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Indian power

Corporations in the developed world increasingly see India as a high-growth market and its companies as acquirers of their assets, global competitors, partners for enhancing the competitiveness of their global value chain and a source of new energy and dreams for the world economy. How did this all happen? Nirmalya Kumar shares the essence of what he learned from 10 trips to India to interview more than 30 CEOs and top executives who are unleashing the new global power of Indian firms.

Indian global powerhouses, until recently, never had the confidence or the ability to be on the world stage. Forged in India's harsh environment, these companies are now increasingly seeking to secure the best of both worlds - access to the lucrative high-margin markets of the developed world by owning companies in Europe and the United States while maintaining their low-cost bases in India. Today, the remarkable thing about Indian companies is that they have massive aspirations to be global companies, and they are extraordinarily confident about acquiring foreign firms and integrating them with their companies in India.

Indian firms have brought three unique traits to their acquisition spree. First, many Indian companies are part of a group of companies such as Aditya Birla or Tata groups. They can leverage group assets to complete deals that would be difficult for any individual company. One or more of the group companies can lend or take an equity position in the company attempting to make the acquisition, or the entire group's assets can be offered to raise debt funds.

Second, Indian companies have historically had very high debt-equity ratios. This means Indian entrepreneurs can live with debt levels that many Western companies would find uncomfortable. Whether this is wise under the new debt regime is open to debate. Previously, Indian firms borrowed from nationalised banks whose mandate was to support India's economic development. As such they were unlikely to be aggressive with respect to interest rates, debt collection, or valuation and revaluation of collateral. Now Indian firms are tapping global financial markets to fund their deals, and these lenders are going to be more exacting. High leverage increases risk. Nevertheless, the historical attitude towards debt has facilitated these acquisitions.

Finally, Indian firms, despite being public, are often controlled by powerful families and individual promoters, who have considerable management leeway. Such a promoter can swiftly decide to make an acquisition, knowing that the stock price may dip in the short run. This would be impossible for more conservatively managed companies run by professionals, whose compensation is significantly tied to increases in stock price. Furthermore, Indian promoters have considerable flexibility in negotiating post-merger autonomy issues with the managers of the acquired firms. As a result, Steven Spielberg and Dreamworks inked a deal with the Reliance ADA Group instead of with Hollywood because Western corporate investors are demanding faster payback schedules, better guarantees, and even a say in how a movie is made.

While it is only to be expected that some of these Indian acquirers will stumble because they have either paid too much or taken on large amounts of debt, the overall trend remains unaffected. For the developed world and its companies, the era of India as a major overseas investor is here. The question is not how to stop this trend but how to deal with it. There was a time when Westerners assumed that an Indian in the head office of a multinational or Western company was either an accountant or a computer nerd. Nowadays that person is just as likely to be the boss.

More than call centres

It is important to see India's evolving competitive advantage as more than simply low costs and a steady supply of call centre employees. As costs in India are going up, both Indian companies and Western multinationals are increasingly using India as a destination for high value and technologically sophisticated projects. Almost every Fortune 500 company is setting up or considering setting up operations in India that will be integral to its global value chain.

The rush by multinationals to set up Indian operations and the rapid growth of Indian outsourcing companies has resulted in a war for talent. Only in India would T. V. Mohandas Pai, Infosys Technologies' chief financial officer for 12 years and member of the Infosys board of directors, make a career change to take over as head of human resources at Infosys! But the company hires 25,000 people a year, and its growth is dependent on attracting and retaining the best talent.

Such competition requires a fundamental shift in the mindset of multinational companies about the role of Indian talent. They need to confront the question: Why should an Indian join a multinational instead of an Indian firm? In many multinationals, the local Indian operations are viewed as peripheral rather than central to the parent company's global agenda. As a result, knowledge, capabilities and people flow from the headquarters in the United States, Europe, or Japan to India - but rarely vice versa. There is no career track for the Indian employee in the company's global operations. In contrast, at Infosys, TCS and Wipro, the potential recruit can become the CEO of the firm and lead global operations. Unfortunately, only a handful of multinationals - Citibank, McKinsey and Unilever being notable exceptions - have grappled with the dilemma of remaking the talent management processes in face of the changing global workforce realities.

The other war is for customers and business models. Indian outsourcing companies started from a low-cost basis but are slowly moving up the food chain to more sophisticated projects. Companies like Infosys, Satyam Computer Services, TCS and Wipro are starting to challenge the Western multinationals, such as Accenture, EDS and IBM, head-on for the high-value global consulting deals. These Western IT consultancies are starting from a high-cost structure and are using their Indian back-office operations to move to lower cost structures, while Indian outsourcing companies are making small acquisitions in the West to add to their front-end consulting capabilities.

Western views

India as one of the fastest-growing economies seems like a paradox in a country where everything (especially the traffic, courts and bureaucratic machinery) seems to move at a snail's pace. Regardless, with its neighbour China, India is where future growth and profits for multinational companies lie.

Yet many global companies have been slow to respond to this shift in the locus of world opportunity to Asia. An analysis of several large Western firms found that, although an estimated 34 per cent of the potential market for their goods is in Asia, the region accounted for only 14 per cent of sales, seven per cent of employees, five per cent of assets, three per cent of research and development and two per cent of their top 200 people. Moreover, it found that these disparities were growing larger.

Despite the countries' many challenges, this is going to be the China and India century. The concepts, constructs and mind-set that have prevailed over the past century need to be transformed as a new future, with India and China as dominant powers, comes into play. It is why Jeffrey Immelt, CEO of General Electric, sent the list of the 100 largest emerging-market companies to his underlings, ordering them to identify the companies GE could sell to and buy from, as well as those it would have to compete with.

Japan's geographical location has given the country a front seat to the developments of the last decade. Traditionally, it looked down on the rest of Asia after it became the first Asian country to achieve Western levels of economic development. Recently, overshadowed by India and China, it has become more insecure. Today, Japanese bookstores are filled with titles such as Extreme Indian Arithmetic Drills and The Unknown Secrets of the Indians. Indian education is in fashion as Japanese parents in Tokyo rush to enrol their children in English-language schools taught by Indians and other Asians. The thought of viewing another Asian country as a model in education would have been unheard of a few years ago. In contrast, riot police had to quell protests by Dutch school students in 2007, when the government decided to increase their annual classroom hours by 26.

Support for free trade is falling as people in the developed world feel more alarmed than charmed by globalisation. In a 2007 Pew Global Attitudes poll, the United States was placed dead last out of 47 countries in the percentage of the population supporting free trade. These ambivalent feelings toward globalisation are also seeping into popular Western culture. The 2008 French movie Summer Hours, directed by Olivier Assayas, is about a successful French couple working abroad. In an interview, the director was nostalgic but realistic when he observed: "It is not their own logic that takes them away from home, it is the logic of the world today. If you are young and successful, you look towards India or China.... The world is changing in Russia, China, India, the Middle East... it's like an earthquake. They are absorbing all the energy. You don't feel that sense of change in Europe."

Surveys of developed countries in 2008 show historic lows with respect to outlook for future living standards. The 2008 financial crisis only reinforces the fact that that growth is in the East and debts are in the West. As a result, the fears expressed in the West for its economic future are diametrically opposite to the confidence and desire to succeed that one observes in India.

The New York Times columnist Roger Cohen provocatively wrote: "It's the end of the era of the white man. By 2030, India will probably overtake Japan as the world's third-largest economy behind the United States and China. But in the end, transformation is not about numbers. It's about the mind. Come to Asia and fear drains away."

Nirmalya Kumar (nkumar@london.edu) is Professor of Marketing and Co-Director of the Aditya V. Birla India Centre at London Business School. His book, India's Global Powerhouses: How They Are Taking on the World, is published by Harvard Business Press.

Indian power

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