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Much more thanmerely dollars

Commercial ties between India and the United States have witnessed many peaks and troughs, over the decades. Now there isa growing maturity, and a sense of pragmatism, on both sides.Parthasarathi Swami surveys the emerging landscape.

Thirty years ago, India did not existon the average American's radarscreen. Sure, they knew aboutthe country -- a distant land of

snake charmers and naked fakirs. But theonly time one came across it in the mediawas in TV ads that exhorted: "Don't waste

food. There are millions starving in India."The country was regarded as a basketcase. Some economists even said that thestarving millions should be left to starve;the international community should con-centrate its aid efforts in places more sal-vageable.

Today, India is very much top of mind.Some of it may be for the wrong reasons;the outsourcing controversy has been thesubject of much media hype. "It's not true,but every US programmer seems to feelthat his own job is threatened," says US-based CEO of Hexaware, Rusi Brij.

SHIFTING GEARS TO QUADRUPLE AMERICAN INVESTMENTS IN INDIA: US Ambassador David Mulford with General Motors India’sPresident Aditya Vij at a rally celebrating the return of the Chevrolet badge to India

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around its neck. But, while the world isgraying, India is getting younger. The coun-try will add 335 million workers in the next30 years, more than the total working pop-ulations of the European Union and the UScombined. The solution to the comingscarcity, suggests global human resourcesconsulting firm Watson Wyatt in a jointreport with the World Economic Forum, is"to boost immigration to, and the outflowof investment capital from, ageing soci-eties".

If you want something that's less crystal-ball gazing, here's a media audit last year

by R&PMC:Edelman. (R&PMC is an Indianreputation management company, whileEdelman is the world's largest independentpublic relations firm.) According to the sur-vey, while China currently enjoys fourtimes India's 'share of voice' in the USmedia, the latter is perceived as havingstronger prospects in a five-year-plus time-frame.

Barring the people who want to create arumpus about business process outsourc-ing (BPO), offshoring and job losses, themen and women who matter in the US are

all gung-ho about commercial ties withIndia. Even as some US states were enact-ing laws to prevent government contractsfrom going to India -- which resulted in apiquant situation as the US companies thatwon the bids in turn subcontracted them toIndian outfits-- Corporate America was giv-ing it the thumbs up. According to aPricewaterhouseCoopers Global TopDecision-makers study, the large majorityof MNC chief executives are all for BPO. Itincreases efficiency and productivity, theysay. It reduces costs. The bottomline is

that if you don't do it while your competi-tors do, they'll have your business forlunch.

It's not just keeping up with theJoneses. A study by the McKinsey GlobalInstitute shows that offshoring createswealth for the US as well as for India. Forevery dollar of corporate spending out-sourced to India, the US economy capturesmore than three-quarters of the benefit andgains as much as $1.14 in return. Far frombeing a zero-sum game, offshoring createsmutual economic benefits.

The view from America then is that,once you cut the cackle, Indo-US commer-cial ties are headed for the stratosphere. InIndia, there is a Left fringe that is yet tooutgrow the Cold War days when everyAmerican was a running dog of capitalism.But otherwise, there is support across theboard.

"Indo-US commercial ties are gettingstronger with every passing year," saysTata Consultancy Services CEO and man-aging director S. Ramadorai. "As India hasliberalised, the scope of partnership withthe US in the commercial and businessarena has only increased and existing rela-

1892

2323

2742 31

09 3392

3788 41

33

0

500

1000

1500

2000

2500

3000

3500

4000

4500

1998 1999 2000 2001 2002 2003 2004

Cumulative Foreign DirectInvestment from US

$ m

illio

n

PLACING IT WITHIN AN ARM’S LENGTH OF DESIRE: The softdrink major Coca-cola is the largest US investor in India

Source: CII

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China is already supping at the hightable with the world powers. India is goingto get there soon, invited or not. Accordingto a now famous report by GoldmanSachs, the BRIC countries (Brazil, Russia,India and China) will overtake the G6 indollar terms in less than 40 years. "India'seconomy could be larger than all but theUS and China in 30 years," says the report.Of the four countries considered, India hasthe highest growth potential.

Afollow up to the Goldman Sachs'report — titled BRIC II — says that

these economies currently account for just3.5 per cent of the global capital markets.By 2020, they could account for anythingbetween 10 and 17 per cent. India has theoldest and the most bustling stockmarketof all these countries. The foreign institu-tional investor (FII) inflows, which arelargely confined to the equities market, is adrop in the ocean of the $4 trillion marketcapitalisation these markets are expectedto collectively reach.

Consider another metric. India's hugepopulation was considered an albatross

8237

3564

9071

3688

1068

6

3663

9737

3757

1181

8

4101

1305

3

4986

1556

2

6095

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

Exports to US Imports from US

1998 1999 2000 2001 2002 2003 2004

India-US Trade

$ m

illio

n

Source: US Department of Commerce*Values for exports to US are customs-based value of US imports from India

AN ADAPTIVE STRATEGY: McDonald’s in India is the only country in the world in which the fast food-chain does not serve beef

*

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report, FDI inflows into India have risensince the nineties, but remain low com-pared to other emerging markets. Whilemuch else needs to be done, the IMF givesfour recommendations: decrease the mar-ginal corporate tax rate to that of China(this would increase FDI by one percentagepoint of GDP), increase trade openness toChina's level (0.6 points), improve regulato-ry quality to the level of Thailand (1 point),halve the number of days to start a busi-ness (0.7 points) and halve the years toresolve insolvency (1.4 points). For therecord, FDI inflows into India were $3.5 bil-lion in calendar 2004 against China's $61billion.

US Ambassador to India David Mulfordsays that FDI from US companies in

India has been small until now - an aggre-gate of $45 billion. At a meet the press pro-gramme in Thiruvananthapuram, he saidthat the Indian government wanted thisquadrupled. Not impossible. According toMulford, there are already 1,400 US com-panies registered in India. But more sectors-- retail, for instance - need to be opened upto FDI. And issues such as Dabhol (anEnron power plant that has been lying inac-tive for years because of disagreement overpricing) have to be resolved. "You need toraise the confidence level of US compa-nies," says an analyst.

US companies too need to realise someground realities. "Companies attracted tothe country's potential must do more thanmerely transplant products and systemsthat have succeeded elsewhere," says aMcKinsey report. The successes likeMcDonald's have been adaptive; India isthe only country in the world where thefast-food chain doesn't have beef on themenu.

On the other side are the Kelloggs andthe Nikes. The first assumed it couldchange food habits overnight. (Though whyit did so is a surprise, considering that ittook 13 years to establish itself in Mexico.)

Nike thought Indians would swoon over itsMichael Jordan ads, when rival Reebokopted for established cricketers. "But onthe whole, US companies in India have hada good ride if you overlook the ones thatfell flat because of their own mistakenassumptions," says Chakraborty of Enam.

The early birds had more than their fairshare of hurdles. Pepsi spent more timebattling bureaucracy than its rivals in themarketplace. The DuPont project nearlydidn't take off. But perseverance paid off.Pepsi revolutionised tomato farming in thePunjab in the mid-nineties and is now doingthe same for citrus plantation in the coun-

Diamonds & Precious stones

29.5%

Iron & Steel 4.16%

Textiles 25%

Organic chemicals 3.25%

Inorganic chemicals 3.24%

Others 34.85%

Major export items from India

Engineering goods& machinery

including electricals34%

Precious stones

& metals 9.65%

Organic chemicals

8%

Optical Instrumentsand equipment 7.5%

Aviation &

aircra

ft 6.58%

Others 34.27%

Major import items from US

A LARGE POPULATION HAS TRANSLATED INTO AN ALLURING MARKET: Companies cannot merely transplant products and systems

Source: Embassy of India, Washington DC Source: Embassy of India, Washington DC

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tionships have become deeper. Going for-ward, Indo-US relationships will continue toexpand into a true global partnership." TCSis India's largest company in the softwareand services sector and gets 60 per cent ofits revenues from the US market. "The USis likely to remain our single largest marketfor the foreseeable future," addsRamadorai.

TCS is a homegrown company.Microsoft is not. But Ravi Venkatesan,chairman of Microsoft India, speaks in the

same voice. "Indo-US ties have strength-ened post-liberalisation with companies likeIBM and Coke moving back into India andMicrosoft setting up office in the earlynineties," he says. "The 1998 Pokhranepisode (the five nuclear tests in theRajasthan desert) again restricted Indo-UStrade and commerce with a large number ofIndian companies being assigned to the USDepartment of Commerce Entity List andIndian companies being wary of relying onUS suppliers. This severely impacted theareas of hitech trade and e-commerce. Nowwith the hitech trade dialogue having start-ed again, commerce and trade will see anupswing, especially in areas of high speedcomputing and other IT areas which wereconsidered sensitive."

Problem areas will remain, of course.Doyen of Indian business, Rahul Bajaj, saysthe key ones are intellectual property rightsand US agricultural subsidies. But that toowill get sorted out. "Indo-US ties are notrooted just in commerce but in the sharedideals of democracy and human progress.They are deepened and sustained by thetwo-million-strong Indo-American commu-

nity," says he. "The past 15 years haveseen a significant improvement in Indo-UScommercial ties. Merchandise trade hastripled. Trade in services is set to matchtrade in goods. US companies are practical-ly the largest source of foreign directinvestment into India. But we have barelyscratched the surface."

Very true. India is still not among thetop 25 US trade partners. Foreign institu-tional investments in debt and equities (FII)inflows have crossed the $3 billion mark inthe first two months of 2005. This comeson the heels of $8.5 billion in 2004 and$6.4 billion in 2003. That's big money byIndian standards. But a couple of monthsinto 2005, tiny Taiwan has attracted $4.2billion. "We have to see things from theproper perspective," says NandanChakraborty, head of research at EnamSecurities.

When it comes to foreign direct invest-ment (FDI), or investment in industry,

the numbers are improving. But there is stilla long way to go. According to a recentlypublished International Monetary Fund

GLOBALISATION is never a one-waystreet. Just as US companies are arrivingin droves in India, Indian majors are alsotaking their first tentative steps abroad.Earlier, it was largely restricted to settingup a low-cost front office - a marketingoutfit. Now, manufacturing facilities arealso on the menu.The US market is both the easiest andthe toughest. As the Chinese havedemonstrated, prices matter; the coun-try's cheap exports have captured largeswathes of US sectors such as textilesand consumer goods. But setting up basein the country or establishing an Indianbrand in the US is a different kettle offish altogether.A paucity of foreign exchange all theseyears was a major handicap. It didn'thelp too that the international marketswere not particularly enthused by Indianpaper - the prime currency for takeovers.How things have changed. The country'sforeign currency reserves are now touch-ing $140 billion. And Indian companies

quoted on the New York Stock Exchangeor Nasdaq are commanding a premiumover the price on the Bombay StockExchange.But the US market is no cakewalk. ManyIndian companies with global ambitionsare therefore taking their first takeoversteps in easier territory. To cite just afew examples, Infosys took over ExpertInformation Systems of Australia, EsselPackaging snapped up Propak ofSwitzerland to become the world'slargest producer of laminated tubes, andthe State Bank of India has acquired theIndian Ocean International Bank inMauritius and is eyeing other buyouts inAsia and Africa."The State Bank of India has mostly beenan inward looking organisation," sayschairman A.K. Purwar. "Locally, we havegrown from 400 branches in 1955 toalmost 14,000 branches in 2005.Globally, we have hardly grown — wehave 54 offices spread over 38 coun-tries. As the largest bank in the country,

it is befitting for us to have some globalambitions and a global presence. We arenew to this area; we have never acquiredbanks overseas. So, to begin with, wewould like to acquire some small banks;gain some experience; and even burn ourfingers, if need be."If SBI is seeing the writing on the walltoday, others recognised it much earlier.Tata Group chief Ratan Tata told a mag-azine in 2000: "We have not focusedadequately on growing overseas. Part of[the reason] was due to foreign exchangerestrictions. Now that these restrictionshave been eased extensively, we shouldbe looking at growing overseas in a seri-ous manner. By growing overseas, Idon't mean just exporting our productsbut looking at acquisitions, alliances andthings of this nature."All that has begun happening. Indian indus-try has already acquired its passport, per-mission from the Indian government, andvisa, the US welcome. It is now decidingon the best flight to catch.

The two-way traffic in takeovers

Utilities19.4%

DepositoryInstitutions

15.3%

Manufacturing38.3%

WholesaleTrade7.7%

OtherIndustries

15.2%

Professional &Scientific services4.1%

Sector break-up ofUS investments in India

Source: US Department of Commerce

INDO-US REPORTINDO-US REPORT

try. DuPont is planning to make India theknowledge hub for the Asia-Pacific region.And IBM, which walked out of the countryin the seventies because the governmentinsisted that it find local equity partners, isconstantly emphasising its commitment toIndia. "India matters a lot these days," says

Nicholas Negroponte, chairman andfounder of the MIT Media Lab.

Actually, Negroponte has reason to beuncharitable. His Media Lab venture withthe Indian government was abruptly termi-nated. But he's optimistic instead.

Different industry sectors have differenthurdles. But they can all be looked

upon as either threat or opportunity. Takethe pharma sector, expected to be impact-ed by changes in the Indian Patents Act.But Habil Khorakiwala, chairman of pharmamajor Wockhardt, looks at another side ofthe picture. "India has over 60 pharmaceu-tical manufacturing plants that areapproved by the US FDA -- the largestnumber outside the US," he says. "Indiaaccounts for the largest number of DMF(drug master files — for active pharmaceu-tical ingredients) and ANDA (abbreviatednew drug applications — for formulations)filed with the US FDA. In a few years fromnow, you will see the full impact of India'sgrowing competitiveness in the US mar-ket." It's a view echoed by many others inIndia.

In the US, the fakir-in-loincloth imagehas given way to Asok — the Dilbert comicstrip character whose brain works so fastthat that he can heat a cup of tea by hold-ing it to his forehead. He's a product of oneof the Indian Institutes of Technology(IITs). Asok is also socially dumb and vic-timised by his management and other

employees. But he has come a long way."IT and IIT have changed the image ofIndia," says Pavan Nigam, a Silicon Valleyserial entrepreneur and a product of IITKanpur.

In India too, attitudes have changed. Ina recent 21-nation BBC poll, India was theonly country (apart from the Philippines andPoland) to view Bush's re-election positive-ly. Some 62 per cent gave him the thumbsup, against a rejection by 75 per cent inFrance and 77 per cent in Germany. Bushis likely to come to India on a state visit;the groundwork has already been done byhis Secretary of State Condoleezza Rice.She is perceived as a friend of India, as isBush.

On the Indian side, the greying old menof the ruling Congress Party, who wereonce US-baiters, one and all, seem tohave shed some of their suspicions. TheLeft, which backs the government at theCentre, may make their customary noises.But in the state of West Bengal, whichthey have ruled for nearly three decades,they are rolling out the red carpet for USinvestors. Sums up Rahul Bajaj: "I think amomentum has been created for largerIndo-US commercial ties which can only grow."

MNCs WITH CAPTIVE UNITS IN THEITeS-BPO INDUSTRY

Banking, Financial Services andInsuranceFidelity, JP Morgan, Bank of America,American Express, HSBC, StandardChartered Bank, ABN AMRO,Goldman Sachs, Prudential, MorganStanley, Deutsche Bank, Lloyds TSB,Capital One, Axa, Winterthur, LehmanBrothers.

Professional ServicesMcKinsey & Co, Deloitte Consulting,Accenture, Bain & Co, Ernst & Young,Reuters, Frost & Sullivan.

Technology and TelecomHewlett-Packard, IBM, EDS, Dell,Samsung, Honeywell.

Automotive and HeavyMachineryGeneral Motors, Hyundai, Ford,DaimlerChrysler, Caterpillar, Bechtel.

Pharmaceuticals/BiotechnologyAnd HealthcareVision HealthSource (Perot Systems),Eli Lilly, AstraZeneca, Pfizer.

OthersAOL, Tesco.The above list is not exhaustive and is indicative ofthe key companies sourcing non-IT functions fromtheir captive units located in India.

Source: Nasscom

The big boysin BPO

Top US investors in India Company Industry Investments approved *

Coca-Cola Food Products 694.10

Mission Energy Power 358.49

Fluor Damiel Inc. Power 317.65

CMS Generation Power 301.72

Ford Motor Company Passenger Cars 275.00

Hughes Electronics Cellular Mobile / 254.77Basic Telephone Service

Public Power International Power 207.42

Soros Fund Management Power 195.15

Panda Energy Power 165.88

* $ million Source: Embassy of India, Washington DC

On the WebIndia Brand Equity Foundation:www.ibef.orgConfederation of Indian Industry:www.ciionline.orgEmbassy of India, Washington DC:www.indianembassy.org

US Department of Commerce:www.commerce.gov

Essel Propak America is expandingits plant at Danville (Virginia). It haddecided to start operations there inJuly 2002.Videsh Sanchar Nigam Ltd, a TataGroup company, has bought TycoGlobal Network for $130 million.Reliance Infocomm has acquiredFlag International, a major internationaltelecom network, for $211 million.NIIT has acquired Osprey Systems Incand Clicktolearn in the US for $6 million.Ranbaxy Laboratories bought OhmLaboratories in the US and is planningto bid for the branded pharmaceuticalsbusiness of the US-based AndrxCorporation.Mahindra Group has picked up amajority stake in California-basedtechnology consulting and servicesfirm Bristlecone.Wipro has acquired US-based consult-ing company Nerve Wire for $18.7million.Source: India Now compilation

Back in the USA

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