Indian corporations are going global. The recent acquisition of Corus by Tata has signalled that some of them are looking beyond the national market and seeing their future as multi-nationals, competing for space in the global economy with the present occupants.
International power relations are influenced by the global reach of national capital. Hence the global ambitions of Indian corporations make geo-political sense. Do they also make economic sense?
The Tata-Corus deal is the biggest one so far. But a lot has been happening since the finance minister loosened controls on overseas investments by Indian companies in 2003.
The volume of overseas acquisitions by Indian companies has grown from around $2 billion in 2004 to $4.5 billion in 2005 and may reach over $10 billion in 2006. Videocon, Bharat Forge, Ranbaxy and other pharma companies, the IT majors and, of course, ONGC are some of the others who have been active.
This push by Indian companies is part of a broader outward expansion by companies from the rapidly developing economies (RDEs). A study by the Boston Consulting Group* has identified 100 globalising companies in 12 RDEs, of which 44 are in China, 21 in India, 12 in Brazil, 7 in Russia, 6 in Mexico, 5 in ASEAN, 4 in Turkey and 1 in Egypt.
There are of course several older global players operating out of South Korea, Taiwan, Singapore and Hong Kong, which are now considered part of the developed world.
Since joint ventures and foreign subsidiaries are excluded, the Chinese companies on the list are mostly public enterprises. They have combined their low costs and super scale production with a remarkable agility in logistics, design and marketing.
The Indian companies, on the other hand, are almost all private sector players with the exception of ONGC. The strength of the Chinese companies is in low-cost manufacture and assembly of final products. The Indian companies, other than the pharma group, show their strength in skill-intensive intermediate products and services.
Going global involves more than just acquiring foreign companies. The BCG study looks at it more broadly in terms of a company's presence abroad in the form of subsidiaries, manufacturing and servicing facilities, its interest in M&A activity, access to international capital markets, the breadth and depth of its technical competence and the value proposition it presents.
Why do companies choose to go global? After all, the greatest comparative advantage of the RDEs is their cost advantage in labour and even in fixed costs at home. Two-thirds of the BCG 100 come from China and India, where the size of the domestic market reinforces this cost advantage. What then is the advantage which accrues to these companies if they invest abroad, often in high-cost mature economies?
One reason, perhaps the most important one, is ambition. When Mr Dhoot of Videocon was asked this question after the preliminary moves to acquire Daewoo Electronics, he replied that he wanted to grow five-fold in size in five years and he could not do that even if his company expanded at twice the GDP growth rate within India.
The Tata-Corus deal has some of this raw ambition. But it is more than that. It reflects a rather special value proposition the Tata management can provide. The Tatas have operated a steel plant under difficult conditions, coped with competition and developed plant management, supply management, maintenance and marketing skills, which constitute a viable business-model for developed country commodity producers teetering on the edge of commercial decline.
In some ways Mittal's empire rests on the same strength as he has brought in management talent from India even though he himself is based in Europe.
Other companies have used acquisitions to reach new markets and get the technical and marketing muscle required for this. Thus Bharat Forge, which now is the second-largest forging company in the world, points out that each acquisition brought in something new to its capabilities -- access to the US pick-up truck market, the European engine assembly market or the aluminium castings market.
The same is true for several pharma acquisitions. These are commercial beachheads allowing these companies to conquer new markets.
A different way of going global is organic growth of a company, by setting up sales and service facilities, manufacturing plants, and R&D centres abroad. This becomes necessary at a certain scale because of the long supply chains, particularly from Asia to Europe and the US.
Indian IT majors and many of the consumer product companies on the BCG 100 list have followed this route. Some Chinese companies have built deep relationships with retailers like Home Depot and Wal-Mart, which give them access to the price-conscious consumer segment, where they can compete effectively with present players.
In the long run, survival in a global market depends on building a strong brand equity or a cost or technical advantage that allows a company to capture, say, 25 per cent or more of a global market. There are some Chinese and Brazilian companies that can claim this but none as yet from India.
ONGC, China's national oil company and its main steel company are different. Their overseas forays are an effort at securing supply sources. Both China and India are late-comers to this game and both have large and growing demands for imports of oil and other minerals. This part of the globalisation process is more a geo-political than an economic game.
Overseas expansion necessarily involves some financial packaging. Most of these financial services are today provided by investment bankers abroad. Why not make it easier for Indian investment bankers to provide these services? They have the talent but are hemmed in by controls on what they can do abroad.
One question that arises is whether a capital-scarce country should be a capital exporter. First, any large country that engages in foreign trade has to invest abroad for securing markets and raw material supplies. Second, acquisitions like the Tata-Corus deal do not involve much export of capital since they are often financed by foreign borrowing. They are, in effect, an export of management capacity.
India's greatest comparative strength is in project and plant management under difficult conditions, in intermediate engineering and IT services and in skill-intensive manufacture. Leveraging this to our advantage requires a liberal view of overseas expansion by Indian companies.
* The New Global Challengers: How 100 top companies from rapidly developing economies are changing the world, Boston Consulting Group, May 2006.