Ten Tips from Successful European Companies in India

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 Indias 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 hasnt 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 A. B. C. Success factors fall under three categories: Commitment at the global level; provide global support and technology; Empowered local management; develop local team autonomy and capability; 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 business models 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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Ten Tips from Successful European Companies in India

Table of Contents

Setting the context: The India Opportunity

Benchmarking Objectives and Methodology

Ten Tips for Success in India: A Framework

Section A: Commitment at the Global Level

Section B: Empowered Local Management

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Section C: Localized Product/ Market Business Models

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Appendix: Benchmarked Company Snapshots

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Ten Tips from Successful European Companies in India

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 opportunity Indias 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 capacity has 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 annual growth 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 by the growing consumption by the young generation in India.4 B. The offshoring opportunity India accounts for roughly 65% of the global offshoring market and is expected to grow at 50-60% per annum for the next 5 years Offshoring provides a fast growing and increasingly important opportunity for MNCs. It is mainly derived from Indias largest asset its people. India is the largest English-speaking nation in the world with the second 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 at attractive rates, and translate this into an important competitive advantage. The cost of a highly qualified engineer/ scientist in India is less than $20 per hour, as compared to over $40 per hour in the US or EU.

The benefits of Indias 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 their organizations 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, power equipment, and medical systems.
1 2 3 4

Among economies larger than $125Billion Goldman Sachs Dreaming with BRICS the path to 2050" Per annum income of less than 450 Euro Indias median population age is below 24 as compared with EU and US population at over 35.

Ten Tips from Successful European Companies in India

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 part of MNC strategy; these include:

Difficult operating environment Mainly brought about by government policy and processes, procedural bottlenecks, 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 capital goods and raw materials opening up the financial sector, and reducing customs duties. Second phase reforms that are in the making include lifting restrictions on FDI, simplifying tax and tariff regimes, and opening up markets for competition.

Socio-economic challenges - Related mainly to poverty, illiteracy, and health concerns. A quarter of the Indian population 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 with other developing countries, an analysis of the trends in the last 10 years shows that India has made significant 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 recorded by India is significantly better than most other developing countries. This is attributed to the sustained high economic growth rates, multiple schemes for the poor launched by both state and central governments, and the increasing thrust in these areas by other bodies such as NGOs, World Bank, the Corporate Sector, etc.

Weak infrastructure This is perhaps the most significant challenge that affects MNCs operations on a dayto-day basis and includes such factors as poor roads, inadequate airports and port facilities, and inconsistent and relatively expensive power supply. The government is responding to this challenge with various measures, some of 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 and breadth of the country, connecting the 4 major metros. Power: Deregulation of the power sector and unbundling of State Electricity Boards (SEB) into separate transmission, generation and distribution units. Telecom: Privatisation of government-held companies, introduction of multiple technologies, and policy focus on creating a competitive playing field. Airports and ports: Plans to upgrade, develop and corporatize major facilities.

Ten Tips from Successful European Companies in India

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

Ten Tips from Successful European Companies in India

Benchmarking Objectives and Methodology

The MNC benchmarking exercise presents members of the business community a set of actionable recommendations that can serve as guideposts when devising an India entry strategy or evaluating current India operations. The main question we attempted to answer is: What are the critical components that enable MNCs to become successful in India? Methodology: Benchmarking included extensive desk research and detailed face-to-face interviews with senior executives 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 conducted by The Boston Consulting Group (BCG) and Confederation of Indian Industry (CII) working teams, together with functional and industry experts from BCG.

BENCHMARKING SCOPE SUMMARY

Key Topics/ Questions That Were Discussed During Interviews
View of India from headquarters What is the general perception of India at global MNC headquarters?

Key challenges encountered

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

Position of local management

What is the role and structure of local management at MNCs? How much autonomy does the India team have in strategic and operational issues?

Localization

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

Leveraging India for value-add opportunities

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

Outlook

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

Ten Tips from Successful European Companies in India

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 the domestic market opportunity at large. They have positioned themselves as mass-market players in relation to their industries, often by localizing their operations in India. By virtue of their success, these companies have become key contributors to the global or regional setup in terms of market share, contribution to bottom line, or innovation.

Leveraging Indias resource base to derive additional value for the corporation: These companies have succeeded in adding value to their corporations by engaging in such activities as R&D, manufacturing, BPO and sourcing from India. For some companies, this has become a key competitive strength, differentiating them from global competition.

Ten Tips from Successful European Companies in India

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

SEVERAL MNCs SUCCESSFUL ALONG BOTH DIMENSIONS...

Company example Industry standing and industry altering innovations... Providing the full range of banking products in India; Created special online offerings for Indian clients Cutting edge products and solutions available in India 8 local manufacturing units and countrywide marketing and service presence The industry leader in the chocolates and confectionary market Multiple innovations across products, price and packaging Introducing the latest telecom technologies to India Transferred their full product range enabling end to end communication solutions Ranked as #1 pharma company in India Built a superior sales force and distribution network currently used in joint marketing agreements Introducing superior engine technology, new 3 and 4 wheeler models, and innovative customized solutions to India New technology and design expertise introduced to India Developed special products tailored to Indian market requirements Created and grew segments in the confectionary market from the ground up (especially deposited candy) ...strong performance indicators... Achieving 45% sales growth and 70% growth in consumer banking See India as 4th major home market for the group 1,200 Cr. in sales in 2002 Over 20% revenue growth and over 30% profitability enhancement 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 profitability during the 90s Market share of 40% of connected subscribers on its systems Supplied 50% of mobile network systems in India Over 1,100Cr. sales and 128Cr. profits in 2002 Gearing up for significant growth post 2005 ...and leveraging India for global business Reached significant cost savings through BPO Expanding to serve the BPO needs of other financial institutions First IT centre outside EU &US in India Significant export of products, solutions and services from India Exporting both finished goods and innovative concepts to Cadbury around the world

Project Next Billion: Collaborating with Wipro to develop infrastructure and services in India for mobile networks in emerging markets across the globe Plans in place to develop India as R&D center, statistical & data management, sourcing for raw materials, and clinical trials

Turned operation around to become profitable 1,5 years after initiating independent operations in India

Plans to make India global hub for 3 wheeler mfg, and the launching pad for global expansion Planning components exports to the EU Have built an export business for both tractors and components Plan to increase exports 6 fold to 6000 units in 3 yrs Exporting creative talent, innovation and ideas Local advertising is being used in other markets

Turnover of ~500Cr. Investing over 300Cr. in expanding capacity to satisfy expected global demand Turnover of 350Cr.; growing 30-40% annually India is one of the top performing units for organization

Ten Tips from Successful European Companies in India

Ten Tips For Success In India: A Framework

Achieving success in India ultimately pivots on having the right India business models in place. These business models are not prescribed. They are derived from the mechanisms that enabled them to develop, namely global management and local management processes. During the MNC benchmarking exercise we identified 10 key success 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 successful companies. Global management processes provide the global support and technology, Local management processes drive local autonomy and capability and both together work to allow localized business models, products and services to develop.

Ten Tips from Successful European Companies in India

Section A: Commitment at the global level

India is a unique market that merits tailored global management processes. The more global management understood 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 in India. These processes are instrumental in offering the right backup, support and technology to the country organization - helping it in conducting business and leveraging the international brand name in India. The centres perception of India and the position that it occupies on managements agenda were factors found to influence 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 importance of India to their global portfolio drawing attention and resources to the India operation and ensuring high-level facilitation of major decisions.

India country champions help bring India to the forefront of the global agenda. These are senior executives who have a deep understanding of the Indian environment and actively champion India related decisions. Since Indian operations are often times small contributors to Group revenues, this requires strong management vision and understanding of the opportunity at hand. Sponsors could be senior Indian managers who originated in the India 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 making it happen. ABB, for example, has designated its two most senior global division heads to hold active positions on the India board. In addition to facilitating faster and friendlier decision making, these senior sponsors act as a 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 in the Indian arm of the organization.

Other ways by which successful MNCs raised the profile of India on their global agenda are by arranging highlevel CEO visits to India to demonstrate their commitment internally and externally, or publicly recognizing the efforts and achievements of the India operation - as with German-Indian insurer Allianz-Bajaj, which highlighted the India CEOs accomplishments at the corporations global forum.

Ten Tips from Successful European Companies in India

SUCCESSFUL MNCS VIEW INDIA AS A KEY FOCUS AREA DESPITE IT BEING A SMALL CONTRIBUTOR CURRENTLY
1 KSF#

India is seen as an important market...

2 KSF#

...supported by top driven aspirations

We want to partner India into the future. With our strong and reliable local presence, we are the ideal partners for realizing Indias needs in infrastructure development...we are committing to make new investments in India to the extent of US $ 500 million in the years to come. Siemens We see huge potential in the market since this is where the growth is happening..We have overtaken Italy in 3 wheeler production Piaggio India is a fast emerging economy with low product penetration. The country is gaining recognition for its increasing pool of local knowledge and talent. India is increasingly taking charge of its own future in the Convergence, Digital and Internet revolutions. Philips

Siemens aims to consolidate its presence as Indias ideal infrastructure partner - offer complete solutions for different market segments by combining multiple high-end technologies, i.e. building complete hospitals, airports, railways or industrial units. Piaggio aims to make India a manufacturing and operational pad 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 jointly set a revenue target of 1Billion Euro for India by 2007, with 250 Million Euro coming from exports

KSF#2 Formulate bold, long-term targets that drive decision-making Why is this important? 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 to future products, markets and investments. Successful companies that highlighted Indias importance on their global 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 short to medium term. For example, UK confectioner Cadbury links these targets back into the management process of 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 as focusing on increasing the quality of engines, or speeding up the supply chain for components. Other companies may 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 Why is this important? helps find the right balance of autonomy allotted to the local team and aligns organizational objectives in India One challenge faced by MNCs is that global managements perspective about the challenges and the opportunities in India is often quite different from the reality on the ground leading to differing views on the appropriate business model for India. Situations may arise where the local team feels that they neither have the autonomy to run the local business as needed, nor do they have the support from the global management in terms of taking India-relevant decisions. 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 Indian environment and align organizational objectives, is by encouraging frequent and high level interaction between the global and local teams, at various levels of the organization.
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Ten Tips from Successful European Companies in India

KSF

#3

LATERAL FLOWS SPEED INTEGRATION AND FACILITATE LOCALIZATION

Constant two way interaction to build a common thought platform Local team understands global standards and practices Global team understands local challenges and the need for smart localization Possible interaction Formation of focus groups Global conferences and workshops

Local team

Global team

Personnel transfers

Personal CEO visits

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

KSF#4 Change the rules regarding global metrics and standards to meet market challenges Why is this important? allows fine-tuning of metrics to fit with Indian market realities and sets the organization to take full advantage of India opportunity Successful MNCs have worked the unique characteristics of the Indian environment into their target-setting process. For some companies in heavily regulated industries, e.g. Oil and Gas, Pharmaceuticals, and Financial Services, this has been especially important. Setting unique India targets with a long-term horizon in view has helped them focus on establishing market presence, gain market share and capture future growth prospects.

KSF

#4

SUCCESSFUL MNCs FINE-TUNING GLOBAL METRICS TO SUIT INDIAN ENVIRONMENT

Company Metrics used Sets targets within the context of India market challenges Understanding that high penetration will compensate for reduced margins Implication for India Management able to create the right product-price proposition Investment in distribution network and product localization

Adopts standard global product margin and profitability metrics But Indian team given longer timeframe to reach global benchmark Defines metrics that highlight operating efficiencies as much as topline growth
Hindustan Lever

Allowed investment in robust distribution network Currently leveraged for joint marketing agreements; will be a key driver for growth post 2005 Allows investment in market penetration and reach while driving efficiencies HLL known as most successful in rural penetration

Understanding constraints of price sensitive environment

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Ten Tips from Successful European Companies in India

Section B: Empowered Local Management

Performance in India will ultimately depend on the capabilities and drive of the local team. Companies that we interviewed had long recognized this and worked towards establishing a highly capable local team that is empowered to take decisions. As part of this process, organizations have gradually transferred responsibility to the 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 HR policies 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 shaping company strategy, and have become a core contributor to the companys ultimate success.

KSF#5 Build for the long-term in India regarding people, HR practices and external stakeholders Why is this important? 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:

5 KSF#

CREATING A HIGH QUALITY LOCAL TEAM CONSIDERED EXTREMELY IMPORTANT BY ALL MNCs
Capability to manage local operations Externally, local managers are more effective at managing supplier relationships, distributors and other intermediaries Internally, local teams are usually more effective at managing the local workforce (either unionized on non unionized) Cadbury, HLL, ABB, GSK, Piaggio all cited having an predominantly Indian management team a key contributor to success Suitability for business model innovation and localization Local teams have a deeper understanding of the environment and the Indian consumers tastes and preferences Local managers are often better positioned to design products and business models tailored to the Indian market Headquarters provides us with the required support and advice, but you need a 100% local team to execute they know the environment best Piaggio

Cost effectiveness and business continuity Expatriate manager costs are significantly higher than locally available talent

High expatriate mobility may lead to a discontinuity in strategy

The engineering and management talent available in India is world class and costs less - Wartsila

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Ten Tips from Successful European Companies in India

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

#5 KSF

MNCs ADOPTING SOME KEY HR PROCESSES TO BUILD A STRONG LOCAL TEAM

Strong recruiting processes Continuous investment in relevant training Large investments in entry-level training as well as management development programs Allianz-Bajaj investing in an in-house management training program for a new generation of managers

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 includes applicant values and integrity assessment

Companies also creating uniformity and a sense of belonging to the global organization Barco*, has created a global innovation competition designed to enhance integration Career progression avenues for high potential employees This factor was singled out as a key differentiator in India - Indian employees tie social status to career progression, and are thus highly motivated to progress. - May differ from Europe, where employees may retain a particular position as a career and lifestyle choice

Well-designed performance management system Systems to ensure that evaluation criteria is aligned with business imperatives High level of involvement from senior management in defining both hard and soft performance criteria

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

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 plans to generate another 1000 jobs in the next 5 years in knowledge work and at least as many more indirect jobs in the supply chain. - Philips Our recognition as a one of the Best Employers vindicates our strong belief in our people and practices. It is also a sign of ST India maturing as a world-class organization.- STMicroelectronics KSF#6 Define a value added role for country management Why is this important? 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 behind this are: lack of scale in individual business units for the India business, similarity in some part of the value chain which may not exist in other countries (e.g. supply chain, distribution channel), and commonality of important overall issues (e.g. regulatory affairs) across business units. Additionally, as companies progress from being executers of global strategy in India to assuming a higher degree of autonomy and decision making power, they have found it important to broaden the role of local
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Ten Tips from Successful European Companies in India

management to oversee multiple areas of responsibility. Some specific areas of responsibility may be identifying and leveraging cross-divisional synergies, identifying opportunities for new businesses in India, assuming responsibility for building a country level brand, and building and managing relationships with external stakeholders. These stimulate frequent working level interaction with the global organization and facilitate the gradual 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 for decision rights to flow through and localization to take place. Beyond the processes that relate to the formation of the local team, which to a large extent lie with global management, companies voiced their opinion that establishing credibility was in the hands of the local management team itself. We identified three ways in which local management created credibility:

#7 KSF

CREDIBILITY OF LOCAL TEAM ACHIEVED THROUGH THREE KEY FACTORS

Here in India we insisted that we will absolutely not deviate from global safety norms or use fast money. This has bought us credibility at HQ and given us a chance to shape our industry Lafarge cement

Results ...meeting and exceeding financial targets

Innovation/ knowledge transfer ...demonstrating the ability to devise sound innovative business models that adapt to local challenges

STMicro moved from project execution to endto-end management by surpassing expectations in terms of quality, reliability, and cost STMicroelectorincs

Bank-Cafe, Kiosk and doorstep delivery of banking services are all concepts that sprung up in India and are now being looked at globally ABN Amro

Standards ..demonstrating commitment by staying within the boundaries of the overall corporate standards while adapting to local needs

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.

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Ten Tips from Successful European Companies in India

SUCCESSFUL MNCs GRADUALLY TRANSITIONED DECISION POWER TO THE COUNTRY OPERATION

Invest in the formation of a high quality local team

Reducing day to day role of global team

Limited independence for local team; all decisions approved by global management Freedom in local operational decision making E.g. Independence over advertising and promotion strategy

Define a value added role for country management

Freedom to invest in localizing certain aspect of manufacturing E.g. Sub assembly, procure certain components locally, or enter into supplier agreements

Time

Establish local team credibility

Increasing decision rights for local team

Freedom to innovate on and introduce new products E.g. Setting up manufacturing and distribution networks ...Complete operational freedom within approved budget

KSF#8 Leverage India opportunities beyond the product/market Why is this important? draws attention to the India organization, derives value for global organization, and gains competitive advantage

Offshoring opportunities are a key point of focus for MNCs operating in India today. In fact, all the MNCs that we benchmarked are either actively involved in using India for value added activities outside of the domestic market opportunity or are in the process of evaluating such opportunities. Their ability to contribute to their global operations in this regard was highly appreciated by their headquarters and increased the stature of the India organization. Some key hurdles faced by companies included global level concerns related to IP protection, quality and reliability 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 limited piece of the value chain and then expanding the scope of outsourcing for example, starting by handling IT operations for another country organization, demonstrating the savings and then moving to handle another country or region. Again, arranging for personal visits by company executives to India to witness first hand the capabilities of the India organization and the opportunities available in the country were important in facilitating the offshoring process.
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Ten Tips from Successful European Companies in India

KSF

#8

MNCs ARE LEVERAGING FOUR MAIN OPPORTUNITIES BEYOND THE PRODUCT/ MARKET
Research and Development Software development/ Engineering Software activities include both embedded software for the global product range and application design MNCs have added significant value to their organizations, both through savings on software development and important contributions to IP

Significant cost savings and product development breakthroughs achieved Most benchmarked MNCs operating R&D centers have significant expansion plans - Transferring greater components of the R&D value chain to India - Expanding scope to worldwide R&D Shared services/ BPO

Manufacturing and sourcing Successful MNCs are leveraging manufacturing towards global advantage local

MNCs are realizing significant efficiencies by shifting a host of support functions to India - These include back office operations such as transaction processing, customer interface management, and IT support services.

- Including components, sub-assemblies, and full products that cater to the domestic and export market - Leading companies are integrating India into global platforms, in areas where India has strongest competitive advantage

KSF

#8

...AND REALIZING SIGNIFICANT GAINS IN ALL AREAS

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

Astra Zeneca conducting cutting edge R&D as well as discovery work in India

Philips planning to expand software, product dev & research from 1000 to 2500 seats by 2007

ABN Amro BPO center services entire global operation and other banks

Grundfos earmarking 70% of production from Chennai facility for export

Glaxo Smithkline setting up both clinical trial and research in India

STMicroelectronics planning to expand 1000 seat Noida software dev facility to 1500

Allianz Bajaj does IT servicing for some Asian countries, looking to expand

Siemens proposing to make India a manufacturing hub for medical systems

SKF Bearings has set up an R&D unit for 2 wheelers in Bangalore

Wartsila is leveraging cost advantage and project competency to service group

Bayer setting up India shared services structure to drive efficiencies

ABB supplying worldwide demand for certain power products* exclusively from India

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

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Ten Tips from Successful European Companies in India

Section C: Localized product/market business models

Creating the right product/market business models for India is perhaps the most critical, and the most challenging success enabler. While global and local processes can create the platform from which to launch these models, the companys long-term success and sustainability depends on its ability to design its business model in response to unique challenges and opportunities raised by the market. This makes it imperative to have clear and directed strategies, through the two remaining success factors. KSF # 9 Localize parts of the value chain to obtain Indian costs and capability benefits Why is this important? 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. To compete effectively, it is important to set up an effective cost and operating structure involving various degrees of localization in parts of the value chain. Some factors that may affect localization decisions are mentioned below: a. Labour/capital trade-off: Indias 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 and transferred labour-intensive processes to India. Lafarge, for example, clearly demonstrated that the standard global IT system is not economical given the cost of Indian IT experts. Instead, it designed its own IT system at a reduced cost with acceptance by the head office. b. Brand recognition: Some companies have chosen to import critical components and manufacture other parts 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 a decade 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 European cost allocations and imported machinery that was more expensive than locally available machinery. Joyco has since identified and developed capable local suppliers and has indigenized its cost structure, enabling the 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 to import most of its electronic components from vendors with which it has global contracts, while manufacturing mechanical components in India, and assembling the final product locally. e Regulation: State government incentives may prompt companies to localize parts of the value chain such as manufacturing or R&D. Certain states in India are known to provide various incentive schemes which may include tax holidays, free rent or use of utilities for setting up operations in a particular area which have encouraged MNCs to set up operations in the area.

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

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Ten Tips from Successful European Companies in India

KSF # 10 Formulate India-specific business model strategies (product, value, pricing) Why is this important? 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 was not enough to merely replicate in India business models that have been successful in Europe and elsewhere in the world. The following graphic illustrates some of the market challenges that are unique to India, and some of the principles that successful companies use to help tackle them.

Core challenge

Explanation

Mitigation principle

Distinct tastes and habits from rest of world & variations within India

India has 336 tribes, 18 languages, 1600 dialects

...product proposition tailored to the unique target segment

Large variation in paying capacity

Both a niche super rich class and an average income 1/10th of OECD countries

...an appropriate value-price offering for each segment

Dispersed population; fragmented retail channel

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

...cost effective reach

Infrastructure challenges

~ 50% villages not connected by all weather roads; Large number of supply chain intermediaries

...innovative supply chains

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Ten Tips from Successful European Companies in India

a. Tailored Product Proposition: As Indian tastes and habits are distinct from the rest of the world and vary from region to region, many companies have found the need to alter their international product to suit local tastes and conditions. Successful companies derive ideas for customisation from a deep understanding of the needs of the segment being targeted.
KSF #10

SUCCESSFUL MNCs TAILORING PRODUCTS TO SUIT INDIAN ENVIRONMENT

Tailored products vary from minor localization to complete innovation Degree of customization

Cadbury has a successful product innovation model in place

Consumer insight cell

Innovation cell

Company example

Consumer cell Identifies the customer segments and their needs, and tests products designed by R&D We discovered that peanuts in India are less desirable almonds on the other hand are much more attractive to consumers

AVL built emissions detectors that can operate under extreme heat and dusty conditions Grundfos built pumps that can work under adverse power conditions, such as those in certain parts of India Renault-ITL developed smaller low-mid HP tractors designed to fit the Indian farmers plot size Perfetti entered a completely new product category, building the deposited candy segment from ground up

Innovation cell develops the right features given market conditions and the customers price-value trade-off A European chocolate would not survive the conditions, we formulated more resilient chocolates that do not melt easily

b. Appropriate Value/ Price Offering: India is a country of widely dispersed income distribution, containing both a small but substantial affluent class and a vast population with an average disposable income that is 1/10th that of OECD countries. Successful companies have understood that India is not just about cheap products but providing the right value proposition, and have thus been able to find success across various price points. Companies catering to the mass market, such as HLL, have employed breakthrough efficiencies that enable them to break the price barrier and supply high quality goods at affordable prices. Philips has used this logic to cut the price of its acclaimed Compact Fluorescent Lamps sold in India from Rs. 600 to Rs. 140. On the niche side of the spectrum, Skoda has recently entered the high-end motor market in response to market demand, competing with the likes of Mercedes, and positioning cars in the super luxury category at a price of Euro 50,000.

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Ten Tips from Successful European Companies in India

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

KSF

#10

SEVERAL EXAMPLES OF COMPANIES EMPLOYING INNOVATIVE DISTRIBUTION STRATEGIES

...focusing on cost effectiveness and reach Partnerships often used to drive more scale through the channel Allianz-Bajaj partnering with banks, hospitals, travel agents and others to distribute insurance products GSK is leveraging its channel to form joint distribution agreements with both pharmaceutical and consumer goods players Swedish SKF bearings is partnering with auto components company to increase product visibility in rural areas Danfoss, Denmarks largest industrial Group, has developed a network of references and third party consultants to increase the reach of its energy saving products

Companies employing innovative distribution strategies... Cadburys rural/ semi urban horse driven kiosks increase reach

d. Innovative supply chains: Infrastructure challenges and a large number of supply chain intermediaries place pressure on the supply chain both in terms of cost and consistency. MNCs that have localized their supply chain have often also developed strong links with their suppliers by investing resources in improving their 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 multiple Indian 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 Piaggios facility in Pune. This resulted in a highly successful relationship and a win for Lombardini that was then also able to leverage India for its own worldwide operations. ***

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Ten Tips from Successful European Companies in India

Companies have followed many different paths to build and follow the key success factors mentioned in this document. Our benchmarking exercise has revealed that it is important to have the majority of these 10 success factors in place (and not merely one or two) in order to unlock some of the remarkable potential available in India, 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 companys strategy and performance in India. The attached Appendix provides a profile of the benchmarked companies together with specific examples of how they have used global processes, local processes, and customized product/market business models to succeed in India.

HOW WELL IS YOUR COMPANY PERFORMING AGAINST THE 10 KSFs?

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)

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

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Ten Tips from Successful European Companies in India

Appendix

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