Many multinational companies are quite pleased with their performance in India. That’s because they have set quite a low bar for success. To most, the fact that their business in India is meeting budget or growing at double-digit rates is significant.
But that isn’t success. Companies can be growing at double-digit rates and meeting budgets, and still be irrelevant to their parent and in India. McKinsey & Company analysis shows that the 25 largest, publicly listed multinational companies in India contributed just 2% of their parent’s global revenues and profits in 2011. That’s telling, especially since many of them have been operating in India for a long time. The Indian operations of companies that have set up shop since 1991 as wholly owned subsidiaries contribute an even more anemic 1% of their parent’s revenues and profits. If all these operations grow at roughly the same pace as their industry, even after a decade their contribution will still be extremely modest.
Real success in India, I would argue, means meeting three criteria:
- The company is a leader in its industry. That is, it is number one, two, or three in the local market, and gaining market share.
- India delivers 10% to 20% of the company’s new growth in revenues and profits on a global basis. In comparison, China may be delivering 20% to 40% of global growth.
- The company is using India as a hub to win in other markets. It is taking products developed for India overseas and using the low-cost manufacturing, engineering capabilities, and managerial talent there to support similar markets.
That may seem like a high bar, but some multinational companies have vaulted over it. They span many industries such as banking, engineering, food, packaged consumer goods, trucks, telecom, information technology, and automotive. They are American, South Korean, Japanese, Swedish, French, German, and British. Some are large; others midsize. Yet they are all doing well in India by my parameters. Despite their diversity, these companies adopt a similar approach:
- The winning companies straddle the pyramid. They don’t just stay at the top of the market, but focus on the middle market, developing products tailored for India that span different price points. Volvo, for instance, offers heavy trucks ranging from less than $40,000 to $150,000 under different brands, such as Eicher and Volvo.
- They create a localized business model, including a supply chain that overcomes local challenges and delivers margins even at aggressive price points. A case in point: McDonald’s India, which makes money even at the price point of 25 rupees for a burger.
The winners take a long-term view, trading short-term profits for growth and leadership. They make significant investments in product localization and distribution, and in creating an aspirational brand, ahead of demand and ahead of competitors. For instance, between 1995 and 2005, McDonald’s India invested nearly $100 million in setting up a supply chain, creating a brand, and developing a low-cost business model before ramping up its presence across India.
- Smart multinationals run India as a geographic profit center, empowering the local organization to grow the business. They are also quick to localize the top team, reducing their dependence on expatriate managers.
- Finally, they develop the resilience to deal with India’s corruption, uncertainty, and volatility, and proactively manage reputations and influence regulations.
Take the case of UK-based construction equipment company JCB. India is the jewel in the JCB crown, contributing more than a third of its revenues and perhaps half its global profits. The company has a very substantial share (estimated at 55% by industry sources) of the fast-growing Indian construction equipment business, and it is beginning to use its low-cost manufacturing and engineering capabilities to compete in other developing countries. Invigorated by the capabilities it has built in India, JCB has become a global leader in its industry. By contrast, Caterpillar, the world’s biggest construction equipment maker, has struggled to get its act together despite being an extremely well-managed company. Caterpillar languishes in fourth position in sales of construction machines in India. In a 2009 interview in the Financial Times, then chairman and CEO Jim Owens said he was “disappointed” with Caterpillar’s weak showing in India, but was “determined we will do better.” Since then, the gap between JCB and Caterpillar in India has only grown bigger.
Reprinted by permission of Harvard Business Review Press. Excerpted from “Conquering the Chaos: Win in India, Win Everywhere.: Copyright 2013 Harvard Business Publishing Corporation. All rights reserved.