India: Going for Growth

Infrastructure, Sutton noted, is what emerging economies need the most. That subject was covered more extensively in the first panel of the conference, titled "Infrastructure Projects and Their Future in India." Moderated by Deepak Sukh, director of operations at Lucent Technologies’ Lightning Program, the panel included Sutton, Pramodh Malhotra and Bala T. Kuchinad. Malhotra is founder, president and CEO of Global Finance Associates, a Washington, D.C.-based investment banking firm specializing in project finance in developing countries. Kuchinad is president and CEO of Lucent India.

The panelists echoed Sutton’s earlier comments, noting that fear of uncertainty led many businesses to shy away from investing in India. "China’s economic reforms, for instance, have gone on for a longer time," said Kuchinad, explaining the disparity in foreign direct investment between India and its neighbor to the east. Government policies have been another long-standing barrier. In telecom, for example, "the Indian government was competing with new service providers. Until recently, there was nobody operating autonomously and ruling objectively on issues such as licensing," Kuchinad said.

Prioritizing projects is essential, said Kuchinad: "You need incentives to go to rural areas, to ensure that basic services are extended into those places. In context, is the Internet really required there in the next five years or so? It’s a long way off from becoming a routine of life." Malhotra agreed that targeting rural areas makes good business sense. "A lot of companies don’t even understand the rural market. The agricultural sector has boomed, and there is a great deal of opportunity there."

Sutton also emphasized the side benefits of infrastructure projects to the communities around them. "At Dabhol, the villagers initially protested our entry. But we built a state-of-the-art hospital, schools and information technology training centers. There is now a budding business community that has sprung up around the plant."

Wharton marketing professor Jagmohan Raju moderated a panel on the "Growth and Impact of Technology in India." The panelists included Somshankar Das, general partner, Walden International Investment Group; Pradeep Kar, chairman, Microland Electronics; Sanjay Mirchandani, managing director, Microsoft India; and Raj Vattikuti, founder of Computer Based Systems.

Opportunities for funding technology in India are growing rapidly, said Das. "The large pool of talented people, as well as the worldwide acceleration of the technology business, has stimulated growth in this area. When we look at companies in India, we focus on technology companies. We look at the size of the market, the simplicity of the corporate structure and the management team."

Kar described his experience as a high-tech entrepreneur in India, noting the difficulty of creating adequate infrastructure on the fly: "Often, you get raw space. You have to pay deposits to the electricity board to get an uninterrupted power supply. That’s the challenge of starting up there."

Asked how Indian businesses are adapting to the environment of global competition, Mirchandani said that top management is trying to figure out the ins and outs of information access, both in-company and beyond, to keep abreast of worldwide markets. "CEOs want to know, how do I build knowledge assets? How do I keep the best people here so they don’t rush out of the country? How do I provide them a state-of-the-art work environment? They have to do all of these things to stay competitive," he said.

Vattikuti noted that seamless rotation of company employees between the U.S. and India also helped firms to stay competitive. "Interactive development, integrated teams and the flow of resources back and forth — all of these take time, but they have revolutionized the business."

In another keynote address, Montek Singh Ahluwalia, head of the Indian Planning Commission–who participated by teleconference from India–reported on the state of the Indian economy. Agreeing with other participants that India needs to strengthen its infrastructure, he said that the country had relied on both public and private investment to make this happen. These efforts, however, had achieved mixed results. "We require a careful balance of regulatory needs and a level playing field," he said, adding, "We have had problems of implementation."

Ahluwalia was more upbeat about the potential of India’s information technology industry. He said the country has a "strong competitive advantage in software and information technology-enabled services." Predicting that these industries would see annual growth of 30%, he said that the quality of India’s telecommunications system represents a major hurdle to more rapid growth. The Indian government has made overcoming this hurdle a key priority, he said.

Ahluwalia also commented on a statement by Ahsan Iqbal, former Pakistani minister of state for planning, who recently told Knowledge at Wharton in an interview that software companies are moving to Pakistan because the southern Indian city of Bangalore, a major software hub, has become too expensive. Asked whether the Indian software industry could lose its competitive advantage to neighboring nations, Ahluwalia acknowledged that real estate prices in Bangalore have been rising. Still, he argued, the city has a critical mass of software infrastructure and expertise, and it should continue growing. Ahluwalia added that Indian software development is moving to areas like Hyderabad, where costs are relatively lower. "In a globalized industry like software, competition is everwhere," he said. "We feel confident that we can deal with competition."

Asif Adil, a principal of consulting firm McKinsey & Co., moderated a panel discussion about India’s consumer goods industry. The participants included Satya Brata Ganguly, chairman of Exide Industries; Rajiv Bakshi, managing director of Cadbury India; and Ashwin Dani, managing director of Asian Paints. They pointed out that India has a massive consumer market; companies just need to figure out the correct strategy to tap into it. Trying to replicate strategies that have worked in other countries might not work because the Indian consumer market presents unique challenges, they said.

Ganguly pointed out that his company, which makes batteries for automobiles, has seen an explosion in demand. "Five years ago, we made 1 million batteries a year," he said. "We now make 5 million." The number of car companies active in India has increased from barely two or three a decade ago to more than 10. The country has also seen an enormous increase in demand for cars, fueled largely by an expansion in consumer finance. "These days a management trainee who earns Rs. 8,000 (approx. $200) a month can buy a car," he said.

Asian Paints’ Dani noted that the key to success in the consumer market lies in managing distribution. Companies that have implemented innovative distribution practices have found ways to penetrate India’s huge rural markets despite the low purchasing power of rural consumers. For example, shampoo manufacturers who introduced inexpensive sachets now sell 60% of their products in such packaging, Dani said. Some 70% of shampoo sachets are sold in rural areas. Oil and biscuit manufacturers have adopted similar strategies, he said.

Cadbury India’s Bakshi noted that consumer goods companies that want to succeed in India should "go for mass market products rather than niche products." They should aim for large numbers of consumers buying fewer products rather than a small number of consumers buying more. Cadbury India now has 60 million customers–in a country of more than 1 billion–and it hopes to add 10 million customers a year. As the country achieves higher rates of GDP growth, Cadbury should be able to reach this goal, he said.

Bakshi emphasized that the 1990s have seen a process of demystification of foreign brands. While consumers were early on eager to try new products after India opened its economy in 1992, they stopped buying many of these products after an initial trial period. As a result, Kellogg’s cornflakes flopped, as did Ford’s Escort cars. "No international brand can succeed without understanding the cultural aspects of the Indian consumer," he Bakshi said. "You can’t succeed through affordable pricing alone."

A final panel introduced four entrepreneurs of Indian origin who are building high-tech businesses in the U.S.: Sabeer Bhatia, the CEO of Arzoo; Sunir Kapoor, founder of E-Stamps; Varsha Rao, founder of Eve.com; and Ashutosh Roy, founder of eGain. Introducing these entrepreneurs, Anjani Jain, deputy vice dean of Wharton’s MBA program, said that South Asians have emerged as "an extraordinary force" in the U.S. Indian and Chinese entrepreneurs now operate some 25% of start-ups in Silicon Valley.

Bhatia, better known as the founder of Hotmail, a web-based service that allows users to access their e-mail from anywhere in the world, described how he built his business and eventually sold it last year to Microsoft for more than $400 million. The inspiration for Hotmail, Bhatia explained, arose from the problems he faced retrieving e-mail after his employer built a secure firewall. He figured that a service that provided universal access to e-mail could help him and others.

Learning from Netscape, whose Internet browser gained market share rapidly because it was free, Bhatia decided to keep Hotmail a free service. He approached some 19 venture capital firms for funding. Each one turned Bhatia down, but he used each rejection "as a way to learn why we were being turned down." The 20^th venture capitalist agreed to fund Hotmail. Bhatia needed $3 million; the venture capitalists offered $300,000. Bhatia accepted the money and "stretched it very far." Bhatia and his partners took as little money as possible from venture capitalists so that they could retain majority control of their company. This turned out to be a major advantage when they sold Hotmail to Microsoft.

Kapoor, founder of E-Stamps, said that his company works closely with the U.S. Postal Service to sell postage over the Internet. Recognizing that buying postage–not using it–is the most inconvenient aspect of dealing with the postal service, Kapoor said his company allows users to download postage into a device connected to a PC. Building this company turned out to be a major challenge, since it involved convincing postal and federal government officials about the value of the service. Venture capitalists, too, initially expressed no interest in E-Stamps. Their biggest worry was that Kapoor wouldn’t be able to get the U.S. postal service, a much-feared bureaucracy, to cooperate.

Unfazed, Kapoor took the concept to Microsoft, where he had once worked as a director of worldwide business strategy. Microsoft agreed to invest in E-Stamps, after which the venture capitalists who had earlier shown Kapoor the door changed their tune. "We became the first company since Pitney Bowes to be allowed to print postage off the web," Kapoor said. His advice to aspiring entrepreneurs was to persist in their vision despite the pain that entrepreneurship entails. "Silicon Valley is littered with great ideas that went nowhere," he said. "You have to convince a lot of people–particularly your spouses–to buy into your vision."

Rao, a former consultant at McKinsey, agreed. When she and partner Mariam Naficy started Eve.com, a website that markets beauty products, one of her major challenges was convincing her parents. Rao’s parents were appalled that their daughter intended to leave the prestigious consulting firm to launch an Internet start-up. "I had great prospects at McKinsey, but my husband supported me because he knew how much I wanted to do it," she said. "Before I knew it, we were on our path to raising financing."

When Rao and Naficy started out, they did not have a formal business plan; they put together a slide-show presentation to approach venture capital firms. Soon, the entrepreneurs had to make a tough choice between two offers: Accept $3 million in funding and give up 80% of the company, or take $200,000 in funding while keeping substantial ownership. Rao and Naficy chose the latter course, signing up with Idealab, whose founder Bill Gross has backed such Internet start-ups as eToys and CarsDirect.com. "One of the biggest assets we have is persistence," she said. "You need to have a crazy passion about what you do."

Passion also was a prime motivator for Ashutosh Roy, founder of eGain, a company that provides customers with products that help them manage high volumes of e-mail. Roy has been an entrepreneur in India and in the U.S. In 1992, he teamed up with three partners to start a telecommunications software company in India at an incubator in the Indian Institute of Technology, New Delhi. "That experience taught me a lot," he said. "You can develop products in India, but the problem is that you don’t have access to world markets. Local customers don’t push you hard enough to develop world-class products."

Roy suggested that budding entrepreneurs explore ways to connect emerging companies and markets. "If you go to Bangalore or Mumbai, you will meet lots of people with great ideas," he said. "They don’t have access to markets. Sometimes, there’s value in connecting the dots."