By

Deepti GogawaleChintan ShahSushma JadhavRaji Nair

Entry into INDIA……… A lesson in GLOBALIZATION.

Words Of Welcome To President Of the multi-billion Cola Company

New York office -1988

“ I learned that you are coming here. I am the one that threw Coca-Cola out, and we are soon going to come back into the government. If you come into the country, you have to remember that the same fate awaits for you as Coca-Cola”

George Fernandes, General Secretary Janata Dal Year 1988

Issues To consider

• Political environment• Intent of development of local players only• Opposition to promotion of carbonated drinks• Fear of invasion of foreign brand

• Legal environment• Severe restrictions in equity through FERA• Dispute in relation to ownership of Pepsi brand name( foreign name

not allowed)

• Economic environment• Closed and Forex starved economy• Cold drink industry in nascent stage

• Socio cultural environment• Fear of invasion of MNC culture• Fear of impact on Health/diet

Pepsi Pull Towards Indian Market

• The thirst for globalisation made Pepsi to venture in India, It’s vast population was an attractive proposition .

• The huge consumer base of 850 million in India can never be ignored, in spite of all the odds.

• Pepsi Co was also encouraged by the fact that increasing urbanization had already familiarized the Indians with leading global brands.

• Due to the fate of Coke in India the market entry had to be prepared carefully.

Pre-Establishment(First Attempt)First Attempt To Foster introduction and Development of PepsiCo produces In

India-May 1985

• PepsiCo teamed up with Agro Product Export Ltd., a company owned by R. P. Goenka.

• Objectives put forward to sought permission from the central government

• to promote the development and export of Indian made and agro-based product

• to import cola concentrate and to sell a PepsiCo brand soft drink in the Indian market

• But the Proposal rejected on the grounds that the import of concentrate could not be agreed to and the use of foreign brand names was not allowed

• RPG group then ended at this juncture.

The” Punjab Card”Second Attempt With Stress More on Diversification of Punjab agriculture

and employment generation rather than on soft drinks-May 1986

• Proposal:– 'Green Revolution' in Punjab which would end stagnation in

Punjab's rural sector and would help in promoting small and middle farmers.

• Argument:– This project will create ample employment opportunities for the

unemployed youth who has taken the path of terrorism and thereby will help in restoration of peace in Punjab

• Outcome:– Argument very well received in the political circles in Delhi and

Punjab which finally led to PepsiCo's* entry into India in the form of a joint venture with PAIC* and Voltas* as its partners

Terms and Conditions leading To establishment of Pepsi in India

-September 1988

• The project will create employment for 50000 people nationally, including 25000 jobs in Punjab alone.

• 74 percent of the total investment will be in food and agro-processing. Manufacturing of soft drinks will be limited to only 25 percent.

• PepsiCo will bring advanced technology in food processing and provide thrust by marketing Indian products abroad.

• State of the art technology would be provided in the fields of food processing and soft drink manufacturing at no foreign exchange outflow.

• 50 percent of the total value of production will be exported.

Terms and Conditions leading To establishment of Pepsi in India

-September 1988

• An agro-research centre will be established by PepsiCo in consultation with ICAR and PAU;

• No foreign brand name will be used for domestic sales;

• The export-import ratio will be 5:1 over 10 years, which means that for every dollar spends in foreign exchange on this project, the company will ensure an export earning of 5 dollars for 10 years;

• 25 percent of the total fruits and vegetable crops in Punjab will be processed in the project;

• A substantial increase in government revenue due to consumer market expansion and tax collection.

Finally Pepsi Entered IndiaGovt. Was Quite impressed with T&C Proposed in the Second Attempt.

In 1988 Finally The Entry was Cleared by the Govt.

JV – PAIC (Punjab Agro Ind. Corp.) & Voltas India Ltd. (TATA)

JV Stake PEPSI – 36.89, Voltas –36.11% & PAIC – 24%

In 1989 Launched the Soft Drinks with Great Fanfare & Multi-Media advertising Campaign.

Comment Of Marketing Expert on success of PepsiCo’s effort

-Philip Kotler

• Some Years later renowned expert commented on how effectively PepsiCo used mega marketing to enter the Indian market.

• Pepsi bundled a set of benefits that won the support of various interest groups in India.

1)Instead of relying on the normal four Ps added two Ps – Politics & Public Opinion.2)Committing towards developing Rural economy & Bringing Technologies for Food Processing & water treatment.

• Turned a lot of Votes in Pepsi Cos favour.

Pepsi’s Promises-Keep some Break some

• Pepsi began by setting up a fruit and vegetable processing plant at Zahura village in Punjab's Hoshiarpur district.

• Focus on processing tomatoes to make tomato paste. Local varieties of tomatoes were found to be of inferior quality.

• Imported the required material for tomato cultivation. Agreements with a few big farmers and began to grow tomatoes through the contract farming.

• The agro-climatic profile of Punjab was not exactly suitable for a crop like tomato.

• Pepsi had chosen the state because farmers were progressive, landholdings were on the larger side, & water availability was sufficient.

• Experts from the US had to interact extensively with the farmers to explain how they could benefit from working with the company.

• On payments by cheque , company found out that 80% of the farmers did not even have a bank account.

Comments of Critics made on Pepsi Co

• At the end of 1990 due to the Zahura non operational plant the local farmers had to bear a combined loss of Rs 2.5 million.

• Pepsi paid the farmers only Rs 0.75per kg of tomatoes,when the market price was Rs 2.00 per kg.

• Pepsi’s detractors also alleged that the company had selected only big farmers, deliberately neglecting the small and medium farmers.

• Failing to Create Jobs, Promised for 50000 Jobs but by 1991 -783 Employed, 1992 – 909, & By 1996 – 2400 people as Direct Employees.

• Pepsi Claimed that it Employed 26000 through Indirect Employment . The company even included the small vendors selling soft drinks in it.

Promises Broken By Pepsi

• It had major holding in Futura Polymers Ltd. Recycling plastic – a capital intensive firm(this company was reported to be working towards replacing many workers with machines).This attempt of reducing the workforce seemed to go against the company’s commitment’s to create job.

• The use of name “Lehar Pepsi” also attracted much controversy.• Pepsi also failed to adhere its commitment to export 50% of its

production.• To overcome its commitment it started exporting tea, rice, shrimps,

glass bottles, leather products , and champagne .• There was even a show cause notice to Pepsi company by Ministry

of Commerce , as they did not adhere to its commitments to which company paid no attention.

• Luckily for Pepsi, it did not have to face criticism for long

India Liberalizes - A Boon For Pepsi• In the early 1990s, the Government of India was facing a

foreign exchange crisis.

• Organizations like the International Monetary Fund agreed to help the government.

• Condition that it liberalized the Indian economy ,as a result government decided to liberalize the economy.

• The two most prominent features of government new economic policy were:

• 1)The removal of the numerous restrictions on foreign trade

• 2)The increased role of private equity in the Indian markets.

• By these changes in the economy Pepsi was Benefited, as

• Government removed the restrictions that bound Pepsi’s investment in the soft drink business to 25% of the overall investments and required it to export 50% of its production

Change In economy- A Boon For Pepsi

• In 1994,It bought off its partners in the venture , while Voltas sold of its stake completely ,PAIC’s stake was reduced to less than 1%,This made the company establish a wholly-owned subsidiary , PepsiCo Holdings India Pvt .Ltd(PHI).

• PHI was completely devoted to the soft drinks business.• Under the new policy foreign names were allowed so the company

changed its cola name from Lehar Pepsi To Pepsi.• Company sold of its tomato plant to the Indian FMCG major , the

Unilever subsidiary , Hindustan Lever Ltd.(HLL).• The only commitment Pepsi maintained was the contract farming of

tomatoes over 3500 acres of land.HLL used the bulk of the tomato paste produced by the plant for its tomato ketchup and the rest was handed over to Pepsi for export.

• 1995 – Beverages business grew by as much as 50%• 1996 – PHI – Pepsis turnover by Rs. 1.25 Billion, 1.5% Fruit &

Vegetable Exports & 67% Plastic Exports• 1997 – The Agro Research Centre promised by the Company was

nowhere in sight.

Pepsi Goes Farming-Finally

• Though Pepsi attracted a lot of criticism, many people felt there was a positive side to the company’s entry into India.

• Pepsi’s tomato farming project shot up India’s tomato production from 4.25mn tonnes in ’91-92 to 5.44mn tonnes in ’95-96.

• Punjab’s overall tomato productivity went up from 28,000 tonnes to 250,000 tonnes and per hectare from 16 tonnes to 50 tonnes.

• The company offer its contract farmers, free of cost, some advanced equipments such as transplanters and seedling machines.

• It also set up agriculture research centres in Jallowal and Chano (Punjab) and Nelamangala(Karnataka).

• Though “Pepsi Agri Backward Integration Programme” the company encouraged Punjab farmers to cultivate potatoes with low sugar content.

AFTER ALL PEPSI WASN’T THAT BAD PEPSI’S ENTRY-INDIAN BENEFITS

• It extended it contracts farming initiatives to groundnuts in the year 2000.

• The project initiated in Punjab and then in Gujarat.

• By using improved technology from China, the per hectare yield improve from 1tonne to 3.5- 4.5tonnes.

• Pepsi invested additional Rs.3.75bn in spread over 3 years (2000-2002) in Karnataka over and above the existing investment of Rs.1.4bn.

• Since its entry to India company already invested Rs.18bn by the year 2000.

• 8000 people were working for the Company

DOING BUSINESS ON ITS OWN TERMS

• In 2000 Pepsi’s export added up to Rs. 3bn.• It included processed foods, basmati rice, guar gums and even soft

drink concentrate.• Even by 2000 it could procure only 3,000 tonnes of potatoes p.a. as

against its requirement of 25,000 tonnes.• In 2002, company entered into various contract farming deals.• It joined hands with Punjab Agri Export Corporation to process

citrus fruits for its Tropicana project in August 2002.• The company also initiated, first of its kind, organized and

commercial seaweed farming in Tamilnadu.• By 2003, Pepsi’s soft drinks, snacks, fruit juices and mineral water

business had established themselves firmly in India.• For Million of Indians Pepsi had Become a part of their lives.

Question-1.1 Why do Companies like Pepsi need to Globalize?

• Expand Sales- Increase the market for their production by tapping potential new countries.

• Minimize Risks- Globalization and International trade also helps in minimizing risks.

• To leverage on technology.

• To increase production efficiencies.

• For diversification so as to reduce risks.

• To counter foreign investments by competitors.

• Minimize Costs and optimal resource utilization- By shifting operations in areas with cheaper labour and resources.

Question 1.2- What are the various ways in which Foreign Companies can enter a Foreign Market?

• Companies can enter foreign markets through the following ways:

• Export – Direct & Indirect*

• JV - Joint Ventures* Mergers and Acquisitions*

• Licensing, Franchising* Strategic Alliances

• Management Contracts*

• Contract Manufacturing*

• FDI – Foreign Direct Investments*

Question1.3- What hurdles and problems did Pepsi face when it tried to enter India during the 1980s

• India being a closed economy till 1991, there was high level of intervention by the government in the corporate sector.

• Low awareness, demand and consumption for soft drinks. The per capita consumption was only 3 per annum.

• Foreign brand name could not be used.• Lack of liberalization 100% FDI was allowed.• Sensitive political and social problems in the country

like terrorism.• Cola concentrate – the major ingredient to make Pepsi

soft drink could not be imported.• Agriculture sector was the priority

Question-2.1-Critically analyze the strategy adopted by Pepsi to sell itself to the Indian Government.?

• Promoting and developing the export of Indian Agro-based products, though it got rejected.

• Each cola import would be in return of exporting juice concentrate from Punjab.

• Development and Welfare of State.

• Bringing about Agriculture Revolution in state. Creating Employments.

• Terrorists to return to society.

• Punjab boasted a healthy agricultural sector

.2.2 Do you think the biggest Factor Responsible for the acceptance of its proposal by the Regulatory

Authorities was its Projection of its Operations as the solution to many of Punjab’s Problems? Why/Why Not?

• Yes,

• Most of the commitments were related with Punjab therefore it is the biggest factor responsible for acceptance of Pepsi.

Strategy Adopted by Pepsi

• Development of Areas it planned to operate in.

• Directing major (75%) investment towards agricultural sector.

• Focusing on food and Agro-processing.

• Boosting the image of Indian products in foreign market.

• Establishing Agricultural Research Centre.

• More emphasis on Exports than imports to improvise the balance of payment.

Question-3.1- How did the Company react to the changes in the Business Environment after the Liberalization of the Indian Economy in

the early 1990s?

• It bought off its partners in the venture the company establish a wholly-owned subsidiary , PepsiCo Holdings India Pvt .Ltd(PHI).

• PHI was completely devoted to the soft drinks business.

• The company changed its cola name from Lehar Pepsi To Pepsi.

• The only commitment Pepsi maintained was the contract farming

• 1995 – Beverages business grew by as much as 50%

• 1996 – PHI – Pepsis turnover - Rs. 1.25 Billion, 1.5% Fruit & Vegetable Exports & 67% Plastic Exports

• 1997 – The Agro Research Centre promised by the Company was nowhere in sight.

3.2 Critically comment on the allegation that Pepsi deliberately did not adhere to most of its commitments

• After Liberalization :

• In 1994, it bought off its partner in venture i.e. Voltas and PAIC.

• Establishing wholly owned subsidiary PepsiCo Holding India Pvt. Ltd.

• Changed name from “Lehar Pepsi” to “Pepsi”.

• Sold off its Tomato Paste Plant in 1995.

• Gradually extended the contract farming.

• Plastic Exports were 67%.

• Till 1997, the agro research centre was no where.

Allegation

• Failing to create jobs.• 50% of employee working for Concentrate and Bottling

Business not for Food processing Business.• Pepsi with Futura Polymers Ltd. were reducing the

workforce and more machine oriented.• More lasting impression of “Pepsi” and “Lehar Pepsi”.• Pepsi failed to adhere its commitment to export 50% of its

production . To overcome its commitment it started exporting tea, rice, shrimps, glass bottles, leather products , and champagne .

• Products exported were same which use to happen earlier.• Pepsi paid the farmers only Rs 0.75per kg of tomatoes ,

when the market price was Rs 2.00 per kg

Questions . . ?4.1 Examine the Contract Farming initiatives undertaken by Pepsi in India and Explain the rationale for such initiative from the

Company’s Perspective.

• Increase in Tomato crop production

• Providing High yield seeds to increase the productivity in the tomato cultivation

• Offered advanced equipments (Free of cost) to increase the speed & efficiency

• Imported the required material for tomato cultivation.

contd

– Other rationale behind the contract farming was to increase their own business rather than any social welfare.

– Taken initiative for• Chilly farming

• Groundnuts production over paddy production

• Rice production

• Fruits & Vegetable Farming

– Encouraging farmers to cultivate potato with low sugar content for chips.

4.2Why is it important for Multinational Corporations to Work towards the Improvement of the Economy of the Countries in

which they Operate? What are the other various ways in which this can be done?

• MNCs import large amounts of capital in order to pay for their new business investments; factories, offices .

• Generally, MNCs set up new businesses which need new workers and so employment is improved; jobs are created. However, it depends on the skills match between the new jobs and the local employment market.

contd

• PepsiCo seek to produce healthy financial rewards to investors as they provide opportunities for growth and enrichment to their employees, our business partnersand the communities in which we operate.

• One of the largest multinational investors in the country, PepsiCo has established a business which aims to serve the long term dynamic needs of consumers in India.