Contribution of FDI in Bailing out India

Posted in Finance Articles, Total Reads: 2792 , Published on 08 February 2013
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Foreign direct investment is the direct investment into production in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.

In 1991, after India faced a balance of payment crisis, it had to pledge 20 tons of gold to union bank of Switzerland and 47 tons to bank of England as part of a bailout deal with the IMF. In addition, IMF enquired India to undertake a series of structural economic reforms. As a result of this requirement the government of Mr. P.V Narsimha Rao and finance Minister Mr. Manmohan Singh at that time, formulated neo- liberal policies which led to the opening of international trade and investment, deregulation, initiation of privatization, tax reforms and inflation control measures.

Indian is among the largest markets of the world in terms of its sheer size and having this huge potential, India is one of the most promising and progressively growing economies in the world.

image:freedigitalphotos.net

A large no. of global brands have entered the Indian market, but not all were able to crack the success mantra for the mysterious, complex and a diversified market where the tastes and preferences of customers change, every now and then.

Indian market is so complex because of the large number of cultures, religions, diverse  income levels of the people. Moreover, a wide rural and urban divide creates another challenge in front of companies while establishing effective distribution network. The global firms need to adapt to the local market conditions in order to attract the customers towards their brands. These global brads upon their entry in the Indian markets used the most successful of their companies’ strategies which in some cases benefitted them. Some of these strategies pertaining to different sectors were:

FMCG INDUSTRY: India’s FMCG sector is the fourth largest sector in the economy and creates employment for more than three million people. Its principal constituents are Household Care, Personal Care and Food & Beverages. The total FMCG market is in excess of Rs. 85,000 Crores.

In 1994, when Kellogg’s entered India  , it heavily bet on transforming the Indian breakfast cereal market through switching breakfast habits of Indian consumers who were used to hot breakfast foods. The company wanted Indian consumer to change its traditional habits of having either idli dosas or paranthas in their breakfast. The company wanted them to make an instant switch from their own traditional habits to start having a healthier breakfast cereals which was a huge challenge for the company. The major challenge faced by the company was the product targeted only a narrow section of the society which was health conscious, higher strata people .

Rest 70% of the country’s population lived in rural areas where such a policy formed a cornerstone for the company. Another challenge faced was the kind of breakfast which the Indians were having was available in many varieties at cheaper prices than  kellog’s modern breakfast of corn flakes. In addition to this, the company could not understand another cultural aspect that Indian customers had warm milk in their breakfast whereas, the corn flakes were preferably used with cold milk as the crispiness of the cornflakes remained in cold milk only. Due to all these problems kellogg’s sales declined considerably. To overcome all these problems the company studied the Indian market in and out and then came out with strategies that were formed specially for the Indian market. To overcome the price sensitivity of Indian customers, it launched small size pack at Rs. 10 only. This helped them to target middle class families who inspite of being heath conscious were not able to buy the kellogg’s products, due to its high prices.

They also changed their product and made it fit to be taken with hot milk, the way Indians preferred. They targeted children by launching kellogg’s chocos, spider man-2 web designed cereal and this chocolate flakes was a hit with the children. Attractive packaging was used as an effective tool which gave the brand an on shelf differentiation from though a handful no. of  competitors. To make the brand more acceptable amongst the female customers, the brand launched kellogg’s special K for women who wanted to regain their fitness levels. For this, they chose Lara Dutta as the brand ambassador. The company localized the whole raw material and packaging material required to lower the cost. This made its offerings affordable for the price sensitive Indian customers.

These initiatives helped kellogg’s in repositioning its brand thereby gaining around 60-65 per of Indian market  Share of the breakfast cereals market and hence become a market leader.

ELECTRONIC GOODS INDUSTRY: LG electronics Indian Limited is a wholly owned subsidiary of Seoul (south Korea) parent company. LG first attempted  to enter India during early 1990’s and faced two major challenges including the failure of joint venture and de- licensing of the consumer electronics industry leading to the discontinuation of its operations in the Indian market. Another reason of their failure was the ineffective advertisement and pushing the products only when the consumer entered he stores. In Jan 1997 they re- entered the Indian market and faced intense competition from the Japanese competitors who had a stronghold of the Indian market. Another challenge faced was that of high import duty. The high levels of competition from the local players and other MNC’s and the sensitivity of Indian consumers towards pricing issues proved to be a challenge for them.

The company overcame the challenges by using innovative marketing strategies, with the introduction of innovative technologies in consumer electronics and home appliance application. In order to develop a stronger connect with the Indian audience it formed close ties with Indian cricketers and launched cricket games on its television models and sponsored the world cups in the year 1999 and 2003. It focused on products which took care of the health of the Indian consumers only with launches like ‘golden eye’ colour television, AC’s using the ‘health air system’ and the microwave ovens with ‘health wave system’. In order to reduce its costs, it shifted the manufacturing base for many of its products. For the price conscious customers it introduced low priced ‘cineplus’ and ‘sampoorna’ range. This shows that how LG was able to turn around its fortunes and be a successful global brand in the Indian market.

APPAREL INDUSTRY:

Reebok India is an Indian  subsidiary of adidas group from germany and it entered India for the first time in early 1990’s. When it entered for the first time in India, made certain assumptions which were totally wrong such as every car owner of India must have a reebok sneaker. This assumption which may have been correct in other markets failed totally in Indian because here the car owners either bought their cars in installments or the cars provided to them were of their employers and not owned by them. Despite all these setbacks faced by the company, it eventually came out as a winner in the Indian market with a 53 percent market share of the branded sportswear market. To keep the costs down 80 percent of the manufacturing was done in India. To grow further the company added a lot of product lines and SKU’s for the adults, kids, teenagers and even females. To reach out to a larger segment of market it decided to keep a focus on the tier -2 cities in the Indian markets and roped in top cricketers of the Indian cricket team. It also, sponsored the KKR outft in the IPL to appeal to the masses. Reebok associated itself with the Indian sports stars instead of banking on the aura of international sports stars to push its sales unlike nike, adidas and puma. Thanks to all these strategies reebok enjoys a stickiness in the minds of the consumers by setting a blistering pace in the Indian sports good market.

AUTOMOBILE SECTOR: India’s automotive industry is now $34 billion worth and expected to grow $145 in another 10 years.

All companies, but not FIAT have been able to have a piece of this huge Indian automobile company. Despite of all its efforts till date FIAT has not been able to get a good foothold of this complicated Indian market.

FIAT, the 6th largest car maker in the world, is based in Italy. However, the unconventional Indian market has proved to be a bit too much for FIAT.

FIAT has had a very strange relationship with India.

FIAT stormed the Indian markets with its flagship car, FIAT 50 which was mass produced by Premier Motors under the name Premier Padmini. The car was so famous and is so reliable that it was on roads till 2000. Even today majority of the TAXI's in Mumbai are Padmini.

Premier was lesser known but when the name FIAT and its technology came up the car sold like hot cake. Decades went by but the name and main design of the car didn't change at all. With little competition in pre liberation times it was a supreme vehicle. By this time the cars were known by the name of premier.

All these things changed when FIAT actually came to India post liberalization, they entered India with FIAT UNO in 1996 with PAL as partners but things didn't work out as PAL delivered just 617 cars out of 30,000 ordered. The problem with FIAT was that the image that people had of FIAT was the Premier Padmini. That image refused to go away from people's mind.

FIAT tried hard in Indian markets, but Indians had moved on with Maruti. Even then Fiat UNO picked up well. Uno was initially a success in India, but then it faded badly due to poor dealer support. Then in 1997 they again launched it with a JV with TATA Motors.  Bad service and customer support from TATA dealerships proved to be a corner stone for FIAT in India. The recent de- merger between FIAT and TATA is the first and foremost step taken by FIAT to be self reliant to establish a strong grip on Indian market.

TELECOMMUNATION INDUSTRY:

India's telecommunication network is the second largest in the world based on the total number of telephone users. The total revenue of the Indian telecom sector grew by 7% to 283,207 crores for 2010–11 financial year.

In the telecom sector, FDI up to 49% is allowed under automatic route and beyond that up to 74% is permitted through the Foreign Investment Promotion Board (FIPB), a government body.

Vodafone is the best and as well as the most controversial example of FDI in India. Finally in july 2011; Vodafone group agreed terms for the buy- out of its partner essar from its Indian mobile phone business and made an independent entry into the Indian market.

Hutch was often praised for its award winning advertisements which follow a clean, minimalist look. In 2003, the ad campaign featuring a pug named cheeka following a boy around in unlikely places, with the tagline ‘where ever you go, our network follows’ was a big hit among people. Ads featuring the pug were continued by Vodafone even after rebranding. The main message of the brand transition exercise was the new Vodafone in the same old hutch. Awareness for a new brand takes some time to build, however, Vodafone wanted to achieve this task in the shortest possible time. For this, it tied up with Star India to run a complete roadblock of its fresh campaign on the entire network by unveiling the 24 hour nationwide rebranding campaign. This strategy helped not only in building rapid brand awareness but also broke the clutter during such an important launch in the most happening category- Telecom. The brand subsequently introduced- zoozoo which gained even Indian  higher popularity than was created by the pug. The ads were a hit among the Indian audience. This can be gauged from the huge fan following on social networking sites. This in all helped Vodafone to establish a strong foothold in the Indian market.

In the above all sectors we noticed a considerable growth due to the opening of FDI but FDI being a complex phenomena has its own set of supporters and critics. No doubt, FDI led to the major chunk of growth in the Indian industry. The inflow of foreign currency in the Indain market led to a strong economy. The companies setting up their units in India paid heavy amount of taxes, excise and customs. This led to the filling of the government coffers. The increased investments in industry building a better standard of living. Thus, the cycle of supply and demand started. With increase in demand, supply also increased. This led to construction of new industries and thus more FDI. This led to the development of a healthy economy. With a large number of competitors in the market customer became the king. Unlike pre liberalisation days, customer had a number of choices to choose from the best products available in the market at affordable prices. Monopoly of the government  companies was broken. The gross inefficiencies and the extent of corruption in their work force slowly started to show. Thus, some of the government organizations were privatized.

Major credit goes to FDI for these jaw dropping growth figures. However its motives are still questionable. The critics have their different story to say.

FDI led to a total decimation of the small scale cloth making industries in India. They were not able to compete with the highly mechanized industries set up via FDI. Many craftsmen were unemployed because of this. Many foreign companies rely on the R&D techniques of their mother country,thereby neglecting Indian R&D efforts. Also, a major part of the profit earned by foreign companies goes to their mother country in form of repatriation. Thus, in a way India is loosing its resources for little profit.

Inspite all these reasons the government is still going ahead with the new FDI policies. Thus, in the near time FDI in India will have a number of opportunities in sectors which were not targeted before.

  • Aviation: With the kingfisher and Indian airlines on the brink of bankruptcy a major void has been created in the airline industry. With the govt looking for fresh buyers of the ageing fleet of Indian airlines foreign companies have a unique opportunity to penetrate the crippled aviation industry now worth at $12bn.
  • Agriculture: India being a populous nation has so many mouths to feed,so the major emphasis is  on agriculture. Modern techniques need to be applied to get a larger yield and a better crop with minimum investment. With the rising labour costs mechanized farming is the need of hour. All these needs can be well met if government opens up FDI in this sector,creating new avenues in this field.
  • Energy: For a country to grow, for industries to set up plants in a country and prosper, the basic  requirement is electricity. India currently suffers from a major shortage of electricity generation capacity, even though it is the world's fourth largest energy consumer. With major focus on non conventional sources of energy specially nuclear power energy sector is a big opportunity for FDI.
  • Retail: India is one of the fastest growing retail market in the world, with 1.2 billion people.

  • Provident fund: With the government pushing for a 26% FDI in provident funds an altogether new sector has been opened for FDI.

Though FDI provide ample opportunities, but it has its share of threats too which cannot be ignored and need to be taken care of. As it is rightly said that a “balanced approach  leads the economy on the path of sustainable development” so the same approach needs to be taken in this respect in order to make most out of it.

This article has been authored by Sanchita Gupta from BIMTECH.


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