• DECEMBER 28, 2006

India Inc.: We are the world!

This article was written by Equitymaster for Business India, and was carried in its December 3, 2006 issue with the title, "India's most global companies". The original draft, in its entirety, has been retained here.

The dictum of 'the world is flat' is not being practiced anywhere better than in the emerging markets of India and China, which are churning out companies that are vying for top spot in global markets and industries. As we have gathered from the managements of some large corporates, the decision of most of the Indian companies to globalise is driven by their need to create competitive advantage and sustainable stakeholder value over the long-term. While their growth models might not factor in the quantum of prospects from global endeavours, we believe that overseas markets might bring them higher revenues as well as strong volumes. The global attempts are also likely to provide them with opportunities for growth enhancing acquisitions.

The Indian companies who are charting a global growth path are not only gaining global market share or making major acquisitions, they are also emerging as business partners and competitors for the world's largest corporations. And they are basing their growth strategies not only on cost arbitrage. These companies are led by visionary (and ambitious) leaders, have products and services that match the global appeal, and are radically transforming the industries and markets where they are entering.

In this write-up, we profile five Indian companies who have developed a global mindset and are pursuing their growth with no exception to geographical boundaries. This list is inclusive and not exhaustive.

Tata Tea: This was the first company to have done it and done it successfully. Tata Tea marked the entry of India on the world stage, with the acquisition of Tetley. And it has not stopped even as of now. From being a tea plantation company in the early 1980s, Tata Tea became India's second largest player in the branded packet tea market by the end this decade. Then in 2000, it made a transformational change with the acquisition of the UK based Tetley's worldwide tea business for 271 m. Along with a global presence, this acquisition gave Tata Tea access to a large distribution network that would also help the company in the introduction of its brands globally at little incremental cost. The other benefit pertained to an improvement in Tata Tea's business mix in favour of higher margin packet tea. The company, however, did not stop there. After a hiatus of five years while it was integrating and benefiting from the association with Tetley, in 2006, Tata Tea made two large acquisitions in the US - Glaceau Water (enhanced water) and Eight o' clock (coffee). These buyouts will not only provide a fillip to Tata Tea's presence in the global markets, but will also help it emerge as a complete beverage player.

Ranbaxy: This north-India based generics major has been the pioneer in charting the growth path in the global pharmaceutical market. With the introduction of the product patent law in India and the increasing potential of generics globally, Ranbaxy has been increasing its geographical reach to capitalise on the opportunity. Today, the company has a ground presence in 49 countries, manufacturing operations in 8 countries and its products are available in over 125 countries. Its global focus has also enabled the company in generating revenues to the tune of US$ 1 bn and today is ranked amongst the top ten generic companies in the world. Given the highly competitive nature of the generics industry worldwide, acquiring scale has assumed significant importance and consequently consolidation in the industry has been picking up pace. Ranbaxy has played an active role on the acquisition front as well, acquiring four companies in the European region. Given the fact that generics are the way forward, considering the need to reduce medical costs, especially in the US and European markets, companies like Ranbaxy have a meaningful role to play in the long-term.

Wipro: Though being a difficult choice from the technology industry, where its peers like Infosys and TCS have themselves set benchmarks in execution global strategies, the fact that Wipro has emerged as the world's largest third-party engineering services company and the way it has covered to becoming so, provide one with reasons to wonder on this growth story. From being born as a vegetable oil trader, the company has come a log way in its path of becoming one of the most revered global growth stories from among Indian tech companies. The company has embarked upon a clear overseas acquisition strategy to fill up gaps in its service offerings. It has acquired as many as 6 foreign companies over the past 6 months. Apart from the 'filling in the gap' strategy, another rationale for the acquisitions is to get non-linear growth (increase in revenues without having to add much to the manpower). The acquired firms are established leaders in their specific domains of expertise, and do not have a large amount of manpower to integrate.

Bharat Forge: From a modest beginning at a single location in 1966 to being one of the largest and technologically most advanced manufacturer of forged and machined components today, Bharat Forge, the flagship company of the US$ 1.5 bn Kalyani Group, has indeed come a long way. The company, extremely early in its growth path realised that in order to become a force to reckon with in the global forging space, it will have to resort to supplying high value added machined components to not just Tier 1 suppliers but to marquee OEMs or the who's who of global automotive industry. This led to the adoption of an inorganic growth strategy, among the first in the Indian auto component space. Now, with manufacturing facilities spread over 9 locations and 6 countries, Bharat Forge has emerged as a global corporation with world class engineering capabilities, state-of-the-art manufacturing facilities, high levels of service and a global customer base. Not wishing to rest on its laurels, the company has bigger plans for the future. It aspires to be the number one forging company in the world by 2008 (second largest currently). Going by its track record, we believe the task is well within its reach.

Tata Steel: From fifty-sixth to fifth, that is the kind of quantum leap that Tata Steel, one of the world's most cost efficient steel producer, proposes to make post its acquisition of Corus. The company has been active in the past few years in ramping up its global presence, which started with the acquisition of the Singapore based NatSteel (in 2005). In the meanwhile, Tata Steel has also forged a technical marketing arrangement with Nippon Steel of Japan to take the former's cold-rolled automotive steel into the market for higher end applications. The company has also diversified its export markets to Bangladesh, Malaysia, South Korea, Taiwan and some of the African countries. Now, the acquisition of Corus will create a powerful combination of high quality developed and low cost high growth markets. Other gains that Tata Steel has looked from its global forays in the past and is expecting from the Corus deal include those on the technology transfer, R&D capabilities, and opportunity to create a robust global growth platform.

The global growth strategy is not merely an 'inside-out' phenomenon but also has an 'outside-in' angle to it. Not only are Indian companies going global, even global majors in industries like retailing, auto and technology are moving to Indian shores in search of more business, more talent and more supplies. But the basic underlying point is that these companies, like their Indian counterparts (except the technology majors), have a strong domestic presence, which is vital for sustaining international ambitions. Also, while it may be argued that companies, specifically, from the technology and pharma spaces need to necessarily have a global face, the fact that we have included Wipro and Ranbaxy in our analysis indicates that these have been pioneers in charting a successful global growth strategy and leave serious lessons to learn for those following their footsteps.

We are of the view 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 and volumes and opportunities for growth enhancing acquisitions, but there is a lot of value at stake as there are a great deal of risks involved in such a strategy. On a global platform, Indian companies will have to compete aggressively for input supplies, talent, innovation, and new customers. While the task at hand might be tough, time will remain to tell the tale.

To read our thoughts on year 2006 and our view for 2007, click here - Reflections 2006.

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