News: US companies in India - Raking in the moolah

(TV18 07/05/2006) Mumbai - It’s payback time for American multinationals who’d set up business operations in India in the 1990s. From technology outfits to cola makers; from car makers to seed makers; from construction equipment companies to banks -- they’re all making money, and a mark. According to the American Chamber of Commerce in India—which has seen its membership base grow from zero in 1992 to more than 300 today-- a majority of US firms with a presence in India have been reporting doubledigit year-on-year growth.

India has been identified as one of Coke’s most profitable global markets. According to a study conducted by BCG, the Indian arms of two American banks, Citibank and Bank of America are more profitable in India than their global average.

General Electric did $ 1 billion worth of business here three years ago, and continues to maintain the same pace. It has so far invested US $ 600 million in India; this money has brought domestic earnings of US 1 billion and exports worth another US $ 1 billion. In other words, GE has recouped more than three times its investments.

Uncle Sam scales up

American multinationals are scaling up as if there’s no tomorrow. India is already Reebok’s fastest growing market in the Asia Pacific and the country is Motorola’s third largest market. Ford arrived in India at the turn of the millennium with 12 dealerships in 8 cities; today it has 90 dealers in 70 cities. The US auto major has just completed what it calls “its best ever year” in terms of sales.

While many US companies are benefiting from the growing size of the domestic market, others are being rewarded for making India their hub. US automotive systems company Viseton makes automobile starters and alternators for the European market. With $43 million in sales, Viseton is the largest exporter of alternators out of India.

The rapid growth is not restricted to IT or manufacturing. American companies also making important inroads in India’s massive farm sector, which employs 70 per cent of the population either directly and indirectly. US agrochemical giant Monsanto started selling BT cotton seeds in India barely two years ago. In the first year (2003) about 75,000 farmers supported BT cotton. The number was 300,000 in 2004 and in 2005 about 500,000 farmers are expected to cultivate the crop.

For US investors who bought into the India story in the nineties—when others were still restricting their Asian forays to China—the mood is upbeat. A study conducted a few years ago by the Xerox Corporation and consulting firm Inter-Link India revealed that about 70 per cent of all American companies reported better than expected market share, market growth, product launches and profits. Only 14% were worried about sovereign guarantees. Almost all those surveyed said they would not scrap their venture in India. Over 93% rated the business climate in the states they were located in as fair to excellent.

In segments such as Information technology and software, an overwhelming 83% of American companies said they were very happy with their experience in India.

This hardly comes as a surprise. Nine out of top 20 Indian IT firms are from United States. These firms make up over 37% of the turnover of the top 20 firms operating in India. And they’re making hay. Oracle recorded operating margins of over 40 per cent between September and November last year. At another level, IBM led India’s server market in 2004 with a 30 per cent market share.

Building India: Defence and infrastructure

India has developed a ravenous appetite of late, and the country’s consumer,infrastructure, transportation, energy, environment, health care, hi-tech and defence sectors represent a market that exceeds tens of billions of dollars in the short and medium-term.

Consider defence. India imports $1.5 billion worth of military hardware annually. The lifting of U.S. sanctions against India in October 2002 means that U.S. defence suppliers can once again be considered to meet these growing requirements. Also, after the events of September 11, 2001 in the U.S., India’s defence cooperation with the United States has reached an all-time high.

Opportunities are also sprouting in infrastructure. Construction of nearly everything from airports to container ports to teleports, together with a $10 billion countrywide road construction plan, has set the stage for fresh investments, and since they already have a foothold in India, American companies have a headstart over a number of other countries.

Take global construction equipment major Caterpillar makes backhoe loaders. With new infrastructure projects being commissioned every day, backhoe loaders are the backbone of the Indian construction industry, and they account for approximately 50 % of the earthmoving equipment sales. Caterpillar foresaw this environment some years ago and put India on its manufacturing map. It invested in a 183 acres facility which has a factory spread over approximately 51,000 square meters near Chennai. Now it is well set to cash on the construction boom.

Consumer power

Yet it is the sheer size of India’s consuming class that is causing the maximum excitement among US companies. According to Richard Celester, the former US ambassador to India, the country has grown by a Brazil in the last 10 years, and will grow by another Brazil in this decade.

With a manufacturing boom as well as an expansion of back-office outsourcing into the second-tier cities, wealth and purchasing power are no longer a big-city syndrome. According to a report by the National Council for Applied Economic Research, half of India's 10.7 million households with an income of up to a million rupees ($23,000) are in smaller cities. The report has recorded a big rise in the number of rich households, those with incomes of 1 million rupees to 5 million rupees (43 rupees = US $ 1) , in smaller cities like Vadodara, Nagpur, Ahmedabad and Vijayawada. Also, while in 1995 just 2.8 percent of households were counted as middle class, with income of 200,000 rupees to a million rupees (US $ 4600 to US $ 23000), the report has projected that 12.8 percent would be counted as such by 2009.

Because of consumerism, markets of key interest for US companies, like
computers and soft drinks-- are growing rapidly. PC shipments surged 34 percent last year, outpacing the 14 percent increase in Asia, according to data from researcher Gartner Inc. The Indian market will expand more than 30 percent a year for the next three years, according to the Manufacturers Association of Information Technology, Similarly, soft drink sales in India grew 76 per cent between 1998 and 2002, and is expected to grow at least 10% per year through 2012.

All this is good news for a slew of American companies who betted early
on the great Indian middle class.

PepsiCo India -- which is expecting a 15-20 per cent increase in sales in 2005 according to its India head Rajeev Bakshi -- has 19 company owned factories and 21 franchisees. The company has set up 8 greenfield sites and is planning an investment of approximately US$ 150 million in the next two-three years. Similarly, from 1993 to 2003, Coca-Cola invested more than US$1 billion in India, making it one of the country’s top international investors.

Meanwhile, in less than a decade, the US fast food chains of McDonalds, Pizza Hut and KFC have established a strong presence in urban India by putting together recipes made for palates of Indians. KFC came to India in
1995; they opened 70 restaurants over the next 8 years. Last year, they opened 30 more, for a total of 100 to date. Their target in 2014: one thousand restaurants.

Size does matter

The bigger the company the larger is the potential for growth. Citigroup of New York, for instance, makes money in retail banking, corporate banking, wealth management, services for NRIs and a host of other channels. GE also makes money in India in 31 different businesses.

"There isn't a better destination, frankly, than India just because of scale of population and availability of employees," says Pramod Bhasin of GE India. “Right now every one of our manufacturing businesses has a significant engineering operation here," adds Scott Bayman, GE India’s CEO.

Grabbing the Tech space

But nowhere has the performance of American companies been more
profound than in the technology space. In terms of investment and growth, U.S. companies like Cognizant Technologies (largest export revenue earning MNC) IBM, Oracle, GE, Cisco, Compaq, Intel amongst others lead the MNCs in the Information Technology sector. Nine out of top 20 Indian IT firms are from United States. These account for over 37% of the turnover of the top 20 firms operating in India.

These companies are doing well because they bet on India early on. In 1991, Motorola set up its first software centre in Bangalore. In 1999, the American tech giant added two chip designing units around Delhi, and a third one in Hyderabad. India is now well-established as a source of software and chip design, and as a source of excellent capital for Motorola globally. The number of software engineers employed by Motorola in India has gone up from 100 to a current level of 2000 engineers. As a key growth market for Motorola, India has reached a critical inflection point.

Even American companies outsourcing work to India have grown in complexity. Seeking simple cost advantages in the form of call centres is passé. Many now seek the expertise of Indian fashion professionals. India for example, is now a major sourcing hub for Reebok International’s golf apparel and accessories brand Greg Norman Collection. The $100 million brand, which retails at US $60 to US $90 per piece globally, sources about 30-40% of its total apparel needs from India.

The ultimate logic why American companies’ presence will only grow in India is this: If globalization is inevitable, so is a presence in India, one of the largest markets and economies of the future.

American MNCs in India: Tasting success

Oracle started its Indian operations in August 1993. Its Indian subsidiary has achieved a CAGR of about 40 percent since its inception and sells more call-centre software in India than the rest of Asia Pacific combined. Between September and November 2004, Oracle India’s earnings per share increased 35 percent, net income grew 32 percent and operating margin at 41%, the highest ever.

Two years ago, revenues and orders of US giant exceeded US $1 billion in India. GE employs over 22,000 people in India.

At a sales growth of 30 per cent, Ford India recorded its best ever performance in India in 2004, and already, in a period of less than five years, the company’s operations in India have started generating positive cash flows.

Cola Cola re-entered India in the mid nineties. By 2003, the Atlanta giant’s Indian arm. Coca-Cola India had won the prestigious Woodruf Cup from among 22 divisions of the Company based on three broad parameters of volume, profitability, and quality.

Reebok India plans to open a new store in India every week till the end of 2005. India. Reebok India is already the US shoe major’s fastest growing market in the Asia Pacific.