INDIA

A Strategic Overview

Overview
Organizing Framework External Factors Firm Level Factors Key Strategic Choices

Organizing Framework
Country Environment Govt.Policy Value Proposition Resources& Capabilities

Market Driven Firm Driven

Competitor Capabilities

Objectives& Motivations

ExternalFactors

FirmLevelFactors

KeyStrategicChoices?

External Factors

Country Environment

Govt.Policy

Competitor Capabilities

I. Country Environment
Eco no mic Sta ts - Sn ap shot
Ended 2007 GDP Growth Forex reserves FII Inflow FDI Inflow Per Capita Inflation
9.4% $199B $6.7B $15.7B $640 5.0%

Current Fiscal
$276B $18B $9.2B 6.6%

Sound economic fundamentals

Healthy average GDP growth of above 8% since 2003 Savings rate 32.4% in 2005-06 has been increasing at 7% CAGR since 2002 Forex reserves increasing at 30% CAGR since 2002 Interest rates high and stable at ~ 11.5% suggested strong demand for credit Inflation rates below compared to other emerging economies however recent spikes (6.6%) are a huge cause of concern. Rising income levels have led to increased consumer spending power

Source: http://investmentcommission.in

I. Country Environment
Ec ono mic S ta ts - GD P
India's GDP at Current Prices: 2002-07 900 800 700 600 500 400 300 200 100 0

GDP Contributors (2006-07)

Industry: 26% ($138B) growing at 16.2% Services: 55% (269B) growing at 16.3% Agriculture: 19% (73B) growing at 10.2%

USD Billion

469

556

638

737

830 477

Huge Services contribution is a characteristic of a developed economy

2002-03 2003-04 2004-05 2005-06 2006-07

2007-08 (H1)

900 800

USD Billion

- Indias GDP has witnessed high growth and was the 2nd fastest growing GDP after China in 2006-07 - $1 Trillion GDP (PPP)

700 600 500 400 300 200 100 0 191 103 105 237 204 125 105 135 145 2006-07 231 453 398

1999-00 2002-03 2005-06 Agriculture Industry Services

Source: MOSPI Statistics

I. Country Environment
Ec ono mic S ta ts - GD P

12th largest economy based on real GDP

4th largest based on PPP

Source: World Economic Outlook IMF 2005, www.photius.com

I. Country Environment
Gros s Dome stic Sav ing s Gross D ome stic In ve stmen ts

-Very high Private sector savings mainly contributed by households -Increase in Gross Domestic Investment over Gross Domestic Savings a good sign

Source: Central Statistical Organization

I. Country Environment
Ec ono mic S ta ts - Pe r C api ta In com e & Cons ump tion

-Strong growth in per capita Income & Consumption; signaling economic prosperity -Boom in consumer spending

Over 380M Indians (72M households) with annual income > $10,000 Fast growing disposable incomes, increased availability of credit cards and consumer finance Affinity towards western/ global brands Huge market especially for retail, telecom, automobiles, textiles, electrical appliances etc.

Source: http://indiabudget.nic.in, http://investmentcommission.in

I. Country Environment
Ec ono mic S ta ts FD I & FII
FDI Inflow - India: 2001-07
185 percent Increase

18,000 13,500 9,000 4,500 0 4,222

Net FII into India: 2001-07

15,730

9,277 5,546 3,134 2,634 3,755

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

2007-08 (till October)

20 18 16 14 12 10 8 6 4 2 0

18.0

USD Million

USD Billion

10.0

10.2

9.4 6.7

1.8
2001-02

0.6
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (till 14 January)

-With improved performance on PE ratio and ROE, Indian markets have attracted large investments -India ranked 2nd in AT Kearneys FDI confidence index (2007) -FDI inflow in 2006-07 grew by 185% over 2005-06 -Large FII activity has led to an upsurge in the Sensex

Source: DIPP (October Report), SEBI

I. Country Environment
Ec ono mic S ta ts Fo rex & Deb t R atio
India's Forex Reserves: 2001-08 (Till 28 December 2007) 300 250 USD Billion 200 150 100 50 0 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (Till 28 December) 54 75 141 112 152 199 276

- Steadily increasing Forex offer security against possible currency crisis or monetary instability - Forex reserves are in excess of external debt indicating a strong economic platform

External Debt-to-GDP Ratio 22 21.1 20.4

19

17.8

- Increased investor confidence in Indian companies has increased cross border borrowing by corporate houses - 2007-08 Forex reserves already 39% above 2006-07

17.3 15.8 16.4

Ratio

16

13

10 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Source: RBI Statistics

I. Country Environment

-Major sectors attracting FDI in 2007-08 are Services, Telecom, Electrical equipments, Real estate and Transportation -Mumbai, Delhi, Bangalore, Chennai and Hyderabad bring in nearly 66% of total FDI inflows -Top corporate investors: Vodafone ($800M), Matsushita ($340M) -Top holdings investors: GA Global Investments ($258M) EMAAR Holdings, Mauritius ($200M) LB India Holdings, Mauritius ($120M)

Source: AT Kearney, Outlook Business, http://domain-b.com

I. Country Environment
Ec ono mi c St ats - Im po rts & Ex por ts
India's Exports: 2002-08 140 120 100 80 60 40 20 0 126 103 84 53 64 86

USD Billion

-Quality and cost advantage are the two important parameters leveraged by the Indian producers to increase exports -Services sector has been a major contributor to increased exports

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08 (AprilOctober)*

India's Imports: 2002-08 250 USD Billion 200 150 100 50 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (AprilOctober)* 62 78 150 112 191 130

Petroleum products are the major contributors towards Indias growing imports

Source: Ministry of Finance (November Report)

I. Country Environment
Inv estme nt Rout es
General Rule
-No prior permission required -100% equity Automatic Route

Investing in India

Prior Permission

By Exception

-Prior Govt. approval needed -Equity Cap depending on sector and market conditions

-Strategically important sectors are excluded from Foreign investment -E.g. Railways, Atomic Energy, Postal Service, agriculture

Source: Invest Commission of India

I. Country Environment
FDI Cap in Manufacturing
Foreign Equity Cap
100% 80% 60% 40% 20% 0%

Domestic Equity Foreign Equity

Textiles

Mining general

Steel/ Aluminium

Electronics Hardware

Automobiles

Industry

-100% Foreign equity in most cases -Manufacturing in defense, cigarettes, brewing, industrial explosives etc. subject to equity cap

Source: Invest Commission of India

Auto components

Defense Equipment

Chemicals

Coal/ Diamond

Gems

Atomic Minerals

I. Country Environment
Infrastructure FDI Cap
100% 80% 60% 40% 20% 0%

FDI Cap

Domestic Equity Foreign Equity

Power

Telecom

Roads

Ports

Petroleum

Industry

-100% Foreign equity permitted in power, roads, petroleum, urban infrastructure -Equity cap in Telecom, Aviation & airports

Source: Invest Commission of India

Urban Infrastructure

Aviation & Airports

I. Country Environment
Services FDI Cap
100% 80%

FDI Cap

60% 40% 20% 0% Banking & Financail Services Insurance Real Estate & Construction Tourism/ Hotels Entertainment IT/ ITeS Retail Business Services Venture Capital

Domestic Equity Foreign Equity

Industry

-100% Foreign equity permitted in IT & ITeS, Real estate construction, hotels, tourism, films, business services & consulting, venture capital etc. -Equity cap in banking, financial services, insurance, retail etc. -Retail being one of the biggest and most promising industries is most hurt by the cap.

Source: Invest Commission of India

I. Country Environment
Retail
Retail growth $700 $600 $500 in billions $400 $300 $200 $100 $0 2007 2010 2015 $13.20 $93.94 $330 $223 $427 Indian Retail Organized Retail $637

-Contributes 10% to GDP, 8% of employment -Expected CAGR at 20-25% until 2016

IT/ I Te S

-$47B in 2007 revenues, 30% growth -68% revenue from exports growing at 35%

Source: http:ibef.org

I. Country Environment
Tel ec om
Revenue growth
20 $ Billion 15 10 5 0 2002 2003 9 20 15

CAGR - 21%
10 11

-Revenues 2006 $20B, CAGR 21% -160M subscribers increasing at CAGR 38% -Staged to become the 2nd largest telecom network in 2008 behind China -Worlds lowest call rates (2 cents/ min) -Thriving private sector -2nd highest FDI attractor
2006

2004

2005

Medi a & En ter ta inm en t

1000 INR Billion 800 600 400 200 0 353 402 837 CAGR 19% 562 473 686
-$7.7B market size, CAGR 19%, 2010 target $19B -Major growth in Television and Film segments

2005E 2006F 2007F 2008F 2009F 2010F

Source: http:ibef.org

I. Country Environment
Autom obi le s
Size of Component Industry (US$ mn)
10000 8700 6730 3849 3965 4470 5430

-$34B market growing at 14%; 2nd largest 2 wheeler market, 4th largest commercial vehicle market -$10M size in 2006, growing at 17%

FY00

FY01

FY02

FY03

FY04

FY05

FY 06

Real E stat e

-$16B market, CAGR 30% -5% of GDP -Growth driven by IT/ ITeS, foreign businesses, rising incomes, consumer finance, organized retail etc.

Source: http:ibef.org

I. Country Environment
Pha rma ce utica ls
Projected Pharmaceutical market, 2004-2005
12 10 8 6 4 2 0 2004 2005

10.8 8.2 8.7 9.4 10.1

11.6

-$8.7B market, 1.4% of GDP, CAGR 7% -4th largest market in world by volume, 13th largest by value -Currently only 30% of population tapped for modern medicine -Huge base of talented scientists and medical experts -Local companies have 70% market share

* 2006

2007

2008

2009

Biot ech
Indian Biotech Market projected Size
5
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2002-03 2003-04 2004-05 2009-10

-$2B market, CAGR 37% -Exports of $760M -Bio-pharma is the biggest segment but agri-biotech and bio-services fast increasing
1 0.5 0.7

Source: http:ibef.org

I. Country Environment
Fact or Ad vant age & M arke t Con di tion s

Human Capital: critical mass of skilled manpower English speaking population Cost competitive labor Indigenous availability of raw materials Technology superpower
- Software services grew at 50% CAGR over past decade - 65% of worlds CMMI level 5 cos. in India - Over 100 MNCs with R&D labs

Entrepreneurial culture and abundant SMEs

- Open to collaboration

Large domestic market allowing scale economies

- Growing youth segment with increased spending power ($42B/ yr)* - 300M middle consumer class expected to grow @ 8 %

I. Country Environment
Infr astruct ure

Severe bottlenecks in road, airport, power, transportation Govt. commitment to ramp development
-$13 B Golden Quadrilateral, $22 B Sagar Mala projects -$1.5 B investment in Mumbai-Delhi high speed freight corridor -New and modernized international airports in Mumbai and Delhi -Mobile telephony deregulated and showing vigorous growth -Electricity Act, 2003 passed, $75 B to be spent in 5 years

Modern financial systems

-ICT, Basel II compliance, RBI regulation -Retail banking, credit systems, microfinance increasing consumer finance

Mature capital markets

-SEBI regulations acquired international credibility -NSE 3rd largest in the world, BSE $640B market cap, Mutual funds $82B as of 2007 -Private Equity $2.3B in investments; set to touch $25B by 2012

I. Country Environment
Pop: 3.8M GDP: $8.8B growing at 10.1% FDI: $1B (3% of total) Ind: Textiles, Petrochemicals, Pharma, IT, chemicals

To p c iti es

Ahmedabad
Pop: 3.2M GDP: $7.5B growing at 11.5% FDI: Included in Ahmedabad Ind: Gems, Textiles, Chemicals

Pop: 12.8M GDP: $40B growing at 8.4% FDI: $7.6B (23% of total) Ind: Telecom, IT, Hotels, Banking, Tourism, Retail , Manufacturing, Construction

Delhi

Surat Kolkata
Pop: 16.4M GDP: $50B growing at 8.5% FDI: $8B (25% of total) Ind: Films, Financial Services, Media & Entertainment, Textiles, Seaport, IT, engineering, Diamond polishing, Healthcare Pop: 3.2M GDP: $12B growing at 7.4% FDI: Included in Mumbai Ind: IT, Engineering, Mfg, Automobiles Pop: 13.2M GDP: $25B growing at 6.3% FDI: $0.4B (1% of total) Ind: Financial Services, , IT Pop: 3.6M GDP: $10.7B growing at 7.8% FDI: $1.3B (4% of total) Ind: IT, Pharma, Services, Real Estate

Mumbai Hyderabad

Pune Chennai Bangalore

Pop: 6.8M GDP: $14.7B growing at 10.3% FDI: $2.3B (6.8% of total) Ind: Electronics & Telecom, IT, Biotech, Auto, Apparel, Real estate

Pop: 6.4M GDP: $15.8B growing at 6.2% FDI: $2.5B (7.5% of total) Ind: Automobiles, IT, Hardware Mfg, Healthcare, financial services

Source: http://dipp.nic.in , compiled internet sources, http://mapsofindia.com

I. Country Environment
Non- ma rket fo rc es

High foreign trade barriers: high corporate tax, complex indirect taxes, high tariffs, foreign equity cap etc. Stringent Labor Laws Corruption, bureaucracy Regulatory uncertainties in many sectors Strong IPR, enforceable laws, freedom of press, independent legal system Coalition govt. risky but fairly stable in terms of sustained economic reforms

External Factors

Country Environment

Govt.Policy

Competitor Capabilities

II. Govt. Policy

FDI & fin anc ia l p ol ici es refor ms

Openness to foreign investments and operations

-Sustained economic liberalization across all sectors -Increasing FDI limits except in strategically sensitive sectors -Continued reduction in foreign imports and tariffs

Commitment to intl trade

-Active participation in GATT & WTO negotiations

Proactive regulations & legislations to enhance business environment

-IPR legislations, RBI/ SEBI monetary & financial policies

II. Govt. Policy

En abl in g Comp eti tion & C omp etit ivene ss
Privatized/ Disinvested Companies
Bharat Aluminum Company Videsh Sanchar Nigam Ltd. Indian Petrochemicals Ltd Maruti Udyog Ltd. India Tourism Development Corp. CMC Hindustan Zinc Jessop & Co. Ltd.

Sector
Metals Telecom Oil & Gas Automotives Tourism IT Metals Heavy Engineering

Stake sold
51% 25% 26% 100% 90% 100% 26% 72%

Stake residual
49% 26% 34% 50% 27%

Bidder/ buyer
Sterlite Industries 45% Tata Group Reliance Petro Investments 54% Suzuki, rest IPO Group of auction buyers TCS Sterlite Industries Indo Wagon Engg. Ltd.

Pa rtial / f ul l d is inve stmen t pr ospe cts

II. Govt. Policy

En abl in g Comp eti tion & C omp etit ivene ss

Special Economic Zones (SEZ)

- SEZs offering tax holidays, no import/ export tariffs - Along with physical infrastructure development could boost manufacturing capabilities

Distortions in market processes

- Purchase preference to public enterprises anti-competitive (concrete sleepers for railways) - Deliberate interconnectivity issues between private telecom operators and BSNL

Anti-competitive policies
- Trade Policy: Anti-dumping measures, Inverted duty structures - Labor Policy: Exit difficult, Inspection regime creates high entry barriers - Frequent price regulations in commodities like oil, grains, coal

External Factors

Country Environment

Govt.Policy

Competitor Capabilities

III. Competitor Capabilities

Loca l Fi rms

Innovative & Creativity

-Knowledge of domestic needs & quick product roll out -Asian Paints, Tata Motors, Godrej refrigerators, Bajaj Auto, Amul

Access to technology becoming flat

-Mainly through JVs and collaboration: MUL-Suzuki, Reliance-Dow Chemicals, Hero-Honda, GSK-Ranbaxy -Global acquisitions: Tata-Corus, Tata-Jaguar, ONGC, ICICI Bank, Infosys, Aditya Birla group

Access to global markets

- Exports & Operations: IT, Pharma, FMCG, Textiles, Gems, Auto

Strong domestic penetration

-Monopolies in many manufacturing sectors: Reliance 54%, Grasim 91%, Exide Batteries 62% -Access to bottom of pyramid in the rural areas

III. Competitor Capabilities

Major de als by In di a In c. ab road
Acq. Corus Plc for $12B Acq. Jaguar & Land Rover for $2.3B

Acq. Novelis Inc. for $6B

Acq. Algoma Steel for $1.6B

Acq. REpower for $1.6B

Acq. Whyte & Mackay for $1.1B

Othe r Majo r Acqu irer s

External Analysis
Conc lu sion s

Huge market potential, Value conscious consumers demanding best quality for lowest prices, high cultural sensitivity Heterogeneous market, mostly fragmented few concentrated 3rd party distributors critical in supply chain to cover markets Global emergence of local players reducing leveling the MNC advantage Unavoidable destination for IT, Biotech and Retail Monopolies, Collusion and Price rigging exist in some sectors
-Pharma, Cement, Transportation, Petrochemicals

Nationally strategic industries dominated by state entities Fairly stable economic policies

Firm Level Factors

ValueProposition

Resources& Capabilities

Objectives& Motivations

I. Country Environment
Major MNC s

I. Country Environment
Major MNC s

I. Value Proposition
Western brands but at value for money
-Winners: LG, Samsung, Unilever, Reebok -Losers: Sony, Apple, Tang, Levis, Nike

Customized and localized brands for the taste conscious

- Winners: McDonalds, Unilever, Nestle* (Maggi), LG, Samsung, Nokia - Losers: Kelloggs, GM, KFC, Thompson, Philips, FIAT, Dominos

Tight product positioning and customer segmentation

-Winners: Parker, Mont Blanc, LG, Lee, Arrow -Losers: Pierre Cardin, Sony, Lacoste, Levis, GM, Ford

Super accessibility to untapped segments

- Winners: Gillette, ITC Ltd., Unilever, Nokia, Coke

Sense dynamic local needs and innovate

-Winners: Tata Motors, Godrej Appliances, ICICI Bank Ltd., Nokia -Losers: Citigroup, Standard Chartered, Motorola, Siemens

Firm Level Factors

ValueProposition

Resources& Capabilities

Objectives& Motivations

III. Resources & Capabilities

MNCs

Brand power
-Penetration among youth and upper class (Lee, Reebok, L'Oreal) -Ability to lure local firms into collaboration (Suzuki, Honda, Wal-Mart, Dow chemicals)

Deep pockets
-Heavy investments in marketing & advertisements (P&G, Unilever, Pepsi, Vodafone, New York Life Insurance, Skoda, L'Oreal) -Ability to sustain long trial periods (Coke, GM, Sony)

Unique aspects
-Finance: Posco, Vodafone, Citigroup, Goldman Sachs -Technology: IBM, Coke, Sony, Apple, RIM, SAS, SAP -Operational: Toyota, GE

Global experience
-Knowledge economies out of learning from other markets: Org designs, local mgmt, localization techniques, local sourcing, govt./ local partnerships (J&J, IBM, LG, GE) -Ability to exploit scale economies (Hyundai, PC manufacturers)

Firm Level Factors

ValueProposition

Resources& Capabilities

Objectives& Motivations

III. Objectives & Motivations

Access to large and growing emerging market
-Tap 300M strong middle class with spending power e.g. Levis, Nike, MTV, McDonalds, Yum!, Pepsi, Nokia -Tap other regional markets through India as a strategic hub e.g. Hyundai, IBM

Access to low cost sourcing, investor pressure

-Product sourcing: Walmart, Tesco, Marks & Spencer, Adidas -Material sourcing: Cummins, Hyundai, GE, Suzuki, IKEA, Ford -Offshore services: GE, GSK, Pfizer -Manufacturing base mainly for low end generic products

Access to global intellect

-MNC R&D investments -Local talent: GE, ABB, Volvo

Learnings from China

-To make early investments -Hedge against excessive reliance on China and other countries

Conclusions - Firm Level Analysis

Consider how India fits the global strategy
-Is it to grow, to preempt competition, to strategically strengthen domestic/ other markets, reap economies of scale/ scope, low cost sourcing?

Is there a substantial value proposition you can offer?

-Consumer tastes are diverse form those of developed or other emerging countries

Evaluate resources vis--vis the strengths/ weaknesses of competitors

-Will you compete on cost basis or through differentiation? -Do you have the required resources that will be required? -The required capabilities to execute?

Key Strategic Choices

Mode of Entry

Greenfield
-If focus is more on global markets and cost reduction through sourcing -If focus is use as regional hub e.g. GE, IBM -Exceptions if absolutely confident about local market Hyundai, Unilever, Nokia

Acquisitions
-Acquisition has had a bad record of legal issues including licenses, visa etc.

JVs/ Partnerships
-If focus is on domestic market, most sought after mode of entry -Tie up with local partner to mitigate non market forces (GSK with Ranbaxy)
Commitment of senior management and selection of local partners with complementary interests is crucial.

Key Strategic Choices

Localization & Adaptation

Decentralization preferable to Global strategy

-Local CEOs (Pepsi, Hutch, Unilever), -If expat CEO, then strong local No. 2 (Hyundai, LG, GE)

Understand Indian market & consumer needs

-Hire local staff in key areas of marketing and operations (HLL, LG, Nokia, GE) -Make customer a part of product development (Schiller Healthcare)

Comparative Performance Hyundai vs. GM/ Daewoo, McDonalds vs. KFC

Key Strategic Choices

Innovation in logistics to cover markets

Dispersed population, 70% in rural areas 12 million retail outlets, underdeveloped transportation Many companies work with ~ 500 distributors, in addition to wholesalers and franchised outlets (LG, HLL) Direct sourcing from village farmers eliminating middleman (Nestle, PepsiCo, ITC, Reliance Retail)
Retain Local Talent

Most talent migrates to developed countries of the West for higher wages and opportunities High Turnover rate especially in IT Create best possible incentives for employees

Overview
Organizing Framework External Factors Firm Level Factors Key Strategic Choices