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India Inc.: World in its eyes... - Views on News from Equitymaster
 
 
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  • Nov 13, 2006

    India Inc.: World in its eyes...

    There is a storm brewing for India Inc. The storm is not indicative of the earnings momentum that the corporates have maintained in the September quarter and the need to sustain the same over the next quarter, and the next one. Rather, the storm is indicative of a major revolution brewing within Indian boardrooms, for devising strategies to go global, to challenge the incumbents in their own territories. Be it the Tata Group's thirst to acquire scale, or the Aditya Birla Group's strategy to garner a bigger raw material resource base, India inc. is increasingly taking benefit from the 'flattening' of this world. But do these opportunities come alone minus the challenges. We believe, not really!

    The opportunities it gets...
    Global business strategy definitely brings along a whole set of opportunities in forms of bigger markets (more customers to sell to), wider geographical coverage (that de-risks businesses from a single region), global resource base, access to best business practices, higher revenues and, of course, better recognition (that in turn leads to more business). Most of the Indian companies that are going global have one of these reasons for doing so. Take for example Tata Steel. Its recent 'successful' bid for Corus, will not only catapult it to the sixth position in the world steel manufacturers' list (from the 56th position). Also, the Indian steel major will now find place in the elite Fortune 500 club, straightaway from nowhere to almost being at the middle of the list. Do these rankings mean mere rankings? Not really, they mean a whole lot more - in terms of a much bigger global recognition and greater access to global monetary and commodity resources. Plus, the bigger size will give Tata Steel increased pricing power in the commoditised steel market. Increased global presence and larger clientele are added benefits!

    And the challenges it throws...
    Despite the set of opportunities that going global can bring for companies, there are also a host of challenges that is throws upon them. Challenges are in the form of increase in competition, difficulties in integration with global supply chains, stricter levels of corporate governance, and dependence on local policies. Global execution and foreign currency risks are a given. Most of the Indian companies that have made global forays in the past 2-3 years have reported of margin dilution due to the need to sacrifice profitability to enter 'new' markets. There is another set that have seen their consolidated financial performance getting severely impacted due to foreign exchange volatility.

    Conclusion
    We believe that the decision to globalise is ultimately driven by the need to create competitive advantages and sustainable stakeholder value. Overseas markets may bring higher revenues as well as higher volumes (contributing to economies of scale) and opportunities for growth enhancing acquisitions. However, there are challenges galore, at least during the initial period of making a global presence. The earlier companies realise this and include these as part of their global growth model, the better it will be for them.

     

     

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