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Ten Tips from Successful European Companies in India

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Executive Summary

The Indian market is essential for European Union (EU) companies• Large and growing domestic market; increasing purchasing power and consumerism.• Provides opportunities for competitive advantage (low cost sourcing of products and services; exceptional

quality; intellectual skills; etc).

EU companies are already taking advantage of India• The EU is one of India’s largest sources of FDI and trade.• EU companies comprise 50% of all Multi National Corporations (MNCs) in India.• Many see India as key to their long-term global growth and competitive advantage.

Investments in India are yielding returns• Companies have begun to capture local market opportunities (especially in niches).• Many are also sourcing from India (resulting in lower costs and higher productivity).• Some are even more successful than their global operations.

But the road hasn’t been easy, and companies faced several challenges• Bureaucratic hurdles and government processes resulting in a difficult operating environment.• Low average disposable income, a highly dispersed population and distinct tastes from the rest of the world.• Weak infrastructure in terms of roads, power, telecom, and port facilities.

To guide your company, this report presents 10 factors that companies have used to become successful in India.These have been identified based on benchmarking successful EU MNCs operating in India

• Success factors fall under three categories:A. Commitment at the global level; provide global support and technology;B. Empowered local management; develop local team autonomy and capability;C. Localized Product/Market Business Models: create customized products and services in response to the

unique environment in India.• Most companies have implemented the majority of the success factors, and not just one or two.

Successful companies differ from less successful players in their ability to rapidly adapt their businessmodels for India• Most companies recognize the need for local adaptation.• However, implementation is more difficult than it seems – it requires a deep customer understanding and

building scale in India while managing complexity.• Three key areas require adaptation (in additional to several others) – a strong product value proposition,

“smart” localization of manufacturing, and robust supply chains.

Successful companies view India as a long-term play, not a short-term turn• Success in India did not happen overnight.• Success requires commitment, management drive, and focus on long-term objectives for India in the global

portfolio.


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Table of Contents

Setting the context: The India Opportunity 1

Benchmarking Objectives and Methodology 4

Ten Tips for Success in India: A Framework 7

Section A: Commitment at the Global Level 8

Section B: Empowered Local Management 11

Section C: Localized Product/ Market Business Models 16

Appendix: Benchmarked Company Snapshots 21


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Setting the context: The India opportunity

India presents a remarkable business opportunity by virtue of its sheer size and growth• The Indian economy is now ranked 12th in the world in terms of GDP and is the fastest growing after China1.• India is expected to continue along the same trajectory, with consistent growth rates of between 4-7% as

exhibited over the last 2 decades.• This will position it as the 8th largest economy in the world over the course of the next 20 years, with a larger

GDP than that of Italy, France or Germany by the year 2025.2

A. The domestic market opportunityIndia’s vast population is increasing its purchasing power• While ~50% of the population was classified in the low-income bracket3 in 1994-5, this proportion is rapidly

declining, and is expected to account for only 17.8% of the population by 2006-7.• At the same time, there is a rapid shift from the low-middle classes to the burgeoning middle class, and an

even faster increase in the sizes of the high and upper middle class, fuelling growth in the economy.• Even more pronounced is the growth of a niche ‘super-rich’ class, now estimated to comprise of over

100,000 households with net worth of >$1 mn each.

The growing size of the middle and higher consumer classes with increased income and paying capacityhas spurred an increase in consumerism and brand consciousness• Companies have been taking advantage of dramatic growth in such consumer markets as automobiles,

motorcycles, computers, durable goods, and cellular communication – all exhibiting compounded annualgrowth rates (CAGR) of 6%-29% from 1996 to 2011(estimated).

• The domestic market opportunity will further be boosted by a likely increase in propensity to spend and bythe growing consumption by the young generation in India.4

B. The offshoring opportunityIndia accounts for roughly 65% of the global offshoring market and is expected to grow at 50-60% perannum for the next 5 years

• Offshoring provides a fast growing and increasingly important opportunity for MNCs. It is mainly derivedfrom India’s largest asset – its people. India is the largest English-speaking nation in the world with thesecond largest pool of scientists and engineers (second to the US).

• Companies are able to realize significant cost savings by utilizing the highly qualified labour force atattractive rates, and translate this into an important competitive advantage. The cost of a highly qualifiedengineer/ scientist in India is less than $20 per hour, as compared to over $40 per hour in the US or EU.

The benefits of India’s human capital extend beyond cost• Many MNCs are seeking India for the superior management and technical talent base that it offers. Over

100 MNCs have set up R&D facilities in India and many have placed Indian talent in key positions in theirorganizations both locally and globally.

India is also emerging as the manufacturing and sourcing location of choice for various industries• India is considered a low cost leader in such areas as steel and metals and a regional base for the high quality

production of some manufactured goods such as automotive components, engineering equipment, powerequipment, and medical systems.

1 Among economies larger than $125Billion2 Goldman Sachs “Dreaming with BRICS –the path to 2050"3 Per annum income of less than 450 Euro4 India’s median population age is below 24 as compared with EU and US population at over 35.


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C. The Primary Challenges (and how they are being addressed)

While India is positioned for success, there are multiple challenges that must be addressed as an integral partof MNC strategy; these include:

Difficult operating environment – Mainly brought about by government policy and processes, proceduralbottlenecks, and the legacy of cumbersome labour laws

• The reforms process adopted by the Indian government in response to these problems is now firmly in place.Significant progress has been made in liberalizing the external sector- thus allowing freer flow of capitalgoods and raw materials – opening up the financial sector, and reducing customs duties. Second phasereforms that are in the making include lifting restrictions on FDI, simplifying tax and tariff regimes, andopening up markets for competition.

Socio-economic challenges - Related mainly to poverty, illiteracy, and health concerns. A quarter of the Indianpopulation still earns less than $1 per day and ~40% of the population is illiterate

• While these are grave concerns and India does measure on them poorly, even in comparison withother developing countries, an analysis of the trends in the last 10 years shows that India has madesignificant improvements. Life expectancy has improved from ~60 years in 1991 to ~65 years in 2001,and population below the poverty line has moved from 40% to 25%. The rate of improvement recordedby India is significantly better than most other developing countries. This is attributed to the sustainedhigh economic growth rates, multiple schemes for the poor launched by both state and centralgovernments, and the increasing thrust in these areas by other bodies such as NGOs, World Bank, theCorporate Sector, etc.

Weak infrastructure – This is perhaps the most significant challenge that affects MNC’s operations on a day-to-day basis and includes such factors as poor roads, inadequate airports and port facilities, and inconsistent andrelatively expensive power supply. The government is responding to this challenge with various measures, someof which are described below, yet much still remains to be achieved

• Roads: The Golden Quadrilateral – a $12Billion, 4-6 lane highway project that will span the length andbreadth of the country, connecting the 4 major metros.

• Power: Deregulation of the power sector and unbundling of State Electricity Boards (SEB) into separatetransmission, generation and distribution units.

• Telecom: Privatisation of government-held companies, introduction of multiple technologies, and policyfocus on creating a competitive playing field.

• Airports and ports: Plans to upgrade, develop and corporatize major facilities.


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Despite these challenges, many European MNCs have been successful in India - both in relation to other Indiancompanies in the same sector and benchmarked against their average global performance. These companies haverecognized the tremendous potential India has to offer as a sizeable, growing market and a sourcing point forglobal competitive advantage, and view India as a business opportunity that they cannot afford to forego. EUcompanies already make up ~50% of all MNCs operating in India and a multitude of other EU companies areactively planning to enter the market.


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Benchmarking Objectives and Methodology

The MNC benchmarking exercise presents members of the business community a set of actionablerecommendations that can serve as guideposts when devising an India entry strategy or evaluating current Indiaoperations. The main question we attempted to answer is: What are the critical components that enable MNCsto become successful in India?

Methodology: Benchmarking included extensive desk research and detailed face-to-face interviews with seniorexecutives from ~30 European based MNCs operating in India, representing 15 countries from across the EU.The companies were selected from a variety of industries as diverse as confectionary, industrial goods, power,and automobiles. Selected companies are those that have demonstrated a firm commitment to Indian operations;they vary in terms of length of presence in India or degree of success attained. The interviews were conductedby The Boston Consulting Group (BCG) and Confederation of Indian Industry (CII) working teams, togetherwith functional and industry experts from BCG.

BENCHMARKING SCOPE SUMMARY

Key Topics/ Questions That Were Discussed During Interviews

What vision do MNCs have for their operations in India forthe next 5 years and how are they gearing up towards it?Outlook

Leveraging India forvalue-add

opportunities

How do MNCs best leverage other advantages offered byIndian presence beyond the domestic market opportunity?

To what extent are products/ business models localizedto Indian conditions? How is the decision made?

Localization

What is the role and structure of local management atMNCs? How much autonomy does the India team have instrategic and operational issues?

Position of localmanagement

What key challenges do MNCs face in India and how dothey go about mitigating these?

Key challengesencountered

What is the general perception of India at global MNCheadquarters?

View of India fromheadquarters


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Defining success for EU-based MNCs in India

Success in India may be defined along two dimensions:

Capturing the domestic market opportunity:

• These companies have been able to satisfy growth and profitability objectives in India by capturing thedomestic market opportunity at large. They have positioned themselves as mass-market players in relationto their industries, often by localizing their operations in India. By virtue of their success, these companieshave become key contributors to the global or regional setup in terms of market share, contribution tobottom line, or innovation.

Leveraging India’s resource base to derive additional value for the corporation:

• These companies have succeeded in adding value to their corporations by engaging in such activities asR&D, manufacturing, BPO and sourcing from India. For some companies, this has become a key competitivestrength, differentiating them from global competition.


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Company Examples

Benchmarked companies differed in their degree of success. The most successful companies were able to capturesubstantial market share through market-customized strategies, introduce industry altering innovations, exhibitstrong financial performance, and also use India to derive additional value for their organizations. Some examplesof such success stories follow:

Industry standing and industryaltering innovations...

• Providing the full range ofbanking products in India;Created special onlineofferings for Indian clients

• Cutting edge products andsolutions available in India

• 8 local manufacturing units andcountrywide marketing andservice presence

• The industry leader in thechocolates and confectionarymarket

• Multiple innovations acrossproducts, price and packaging

• Introducing the latest telecomtechnologies to India

• Transferred their full productrange enabling end to endcommunication solutions

• Ranked as #1 pharmacompany in India

• Built a superior sales force anddistribution network – currentlyused in joint marketingagreements

• Introducing superior enginetechnology, new 3 and 4wheeler models, andinnovative customizedsolutions to India

• New technology and designexpertise introduced to India

• Developed special productstailored to Indian marketrequirements

• Created and grew segments inthe confectionary market fromthe ground up (especiallydeposited candy)

...strong performanceindicators...

• Achieving 45% sales growthand 70% growth in consumerbanking

• See India as 4th major ‘home’market for the group

• 1,200 Cr. in sales in 2002• Over 20% revenue growth and

over 30% profitabilityenhancement in 2003

• Top performing share price

• ~650 Cr. in sales• Holds a 70% value share of

the chocolate market• Achieved growth of ~30% in

both revenues and profitabilityduring the 90’s

• Market share of 40% ofconnected subscribers on itssystems

• Supplied 50% of mobilenetwork systems in India

• Over 1,100Cr. sales and128Cr. profits in 2002

• Gearing up for significantgrowth post 2005

• Turned operation around tobecome profitable 1,5 yearsafter initiating independentoperations in India

• Turnover of ~500Cr.• Investing over 300Cr. in

expanding capacity to satisfyexpected global demand

• Turnover of 350Cr.; growing30-40% annually

• India is one of the topperforming units fororganization

...and leveraging India forglobal business

• Reached significant costsavings through BPO

• Expanding to serve the BPOneeds of other financialinstitutions

• First IT centre outside EU &USin India

• Significant export of products,solutions and services fromIndia

• Exporting both finished goodsand innovative concepts toCadbury around the world

• Project ‘Next Billion’:Collaborating with Wipro todevelop infrastructure andservices in India for mobilenetworks in emerging marketsacross the globe

• Plans in place to develop Indiaas R&D center, statistical &data management, sourcing forraw materials, and clinical trials

• Plans to make India global hubfor 3 wheeler mfg, and thelaunching pad for globalexpansion

• Planning components exportsto the EU

• Have built an export businessfor both tractors andcomponents

• Plan to increase exports 6 foldto 6000 units in 3 yrs

• Exporting creative talent,innovation and ideas

• Local advertising is being usedin other markets

Company example

SEVERAL MNCs SUCCESSFUL ALONG BOTH DIMENSIONS...


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Ten Tips For Success In India: A Framework

Achieving success in India ultimately pivots on having the right India business models in place. These businessmodels are not prescribed. They are derived from the mechanisms that enabled them to develop, namely globalmanagement and local management processes. During the MNC benchmarking exercise we identified 10 keysuccess factors for MNCs in India; these factors fall under the three categories as demonstrated below.

Reaching Category C (Localized product market business models) is the end-game achieved by most successfulcompanies. Global management processes provide the global support and technology, Local management processesdrive local autonomy and capability and both together work to allow localized business models, products andservices to develop.


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Section A: Commitment at the global level

India is a unique market that merits tailored global management processes. The more global managementunderstood this and facilitated flexibility for the local operation, the higher was the degree of success attained.

Global processes are set by the global centre and form the framework within which the MNC can operate inIndia. These processes are instrumental in offering the right backup, support and technology to the countryorganization - helping it in conducting business and leveraging the international brand name in India. Thecentre’s perception of India and the position that it occupies on management’s agenda were factors found toinfluence the degree of success attained.

KSF#1 View India as a key focus area

Why is this important?

• …to direct appropriate resources towards India and ensure speedy and favourable decisions…

Successful organizations such as Swiss power & automation leader ABB, Swedish Telecom giant Ericsson,Spanish confectionary maker Joyco, Siemens from Germany, and others have been explicit about the importanceof India to their global portfolio – drawing attention and resources to the India operation and ensuring high-levelfacilitation of major decisions.

India ‘country champions’ help bring India to the forefront of the global agenda. These are senior executiveswho have a deep understanding of the Indian environment and actively champion India related decisions. SinceIndian operations are often times small contributors to Group revenues, this requires strong management visionand understanding of the opportunity at hand. Sponsors could be senior Indian managers who originated in theIndia system and progressed through the organization -as in the case of UK pharmaceutical major GlaxoSmithKline- or members of the management team who recognize the promise that India holds and are dedicated to ‘makingit happen’. ABB, for example, has designated its two most senior global division heads to hold active positionson the India board. In addition to facilitating faster and friendlier decision making, these senior sponsors act asa credible source of information and expertise on the country and country operations. If located in country,senior sponsors are also responsible for ensuring that the right values and corporate culture are inculcated inthe Indian arm of the organization.

Other ways by which successful MNCs raised the profile of India on their global agenda are by arranging high-level CEO visits to India to demonstrate their commitment internally and externally, or publicly recognizing theefforts and achievements of the India operation - as with German-Indian insurer Allianz-Bajaj, which highlightedthe India CEO’s accomplishments at the corporation’s global forum.


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KSF#2 Formulate bold, long-term targets that drive decision-making


• …to align the organization behind exhibited market potential and help circumvent short term hurdles…Translating India-related plans to long-term measurable goals adds a visionary lens to all decisions related tofuture products, markets and investments. Successful companies that highlighted India’s importance on theirglobal agenda often followed through by framing these as clear, important aspirations (see above diagram).

Long-term targets and aspirations also help influence how management thinks about the business in the shortto medium term. For example, UK confectioner Cadbury links these targets back into the management processof targeting and monitoring and uses them to form a baseline for discussions with the regional and global teams.Piaggio cascaded long-term country level targets into the business, translating them into such objectives asfocusing on increasing the quality of engines, or speeding up the supply chain for components. Other companiesmay link long-term targets to more conventional top-line revenue or profitability metrics.

In contrast, companies that adopted short-term globally standardized targets in India, often found themselves‘justifying’ their inability to meet these due to price pressures, intense local based competition in the market,or policy and regulation.

KSF#3 Create processes that accelerate the integration as well as the localization of the organization


• …helps find the right balance of autonomy allotted to the local team and aligns organizational objectivesin India…

One challenge faced by MNCs is that global management’s perspective about the challenges and the opportunitiesin India is often quite different from the reality on the ground – leading to differing views on the appropriate businessmodel for India. Situations may arise where the local team feels that they neither have the autonomy to run the localbusiness as needed, nor do they have the support from the global management in terms of taking India-relevantdecisions. This can lead to an increasing communication gap as well as lack of mutual faith and credibility.One way by which benchmarked companies have been able to create a deeper understanding of the Indianenvironment and align organizational objectives, is by encouraging frequent and high level interaction betweenthe global and local teams, at various levels of the organization.

SUCCESSFUL MNCS VIEW INDIA AS A KEY FOCUS AREADESPITE IT BEING A SMALL CONTRIBUTOR CURRENTLY

“We want to partner India into the future. With our strongand reliable local presence, we are the ideal partners forrealizing India’s needs in infrastructure development...we arecommitting to make new investments in India to the extentof US $ 500 million in the years to come.” — Siemens

“We see huge potential in the market since this is where thegrowth is happening..We have overtaken Italy in 3 wheelerproduction” — Piaggio

“India is a fast emerging economy with low product penetration.The country is gaining recognition for its increasing pool oflocal knowledge and talent. India is increasingly taking chargeof its own future in the Convergence, Digital and Internetrevolutions.” — Philips

India is seen as an important market...KSF#1

Siemens aims to consolidate its presence as India’s idealinfrastructure partner - offer complete solutions for differentmarket segments by combining multiple high-endtechnologies, i.e. building complete hospitals, airports,railways or industrial units.

Piaggio aims to make India a manufacturing and operationalpad for expansion into the rest of the world

Philips sees India as the next big thrust area for Philips Asia.The Global board and India management team have jointlyset a revenue target of 1Billion Euro for India by 2007, with250 Million Euro coming from exports

...supported by top driven aspirationsKSF#2


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KSF#4 “Change the rules” regarding global metrics and standards to meet market challenges


• …allows fine-tuning of metrics to fit with Indian market realities and sets the organization to take fulladvantage of India opportunity…

Successful MNCs have worked the unique characteristics of the Indian environment into their target-settingprocess. For some companies in heavily regulated industries, e.g. Oil and Gas, Pharmaceuticals, and FinancialServices, this has been especially important. Setting unique India targets with a long-term horizon in view hashelped them focus on establishing market presence, gain market share and capture future growth prospects.

LATERAL FLOWS SPEED INTEGRATION ANDFACILITATE LOCALIZATION

* Wartsila is the world’s leading ship power supplier, and a leading provider of decentralized power generation solutions

Constant two way interaction tobuild a common thought platform• Local team understands global

standards and practices• Global team understands local

challenges and the need for‘smart’ localization

Local team Global team

Possible interaction

E.g. Wartsila* arranging formal India-Finland personnel transfers at both mid management and engineer level• Streamlining communications and creating organizational alignment• Forming working level relationships which facilitate ongoing work• Creating mutual understanding of the systems, constraints and tradeoffs for each group

KSF#3

Personnel transfers Formation of focusgroups

Global conferencesand workshops Personal CEO visits

SUCCESSFUL MNCs FINE-TUNING GLOBAL METRICSTO SUIT INDIAN ENVIRONMENT

KSF#4

Company Metrics used Implication for India

Sets targets within the context of Indiamarket challenges• Understanding that high

penetration will compensate forreduced margins

Management able to create the rightproduct-price proposition• Investment in distribution network

and product localization

Adopts standard global product marginand profitability metrics• But Indian team given longer

timeframe to reach globalbenchmark

Allowed investment in robustdistribution network• Currently leveraged for joint

marketing agreements; will be akey driver for growth post 2005

Hindustan Lever

Defines metrics that highlight operatingefficiencies as much as topline growth• Understanding constraints of price

sensitive environment

Allows investment in marketpenetration and reach while drivingefficiencies• HLL known as most successful in

rural penetration


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Section B: Empowered Local Management

Performance in India will ultimately depend on the capabilities and drive of the local team. Companies that weinterviewed had long recognized this and worked towards establishing a highly capable local team that isempowered to take decisions. As part of this process, organizations have gradually transferred responsibility tothe country management often to the point where they have full autonomy within a budget. In doing so,companies have leveraged the excellent management and technical talent available in India, and formulated HRpolicies that are a mix of global policy (often demonstrating a feeling of belonging to a global organization),and local processes that cater to the needs of Indian employees. These teams are often taking the lead in shapingcompany strategy, and have become a core contributor to the company’s ultimate success.

KSF#5 Build for the long-term in India regarding people, HR practices and external stakeholders


• …more cost effective, enhances continuity, and leverages understanding of local environment…Benchmarked companies mentioned three main reasons for investing resources in a high-quality local team:

CREATING A HIGH QUALITY LOCAL TEAM CONSIDEREDEXTREMELY IMPORTANT BY ALL MNCs

KSF#5

• Externally, local managers aremore effective at managingsupplier relationships,distributors and otherintermediaries

• Internally, local teams areusually more effective atmanaging the local workforce(either unionized on nonunionized)

• Cadbury, HLL, ABB, GSK,Piaggio all cited having anpredominantly Indianmanagement team a keycontributor to success

• Local teams have a deeperunderstanding of theenvironment and the Indianconsumers’ tastes andpreferences

• Local managers are oftenbetter positioned to designproducts and business modelstailored to the Indian market

• “Headquarters provides uswith the required support andadvice, but you need a 100%local team to execute – theyknow the environment best” -Piaggio

Capability to manage localoperations

• Expatriate manager costs aresignificantly higher than locallyavailable talent

• High expatriate mobility maylead to a discontinuity instrategy

• “The engineering andmanagement talent availablein India is world class andcosts less” - Wartsila

Cost effectiveness andbusiness continuity

Suitability for business modelinnovation and localization


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In forming local teams, companies have committed significant resources to recruiting and especially retaininghighly capable people. Some processes that have contributed to building successful teams are mentioned below:

Philips Software Centre and STMicroelectronics have both been recognized as one of the top employers in India

“Philips India is recognised as one of the most respected companies and as one of the best employers. It plansto generate another 1000 jobs in the next 5 years in knowledge work and at least as many more indirect jobsin the supply chain.” - Philips

“Our recognition as a one of the Best Employers vindicates our strong belief in our people and practices. It isalso a sign of ST India maturing as a world-class organization.”- STMicroelectronics

KSF#6 Define a value added role for country management


• …motivates local team to perform and facilitates transfer of responsibility…

Multiple business-unit organizations operating in India may have a need for an activist country management role,while this may not be the norm for the organization in other countries of operation. The main reasons behindthis are: lack of scale in individual business units for the India business, similarity in some part of the valuechain which may not exist in other countries (e.g. supply chain, distribution channel), and commonality of importantoverall issues (e.g. regulatory affairs) across business units.

Additionally, as companies progress from being ‘executers’ of global strategy in India to assuming a higherdegree of autonomy and decision making power, they have found it important to broaden the role of local

MNCs ADOPTING SOME KEY HR PROCESSES TOBUILD A STRONG LOCAL TEAM

KSF#5

Strong recruiting processes

Carefully selected educational institutions E.g.Indian IIM and IIT schools• Top management involvement in the

process• Well defined criteria for evaluation- HLL recruits at top schools and has a

rigorous interview process which includesapplicant values and integrity assessment

Continuous investment in relevant training

Large investments in entry-level training as wellas management development programs- Allianz-Bajaj investing in an in-house

management training program for a newgeneration of managers

Companies also creating uniformity and asense of belonging to the global organization- Barco*, has created a global innovation

competition designed to enhanceintegration

Well-designed performance managementsystem

• Systems to ensure that evaluation criteriais aligned with business imperatives

• High level of involvement from seniormanagement in defining both ‘hard’ and‘soft’ performance criteria

Career progression avenues for highpotential employees

This factor was singled out as a keydifferentiator in India- Indian employees tie social status to career

progression, and are thus highly motivatedto progress.

- May differ from Europe, where employeesmay retain a particular position as a careerand lifestyle choice

*Barco is a Belgian Company known as a world leader in imaging technology


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Standards

..demonstrating commitmentby staying within the

boundaries of the overallcorporate standards whileadapting to local needs

management to oversee multiple areas of responsibility. Some specific areas of responsibility may be identifyingand leveraging cross-divisional synergies, identifying opportunities for new businesses in India, assumingresponsibility for building a country level brand, and building and managing relationships with externalstakeholders. These stimulate frequent working level interaction with the global organization and facilitate thegradual transfer of control to the country organization.

KSF#7 Establish local team credibility

Why is this important?• …provides the local team the required business flexibility and smoothens the strategic decision making

process…Having a credible local team in place is a key requirement for success. A high level of trust is essential fordecision rights to flow through and localization to take place. Beyond the processes that relate to the formationof the local team, which to a large extent lie with global management, companies voiced their opinion thatestablishing credibility was in the hands of the local management team itself. We identified three ways in whichlocal management created credibility:

CREDIBILITY OF LOCAL TEAM ACHIEVED THROUGHTHREE KEY FACTORS

As witnessed through KSF # 5-7, having a capable and empowered local team in place is imperative for success.The diagram below demonstrates the gradual transfer of decision-making rights to the local team.

KSF#7

Results

...meeting and exceedingfinancial targets

STMicro moved fromproject execution to end-to-end management bysurpassing expectationsin terms of quality,reliability, and cost• STMicroelectorincs

Innovation/ knowledgetransfer

...demonstrating theability to devise sound

innovative business modelsthat adapt to local

challenges

“Here in India we insistedthat we will absolutely notdeviate from global safetynorms or use ‘fast money’.This has bought us credibilityat HQ and given us a chanceto shape our industry”• Lafarge cement

“Bank-Cafe, Kiosk anddoorstep delivery ofbanking services are allconcepts that sprung upin India and are nowbeing looked at globally”• ABN Amro


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KSF#8 Leverage India opportunities beyond the product/market


• …draws attention to the India organization, derives value for global organization, and gains competitiveadvantage…

Offshoring opportunities are a key point of focus for MNCs operating in India today. In fact, all the MNCs thatwe benchmarked are either actively involved in using India for value added activities outside of the domesticmarket opportunity or are in the process of evaluating such opportunities. Their ability to contribute to theirglobal operations in this regard was highly appreciated by their headquarters and increased the stature of theIndia organization.

Some key hurdles faced by companies included global level concerns related to IP protection, quality andreliability of domestic suppliers, or political complexity associated with job loss in Europe. To overcome these,many successful companies took a small step approach, demonstrating the benefits from outsourcing a limitedpiece of the value chain and then expanding the scope of outsourcing – for example, starting by handling IToperations for another country organization, demonstrating the savings and then moving to handle anothercountry or region. Again, arranging for personal visits by company executives to India to witness first hand thecapabilities of the India organization and the opportunities available in the country were important in facilitatingthe offshoring process.

SUCCESSFUL MNCs GRADUALLY TRANSITIONED DECISION POWERTO THE COUNTRY OPERATION

Time

Freedom to innovate on and introducenew products• E.g. Setting up manufacturing and

distribution networks

Freedom to invest in localizing certainaspect of manufacturing• E.g. Sub assembly, procure certain

components locally, or enter intosupplier agreements

Freedom in local operational decisionmaking• E.g. Independence over advertising

and promotion strategy

Limited independence for local team;all decisions approved by globalmanagement

...Complete operational freedom withinapproved budget

Increasingdecisionrights for

local team

Reducingday to day

role ofglobalteam

Invest in theformation of

a highquality

local team

Define avalue

added rolefor countrymanagement

Establishlocal teamcredibility


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KSF#8 MNCs ARE LEVERAGING FOUR MAIN OPPORTUNITIESBEYOND THE PRODUCT/ MARKET

Software development/ Engineering

• Software activities include both embeddedsoftware for the global product range andapplication design

• MNCs have added significant value to theirorganizations, both through savings on softwaredevelopment and important contributions to IP

Research and Development

• Significant cost savings and product developmentbreakthroughs achieved

• Most benchmarked MNCs operating R&D centershave significant expansion plans- Transferring greater components of the R&D

value chain to India- Expanding scope to worldwide R&D

Shared services/ BPO

• MNCs are realizing significant efficiencies byshifting a host of support functions to India- These include back office operations such as

transaction processing, customer interfacemanagement, and IT support services.

Manufacturing and sourcing

• Successful MNCs are leveraging localmanufacturing towards global advantage- Including components, sub-assemblies, and full

products that cater to the domestic and exportmarket

- Leading companies are integrating India intoglobal platforms, in areas where India hasstrongest competitive advantage

* High voltage circuit breakers above 72,5 KV; medium voltage outdoor circuit breakers, magnetic actuators

...AND REALIZING SIGNIFICANT GAINS IN ALL AREAS

Astra Zenecaconducting cuttingedge R&D as wellas discovery work

in India

Philips planning toexpand software,

product dev &research from

1000 to 2500 seatsby 2007

ABN Amro BPOcenter services

entire globaloperation andother banks

Grundfos earmark-ing 70% of

production fromChennai facility for

export

STMicroelectronicsplanning to expand

1000 seat Noidasoftware dev

facility to 1500

Glaxo Smithklinesetting up bothclinical trial andresearch in India

SKF Bearings hasset up an R&D

unit for 2 wheelersin Bangalore

Wartsila isleveraging costadvantage and

projectcompetency toservice group

Bayer setting upIndia shared

services structureto drive efficiencies

ABB supplyingworldwide demandfor certain power

products*exclusively from

India

Allianz Bajaj does ITservicing for some

Asian countries,looking to expand

Siemensproposing to make

India amanufacturing hub

for medicalsystems

R&D Software dev./ Engineering Shared services/ BPO Sourcing/ Manufacturing

KSF#8


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Section C: Localized product/market business models

Creating the right product/market business models for India is perhaps the most critical, and the most challengingsuccess enabler. While global and local processes can create the platform from which to launch these models,the company’s long-term success and sustainability depends on its ability to design its business model inresponse to unique challenges and opportunities raised by the market. This makes it imperative to have clearand directed strategies, through the two remaining success factors.

KSF # 9 Localize parts of the value chain to obtain Indian costs and capability benefits


• …builds competitive advantage by achieving effective cost structure, maintaining quality standards,and leveraging the effects of scale…

MNCs in India are faced with stiff competition from local players, often with an entirely localized setup. Tocompete effectively, it is important to set up an effective cost and operating structure involving various degreesof localization in parts of the value chain. Some factors that may affect localization decisions are mentionedbelow:

a. Labour/capital trade-off: India’s large labour surplus, which is expected to grow even further in the future,1

results in comparatively low wages. Companies have considered this factor in their localization equation andtransferred labour-intensive processes to India. Lafarge, for example, clearly demonstrated that the standardglobal IT system is not economical given the cost of Indian IT experts. Instead, it designed its own IT systemat a reduced cost – with acceptance by the head office.

b. Brand recognition: Some companies have chosen to import critical components and manufacture otherparts locally, in order to leverage high European quality levels and brand recognition. Wartsila, for instance,imports diesel high capacity engines from European suppliers who have developed their capabilities over adecade and manufactures less critical parts in India.

c. Cost structure: In the early days of its joint venture, Joyco set up its operation using common Europeancost allocations and imported machinery that was more expensive than locally available machinery. Joycohas since identified and developed capable local suppliers and has indigenized its cost structure, enablingthe company to compete successfully with local players.

d. Global platforms and scale: As companies are becoming more sophisticated in the use of global platforms,they are increasingly using a mixed localization strategy. AVL, for example, found it most economical toimport most of its electronic components from vendors with which it has global contracts, while manufacturingmechanical components in India, and assembling the final product locally.

e· Regulation: State government incentives may prompt companies to localize parts of the value chain suchas manufacturing or R&D. Certain states in India are known to provide various incentive schemes whichmay include tax holidays, free rent or use of utilities for setting up operations in a particular area – whichhave encouraged MNCs to set up operations in the area.

1 A surplus of 47Million people in the working age group is expected in yr. 2020


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KSF # 10 Formulate India-specific business model strategies (product, value, pricing)


• … delivers the right product at the right price with right positioning for India…

This final key success factor is perhaps the most important. Companies recounted time and again that it wasnot enough to merely replicate in India business models that have been successful in Europe and elsewhere inthe world. The following graphic illustrates some of the market challenges that are unique to India, and someof the principles that successful companies use to help tackle them.

Infrastructurechallenges

Distinct tastes andhabits from rest ofworld & variations

within India

Large variation inpaying capacity

Dispersedpopulation;

fragmented retailchannel

~ 50% villages not connected byall weather roads; Large number

of supply chain intermediaries

India has 336 tribes, 18languages, 1600 dialects

...product propositiontailored to the unique

target segment

...an appropriatevalue-price offeringfor each segment

...cost effectivereach

...innovative supplychains

~650,000 villages; ~70%population in rural India~ 6 million retail outlets

Both a niche super rich classand an average income 1/10th of

OECD countries

Core challenge Explanation Mitigation principle


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a. Tailored Product Proposition: As Indian tastes and habits are distinct from the rest of the world and varyfrom region to region, many companies have found the need to alter their international product to suit localtastes and conditions. Successful companies derive ideas for customisation from a deep understanding of theneeds of the segment being targeted.

b. Appropriate Value/ Price Offering: India is a country of widely dispersed income distribution, containingboth a small but substantial affluent class and a vast population with an average disposable income that is1/10th that of OECD countries.

Successful companies have understood that India is not just about cheap products but providing the right valueproposition, and have thus been able to find success across various price points. Companies catering to the massmarket, such as HLL, have employed breakthrough efficiencies that enable them to break the price barrier andsupply high quality goods at affordable prices. Philips has used this logic to cut the price of its acclaimedCompact Fluorescent Lamps sold in India from Rs. 600 to Rs. 140. On the niche side of the spectrum, Skodahas recently entered the high-end motor market in response to market demand, competing with the likes ofMercedes, and positioning cars in the super luxury category at a price of Euro 50,000.

SUCCESSFUL MNCs TAILORING PRODUCTS TO SUITINDIAN ENVIRONMENT

Consumer cell Identifies the customer segmentsand their needs, and tests products designed byR&D

- “We discovered that peanuts in India are lessdesirable – almonds on the other hand aremuch more attractive to consumers”

Innovation cell develops the right features givenmarket conditions and the customer’s price-valuetrade-off

- “A European chocolate would not survive theconditions, we formulated more resilientchocolates that do not melt easily”

KSF#10

Consumerinsight cell

Innovationcell

Degree ofcustomization Company example

Tailored products vary from minorlocalization to complete innovation

AVL built emissions detectors thatcan operate under extreme heatand dusty conditions

Grundfos built pumps that canwork under adverse powerconditions, such as those incertain parts of India

Renault-ITL developed smallerlow-mid HP tractors designed tofit the Indian farmer’s plot size

Perfetti entered a completely newproduct category, building thedeposited candy segment fromground up

Cadbury has a successful productinnovation model in place


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SEVERAL EXAMPLES OF COMPANIES EMPLOYINGINNOVATIVE DISTRIBUTION STRATEGIES

c. Cost effective reach: India’s geographic size, dispersed population and fragmented retail channel pose asignificant challenge for companies to reach their target customers in a cost effective way.

d. Innovative supply chains: Infrastructure challenges and a large number of supply chain intermediariesplace pressure on the supply chain both in terms of cost and consistency. MNCs that have localized theirsupply chain have often also developed strong links with their suppliers by investing resources in improvingtheir processes and technology and thus growing their business. Piaggio, for example, has localized 100%of its 3-wheeler product in India so that it could compete effectively1. It worked hand-in-hand with multipleIndian suppliers to raise their quality and reliability levels - by training them and transferring technology.In order to provide a world-class product, Piaggio prompted Lombardini, a reputed Italian engine manufacturer,to set up operations close to Piaggio’s facility in Pune. This resulted in a highly successful relationship anda win for Lombardini – that was then also able to leverage India for its own worldwide operations.

* * *

Cadbury’s rural/ semi urban horse drivenkiosks increase reach

Companies employing innovative distributionstrategies...

...focusing on cost effectiveness and reach

Partnerships often used to drive more scalethrough the channel• Allianz-Bajaj partnering with banks,

hospitals, travel agents and others todistribute insurance products

• GSK is leveraging its channel to form jointdistribution agreements with bothpharmaceutical and consumer goodsplayers

• Swedish SKF bearings is partnering withauto components company to increaseproduct visibility in rural areas

• Danfoss, Denmark’s largest industrialGroup, has developed a network ofreferences and third party consultants toincrease the reach of its energy savingproducts

KSF#10


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1 Piaggio established that its localized product of the same quality could be produced at 30-40% less cost in India as compared to Europe.

10 Key Tips for Success in India

1. View India as a key focus area

2. Formulate bold, long term targets that drive decision making

3. Create processes that accelerate the integration as well as localisation of organisation

4. “Change the rules” regarding global metrics, standards to meet market challenges

5. Build for the long term in India regarding people, HR practices and relationship with external stakeholders

6. Define a value-added role for the country management

7. Establish local team credibility

8. Leverage India opportunities beyond the product market

9. Localise the value chain, based on scale and complexity trade-offs

10. Formulate India-specific business model strategies (product, value, pricing)

HOW WELL IS YOUR COMPANY PERFORMINGAGAINST THE 10 KSFs?

Companies have followed many different paths to build and follow the key success factors mentioned in thisdocument. Our benchmarking exercise has revealed that it is important to have the majority of these 10 successfactors in place (and not merely one or two) in order to unlock some of the remarkable potential available inIndia, both in the domestic market as well as for other value added activities.

We hope that this document will serve as a useful tool in assessing your own company’s strategy and performancein India.

The attached Appendix provides a profile of the benchmarked companies together with specific examples of howthey have used global processes, local processes, and customized product/market business models to succeed inIndia.


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Appendix

ten tips from successful european companies in … tips from successful european companies in india...

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