Aditya Gahlaut, Head of Business Banking for HSBC in India, explains what the opportunities are for small businesses and how to break into the Indian market.
AG: “India’s demographics are extremely attractive, with approximately 65% of the total population in the age group of 15–64 years, and a median age of around 25 years. This leads to a strong consumer base.
“There is opportunity to prosper in all consumer sectors, but some of the most lucrative business opportunities for small UK firms in India are in sectors such as automotive, healthcare and pharmaceuticals, education, travel and tourism, and food processing.”
AG: “India is the third most attractive destination for foreign direct investment globally after China and the USA. The main drivers of this are the size of the domestic opportunity (growing middle class, leading to increased consumption levels), availability of an educated workforce and competitive cost of labour.
“Foreign investors have been complimentary of the strong management and education system in India, as well as the improving telecommunications infrastructure.”
AG: “The method of entry to the Indian market you choose would depend upon the degree of risk you are willing to take, the control you require, the resources you commit and your expected return on investment.
“Traditional ways of entering overseas markets include exporting, joint ventures or setting up a wholly-owned subsidiary or branch office. The entry strategy requires careful consideration of the needs, capacities and format of each particular business. It is important that firms pick an experienced local partner/ advisor who can help them navigate the market. HSBC can offer a seamless experience through support from our global network and connectivity between UK and India.
“The government of India has set up an online platform, www.investindia.gov.in, which provides information related to opportunities and advantages, and provides support. The service also includes assistance in identifying business partners for joint ventures, marketing tie-ups and technology transfers, and information on doing business in India. There is a panel of industry experts who respond to specific queries on the sectors and economy.”
AG: “Companies investing in India cannot ignore the key policy and regulatory challenges. The biggest challenge that most companies face is the unique architecture of the Indian governance framework, in which central and state structures are intertwined.
“For example, there are multiple central and state level taxes. It’s possible that a company set up in one state might not be able to economically supply customers in another state because of the tax structure of the destination state, which makes the manufacturer’s sale price uncompetitive relative to someone manufacturing in the destination state.
“Having said that, the level of returns can be high. A recent McKinsey study showed that the nine market leaders by category in India enjoyed a ROCE (return on capital employed*) of 48%, and even the next 26 enjoyed a ROCE of 36%. The one common theme visible across these companies is their willingness to remain engaged with the regulatory environment and manage the uncertainties.”
AG: “With increased globalisation, Indian consumers have become more aware of the latest trends and started demanding greater sophistication in the products they buy. More importantly, they want products built to their needs: customers have started patronising a brand only if the product suits them.
“Hence, it is critical that companies customise products to suit the needs of Indian consumers. Of course, localisation doesn’t work for all products. Many high-end luxury goods, for instance, rely on their country-of-origin tag to enhance their brand appeal. In my opinion, there is still a huge respect in India for the ‘Made in the UK’ tag.”
AG: “Indian consumers are very cost-conscious and expect value for money. Also, product sales involve layers of distributors and resellers, and channel recommendations play a critical role in driving purchasing decisions.
“Given this, it is critical that companies focus on driving innovation by producing new value-added product offerings, introduce differentiated brands with differential pricing and improve operational efficiencies throughout the delivery chain.”
*‘Capital employed’ is the total assets tied up in a venture minus any debt or liabilities. ‘Return on capital employed’ is total earnings from a venture divided by the capital employed – a way of expressing the profitability of a business venture.