Opportunities for DBD to go Global
The vision for most of organisations is to expand its business globally in order to bid for technology related projects in developing countries. Griffin and Pustay (1998) have provided some key issues such as
- "Assessing alternative markets.
- Evaluate the respective costs, benefits and risks of entering each.
- Selecting market that holds the most potential for entry or expansion.
In assessing alternative foreign market we have to consider a variety of factors including the current and potential sizes of markets, legal and political environments , the level of competition to face and socio cultural factors that may affect the firm operations and performance." (Griffin and Pustay, 1998) In order to accomplish the task provided by DBD as a consultant, our role is to develop information based on facts, recommend some possible solutions and aid client in implementation activities.
When a company seems to set globally, it should consider countries which are enormously growing in all sectors. On the basis of research, Asian countries like India and China were found to be economically expanding countries with excessive growth in all sectors. This trend is said to be continued till next few decades.Why India?
According to Business Week Magazine, China has a GDP growth of 8.9%, and India has a growth of 6.10% as of 2009. Due to inflation in the world recently GDP of both countries have fallen down marginally. But with acquisitions and mergers, the market scope has been redrawing by India and China to most extent. India place 2nd in GDP growth following China, but the growth of India is substantially increasing by 1:2 ratio. It's said that India has a higher probability to overtake China's GDP due to growth rate in less period. Steve Hamm (2003) has come up with an article asking "can India overtake China?" (Steve Hamm, 2003) Tarun Khanna a professor at Harvard business school accompanied by Steve Hamm described as "India's domestic corporate sector - strengthened by the country's rule of law, its democratic processes and relatively healthy financial system - was a source of substantial competitive advantage over China." (Tarun Khanna and Steve Hamm(2003) in Yasheng Huang, 2006)
India in terms of political aspects has developed a soft corner of socialism, which may not involve in controversies and allow cash inflows into their capitals. While, there may be some controversies in a communist country like China. India has a strong and efficient economy sector maintaining sustainable growth. Whereas China is strong but has a waving economy, because of their accumulation in the resources. According to analysts, the short but efficient economy can run for long time rather than long inefficient economy.PEST Analysis of India
Preferably India would be an attractive option for investing capitals.Political Factors
Foreign investors are allowed to have 100% equity without accompanying a domestic company. And in some key areas the foreign equity is allowed up to 70%. India has certain Special Economy Zones (SEZ) where if foreign investors willing to plant any business or market, then the companies are eligible to have 100% tax exemption for first 5 years and 50% off then after 5 years.
Though, economic reforms are carried out in India, foreign investment is still restricted. Restrictions are subjected to two tracks
- Inside the Automatic track: A track where there is no need of Government approval. But only thing is the company must report its holding to Reserve bank of India (RBI) within the 30 days of share issue.
- Outside the Automatic track: A track where government approval is required. And if approved, there is separate basis for each class of investment.
The Foreign Direct Investment is not allowed in some areas such as retail trading, betting, nuclear or atomic energy, plantation activities, real estate, finance and chit company.
Additional information of different sectors and their criteria for foreign investors are as follows
- Insurance - pay up to 26% on the cost of automatic track.
- Banks - up to 20% in banks are owned by the State and up to 49% are private banks.
- Commerce - Foreign investors may not be able to invest in commerce but an investment of up to 51% is permitted in export-oriented commercial ventures.
A foreign investment of up to 100% is permitted in IT such as software other than in the defence and space industries.
(Indian foreign Incentives, 2009)
India is the 2nd most powerful emerging country in sectors like IT/Software, Design services and Manufacturing. It is also said that no country can be evenly compared with growth of Indian IT industry.
India is expected to have an outsourcing of half trillion dollars by 2010, due to increase in common people earnings. (JohnRibiero, 2009)
Coming to Indian stock market, Bombay Stock Exchange (BSE) has broken many records so far. The Rate of returns is very high in India. For this reason Japan has recently invested 5 billion dollars in "Industrial Corridor". (Asia times online, 2007)
Social FactorsOn the positive side
India is heading towards world's largest producer of youngest population at a rate of 7 of 10. Bringing up more fresh talents and allowing into many sectors. India produces 500000 graduates every year which is 5 times more than U.S.A. Low labour cost and strong man power of 20 millions. (Newsweek,2007)On the negative side
Poverty and inequality, urban air pollution, Problem in acquiring Land rights.Technological Factors
There is huge technology advancement in India which makes the government more efficient to provide services and monitor public financial flows.
In today's trend India is making use of smart water management and advanced in plantation practices related to agricultural sector. (Cellular news, 2009)
India is also growing in terms of mobile telecom network to an extent of 400 million subscribers by the end of 2009. For instance, recently banking sectors in India have started mobile banking services.Ways of investing in India
The ways of investing in India are,
- Foreign Direct Investment (FDI):
- Foreign Portfolio Investments (FPI): This investment is usually made in stock market like buying shares and bonds. India has two main stock exchanges, the Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE). The BSE is the 14th largest market in the world by market capitalization, while NSE follows closely behind in 16th place. Joint Venture:
The government of India has reduced controls on foreign trade and investment. Higher limits on foreign direct investment were permitted in a few key sectors, such as telecommunications. However, tariff spikes in sensitive categories, including agriculture, and incremental progress on economic reforms still hinder on foreign access to India's vast and growing market.
For Joint Venture following review must be assessed.There are five industrial sectors with high market share where foreign investment is allowed. The below fig. describes the share of market.
- Petrochemicals - 23%
- Manufacturing - 23%
- Infrastructure - 17%
- Telecommunications - 9%
- Banks - 9%
Petrochemical and manufacturing areas hold the key areas, in which joint venture can be developed. According to our research we found out that manufacturing growth in India averaged 9% in the last four years (2004-08), with a record 12.3% in 2006-07.
According to the case study by Confederation of Indian Industry and the Boston Consulting Group the manufacturing sector is estimated to hold market of US$ 520B by 2014-15 as against US$ 272B as of Sept 30, 2007. To accompany India's business market a review of 2 potential manufacturing companies eligible for joint venture has been taken.(Opportunities in India's Manufacturing Sector, Prepared by IE Singapore, 03 Apr 2009) (PDF file)
CASE STUDY 1
Company name: - Opto Circuits Limited (Manufacturing sector)Introduction
Opto Circuits (India) Limited (OCI) is one of the leading well known Indian companies in the field of Medical Electronics and Information Technology arena since 12 years. The company focuses on global market sector by developing, manufacturing and marketing of medical devices. The company is established over 4 countries providing facilities to companies like Abhirami Electronics, C K Medical International and many more.Business Description
The company is located in one of best IT developed city Bangalore. As per reports the company has gained a net profit of Rupees 66.9 CR in Sep 2009, when compared to its previous quarter year profits. The company was always successful in gaining required solutions for clients. OCI is recognised as one in among 200 billion Rupees companies in Asia by Forbes in Business Magazine and the company has strictly maintained less than 2% attrition rate.Certification
- OCI meets standard such as ISO 9001-2000, ISO 13485-2003, ISO 14001:2004 and OHSAS 18001:2004
- OCI is established as "Conformit Europene" CE marking company which means it can trade their market in all European nations.
- OCI has 100% EOU (Export Oriented Unit) status approval by Government of India. CE marking is also set by OCI.
Facilities & Capabilities
With the latest Qualified Institutional Placement (QIP) issue of 400 Cr Rs. OCI has managed to reduce their working cost by Rupees 150 Cr and decreased company's long term debts.Market Strategy
- Opto Circuits follows the market strategy of growing larger through acquisitions, spanning India, USA and Germany. Through acquisitions the company had expand its production base and helped itself to grow in both invasive and non-invasive market.
- In the current scenario, Opto Circuits is shifting its production from USA to India in phases, to achieve the objective of saving the production cost.
The whole chapter of a company can be determined by a snap of SWOT analysis.
- Cost of setup is low
- Recognised internationally
- Producing new innovative products frequently by In-house R&D
- Strong product promotions through variant sources
- Spending excess money on R&D
- New product may not survive for long period due to imitation by competitors
- More chance of risk in credit check due to fluctuations in foreign exchange
- Chance to establish a mark in U.S market by tapping in Pulse Oximeters
- Can expand its market more vigorously with current strategies
- Competitors may overtake with new products
- May have to remove existing product from market due to regulations
- Product recall and delays may concern
CASE STUDY 2
Company name: Prakash Industry Limited(Manufacturing sector)Introduction
Prakash Industry Limited (PIL) was founded in 1980 by Sh B D Agarwal & is a part of "Surya Roshni Group". This company has expanded and gained profits from its business all over India with steel, mining and power generation as its Core competencies.Business Description
Besides being well-known as a steel-maker, Prakash Industry Limited (PIL) also manufactures Worsted Yarn, PVC pipes, wind mills, B & W TV picture tubes and video tapes & cassettes. Its plants are located all over India in states of Uttaranchal, Chhattisgarh, Uttar Pradesh, Punjab, Orissa, Silvassa, Tamil Nadu and Madhya Pradesh. PIL has been involved in technical Collaboration with Lurgy, Germany for the growth of their sponge iron project work. Leading television and automobile manufacturers are among the customers of PIL.Infrastructure
PIL has got
- Wind Power Generating Farms with 6 MW power generating capacity
- Strong Transport network
- Mining and crushing division to ensure uninterrupted supply of quality raw materials to its integrated steel plants
- Crushing and Screening plant for uninterrupted power supply for production of Iron ore, 'Submerged arc furnaces' to produce high quality Ferro alloys
- 'Power generation plant' with waste heat recovery boilers to save waste gas coming out of Sponge Iron Kiln
- "PIL came out with a public issue" to partly finance the Sponge Iron Project setup at Champa, Madhya Pradesh with an installed capacity of 1.5 lac tpa in Nov 1991
- For further growth of Sponge Iron Project, PIL involved in technical Collaboration with Lurgy, Germany by acquiring their SL/RN technology
- In 1994-95 PIL doubled the expansion of Sponge Iron Plant from 1.5 lac tpa to 3.30 lac tpa and side by side set up a stainless steel plant in Gujarat as a result of which it came up with a rights issue in Jan '96' to partly finance the above expansion cum-diversification project.
- One of their important strategies of growth is to expand and make improvement in existing production facilities.
- Latest Price of share PIL is between 150 and 200 as shown in the above graph, but it looked attractive in the long term investment strategy.
- Earning is on the upward trend since 2006 while dividend has static growth and is on the bottom-line from 2006-09
- PIL is using latest technology such as SL/RN technology which PIL acquired by getting involved in technical Collaboration with Lurgy, Germany by for further growth of Sponge Iron Project
- PIL has strong infrastructure such as Transport network, powerful manufacturing plants due to which demand of its products increases.
- PIL has been certified as ISO 9001:2000, ISO 14001:2004 and OHSAS 18001:2007 for maintaining quality in terms of environment and product perspective.
- Strong Domestic Network
- PIL has the ability and knowledge to develop innovative ideas of converting the waste products into useful energy source.
- Unable to spend more on R&D due to lack of budget
- Lack of global exploration
- High Working capital
- Taxes are high
- There is a chance of expanding its market across other countries due the demand of its product
- Due to high scope of steel consumption there is a chance of increasing demand
- PIL might face the Competitive pressure for providing quick and smooth transfer of technology as to go ahead of its competitor in race of technological superiority
- There may be a threat of substitutes such as plastic and composite poses may replace steel in sectors such as automobile
- Threat of technology becoming obsolete
Due to uncertainty of Indian Government regulations, there is less probability for a small company to sustain for long period. So as to retain more than what is been invested, an efficient exit plan must be implemented. Exit plan includes the following:
- Conditions for Exit
- Sell the business after achieving business goal
- Sell the business if there is no further growth or the growth is slow
- Sell the business if there is loss in business.
- Coming out from business for some personal reasons
- Types of exit
- Management Buy Out
- Management Buy In
- Selling to someone you know
As there are three possible ways of investing in India, joint venture would be an appropriate option because there is low level of risk involved. High level of risk and high costs are involved in setting up new business. For Joint venture, the companies that are recommended have their own strength and weaknesses. Both Companies have their own growing product market and deserves equal opportunity in terms of investment.
As a Consultant, in processing the task allotted by DBD, we have come across various factors necessary to invest globally such as assessing alternative market, evaluating costs, benefits and risks in entering and selecting the most potential entry for expansion. Further by analyzing global market, we found that Asian markets have most potential and in that India seem to be the top contender. As our research went forward we have come across various political, economic, social and technological factors of India and strategies of investing in India. Among the ways of investment, joint venture was most desirable and for that we have prepared a case study of two manufacturing companies 'OPTO CIRCUITS LIMITED' and 'PRAKASH INDUSTRIES LIMITED' for DBD as an option for investment. And at the end, exit strategy is developed to show the way forward and recommendation to decide optimal path to Invest in India.
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