India’s Corporate Globalization: Acquisitions and Talent
Globalization of Indian Companies
Swaminathan Aiyar
Both private companies and the Indian government have embarked upon the conquest of foreign companies. While the largest mergers and acquisitions tend to occur in capital-intensive sectors such as steel and oil, the purchases occurred in all fields.
Having begun as a goal of globalization, India is now turning other countries into their own objectives. Nothing demonstrates this better than the tender offer in November 2006, launched by Tata Steel for Corus, the Anglo-Dutch steel giant. At the time of this writing, it is still not clear that Tata Steel will succeed in the operation as a rival bid from Brazil’s CSN could be the winner. But the remarkable thing is that an Indian company can provide 8,000 million dollars for a multinational three times larger in terms of steel production and ensure competitive conditions in the overall project financing, which is a sign that India has entered like a tornado on the international stage.
Britain pioneered the modern steel industry; Henry Bessemer invented the converter of the same name, which enabled the production of steel on a large scale. Tata Steel was founded in the early twentieth century when India was still a British colony. The president of The Indian Railway Board, Sir Frederick Upcott, thought so little of the skills that he said Tata Steel would eat every pound of steel that Tata could produce. A century later, Tata Steel is ready to buy the entire British steel industry (Corus emerged from a merger that included British Steel).
The pioneer among globalizing Indian industries was Lakshmi Mittal-Arcelor Mittal, the largest steel company in the world.
Mittal was not allowed to build a steel plant in India, since its production was reserved for the public sector from the late fifties onwards. So he set up a small steel furnace in Indonesia. He later took over the ailing public sector plants of several countries: Trinidad, Mexico, Ireland, and quickly acquired facilities worldwide. Mittal proved that India could succeed in the steel sector, a field where big names from the global level had failed. This has encouraged many other Indians, but also made foreigners begin to believe that an Indian acquisition will add value and therefore should be supported.
The Financial Times recently reported that mergers and acquisitions by India abroad in the first nine months of 2006 had reached 7,200 million dollars. The offer from Tata Steel for Corus, if successful, will increase this amount by more than twice. In this sense, it appears that purchases abroad by Indian companies far exceed mergers and acquisitions within the country.
Also, the government of India has been very interested in acquiring oil and gas reserves abroad. Therefore, public enterprises, especially Oil and Natural Gas Corporation, have made purchases in several countries. Some major deals have taken place in Brazil (1,400 million), Colombia (850), Sudan (783), Angola (600), and Syria (581). In Iran, many agreements are being negotiated. Some large Indian corporations like Reliance Industries Ltd. are also carrying out work related to oil exploration (begun in Yemen and East Timor).
Top 10 Acquisitions in India (until Sept. 2006)
- Buyer – Procurement – Sector – Value (million / $)
- Tata Tea – Energy Brands, U.S. – Water, energy drinks – 677
- Dr. Reddy’s Labs – Betapharm, Germany – Pharmacist – 570
- Eve – Suzlon Energy Holdings, Belgium – Wind turbines – 520
- Tata Steel – NatSteel, Singapore – Steel – 486
- Tata Tea – Tetley, UK – Tea – 407
- Tata Steel – Millennium Steel, Thailand – Steel – 404
- Ranbaxy – Terapia, Romania – Pharmacist – 324
- VSNL – Teleglobe, Bermuda – Communications – 239
- Eight O’Clock Coffee – Tata Coffee, U.S. – Coffee – 220
- Reliance – Flag, U.S. – Communications – 207
Note: Data exclude mergers and acquisitions by public companies of India.
Source: India Review, September 2006, Indian embassy in the United States. Outbound M&A transactions.
The largest mergers and acquisitions tend to occur in capital-intensive sectors such as steel and oil. However, shopping on the part of India has taken place in almost all industries and services. The emerging Indian multinationals range from software to pharmaceuticals, through electronics and communications, the automotive subsidiary, paints and drinks, and not forgetting banking and insurance or wind turbines and legal services. All of them form the new global India. Their skills and ambitions run the gamut of industries and services, not just a few sectors.
New Conditions
This development was unexpected. Until five years ago, Indian businessmen were afraid to compete with China in manufacturing and supported the imposition of high protective barriers. They did not have labor and cheap capital as China. India’s labor laws made it virtually impossible to fire workers or cut templates, which gave China an edge over India in regard to intensive manufacturing. India’s infrastructure was also worse than China.
Three factors have changed the conditions for doing business in the last decade:
First, the Asian financial crisis forced Indian manufacturers to reduce costs, innovate, and improve quality to survive.
Second, the continuing global integration of India with global markets helped to control inflation so as to cut interest rates. Currently, global capital is available not only in the form of loans but also in actions. Each IPO in India is clearly oversubscribed, i.e., with large excess in demand compared with supply purchases, mainly by the bet of international investors. In one year, India’s financial markets attract more than 10,000 million dollars.
Third, the field of information technology, followed by pharmacists, for example, showed that even if India was not able to compete with China in terms of labor-intensive manufactures through standardized processes, the technical expertise of India along with innovation were very competitive in manufacturing processes where changes in design and R&D were important. Indian companies have prospered more in intelligence-intensive industries and services. And these are precisely the ones that have the greatest potential.
India is betting on positioning itself as a worldwide leader in software and as a provider of BPO (business process outsourcing-BPO). All major computer companies now have multinational operations not only in America but also in China. The largest companies in informatics specialists are focusing on the provision of consulting and even experience.
Several analysts expect Infosys to someday make a takeover bid for Accenture, one of the global consulting giants.
All major international companies in this field and software (IBM, Oracle, Microsoft, Accenture, Capgemini) already have subsidiaries in India in an attempt to harness the skills that this country offers. In their day, these global companies anticipated that they would take control of Indian firms, but firms from India have been consistently showing higher profit margins, higher sales growth, and more training courses for new staff than subsidiaries of the foreign companies. So it seems that the biggest companies in India will one day take control of several of these international giants.
So far, computer companies in India have been very careful when purchasing abroad, only pursuing very specific goals. The exception is that Wipro has acquired five small firms this year. Its “string of pearls” strategy envisions itself as the thread, Wipro, with dozens of small foreign companies that make up the pearls of the string.
Pharmaceutical companies in India grew in the eighties by using reverse engineering to create drugs patented by Western multinationals. These companies have now joined the global patent system and are much admired for their formidable research and production skills. They have initiated partnerships with leading pharmaceutical R&D, clinical trials, production of active ingredients, and generic production.
Ranbaxy, the largest Indian pharmaceutical company, currently sells more abroad than at home. Biocon and Shanta Biotech names have become relevant within the global biotechnology industry.
India has long been an important producer of tea and coffee. Therefore, they are logical areas for expansion.
Furthermore, with the elimination of textile quotas in 2005, sector companies in India began to acquire firms in the U.S., UK, and other countries of the Organization for Economic Cooperation and Development (OECD). The main goal is to get well-known brands and marketing operations in established markets and return to India the bulk of production. Anyway, for Indian companies, it is hard to compete with China on textiles.
A striking fact has been the emergence of India as a formidable competitor in the automotive sector in general. When India’s economy was opened in the early nineties, automobile imports were still banned. To overcome barriers to imports, international companies began manufacturing
sector in India, even though production costs were considerably more expensive than outside. Was pleasantly surprised to find that the local ancillary sector companies had considerable expertise, despite being very small. The dialogue between the automobile giants and industry supporting manufacturers led to constant improvements of design, innovation and quality. Soon, manufacturers of parts for vehicles were able to move from concept to prototype and commercial production in a month, compared to three months were needed in most OECD countries. This allowed off exports of automotive components and with them also to hire. The major global manufacturers of automotive components, Delphi, Visteon, Federal Mogul, have moved their factories in the U.S. to India.
Tata Motors has long been the leading trucking company in India and has now become a formidable car maker whose latest innovation is a car that costs only $ 2,000. Its traditional strength in R & D has enabled it to produce trucks and cars of their own design. Tata Motors is now a multinational: the department has acquired Daewoo Motors trucks in South Korea, has initiated partnershipsGreenfield in South Africa and has bought stakes in companies from United Kingdom, Spain and Latin America.
The Indian subsidiary of Suzuki and Hyundai have been placed among the major world producers of small cars, and India has become the basis of R & D for small cars these firms. Hyundai, Ford, Toyota and General Motors are now betting on India as a supply hub for many different models and components. In India the manufacturers of motorcycles, Bajaj Auto, Hero Honda, TVS, are opening factories in other developing countries of Asia and Latin America, so are becoming multinationals. Mahindra and Mahindra, the largest tractor and sports utility vehicles in India, now has manufacturing and assembly operations in the U.S., China and the European Union.
While acquisitions (such as the Tata bid for Corus) have created the most prominent headlines, the global rise of India is best understood as a phenomenon intensive talent that goes far beyond the corporate business. He goes to every nook and intellectual side board.
The importance of education
Indian scholars have proliferated globally. The most famous living in the U.S. and often have American citizens. The list includes three Nobel Laureates: Amartya Sen (Economics, 1998), Subramanyan Chandrashekhar (Physics, 1983) and H. Gobind Khorana (Medicine, 1968). Other Indians, frequently mentioned as future candidates for the Nobel Prize in Economics are: Jagdish Bhagwati and Avinash Dixit. Also another scholar from India, Raghuram Rajan, was until recently the chief economist of the International Monetary Fund. Wall Street is buzzing with analysts and fund managers from India. This academic excellence is not entirely new. Venkata Raman won the Nobel Prize for Physics in 1930, working in a laboratory with low-tech in Bangalore. Satyendra Nath Bose and Einstein worked in the production of Bose-Einstein statistics on the principles of quantum theory.
India has been complaining of what he considers two historical demons. British colonialism and the brain drain. However, these phenomena have catapulted India to its current global role. British colonialism introduced the English language, which has
proved to be the greatest advantage of India for software and BPO. Chinese engineers can be just as good, but can not compete with English. This is an area where India outpaces China. In fact, the colonial legacy could mean that Bangladesh, more than China, appears as the biggest rival of India.
The same advantage with the English language is evident in the rise of the Indians in the literary and media. Rising stars in the U.S. media include Fareed Zakaria of Newsweek and Chandrashekhar Rajv The Washington Post. Three Indians have won the Booker Prize for English literature (Salman Rushdie, Arundhati Roy and Kiran Desai), and two have won the Pulitzer Prize (Jhoompa Bharati Mukherjee and Lahiri). All of them written in English.
When India has invested heavily in education since gaining independence in 1947, many graduates with top grades in engineering and medicine emigrated to the U.S. and Europe. What was considered as disgrace and moaned. Precisely in talent. The Indian engineers were very successful in Silicon Valley. Professor Anna Lee Saxenian of UC Berkeley estimated that 27% of all companies in Silicon Valley were born between 1980 and 2000 were started by Indians and Chinese. Over time, this helped build computer skills to pass on then to India.
The brain drain turned into brain circulation. This has proved to have resonance not only in information technology but also in fields ranging from R & D and finance to biotechnology and pharmacy. China, no less than India, is also benefiting from the brain circulation.
Anyway, although India is now heralded as an economic miracle grow at 8% through the preparation of its citizens, the reality is that this is a rosy picture that is misleading. In India only 65% of the population can read and write and the level of education is deplorable in most of the states.
India produces 450,000 engineers a year, a figure that may seem impressive at first glance. However, those engineers only a quarter met the standards recognized worldwide, a quarter are considered suitable for these works and half does not reach the minimum. The quality of teaching in schools and universities is poor, in general, should not be masked by the fact that the best institutions in India have international level.
India has a very achieved image abroad that has impacted the world. However, this Asian country has only a thin layer of excellence under which the quality of the skill and talent is very weak. An explosive growth of private institutions filled the gaps in public education, but the quality of the new institutions is poor.
India lags far behind China in minimum schooling and functional learning. Unless this will be resolved urgently, India can not hope to turn into a world power on the basis of talent-intensive manufactures and services. In fact, the lack of supply and is driving up wages.
The increase of skilled workers has been a pleasant surprise in recent years, but this phenomenon will become extinct unless human resources and the need for preparation to equilibrate rapidly with the requirements of demand.