India :100% Foreign Direct Investment permitted in E-Commerce

Source: INDOLINK

On 29th March 2016, Ministry of Commerce and Industry, Department of Industrial Policy and Promotion (DIPP) vide Press Note 3 (2016 Series) released the guidelines for Foreign Direct Investment (FDI) on E-commerce.

FDI up to 100% under automatic route (without prior approval from government) is  permitted in Business to Business (B2B) e-commerce.  Restrictions on FDI in Business to Consumer (B2C)  will continue. No FDI is permitted in B2C E-commerce.

• A manufacturer is permitted to sell its products manufactured in India through e-commerce retail.
• A single brand retail trading entity operating through brick and mortar stores, is permitted to undertake retail trading through e-commerce.

In order to provide the clarity on this, E-commerce business is categorized in two categories:

1. Marketplace based model of E-commerce: Marketplace based E-commerce model means providing of an information  technology (IT) platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller. 100% FDI is permitted in marketplace model of e-commerce.
2. Inventory based model of E-commerce:  Inventory based model of e-commerce means an e-commerce activity where the inventory of goods and services is owned by e-commerce entity and it sold to customers directly. FDI is not permitted in inventory based model of e-commerce.

With this press note there is more clarity about e-commerce business in India . Also,  it seems for B2C e-commerce to be open for FDI, going to take some more time.

Thinking @ doing business in India? What Next?

Author: Ravi V. Patil, India Director of INDOLINK Consulting

“India is doing great. Nobody talks about it.” Republican presidential candidate Donald Trump said in an interview with CNN on Monday 27th Jan.16. His statement carries particular importance knowing his views accusing several countries taking advantage of US particularly China. Steadily, India has overtaken China as fastest growing economy currently with @7.5% growth rate.

 When I meet overseas business delegates during this trips to India, one of the questions I normally ask is “Is this your first trip to India?” and the answer could be: Yes or 2nd, 3rd, 4th…  More than 50% of these delegates, this is their 2nd to 3th  visit to India during last 2-3 years and the purpose is exploring the possibility of doing business in India. They read the news: India offers very good opportunities, its vast market size, its growth rate etc. but at the same time, they read about  bureaucracy, delays and difficulties faced by some of the businessmen who tried it before. It creates a dilemma in their mind- to be or not to be and hence 2nd trip and more trips…  After 2-3 trips they realize that some players had taken the decision to start and now they are settled and doing great.

7 reasons why Joint Ventures fail in India

Source: INDOLINK

The joint venture is often considered the first option when the idea of doing business in India arises. Nevertheless, the experience proves that these associations rarely reach the expected goals and results. In most cases it turns out on traumatic experiences and failure for at least one of the partners (usually the foreigner).

There are logical reasons why foreign companies consider advantageous to join local Indian partners: lack of local knowledge –bureaucracy, market dynamics, business culture, management styles, labour laws…- quick access to the local market –due to distribution networks and customer portfolio of the local partner, and immediate availability of starting infrastructure –land, manufacturing plant, licenses and operation already going on-. For all this, the local partner is expected to pave the way for an easier, quicker and safer or lower investment.

This approach may seem logical a priori, but instead, we eventually find out that in many cases these assumptions prove wrong. Us in INDOLINK, after years of helping foreign enterprises to enter the Indian market, find the following main reasons that lead the joint ventures to fail:

CASE STUDY: The successful set up of GAMESA in India

With more than 15 years of experience, GAMESA is one of the world leaders in design, manufacturing, installation and maintenance of wind turbines, with around 21,000MW of installed power in 30 countries in 4 continents and more than 13,600MW in maintenance, with an international workforce of more than 7,200 employees.

Recently, the company has announced investments of 60 million Euros until 2012 for the setting-up of new production centers.

In this case study we present GAMESA’s experience in India and draw the most interesting conclusions from its implementation. For this, we have interviewed Ricardo Chocarro, Chief Operation Officer of GAMESA.

In 2007 GAMESA identified India as one of its strategic markets. At that time, India represented the 5^th largest wind power market in the world and they already foresaw that it would reach the 3^rd position soon, as it is the case now-a-days.

Given the difficulty and cost involved in transporting wind turbines, it is necessary for them to set up production plants close to where their demand is located.

Mr. Chocarro tells us how they developed their entry strategy: ‘we traveled around India extensively in order to understand how things work there. We studied the possibility of entering the market through a Joint Venture with a local partner but the prevailing high failure rate discouraged us. We believe that a good local knowledge is more important than a local partner. And that knowledge can be provided by a good local team, so that’s where we focus our attention. While designing our entry strategy, INDOLINK helped us significantly by providing that knowledge of the country, thanks to their understanding on the Indian reality and business culture from an European perspective, necessary to understand our needs. That duality, along with their previous experience, made us choose them as our consultants in India. It’s important to have a balanced knowledge on both cultures in order to make as accurate decisions as possible.’

GAMESA was ambitious about their expectations since the very first moment. Their aim was to reach position among the 3 main wind turbine suppliers in India. At the same time, one of their initial concerns was about managing to understand the market and being able to respond to it suitably.

During the initial prospection visits, a strategic analysis was carried out, followed by a location study, where various cities were assessed according to a number of key factors such as access to supplies, availability of staff, legal security, proximity to the port…

From this analysis, Chennai, southwest of India, was positioned as the best choice for GAMESA’s needs. After checking several locations for the construction of a plant, and in order to accelerate the process, they finally decided to rent, with a long term contract, an already existing building in the outskirts of the city. In the beginning of 2009 conditioning works started in the plant. Meanwhile, the newly recruited team worked for some months in a business center in the city center, close to the airport.

In February 2010 their first production center in India was launched. The initial assembly capacity of the plant, which manufactures GAMESA G-58-850 kW wind turbines, was 200 MW per year.

‘The experience so far has been very positive, we have grown even faster than what we originally expected. Market acceptance has been excellent as we have gained a significant market share in a short time’, says Mr. Chocarro.

The production process too has moved faster than expected.  Given the necessity of catering to the robust demand growth, they have increased the assembly capacity to 500 MW.

The figures give an idea of the evolution of the company in India. During the first year of operations (2010) they sold 196 MW, a figure that accounts for 8% of total company sales. Also, they multiplied almost by 5 the number of employees in the country, with more than 330 (direct employment).

In terms of sales forecast, taking as a reference the period 2009-2013, GAMESA expects cumulative growths of 166% in this market, expecting an approximate sales volume of 800 MW for 2013.

When asked about which the key factors for the success achieved are, Mr. Chocarro states that ‘the first and most important factor is to correctly select the local management team.  Hitting the mark with the team is essential.  It’s the basis on which the whole venture is founded.  Secondly, GAMESA has understood the specifications of the Indian market and we have been able to respond accordingly, since India is a very particular market. Thirdly, our product, of course!, all above mentioned factors are not enough if one lacks a good product. And finally, I would highlight the agility in decision making. ‘

The experience of setting up in India has probably been the fastest among those undertaken by GAMESA so far. In other international markets such as China and USA, GAMESA entered in a time when the wind power sector was just starting. There were not experienced professionals so they had to ‘create’ that know-how.  On the contrary, when they entered India the sector was more mature and they have been able to identify skilled and experienced professionals in the labor market, with the time savings it entails.

GAMESA launched its project with a low investment which has achieved a high return on investment. Now, once it is established in the market, the aim is to make a major future investments.  GAMESA plans to open a blade plant in 2011, with an initial capacity of 300 MW, and will continue with the location of G9X-2,0 MW in 2012.

In the new plant, located in the state of Gujarat – northwest of India -, blades for G5X-0,850 kW will be initially manufactured, but some other higher power models might be incorporated, such as G9X-2,0 MW.

GAMESA also plans to install new production plants for the manufacturing of nacelles and towers (in joint venture with other Spanish companies) in different locations in the states of Gujarat and Tamil Nadu during the coming years.

Set in the strategy to consolidate their presence in the country, with industrial and technological base, GAMESA has also started its first technology center in Sholinganallur, in Chennai.

They plan to add a total of 100 engineers in this center in 2011 to develop R & D activities in India, an amount that could be duplicated in 2012. Gamesa technology center in India will work closely with the local supply chain and work with experts in energy, universities and institutions in the analysis and development of new materials and production processes.

At the time of finishing this article GAMESA has secured an order of 2,000 MW with Caparo Energy India, for the next five years.

Key success factors to setup business in India

This article was published in the ICE (in english Spanish Commercial Information) Economic Bulletin in February 2011.

Author: Mario Gil, Director of INDOLINK Consulting

The present article aims at encouraging executives from small and middle scale European companies to set up business in India. With this objective we present the main variables which make India an attractive business destination, the major obstacles limiting the access to available opportunities and, finally, a few suggestions to avoid those constraints and increase their chances of success in setting operations in this country.

Any internationalization process, regardless of its magnitude or destination, constitutes a major decision in the life of a company, with far reaching implications. Given the difficulties which that decision implies, in the introduction of this paper we present an approach which may break the generic conflict many industrial SMEs face in venturing on their first foreign establishment.

In these links you can find the full article:

• Original (in Spanish)
• English version

CASE STUDY OF A SPANISH SME FROM ELECTRONIC SECTOR IN INDIA

ADD Semiconductor (Advanced Digital Design S.A.)  is a Spanish company set up in 2001 by two professionals from the Zaragoza University with more than 15 years of experience in microelectronic design. ADD develops systems of high efficiency and low cost in one chip (System on Chip) for telecom application and signaling processors. ADD is growing fast and nowadays has 40 employees between Spain, India, China and USA.

In 2009 ADD identified India as a priority market. Along with China and USA, India is one of the biggest markets in this sector. The country has more than 135 millions power meters where the ADD chips are inserted. Compared to the European average of one meter per inhabitant, and making a conservative estimation, in 10 or 12 years India can reach 700 millions of meters.

In addition, India is experiencing a robust development in infrastructures, which is pushing the electronic sector. ADD’s product has several applications such as controlling public lighting,  controlling solar energy panels, home automation, etc.

According to its International Sales Vice-president, Jesús Teijeiro, “we were aware that, for entering the Indian market, our physical presence was required. Speaking the same language and sharing the same culture is basic to do business”.

The basic structure needed by ADD to set up in a country is composed of two people: one Business Development Manager, who must have a good knowledge of the region and the potential customers, and one Application Engineer for giving technical support to their clients.

Instead of choosing the traditional strategy of creating a commercial subsidiary, ADD opted for recruiting these people on a contractual basis through a third party (INDOLINK). Ensuring their full dedication to ADD would guaranty their objective of establishing quickly in the market without the need to create their own legal structure, avoiding several duties and diverse legal, accounting and financial costs.

“At the time of deciding which company was going to support us in our entry strategy we assessed a couple of options. We chose INDOLINK due to its experience with other clients in the industrial sector. We wanted a sound consulting firm that knows how to move fast in the market. The promptness in hiring our technical staff and their Business Centre guaranteed a fast set up at a reasonable cost”.

In September 2009 the recruitment was finalized and the two newly hired professionals joined duty. The experience is being more positive than expected, in less than a year they have got important contacts and brought in the first big sale, “normally it takes between one year and a half to two years to recover the initial investment. In India we hope to recover the investment in our first year working there. We expect our turnover to be around one million Euros in the next financial year. We plan an exponential increase; by 2012 we hope our turnover to reach 5 to 6 million Euros.”

According to ADD, the main causes for their success are, firstly, having a sound and robust technological product very suitable for markets like the Indian. Secondly, recruiting the right people with a deep knowledge of the market, who have effectively conveyed their product value to the client. Finally, the support and orientation provided by INDOLINK to ADD and their local staff.

When compared to other countries, their experience in India shows particularly positive. ”We have been working in China one year prior to India, but it is only now when we are starting to receive the first orders, and they are still much smaller than the Indian orders. We have noticed that the Indian market is more open, more prepared to listen, and there are less idiomatic barriers than in China. ROI is higher in India than in China. We would recommend consolidating first in the Indian market and then trying the Chinese one. In EEUU we are also having good results because it’s a market that is not so price sensitive”.

Currently ADD is recruiting a new engineer and they are planning to continue expanding their staff. In the medium term they will establish a subsidiary company, once their sales confirm their real possibilities in the Indian market.

Recruitment on contractual basis through a third party is a convenient alternative for SME’s that are willing to enter in international markets, but prefers to avoid incorporating a subsidiary company ad hoc.

Advantages of this type of strategy:

SOURCE: INDOLINK

Indian services sector witnesses two-year high growth in June 2010

New Delhi: The services sector in India grew at its fastest in two years in June 2010 led by an increase in business expectations and new orders.

According to the HSBC Markit Business Activity Index, based on a survey of 400 firms, the service sector rose to 64.0 in June 2010 from 58.2 in May 2010, pointing to a substantial rate of growth as a figure above 50 indicates expansion.

How to effectively control our Indian subsidiary?

Any Board of Directors worldwide is well aware that financial control is critical for a company healthy growth, particularly on new ventures in far, unfamiliar regions, or dealing with not so well known people, which happens to be the case in most overseas setups, specifically in a new venture in India.

In such environment there is a certain risk of some events going wrong and unnoticed for a while, thus limiting company’s capacity to take just in time corrective actions.

It is also acknowledged that, no matter the amount of control and prevention systems established, there is no manner to achieve full guaranty that one will get, at all times, the complete and veracious information on the project performance required to take the right decisions.

On the other hand, it is equally accepted that the more effective controls we implement, the better chances of an early alert in case of deviations.

In order to cater to this need, companies with setups in India typically resort to two diverse approaches. In medium to large projects, they will ask their expatriate Director, usually responsible for the industrial organization and know-how transfer, to pay also attention to financial issues. If affordable, they may depute an additional expatriate, with financial background, in the capacity of Financial Controller to handle these matters. The alternate choice, usually in smaller projects, goes to leaving everything in the hands of the local staff, hence wholly depending on the skills and ethical behavior (or lack thereof) of a newly recruited team.

It is evident that, no matter our faith in having the best possible team, leaving this function exclusively in the hands of the branch local staff exposes the company to a certain risk of dangerous deviations, which in case of occurrence could easily go unnoticed till the damage is beyond repairing.

However, contrary to common believe, through our years working in India, we have observed that expatriate financial controllers need not be the only or best approach to handle this requirement and might not produce a significantly better outcome.

Often, cost, lack of the specific local knowledge and experience, required to effectively perform this function, and the “void” where foreigners are sometimes placed, by themselves or kept by the Indian staff, drastically lessen their performance. In fact, it is not exceptional that, in case of misconducts in the company, the expats are the last people to know.

In this context, companies confront a conflict with no clear solution but that of balancing compromises between both approaches.

However, there is a third option which might be considered. Under certain conditions, this controlling function can be also supplied by a third party. A Service Company, with expertise in the Indian environment and awareness of western companies’ concerns, could provide the skills, experience and independence from the subsidiary staff, required to offer a higher reliability at an effective cost.

Moreover, such third party could provide not just an outsourced accountant to depute at the local branch, but make available the support of an entire team of experts in various fields. This approach could transform the traditional financial controlling function into a far wider service of global controlling.

As a matter of fact, a multidiscipline team, with sufficient business processes knowledge, can take controlling beyond just reporting on financial results to providing a highly valuable support in the company’s process of ongoing improvement.

No doubt, being such an innovative model of controlling overseas subsidiaries, its implementation is likely to face constraints and resistance to change from both, parent companies as well as local branches, but the rewards in terms of accurate, trustworthy and cost effective information on the subsidiary progress and valuable support to its growth may well compensate the attempt.

Mario Gil Medrano

Director INDOLINK Consulting

Establishments in India Vs China

When our companies look East they find two colossus that without difficulty are going to play a fundamental role in the economy of the new millennium: China and India.

From the distance we see two Asian giants, with a population of more than a billion inhabitants, high rates of growth, low productive cost, and a market potential of fantastic dimensions,  but away from these similarities we confront two very different countries.

China is way ahead in regards to economic development, level of technology, infrastructure, productive capacity and lifestyle. From the managerial point of view, we find a very attractive market for some sectors and an ideal base for industrial subcontracting. However, by the experience of numerous western companies, it is a complicated destination for foreign direct investment.

To produce in China is cheap for the local companies that often can “evade” part of the tax load and legal, intellectual property and environment requirements.  The foreign companies, however, have to abide strictly with the rules and meet with serious difficulties to compete in price with the countless local suppliers that operate in this market.

India, way behind in economic development, with shortage of infrastructure, limited industrial capacity and excessive bureaucracy, offers, nevertheless, more attractive opportunities of investment.

The number of foreign establishments is especially limited and the majority generate positive performances. We find a country of incalculable possibilities.

Recently, the head of an international insurance company in India summarized this potential from his own experience: “We landed in Mumbai eight years ago and today we employ, between our staff and independent agents, nearly 200,000 people, we are the market leaders and this with an exceptional profitability from the first year of operations”.

Not all projects reach this magnitude, but their experiences illustrate well how this market can be in fact profitable for the pioneers.

The main attractions that India offers are summarized below:

• An internal market of great potential, well developed in areas like construction, infrastructure, energy, telephone and communications, automotive… that is, in general, in a stage in which a new comer can take a sensitive solid strategic position which will generate substantial profits in future.

• The growth in demand of Global Sourcing of western companies, that set India as a priority center for searching of suppliers of competitive prices, the same way as the aggregate demand of various countries of the geographical environment like Western Africa, South East Asia and Middle East.
• Additionally, to consolidate a center of production or of services in India guarantees the access to:

–A base of production where to produce and to subcontract components at low cost, which is important to maintain the competitiveness for a long period.

-Professionals and skilled workers with whom to develop other sustainable competitive advantages. The human resource team of the subsidiary, once they know the processes and the technology, can carry out R&D activities, marketing, systems development…that will be of benefit to all the companies of the group, to costs surely lower to those that might have in the headquarters.

These elements are framed in a socio – cultural environment that, although at first can seem unintelligible, is closer than we imagine. We can´t forget that western culture is “indoeuropean” and our languages and mental structures have a common base.

If we add the presence of the British for three centuries in India, with a decisive weight in the establishment of English as official language (English is used for university teaching and is the main language for business) and a industrial culture, administrative organization and judicial system of western type, we can find numerous elements of common reference. This represents a big advantage with respect to China, where the difficulty of language makes us lose market transparency.

We finally should take into consideration, the solid bet that the United States have taken, for strategic, geopolitical and economic motives, to develop India, which has been so decisive in the past for the development of other Asian economies, included China.

Mario Gil Medrano

Director

INDOLINK Consulting