Headed For India? Learn The Ropes

Nearly 1 billion people. A middle class of 250 million. For many multinational companies, that has been the appeal of India since its government began to deregulate the economy and welcome foreign investment six years ago. But what seemed at first to be a vast market promising easy profits has turned out to be a complex, multifaceted society with many obstacles to successful investment. General Electric Co. and a few others seem to have made the right moves. But more common are the blunders, such as Mercedes-Benz's foray into local production of its E-class sedan with a plant now running at 10% of capacity.

To be sure, the government could do more to deregulate the economy and streamline the bureaucracy. But multinationals must take a less naive approach. Widely held assumptions about the size of India's middle class are wrong: Indian economists put it at closer to 100 million. Then, too, India is exceedingly diverse, with 25 states, 17 official languages, and 6 major religions. Manufacturers shouldn't expect their products to go over equally well with all groups.

Years of colonial rule have made Indians sensitive to foreign incursions. Enron Corp.'s pursuit of a power project alienated Indians: Enron got bogged down in 24 court cases--even though it eventually won them all. Other companies failed to do their research--and wound up investing with feuding local partners, for example. GE and a handful of other investors, meanwhile, did extensive homework on their potential markets and partners. For investors in India, "proceed with caution" should be words to live by.