ia intro feder_manager_fr_v12

© InAlliance Consulting – All rights reserved

India: Now, tomorrow or never ? Turin, 12th April 2012

1 FederManager - 2012 - Seminar 1


Agenda Page


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

2 3 4 5 1


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


2 3 4 5 1


However, besides the obvious opportunities, India also presents challenges that require a differentiated approach


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



USA

China

0

20

40

60

80Power Distance

Individualism



Germany

Italy


2 3 4 5 1

3000 km

3000 k

m

3000 km


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


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


2 3 4 5 1


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


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


2 3 4 5 1


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


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


2 3 4 5 1


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


-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


2 3 4 5 1


New Delhi

Indian agricultural crops depend heavily on the yearly monsoon for water and suitable temperatures


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


2 3 4 5 1


Agenda Page






5. Case studies




2 3 4 5 1


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


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)


2 3 4 5 1


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


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


2 3 4 5 1


Motivated by external trade growth, India has continuously reduced import duties in the past decade, especially on industry consumables and production equipment


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


2 3 4 5 1


As a result, the competitive disadvantage on imported products has reduced significantly and does not always justify on its own a production localization


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)


2 3 4 5 1


Agenda Page






5. Case studies




2 3 4 5 1


While attractive at first sight, a decision to start manufacturing in India must fit company strategy and be preceded by extensive research


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 ?


2 3 4 5 1


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


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 ?


2 3 4 5 1


India’s high attrition across its entire industry presents businesses with specific overheads and HR strategy issues


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 ?


2 3 4 5 1


The ease of communicating in English in India plays in favour of India as an outsourcing destination but is often greatly over-estimated


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%


2 3 4 5 1

Italy: 17m

India: 125m


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


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


2 3 4 5 1


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


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


2 3 4 5 1


State intervention has decreased substantially since liberalization in 1991 but still limits or bars foreign – or even private – direct investment in some sectors


- 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


2 3 4 5 1


Agenda Page






5. Case studies




2 3 4 5 1


Indian culture considers several foundation concepts very differently from Western culture, causing many misunderstandings and possible goal misalignments in cross-border projects


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


2 3 4 5 1


Although castes are outlawed by constitution, they still structure much of Indian society, explain fatalism, and impact human resources management


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


2 3 4 5 1


Private or public, large or small, Indian companies model their corporate hierarchy on Indian society’s stratification


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


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



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


2 3 4 5 1


Agenda Page






5. Case studies




2 3 4 5 1


Socio-economic fundamentals point to a sustained demand for motor vehicles


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


2 3 4 5 1


Fast growing sales of motor vehicles remain dominated by 2-wheeler sales, but this is about to change


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


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


Total vehicle sales trends

CAGR: +10,3%


2 3 4 5 1


Competitive structure in car manufacturing remains highly consolidated, leaving little room to European manufacturers


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


2 3 4 5 1


Possible entry strategies vary greatly in scope, risk and returns and must therefore be closely evaluated beforehand


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


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


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


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


Agenda Page






5. Case studies




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The Indian beer market is highly consolidated but growing fast


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


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


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


Peninsular Zone (PZ)

Water stress and pests challenges

3 t/ha average wheat yield

North-Eastern Plains Zone (NEPZ)

Weed and pests challenges


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


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


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


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


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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