No Longer a One-Way Street: The Growing Impact of India's Emerging MultinationalsPublished: June 28, 2007 in India Knowledge@Wharton
Earlier this year Tata Steel, India's largest steel maker, succeeded in its bid to take over the Anglo-Dutch steel giant Corus, making the new entity the fifth-largest steel company in the world. The Corus deal came barely six months after Mittal Steel, a London-based firm founded by Lakshmi Mittal, a businessman of Indian origin, acquired the European steel company Arcelor, which created a ripple of anxiety in the west and a rumble of pride in India. Mittal-Arcelor is now the world's largest steel company.
These high-profile transactions, which India Knowledge@Wharton has written about in the past, retrace some interesting historical lines between India, Britain and the Netherlands. The British East India Company, granted its royal charter by Elizabeth I in 1600, often vies for the title of "world's first multinational company (MNC)" with The Dutch East India Company, established by the States-General of the Netherlands in 1602. The raison d'etre of both companies was to profit from commercial enterprises in Asia in general and on the Indian subcontinent in particular. Four hundred years later, in a curious reversal of fortunes, Indian companies seem to be seeking treasure and economic advantages in Europe.
Jitendra Singh, a professor of management at Wharton, and Ravi Ramamurti, a professor at Boston's Northeastern University, trace some of the paths Indian companies have taken to reach MNC status in a paper titled, "Generic Strategies of India's Emerging Multinationals." In the paper, Singh and Ramamurti say they hope that "bringing these generic strategies into sharper focus, and highlighting the organizational demands and strategic dilemmas each is likely to present, will be helpful to managers as they take their companies global. The generic strategies identified here are not unique to India and have relevance for MNCs from other emerging markets as well. As a group, however, these generic strategies are unlikely to be pursued by firms in advanced economies because they are rooted in conditions peculiar to emerging markets, such as low-income consumers, low-wage workers, high-growth domestic markets, and under-developed hard and soft institutions."
The paper was presented at a conference on "Emerging Multinationals from Emerging Markets," organized by Ramamurti and Singh and held in Boston on June 22 and 23. The conference was sponsored by the Center for Emerging Markets at Northeastern University, and The Mack Center for Technological Innovation and the Center for Leadership and Change Management -- both at Wharton. The conference's papers will form the core of an edited volume of the same name, which the organizers hope to see published in 2008.
Follow the Money
One way Ramamurti and Singh track the growth of the emerging MNCs is to look at both the rate and, in particular, the direction of foreign direct investment (FDI), between the developed (north) economies and the developing (south) economies. Not surprisingly, most countries tend to focus FDI in their own spheres. Thus, two-thirds of FDI from the developed economies goes to other developed economies; three-fourths of FDI from the developing world goes to other developing economies.
Most of the FDI that travels between the two spheres, some 83%, moves from north to south, which makes intuitive sense: Companies based in countries with more advanced economies are more likely to have capital to invest; countries with less developed economies are more likely to have resources, labor or other assets available at lower cost.
It is, of course, the 17% of FDI moving from south to north which is of greatest interest. Ramamurti and Singh cite a newspaper article (Indian Express, 17 June 2007), which, on the basis of a study of outbound and inbound FDI by the Federation of Indian Chambers of Commerce and Industry (FICCI) and Ernst & Young, projected $35 billion in outbound FDI for India in fiscal 2007-08, an amount which would, for the first time, exceed the year's target of $30 billion for inbound FDI.
Paths to MNC Status
Ramamurti and Singh identify four generic strategies of emerging MNCs -- which they stress are not mutually exclusive and may be combined or ordered in a variety of ways -- to which they attribute the success, the growth, and ultimately the ability to move onto the global stage demonstrated by a small but growing number of Indian companies. These are: Local-Optimizer, Low-Cost Partner, Global Consolidator and Global First-Mover. The researchers then go on to sketch the elements that comprise each strategy, the conditions that facilitate implementation, and examples of companies -- or sectors -- which have successfully pursued the strategy.
The Local-Optimizer Strategy focuses on products and processes that are optimized for emerging markets; they may, in addition, seek niches in developed countries. Often these companies will pursue downstream joint ventures or relatively small M&A activity in other emerging markets. They benefit by focusing on products that are not easily standardized across countries with different incomes, tastes, etc. Ramamurti and Singh cite the automotive divisions of both Tata and Mahindra as examples.
The Low-Cost Partner Strategy has been most visible in the kinds of business process outsourcing (BPO) operations typified by Indian IT companies such as Infosys and Wipro. Such companies benefit from cost arbitrage vis-à-vis more developed economies and also from the "clean slate" advantage: They can set up processes which have been optimized from the beginning, rather than having to upgrade antiquated systems. These companies may market to the developed economies but -- at least in the beginning -- as an unbranded component. India has particular strengths in this area because of the availability of relatively inexpensive, well-educated workers with solid English language skills.
The Global Consolidator Strategy is in many ways typified by the recent large steel mergers. Both Tata Steel and Mittal Steel benefited from extensive experience as domestic consolidators before going global. They built up a solid knowledge base of post-merger integration procedures that they were then able to apply to international operations as they continued to expand. Companies well suited to this approach have relatively standardized products/processes globally; often these are industries that have matured in the developed economies but which are booming, and therefore more dynamic, in emerging markets. Cemex of Mexico -- the world's largest supplier of building materials, subsequent to its buying a majority stake in Australia's Rinker Group in June -- is another example of this strategy.
Ramamurti and Singh cite India's Suzlon Energy as a prime example of the Global First-Mover Strategy. Suzlon is involved in the wind energy industry from end-to-end; it does everything from building windmills, down to component level, to designing and constructing industrial scale wind farms. Suzlon dominates its home market, and indeed Asia overall; it is the fifth largest company globally in its industry. This home market dominance has yielded efficiencies of scale, a large and growing knowledge base and a solid financial platform to support ongoing expansion. The market, both for wind turbines and for wind generated electricity, is growing rapidly, both at home and abroad.
Emerging markets in countries like India have a number of unique characteristics that make them crucibles for innovation. Ramamurti pointed to three issues: Experience with a low-income customer base; a low cost business model -- "these companies have to be not 10% or 20% cheaper, but 50%, 60%, 70% cheaper"; and risk management experience on a scale totally different from that familiar to companies in more developed countries.
Singh described that latter issue in essentially Darwinian terms, arguing that durable capabilities are generated by the winnowing process that results when skills come up against challenges. An environment rife with challenges produces not merely competence but what amount to battle-hardened capabilities in the companies that survive. If the electricity stops flowing to your production facility, you have to have multiple back-up plans for how to respond, for example.
In that regard, Suzlon Energy is a case in point. The company's founder -- Tulsi Tanti, one of the 10 wealthiest men in India -- was in the textile business in the early 1990s but found the survival of his business threatened by the high cost (and sporadic availability) of electricity. Mid-decade, he installed two windmills to address this problem by having the firm generate its own electricity. Soon, Tanti rapidly concluded that there was more of a future, and more money to be made, in wind generation than in textiles.
The story of Tanti and Suzlon supports Ramamurti and Singh's contentions in several ways. Not least, it reinforces their emphasis on the "survival of the fittest." Tanti himself has joked that wind energy was the 17th business he attempted, and the company with which he ultimately succeeded is a quintessential MNC. In addition to having more than 7,000 employees in India, Suzlon has a headquarters office for international expansion located in Denmark -- home of Vestas Wind Systems, the world's largest wind turbine manufacturer, and an ambitious national alternative energy program. (Wind power supplies more than 20% of Denmark's electricity.)
Suzlon has production plants in Belgium, China, India and the United States; R&D facilities in Germany, Belgium, and the Netherlands; and a sales and support office for the Asia Pacific market located in Melbourne, Australia. The company is now building out one of the world's largest wind park projects in Maharashtra, in western India, with a projected capacity, on completion, of approximately 1000 MW.
Tanti says he is aiming to put the company in the top three in the industry worldwide. If the Tata and Mittal deals are any indication, he might well succeed.