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How India Inc can win the world
BS Strategist Bureau | July 04, 2006
When global management consultancy, the Boston Consulting Group penned a report titled, "The New Global Challengers: How 100 top companies from rapidly developing economies are going global - and changing the world", it homed in on 3,000 companies from 12 rapidly developing economies.
When the top 100 list was published in May 2006, 21 Indian companies made it to the elite list. Asian companies formed 70 per cent of that list. And how? These companies were selected on the basis of being truly based out of developing economies.
For instance, foreign JVs and RDE subsidiaries of multinational corporations were left out. Only companies with a turnover of more than $1 billion as of 2004 were considered - that's the threshold required to drive serious globalisation campaigns.
If the international presence was less than 10 per cent of revenue, the companies were struck out - with exceptions. Companies which were close to hitting the 10 per cent mark and whose international business activity had grown swiftly in the recent past were considered. There was more to pass the test.
International presence indicated by owned and operated subsidiaries, sales networks, manufacturing presence, R&D facilities and international investments, including M&As, were considered.
Equally important were the company's access to capital for international expansion, the breadth and depth of its technologies, intellectual property portfolio, the international appeal for its existing offerings and value propositions.
The chosen companies belonged to a diverse set of industries (see table: The India 21). As the findings below indicate, each company follows its own way, implementing a number of different strategies. But certain patterns seem to emerge which fall under six primary models of globalisation.
Model one: Taking RDE brands global
Twenty-one of the RDE 100 are growing internationally by taking their established home-market product lines and brands to global markets. Take the case of China's Hisense, a $3.3 billion consumer electronics group. The company is one of the largest manufacturers of television sets, air conditioners, PCs and telecom equipment.
In addition to manufacturing in China, Hisense has production sites in Algeria, Hungary, Iran, Pakistan and South Africa. The company has expanded mainly through organic growth and sells 10 million television sets and 3 million air conditioners every year in more than 40 countries. International sales account for more than 15 per cent of revenue (it's the best-seller of flat-panel TV sets in France).
Hisense's success formula: stylish consumer products at an affordable price and a continuous stream of innovations. Its R&D facility is located in its home-market, China, which is a huge market and a demanding one too.
This gives Hisense a super scale and low-cost manufacturing base. India's automobile maker, Mahindra & Mahindra follows this model of taking its brand global. How does M&M do it?.
Model two: Turning RDE engineering into global innovation
Twenty-two of the RDE 100 companies are pushing their international clout by marketing innovative technology-based solutions to leverage their strengths in engineering and research.
An example is Wipro, the Indian IT services group. Wipro has expanded rapidly by providing software coding support. It was a $545 million company in 2000. By 2004, it became a $1.8 billion company.
At present, Wipro is taking innovation to the next level by building extensive engineering capabilities, thus making R&D services the next battleground. The company already claims to be the world's largest third party provider of R&D services.
Its 12,000 strong product engineering services group offers R&D services from product strategy to hardware design and quality consulting for clients who sell electronics-based products. Growing at 36 per cent per year for the last three years, this business group accounts for 36 per cent of Wipro's revenue.
Model three: Assuming global category leadership
Only 12 companies from the list are growing by establishing themselves as specialists and global leaders in one specific, relatively narrow, product category. For instance, Hong Kong's Johnson Electric had $1.1 billion revenue in 2004 - 67 per cent of that came from outside of Asia.
The company is the global market leader in small electric motors for automotive, consumer and various commercial applications. The company can produce 3 million motors every day in China alone.
This is complemented with other manufacturing sites in Latin America, US, western Europe and R&D centres in Israel, Italy, Japan and the US. While putting a strong emphasis on aggressive organic growth, the company has also pursued multiple overseas acquisitions in the US of its tier-one suppliers.
In parallel, the company is also using acquisitions to broaden its capability base and move into more specialised product lines such as precision piezoceramic motors (it bought Israel's Nanomotion) and digital camera motors (it acquired Japan's Nihon Mini Motor).
Then Johnson has the other China advantages - superscale, high volumes and low global unit costs. Any Indian comparison? While companies like Bharat Forge and Crompton Greaves principally follow the engineering-led innovation approach (like Wipro too), they have managed to establish strong positions in their categories. Take the example of Bharat Forge, which is the second largest forging company in the world.
Model four: Monetising RDE natural resources globally
Thirteen of the RDE 100 companies adopt this approach. They leverage their home country's natural resource advantages. Prime examples are Brazilian food processors Sadia and Perdigao, with an annual revenue of $2.2 billion and $1.8 billion respectively.
Half of their turnover comes from more than 100 countries. Both companies hold 30-50 per cent shares of the Brazilian market in their main product lines. Both operate along the entire value chain from farming to marketing chilled and frozen foods and high value added products like ready-to-eat meals.
Both the companies' expansion models focus on growing their domestic production capacity, while investing in overseas supply chain management capabilities.
Their key competitive advantage lies in abundant production resources for pork, poultry and grain which is complemented by ideal growing conditions for animal feed and by low labour costs. Both have hatcheries that are among the most productive in the world, achieve low production costs and high yields with highest quality standards.
In India, Hindalco and Tata Steel follow this model. The $2.5-billion Hindalco is Asia's largest producer of finished aluminium and alumina. It's also India's largest integrated copper producer.
With India having the fifth largest reserves of bauxite in the world - reserves that could last for more than 20 years - Hindalco has an inherent competitive advantage. Similarly, in steel-making, India has access to some of the richest supplies of iron ore, which gives Tata Steel a competitive edge.
Model five: Rolling out new business models to multiple markets
These 13 companies are building regional or global portfolios in their respective businesses by rolling out business models that were pioneered in their home markets. Cemex, the $15.3-billion Mexican cement conglomerate is an example.
One of the largest ready-mix concrete companies in the world, Cemex is vertically integrated and generates 79 per cent of its revenue abroad. It has built a global presence with acquisitions in the Americas, Asia-Pacific, west Asia and Europe.
The key to Cemex's success is in its rigorous approach to integrating and running acquisitions in a way that it covers every aspect of the business.
Integral to this approach is a seasoned M&A and integration team that executes serial acquisitions. A number of companies, which follow this model are still in the early stages of globalisation. Indian companies adopting this approach include VSNL and Reliance.
Model six: Acquiring natural resources
In contrast to others, the 12 companies in this category are expanding overseas to acquire vital raw materials for their home markets.
Companies in this category are active either in fossil fuels or metal and mining products. Nine of the 12 companies who follow this strategy are Chinese. A good example is Shanghai Baosteel Group Corporation, China's biggest steel maker. The company has a production capacity of 20 million tonnes of crude steel a year (half of Arcelor's capacity).
But more than 98 per cent of its revenue comes from China. To secure stable supplies, Baosteel acquired a 50 per cent stake in Brazilian CVRD's Agua Limpa iron mining complex in 2001. A year later it invested in a joint venture with Hamersley Iron, an Australian subsidiary of Rio Tinto group.
In India, ONGC follows this model. It has expanded globally to access oil resources and has committed investments of $4.3 billion in overseas exploration projects.
Companies from the rapidly developing economies may broadly fit into one of the six strategies. But there is a rider: while these strategies are distinct in principle, they often overlap in practice. For instance, while Tata Steel monetises natural resources of its home country, it is also rolling out business models that are perfected in its home country in its acquired businesses abroad. The RDE 100 also have some features in common. First, all of they build on positions of low cost - a key competitive advantage of rapidly developing economies. Virtually all the companies are adept at learning and adapting. This is what enables them to learn the lessons of established companies. Moving forward, that might be their biggest strength.