The crown jewel buys the crowns

Rising India in the geo-economy of the 21st Century

Ashutosh Sheshabalaya, a regular writer and commentator about India and Asian issues, who heads now Allilon, an IT services firm based in Brussels, Europe, argues about the emergence of the Indian multinationals and the new face of India in Science, Technology and knowledge economy. As an "insider", he debates the western myths about India, and refers that the traditional image of Bangalore specialization in call centres with a fake English accent and low-value programming do not apply anymore. In his book "Rising Elephant", just published by Common Courage Press and MacMillan India, Tosh (for the friends) tells a few stories about the emergence of the new science and tech world power. The book targets an American audience - those white-collar guys frightened by BPO -, but has useful insights for people around the world, especially for Europeans. Tosh talks about an "alliance" between the two old civilizations - Europe and India - in geo-economy affairs. He explains also, with solid arguments, why there's a difference between the knowledge take-off of the "elephant" and the strategies from the Asian "tigers" and "dragons". A "detail" that few Westerners understand.
Jorge Nascimento Rodrigues, editor of Gurusonline.tv, in Geo-Dialogue with Tosh Sheshabalaya, May 2005

5 FACTS TO WATCH

- Expect one or two major high-profile IT acquisitions by the Indians in the next 12 months, in Europe. The financial markets will push for this.
- India has the largest number of FDA-certified pharma manufacturing plants outside the US (parallels with IT here are ISO and CMM certifications). And since a few years, there has been an IT-like climb up the value chain by Indian pharma firms.
- In the longer term there is a closer proximity between two "old" cultures and, in the geopolitical sense, "soft" powers like India and Europe.
- Consider that India has the world's second largest pool of scientific and technical personnel. But Indian R&D runs short of money in the critical final phase. It simply costs too much to get an international patent. Conversely, think of all the colossal sums of money spent by the European Union on R&D, for its framework programs and all that. European R&D however runs short of people in the critical final phase, when scaling up is essential.
- Even though India cannot compete with China on cost or manufacturing scale - India is on its own going in for the higher, design-rich end of the global textiles trade. I believe there is room for much more collaboration in the middle, and upper-middle ends - even for manufacturing out of India, not the kind of bulk volumes in which China is king, but more targeted niches, involving richer elements of design and value-add.

INTERVIEW

When can we remark the emergence of global companies made in India?

In IT, this has already clearly been the case, for some time. Companies like Infosys, Tata Consulting, Wipro, HCL and Satyam have operations across the globe and are increasingly - and openly - identified by the likes of market leaders EDS, IBM and Accenture as their key rivals. This is not only because of their massive market capitalisations (in three cases, ahead of even EDS), or their 40% growth rates, or the fact that they are acquiring ever-larger end-to-end/enterprise-wide contracts in the West (one very recent example being Akzo Nobel). What is important is that the Indians have forced their rivals to adapt delivery models to set up large, and increasingly, mission-critical Indian operations offshore, and thus impacted on their business models.

Can we talk of an Indian "go global" ITC generation?

Yes, in this sense, the Indian firms are clearly already "global". In addition, you have scores of world-class niche Indian IT companies, such as Sasken (3G wireless and broadband DSL), Ittiam (DSP), Subex (telecoms billing) and Kale (airlines) which also have a global customer base. Or take i-Flex, which has, for some years, been the world's largest provider of banking software solutions, and has now begun acquiring customers in Europe too. Geometric Software's feature-recognition algorithms are incorporated in Dassault's entire automation products suite, and - along with Autolay from the Indian military aircraft program - have been used for the Airbus; they will also be key providers to Boeing's Dreamliner. There are several such examples, niche-players but clearly world class - from bio informatics and rational drug design to geographical information systems (backed, significantly, by the Indian IRS constellation of remote-sensing satellites - which very few know is the world's largest).

India is doing the reverse, and this is probably the most violent aspect of the paradigm shift confronting the West.

But that "go global" geo-strategy is only in the ITC clusters?

No, the process goes beyond IT, to automotive, pharma, chemicals and plastics, telecoms, oil and gas and beyond. As my book 'Rising Elephant' shows, this is part of India's unique white-collar/knowledge industry-led globalisation.

What's the difference with the other "tiger" or "dragon" take-offs in Asia or Latin America?

In brief, unlike the classic (China- or for that matter Brazil/Malaysia) model of developing-country industrialization, where FDI kick-starts a blue-collar, low-cost global manufacturing base, and then this begins a drive up the value chain to white-collar competencies, India is doing the reverse, and this is probably the most violent aspect of the paradigm shift confronting the West.

Can you give examples?

To give just one example of the sheer pace of change. America's undersea optic-fibre telecoms network is now mainly Indian owned. Indians have acquired both Flag Telecom and Tyco Global Network. The two deals were cleared in spite of concerns in the US about national security. On the other side, India's homebuilt INSAT is one of the world's largest communication satellite networks. So this is clear strategic convergence - globally - in telecoms infrastructure, and again a good example of the paradigm shift. The acquirers of Flag Telecom and Tyco Global Network are both Indian telecoms companies. They will no doubt cross-subsidize their India-centered, high-volume, but still low-value markets until telecoms usage patterns in India change, as the economy grows and median incomes rise. Given India's 7-8% economic growth rate and the fact that it is now the world's fastest growing mobile telephony market, this makes excellent strategic business sense. Or take plastics. Europe's highest-end polyester fibre company, Trevira (Hoechst) is now in Indian hands. In May, a little-known Indian enterprise called The Chatterjee Group took over the 6.7 billion Euro Basel Polyolefins, a joint venture between BASF and Shell, which is a world leader in polypropylene (some 8,000 patents and two Nobel Laureates on its staff). Among other things, Basel Polyolefins supplies about half of the medical grade plastics used in the world today. This was the larger M&A operation till now from Indian companies.

Pharma is an especially strong case. This sector is basically developing just like India's IT industry, but using lessons from IT to flatten its own learning curve.

Pharmaceuticals is also a strong argument about the new face of India in your book…

Now pharma is an especially strong case. This sector is basically developing just like India's IT industry, but using lessons from IT to flatten its own learning curve. There already is a massive volume base (with parallels to IT being Year 2000 work); India has, for sometime, been one of the world's largest producers of bulk drugs and generics. But it also has the largest number of FDA-certified pharma manufacturing plants outside the US (parallels with IT here are ISO and CMM certifications). And since a few years, there has been an IT-like climb up the value chain by Indian pharma firms. Bayer has purchased antibiotics drug delivery technology from India's Ranbaxy. Novo Nordisk has an alliance for Indian developed NCEs. Brazilian and South African companies have bought ARV drugs know-how from Indian firms. Outside India, no developing country has managed to produce genetically engineered vaccines. Like with the campaign on AIDS drugs-for-Africa (where the Indians leveraged MSF, Oxfam and ex-US President Clinton, to mount a successful political campaign to sell low-cost generics), it is only a question of time before such elements provide acceleration to India's cost advantage in its push into the West. Two things are of course happening in the West to pull this process - health spending is running out of control, and Big Pharma is running out of emerging blockbusters in their pipelines (as a result, many have begun shifting R&D to India). To this, if you factor in the boom in contract research and clinical trials in India, and the growth of high-value 'medical tourism', India's pharma and broader healthcare sector will inevitably repeat what it has done to IT.

Can you give a brief picture of other Indian multinational clusters?

The automotive sector is another example, both in terms of the massive number of QS-9000 certifications by auto-component firms as well as the upwards pull by international auto companies, who began with software operations, then moved to prototyping and design, and are now making India a high-value-add centrepiece of their global manufacturing operations. The best example of this is Hyundai. Toyota is another. An Indian-made Toyota is the first time ever that the Japanese giant has released a vehicle without any made-in-Japan component. Volvo too has a major operation to design (and has started building) buses and trucks, designed exclusively for developing countries. But meanwhile, India's own auto firms are not sitting on their hands. After the roaring success of the Indian Tata Indica (in a first-of-its-kind story, also rebadged and sold by Britain's MG as the City Rover), Tata plans to boost its international network, and has begun overseas acquisitions. Utility vehicles and tractor company Mahindra has been strong in Africa, has begun assembling in the US and Latin America, and is launching the "Goa", a new common-rail diesel SUV, in France this year. Several Indian scooter/motorcycle firms are now also expected to acquire overseas (sometimes, just for branding) - after having invested in alliances and partnerships, and sometimes greenfield ventures, in Asia, the Middle East, Latin America and elsewhere. Exports of two-wheelers from India are expected to cross 500,000 by next year. All such firms are globalizing and looking at the future. While Tata has recently launched a low-cost pickup, and is designing a $2,500 car, it also plans a 'world truck' for Africa and South America. Elsewhere, a small Bangalore-based start-up has begun exporting what may be among the world's most successful electric cars, the Reva, for which a fuel cell powered version is now on the cards.
Now earlier, I talked about Indian companies acquiring Trevira and Basel; we all know how important polyester and polypropylene are to a modern car. Now add to this the fact that the world's largest steel company, the Mittal group, belongs to an Indian, and the fact that auto electronics giants Bosch and Delphi's largest R&D operations outside their home markets are in India. Along with the developments in the auto industry cited above, here again you see a paradigm shift in a critical industry.

India is not just about white-collar technology and services. It is also a giant market, with a 200 million strong middle-class, which has grown organically.

I think for Westerners to understand that paradigm shift it's the most difficult. We are used to see India as call centres with a fake English accent and low-value off shoring…

I expect that kind of move downwards from white-collar/knowledge to blue-collar/manufacturing to also accelerate in the aerospace segment, where GE, Honeywell and others have long had major Indian R&D operations, and for precisely the same reasons as in automotive. Also watch IT hardware. Craig Barrett has recently said that Intel plans to complement its massive R&D operations in India with an assembly and testing facility. And yet, India is not just about white-collar technology and services. It is also a giant market, with a 200 million strong middle-class, which has grown organically. The next Big Thing will be infrastructure, especially energy. After buying billions of dollar in oil assets in Africa, central Asia and east Asia, India plans to invest as much as $20 billion in the Russian oil and gas industry alone. So much so that even a giant like Shell is worried. Its CEO Jeroen van der Veer recently warned oil-producing nations to avoid dealing with State-owned Indian (and Chinese) firms.

Is the go-global strategy of India companies basically in the direction of the US?

It principally started there, given the strong Indian-American connection, which I have explained in my book. But again, there are IT acquisitions in Europe, e.g. Citisoft in the UK and Infopulse in the Netherlands. An Indian company has bought AD Solutions, an ex-IBM MBO in Germany, with operations in Switzerland. Indian companies are bidding (or have bid) for the likes of Cap Gemini's entire US operations, and for Triaton in Germany. Expect one or two major high-profile IT acquisitions by the Indians in the next 12 months, in Europe. The financial markets will push for this. Other than their huge cash reserves (about $700 million each), Infosys' market capitalization in the US in May ($17 billion) is 70% ahead of EDS, while Wipro's, at $13 billion is 30% ahead. More interesting is that in new non-IT sectors, India is driving into Europe almost wholly via acquisitions. In pharma for example, the entire generics business of RPG Aventis of France is now in Indian hands. In automotive components, Indians have bought Germany's Carl Dan Peddinghaus (one of the world's largest axle companies), Britain's GWK Group, and also made key acquisitions of units of Dana Spicer. Recently, Escorts of India took over Poland's Framtrac Tractors, while Crompton Greaves acquired the blue-chip Belgian transformer company Pauwels International. Once again, a sample of good examples.

What kind of Asian strategy is followed by Indian multinationals?

In IT, there has long been an Indian presence, even at the top-end. Malaysia's high-profile Multimedia Super Corridor was in the early 1990s almost wholly staffed by Indians. Singapore's Nanyang University, for example, preferred to buy an Indian Param supercomputer instead of an American or Japanese one. At that time, and still now, there are no European competitors to the Param. In other sectors, there have been some major acquisitions in recent months. South Korea's Daewoo Trucks, for example, was bought by Tata, while another Tata company bought Singapore's NatSteel. Many automotive companies have alliances in Asia, and also plan assembly/manufacturing operations, especially in scooters and motorcycles, as well as farm equipment.

I must say clearly that Europe has missed the first Indian bus. But if they work hard to plan where they wish to be, say in the next two-three years, there could be massive mutual opportunities. And such advance thinking seems in fact to have begun.

How Indian companies regard the European market?

For now as a first date, in some cases even a blind date. Both sides have a lot of homework still to do. But as explained earlier, there have been some acquisitions, and more are inevitable. In parallel, one has to keep in mind that, for several years, Indian IT firms were deeply involved with the European operations of US technology companies. So too were Indian management professionals, who like Vodafone's CEO Arun Sarin, have now begun to make their presence felt at the top of European companies too. These kinds of people (and there were hundreds if not thousands of them in the US) built the Indian-American IT connection, and are likely to play a somewhat similar role in Europe too.

After the dissolution of the MFA, everyone is aware of the flood of low-cost Chinese exports which threatens to decimate the rest of the world; yes, everywhere, except India. India will gain at the higher-value end of the textiles spectrum. There is obviously room here for alliances between Indian and European companies - brand alliances, for example.

What kind of high value chain operations can we develop with Indian talent?

I think, in any segment, there are three advantages in Europe. The first is capital, backed by the current strength of the Euro. The second is access to the European market, which is as large as North America. Finally, even though in the current scheme of things, Europe's risk-averse culture and the Darwinian style globalisation underway in India means that high-end Indian talent is heading towards the US (or still connected to there, in spite of the nearly 40,000 Indians who are estimated to have returned from the US in recent years), in the longer term there is a closer proximity between two "old" cultures and, in the geopolitical sense, "soft" powers like India and Europe. But one should not be complacent about it. Crucially, I must say clearly that Europe has missed the first Indian bus. But if they work hard to plan where they wish to be, say in the next two-three years, there could be massive mutual opportunities.
And such advance thinking seems in fact to have begun. Today, there is a much greater enthusiasm in Europe to hunt for Indian talent from the earliest stages - that is, at the university level. I have in fact recently helped set up an arrangement between a French university on one side, and an Indian technical school and company on the other. In terms of your specific question, my answer would be just about anything.

How we can "mix" both interests, from Europe and India?

Consider that India has the world's second largest pool of scientific and technical personnel. But Indian R&D runs short of money in the critical final phase. It simply costs too much to get an international patent. Conversely, think of all the colossal sums of money spent by the European Union on R&D, for its framework programs and all that. European R&D however runs short of people in the critical final phase, when scaling up is essential. I know otherwise-promising projects, which have failed. Several studies have been done on this, for example, on ESPRIT, but no one then thought of adding the two sides, India and Europe. Another area is textiles. After the dissolution of the MFA, everyone is aware of the flood of low-cost Chinese exports which threatens to decimate the rest of the world; yes, everywhere, except India. In fact, buried within a much-quoted UN study in America was a very interesting fact. India will gain at the higher-value end of the textiles spectrum. There is obviously room here for alliances between Indian and European companies - brand alliances, for example. Even though India cannot compete with China on cost or manufacturing scale (it is a democracy, and its trade unions are as powerful as those in Europe) - India is on its own going in for the higher, design-rich end of the global textiles trade. The Armani collection last season showed just how much top-end European brands already acknowledge this fact. But I believe there is room for much more collaboration in the middle, and upper-middle ends - even for manufacturing out of India, not the kind of bulk volumes in which China is king, but more targeted niches, involving richer elements of design and value-add.

What would be the steps you recommend?

The initiative has to be from here in Europe. Otherwise, like the Treviras, Basels and Pauwels, the Indians will arrive here, and then they will dictate the terms. There are also some other "future-directed" areas where collaboration between India and Europe may have their own merit. While everyone was awestruck by the orbiting Chinese taikonaut last year, I pointed out in the 'Financial Times' that India's space program was as advanced as China's - but directed less at PR than at development (finding water, for example, or controlling deforestation). Last year, India launched Edusat, the world's first satellite exclusively dedicated to education in hundreds of thousands of villages. Last month, it launched another satellite (Cartosat) to map every home in every village across the country. Soon, another satellite will be lofted, devoted wholly to telemedicine. India has both these kinds of assets and the experience, which may, with a little help from the Europeans, be leveraged to answer some of the most recalcitrant problems of development facing Africa and Latin America.

Which Indian multinationals impress you most?

Reliance, of course, and the Tatas. Tobacco and hotels conglomerate ITC is doing wonders in using the Internet and India's impressive, low-cost telecom infrastructure for rural empowerment, through its trailblazing e-choupal scheme. There also are several niche players, such as Biocon in biotech. But I would look very carefully at south Indian conglomerates like the Murugappas, TVS and some others. These are family owned businesses, but managed by professionals and, in the European context of caution and hesitancy to take undue risks, would combine the best of both worlds.

THE BOOK

RISING ELEPHANT- The Growing clash with India over white-collar jobs and its meaning for America and the world
Macmillan, India, 2005
322 pages
Presentation of the book
Buy at Amazon.com
Contacts: tosh@allilon.com