It looked like a can't-lose proposition. In 1995, Mercedes-Benz opened a plant in India to manufacture its E-class sedan and win over India's new rich business class. Two years later, the plant is using only 10% of its 20,000-car capacity. Indians turned up their noses at the car--a model older than those sold in Europe. Now, Mercedes has to reassess its mistakes and start exporting extra cars to Africa.
As Mercedes found, doing business in India can be gut-wrenching. India's demanding consumers can be difficult to read. Political squabbles, bureaucratic delays, infrastructure headaches, and unprofessional business practices create one obstacle after another. Foreign companies are often viewed with suspicion. For most of its postcolonial life, India has shut out the world, adhering to a socialist ideal of self-reliance. The nation's fragile unity came with the departure of Britain in 1947 and at the expense of partition with Pakistan. As India celebrates its 50th anniversary of independence on Aug. 15, many remain wary of anything that might pull the nation apart--even foreign funds.
WIDE DIVERSITY. Yet policymakers have been struggling for the past six years to lure capital and ignite growth. In 1991, New Delhi dramatically rejected socialism and admitted foreign investors. Now, the companies that ventured in are tallying their profits and losses and wondering what the future holds for this market of 950 million people.
What they have learned is that India, so far, has fallen short of its promise and that the task of reforming the economy is half-finished. Companies have been burned by their own optimistic assumptions. Others, after researching the Indian market, have decided not to invest at all--at least for now. Only $2.6 billion was directly invested in India last year, a figure dwarfed by investment in China, which attracted $42 billion.
Yet there is a positive story to tell. Investors can make money if they're cautious and choose local partners carefully. The government, despite its political turmoil, presses on with reform. Foreign investment is rising by double digits. And the Indian stock market has surged 35% on hopes that New Delhi will keep its pledge to make India more attractive to business. Foreign companies can learn from the first wave of investors and find keys to how this tricky market really works.
A primary lesson is not to be dazzled by India's size. The Indian government used to boast of 250 million middle-class consumers. But a recent survey says they number 100 million at best--and there's much stratification among them. India has 17 official languages and an ethnic diversity as wide as all of Europe. People in Madras have tastes vastly different from people in Punjab.
"GUNS BLAZING." Entrenched players have a big advantage. Anglo-Dutch conglomerate Unilever, for example, began selling soap and toothpaste in India in 1887, the heyday of the British Raj. It has the distribution muscle of 3,500 wholesalers selling to 10 million small shops in rural India--figures to give any competitor pause. "Multinational corporations must not start with the assumption that this is a barren field," says C.K. Prahalad, business professor at the University of Michigan. "The trick is not to bet too big."
Consumer-products giants such as Kellogg Co., based in Battle Creek, Mich., have seen their brand power severely tested in India. Kellogg dreamed of 250 million cereal-eating Indians. So in 1994, with a $65 million investment, it launched Corn Flakes in India. The flakes did well initially, helping to double the market for breakfast cereals. But sales soon plummeted because a 500-gram box of Kellogg's product costs 33% more than its nearest competitor. And in a country where breakfast is usually a bowl of hot vegetables, cold cereal is a novelty--a one-time purchase. "It was clumsy cultural homework," says Titoo Ahluwalia, head of market researcher ORG-MARG in Bombay. A Kellogg spokesman says the company still has 55% of the cereal market and remains committed to India.
The same elusive dream of tapping many millions of consumers also lured the auto makers. After 1991, Ford, General Motors, Daewoo, Mercedes and Peugeot all teamed with domestic carmakers but were blocked out of the low-cost segment by Japan's Suzuki Motor, which, in collaboration with the government, has 80% of the passenger-car market. So the new entrants all launched midsize cars priced too high for India--around $22,000. So many plants have been built that capacity will be 1 million vehicles, way over the 600,000 estimated buyers, by 2000. Auto makers are now making fewer cars than planned and exporting the extras.
In other cases, a local partner turns out to be a liability. Germany's Lufthansa learned the hard way with the $2 billion Modi Group, which has joint ventures with such blue chips as Walt Disney, Rank Xerox, and Revlon. Lufthansa signed an agreement in 1993 with Modi brother S.K. Modi to launch domestic private airline ModiLuft. But execs soon realized the group was not a smoothly functioning entity: The five brothers were feuding bitterly. The airline went bust in 1996. And Lufthansa claims--in a lawsuit filed in Bombay last year--that S.K. Modi reneged on payments and used the German company's funds in other new ventures. Lufthansa is seeking $18.6 million plus the return of three planes it says Modi kept. S.K. Modi, despite repeated attempts by BUSINESS WEEK, could not be reached.
The mother of all investment lessons comes from Houston's Enron Corp. Before it finally prevailed in plowing India's first private power project through a shifting political climate, Enron probably made things worse for itself. It came in with "both guns blazing," says one foreign exec--and alienated many. The project was dogged by controversy and got bogged down in two years' worth of court cases. "We've learned a lot of patience," says Sanjay Bhatnagar, Enron's country manager. And now the Indian government cites Enron's victory in all of its 24 lawsuits as proof that foreign investment is backed by the rule of law.
Other power companies have learned from Enron and staged lower-profile entries into India. Oil-and-gas giants such as Royal Dutch/Shell Group, have been painstakingly building alliances with India's public-sector oil-and-gas companies. Says Shell's chairman in India, Vikram Singh Mehta, who has a joint venture with government-owned Bharat Petroleum Co.: "Only mutual interest will survive the long run."
SURPRISES. General Electric Co., has shared this cautious approach, with positive results. The U.S. giant arrived in '91, when Indian law started letting foreigners set up wholly owned subsidiaries rather than have to find local joint-venture partners. Still, GE chose Indian appliance maker Godrej and sent over a crack team to make sure it could deliver. Then, GE hired local managers and made them meet U.S. standards. The tie-up aided both companies: Godrej got GE technology to upgrade its appliances; GE got Godrej's good reputation and distribution system. Godrej-GE now has a 40% market share, and GE uses India as a low-cost manufacturing base for lightbulbs and X-ray equipment. "We're here for the long term," says Scott Bayman, head of GE-India. "There'll be bumps along the way, but these markets are not for the faint of heart."
Above all, companies must be prepared for surprises. Coca-Cola Co., for example, bought the local maker of a popular soda, Thums Up, and wanted to use its distribution system to build Coke's dominance. But Thums Up holds the No.1 spot: Indians think Coke doesn't have enough fizz. That's how it can be in India--a surprise, but also an unexpected reward.