
Market shares FY11
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10,7
12,1
13,4
15,6
17,9
FY 07 FY 08 FY 09 FY 10 FY 11
Million hl
Indian beer market: size and trend
© InAlliance Consulting – All rights reserved
A major component of beer, malt, is elaborated from selected barley. Theoretical yields, proportional to those of wheat, can vary by a factor of 1 to 4 due to various natural challenges
FederManager - 2012 - Seminar 1 37
Northern Hills Zone (NHZ)
Water stress challenge
1,7 t/ha average wheat yield North-Western Plains Zone (NWPZ)
Weed and pests challenges
3,9 t/ha average wheat yield
Central Zone (CZ)
Water stress challenge
2,4 t/ha average wheat yield
Peninsular Zone (PZ)
Water stress and pests challenges
3 t/ha average wheat yield
North-Eastern Plains Zone (NEPZ)
Weed and pests challenges
2,5 t/ha average wheat yield
Southern Hills Zone (SHZ)
Pests challenge
1 t/ha average wheat yield
Wheat and barley growing zones of India
Source: Indian Ministry of Agriculture, Indian Council of Agricultural Research, NeoFocus / InAlliance analysis
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Barley yields and production in India are lower than the world average, have been growing faster recently thanks to better seed management, but still show much room for improvement
FederManager - 2012 - Seminar 1 38
Barley production and yield (2010, t/ha)
Source: Reserve Bank of India, Ministry of Agriculture, FAO, USDA, NeoFocus / InAlliance analysis Note : figures may show discrepancies due to differing sources
“Even though the government has partnered with private players
for the purpose of seed management, a lot still needs to be done in
this field:
• A majority of certified/qualified seeds consumed were old seeds
whose validity was re-notified beyond their use period
• Additionally, states like Orissa, Bihar, Uttar Pradesh (…) have still
not adopted seed management with no improvements in seed
production and seed replacement rate” (« Flavours of Incredible India », FICCI / Ernst & Young, 2009)
0,0
1,0
2,0
3,0
4,0
5,0
6,0
7,0
1,70
1,90
2,10
2,30
2,50
2,70
2,90
All cereals
CAGR: 2,1%
Barley
CAGR: 3,3%
Wheat
CAGR: 0,9%
t/ha
Selected quotes on barley yield improvement
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85% of the Indian barley production is concentrated in the 3 north-eastern states of Rajasthan, Uttar Pradesh and Haryana, where yield is best and cost of production is lowest
FederManager - 2012 - Seminar 1 39
Barley production and yield in India (2008)
Source: Reserve Bank of India, Ministry of Agriculture, NeoFocus / InAlliance analysis (1) Wheat cost estimates from Indian Ministry of Agriculture, for illustration purpose. 69 INR / EUR
Rajasthan 52%
Uttar Pradesh 22%
Haryana 11%
Madhya Pradesh
6%
Punjab 3%
Himachal Pradesh
2%
Uttarakhand 1%
Other states 3%
Rajasthan
878 kt Uttar
Pradesh
376 kt
Madhya
Pradesh
102 kt
Haryana
185 kt
Punjab
55 kt
Himachal
Pradesh
29 kt
Uttarakhand
22 kt
Area
(000 ha) Yield
(t/ha) Cost of prod. (INR/t, wheat) (1)
Rajasthan 287 3,06 94,2
Uttar Pradesh 172 2,19 94,4
Haryana 53 3,49 97,6
Madhya Pradesh 81 1,26 113
Punjab 16 3,44 94
Himachal Pradesh 23 1,27 n.a.
Uttarakhand 28 0,79 n.a.
Total barley production (2008-2009) : 1731 kt
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Uttar Pradesh
Madhya Pradesh
Uttarakhand
Punjab
Rajasthan
Haryana
As a result of poor security of supply, major malt users United Breweries and SABMiller both had to resort to barley improvement programmes, two steps above their core business
FederManager - 2012 - Seminar 1 40
Malting barley catchment areas of United Breweries and SABMiller
Punjab, Haryana, Uttarakhand
Programme extension since 2007
2010: Procured 2,5 kt from 650 farmers
Rajasthan
Programme started in 2005
Operates 15 barley purchase centres
2010: Procured 15,5 kt from 5600 farmers
Major breed: K-551
Source: Financial Express, Economic Times, Hindu Business Line, SABMiller Progress through Partnership programme, NeoFocus / InAlliance analysis
Haryana
Contract farming partnership with
HAFED cooperative
Estimated volume: 10 kt
Major breed: DWRUB-52
Alwar
New Delhi
SABMiller major catchment area,
district name
Sirsa
Jhajjar
Gurgaon
xyz State
United Breweries major catchment area,
district name
Patiala Sangrur
Jaipur
Sikar
Punjab
Partnership with Punjab Agro Industries
Corporation, started in 2003
Estimated volume: 12 kt
Major breed: VJM-315 (2003 information)
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SABMiller invested in structuring the supply chain in order to secure volumes and quality of its malting barley supplies
FederManager - 2012 - Seminar 1 41
Illustration - SABMiller’s involvement in the barley supply chain
Barley seed
improvement
programme
Programme
Member farmers
Rajasthan
Agricultural
University
SABMiller
« Progress through
Partnership Centers”
Maltings
Agri. Chemicals
suppliers
Kanpur University
of Agriculture
Fertilizers,
pesticides
Certified
seeds
Morarka Foundation
Databank management,
social projects
Micro-credit
lenders
Finance
Certified seeds,
chemicals, financial
support, collection
Malting barley
Specifications, malt
user experience,
(project management ?)
R&D,
field trials
More,
better quality malt
Source: SABMiller India annual reports, SABMiller website, SABMiller Progress through Partnership programme, NeoFocus / InAlliance analysis
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Paris (Head Office)
InAlliance Consulting,
33 avenue Philippe Auguste
75 011 Paris, France
Tel : +33 1 44 64 10 35
Fax : +33 1 44 64 10 36
E-mail : [email protected]
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InAlliance Consulting,
C/O Ing. Pietro Boggero,
Via Pietro Bagetti 25
10138 Torino, Italy
Tel : +39 011 447 5325
E-mail : [email protected]
Geneva area (Registered Office)
InAlliance S.A.S.,
7 Chemin de Moruel,
74200 Marin, France
E-mail : [email protected]
London
InAlliance Consulting,
C/O Dr Deepak Singh
32 Woodsyre, Sydenham Hill,
London, SE26 6SS, United Kingdom
Tel : +44 794 9255476
Email: [email protected]
Chennai (India Head Office)
InAlliance Consulting,
C/O Mr P.N. Subramanian
A1/3 Century Enclave,
54 Kalakshetra Rd, Tiruvanmiyur,
Chennai – 600 041, India
Tel : +91 9380514778
E-mail : [email protected]
New Delhi
InAlliance Consulting,
C/O Mr Girish Kathuria
749/B, Sector 49
Faridabad – 121 001, India
Tel : +91 9560823311
E-mail : [email protected]
www.inalliance.eu
InAlliance Consulting, Indian market entry specialists