Indian Manufacturers Going Global 4

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1. INDIAN MANUFACTURING SECTOR – OVERVIEW 1.1. Manufacturing sector is an important component of the economy

The manufacturing sector holds a key position in the Indian economy. Manufacturing, a part of the wider industrial sector, accounted for nearly 16 per cent of real GDP in FY’ 12. It plays a big role in employment generation, as about 12.0 per cent of India’s labour force is employed by manufacturing units. Also, India’s manufacturing sector has been growing in tandem with the overall GDP growth over the past few years. For example, while real GDP expanded at a CAGR of 8.3 per cent over FY 2005-12, growth in the manufacturing sector was at around 8.3 per cent over the same period. Its share in the economy has remained flat during this time. Strong growth has been accompanied by a change in the nature of this sector – evolving from a public sector-dominated set-up to a more private enterprise-driven set-up with global ambitions. According to United Nations Industrial Development Organisation (UNIDO), India (with the exception of China) is currently the largest producer of textiles, chemical products, pharmaceuticals, basic metals, general machinery and equipment, and electrical machinery. In the coming years, the sector’s importance to the domestic and global economy is set to increase even further, as a combination of supply-side advantages, policy initiatives and private sector efforts place India on the road to becoming a global manufacturing hub.

Figure 1

Size of the manufacturing sector in India

Source: RBI

14.8

15.0

15.2

15.4

15.6

15.8

16.0

16.2

16.4

0

100

200

300

400

500

600

700

800

900

FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12

Manufacturing sector (size in INR billion, constant prices) Share in real GDP (%)

Indian Manufacturers Going Global 5

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Figure 2

Composition of GDP (%) (FY’12)

Source: RBI 1.2. India’s manufacturing quality touches new highs Quality standards in Indian manufacturing have improved significantly, and the sector is now well known globally for its high quality. Over the last decade, Indian manufacturers extensively adopted the Total Quality Management (TQM) approach. As a result, the sector now enjoys a cost advantage of 15-20 per cent compared to that achieved in the beginning of the decade. Ongoing and new best practices will continue to benefit the sector in the medium term through their influence on both the top line and the bottom line. India ranks fourth in the world as per the 2013 Global Manufacturing Competitiveness Index (GMCI), prepared by Deloitte and the US Council on Competitiveness. The index factors in market dynamics and policy issues influencing the sector. The country is ahead of major developed and emerging economies like Singapore, South Korea, Brazil and Japan. India’s competitiveness will increase further with its index score set to improve to 8.49 (out of 10) in the next five years from 7.65 in 2013. In terms of rank, the country is expected to move up to the second rank globally over the same period. The following figures highlight the segments of GMCI and ranks assigned to nations in 2013.

14.0%

19.2%

66.8%

15.3% 4.0% Agriculture & allied

activity

Industry

Services

Manufacturing

Industry (excludingmanufacturing)

Indian Manufacturers Going Global 6

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Figure 3 GMCI drivers in descending order of weight

Source: Deloitte and US Council on Competitiveness, Aranca Research

Table 1 GMCI – India in the top five globally (2013) Source: Deloitte and US Council on Competitiveness, Aranca Research *New addition among the top 10 countries. Currently Vietnam is ranked 18th with an index score of 5.73

Talent-driven innovation

Cost of labour and materials

Energy cost of policies

Economic, trade, financial and tax systems

Quality of physical infrastructure

Government investments in manufacturing and innovation

Legal and regulatory system

Supplier network

Local business dynamics

Quality and availability of healthcare

Current rank

Country Index score Rank after 5

years

1 China 10.00 1

2 Germany 7.98 4

3 USA 7.84 5

4 India 7.65 2

5 South Korea 7.59 6

6 Taiwan 7.57 7

7 Canada 7.24 8

8 Brazil 7.13 3 9 Singapore 6.64 9 10 Japan 6.60 12

* Vietnam - 10

Indian Manufacturers Going Global 7

……………………………………………………………………………………………………………………………………………........................... India is currently second only to Japan in hosting companies awarded for quality excellence. These include 21 companies who have been awarded the Deming Excellence Award and 153 companies with the Total Productive Maintenance (TPM) Excellence Award by the Japan Institute of Plant Maintenance (JIPM). Also, of the 165 Indian companies awarded with the CII-Exim Bank Awards for Business Excellence, around 80 per cent are from the manufacturing sector. This award is globally accepted as being equivalent to the European Foundation of Quality Award. 1.3 Exports of manufactured goods trend higher India’s manufacturing exporters have played a key role in promoting the sector’s prowess to consumers across the world. While on one hand, sectors such as textiles and gems and jewellery have been India’s brand ambassadors in global markets since ancient times, the country has also made its presence felt in key industries such as engineering goods and chemicals. In fact, an analysis of India’s export data for FY’12 reflects that engineering goods had the highest share in manufacturing exports (22.0 per cent), followed by gems and jewellery (15.4 per cent) and chemicals & related products (12.2 per cent). Overall, total manufacturing exports in FY’12 stood at US$ 186.8 billion – reflecting a CAGR of 17.4 per cent during FY 2005-12. It recovered from the low of the FY’10 figure and advanced on an annual basis by 37.2 per cent in FY’11, and thereafter by 18.2 per cent in FY’12.

Figure 4 Manufactured goods exports (US$ billion)

Source: RBI

0

20

40

60

80

100

120

140

160

180

200

FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12

CAGR 17.4%

Indian Manufacturers Going Global 8

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Figure 5

Major components of FY’12 manufactured goods exports

Source: RBI *Excluding Handmade Carpets Within manufacturing exports, engineering goods was one of the fastest growing sectors; the segment recorded a CAGR of more than 21.3 per cent during the period FY 2005-12. Other sub-sectors with high growth rates include gems & jewellery and chemicals, which expanded at a CAGR of 19.1 per cent and 16.9 per cent respectively. Within the engineering goods segment, transport equipment led the way with a CAGR of 33.1 per cent (FY 2005-12), followed by electronic goods (25.3 per cent) and machinery (21.3 per cent).

Figure 6 Engineering goods exports

Source: RBI

1.6%

12.2%

22.0%

9.2%

15.4%

0.1% 0.8% Leather and manufactures

Chemicals and related products

Engineering goods

Textile and textile products

Gems and jewellery

Handicrafts*

Others

-40%

-20%

0%

20%

40%

60%

0

20

40

60

80

FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12

Value (US$ billion) - LHS Growth - RHS

Indian Manufacturers Going Global 9

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Figure 7 Gems and jewellery exports

Source: RBI 1.4 US, Western Europe and the Middle East – The main export markets The main export markets for Indian manufacturing goods are the US and Western Europe. Within Western Europe, Germany and UK are two most important export markets. The Middle East is also a key destination for Indian goods, with the UAE being a major market for Indian gems and jewellery, chemicals and engineering goods. The following figures highlight the main markets for different Indian manufacturing products (in FY’12).

Figure 8 Engineered goods

Source: RBI

0%

10%

20%

30%

40%

50%

0

10

20

30

40

50

FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12

Value (US$ billion) - LHS Growth - RHS

12.2%

7.6%

7.2%

3.9%

3.7%

2.9%

2.5%

60.0%

USA

Singapore

UAE

Germany

UK

Sri Lanka

Italy

Others

Indian Manufacturers Going Global 10

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Figure 9 Chemicals and allied sectors

Source: RBI

Figure 10 Leather and manufactures

Source: RBI

18.2%

4.0%

3.6%

3.1%

3.1%

2.6%

2.4%

63.1%

USA

China

Germany

UK

Netherlands

Brazil

UAE

Others

15.2%

11.2%

11.0%

9.1% 7.5%

6.3%

6.2%

4.1%

29.3%

Germany

UK

Italy

USA

Hong Kong

France

Spain

Netherlands

Others

Indian Manufacturers Going Global 11

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Figure 11

Gems and jewellery

Source: RBI 2. OVERSEAS EXPANSION IS THE NEXT STEP – OUTWARD FDI FROM INDIA Expansion of Indian corporate entities on foreign shores began with the Birla Group establishing a textiles mill in Ethiopia back in 1959. Since then, a number of companies have followed suit and made external investments in order to establish a global presence. A majority of the outbound ventures during the 1970s and 1980s were medium size; clocking the aggregate equity investments to around US$ 220 million between 1975 and 1990/1991. In addition to the favourable overseas investment climate, the rise in cross-border alliances has received a strong backing from fundamental domestic reforms in the form of trade liberalisation and relaxation of regulations governing outward foreign direct investments (FDIs). The liberalisation in 1991 was a blessing in disguise. During liberalisation, the prominent concern from some quarters was that domestic players would not be able to compete with foreign players and, consequently, lose market share. However, many domestic companies not only successfully competed with foreign peers but also gained the confidence to expand overseas. Currently, many Indian public and private companies are actively looking for outward expansion. With a view to expand or enhance access to resources, Indian companies plan to execute greenfield investments or acquire stakes in overseas enterprises. The global expansion is reflected in outward FDI trends.

38.7%

24.2%

14.4%

8.4%

3.1%

11.2% UAE

Hong Kong

USA

Belgium

Israel

Others

Indian Manufacturers Going Global 12

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Figure 12 FDI outflows from India have witnessed a CAGR of 37.9% during FY’01 to FY’11

Source: RBI, *April 2011 to February 22, 2012 2.1 Sharp return for outward FDI in post-crisis period

The outward FDI trend showcases that overseas investments from Indian firms have increased rapidly since the late 1990s, as foreign exchange-based restrictions on capital transfer were progressively removed. The easing policy environment led to a significant increase in the levels of FDI outflows during the second half of 2000 – the aggregate outflows reached US$ 72.0 billion between FY’06 and FY’10 as against US$ 7.1 billion between FY’01 and FY’05. There was a slowdown during the crisis period, but activity rebounded during FY’11. FDI outflows recorded a y-o-y increase of 22.8 per cent and touched US$ 16.8 billion in FY’11. FDI from India has mainly been by way of equities and loans. The trends demonstrate that the composition of outward FDI has shifted from equity to loans – equity accounted for 88.9 per cent of the total outflows during FY’01 as against 45.5 per cent during FY’12*. On the other hand, the proportion of loans surged to 54.5 per cent in FY’12* from 10.4 per cent in FY’01. Moreover, the sharp rise of 22.8 per cent in FY’11 was largely driven by a 75.9 per cent jump in loans.

0

5

10

15

20

25

30

35

40

FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12*

US$

bn

Equity Total Guarantee Invoked

CAGR 37.9%

Indian Manufacturers Going Global 13

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Figure 13 Trend reflecting changing composition of FDI outflows between FY’01 and FY’11

Source: RBI, *April 2011 to February 22, 2012

India’s ranking in the global landscape proves its growing competence. Over the past decade, India, along with other emerging economies, has contributed more and more to the global investment landscape. Aggregate outward investment from the emerging BRICS nations into other countries touched US$ 126.0 billion in 2012, up from US$ 7.0 billion recorded in 2000. This led to increasing BRICS’s contribution to the global share – rising to 9.0 per cent of the total from 1.0 per cent earlier. India has been at the forefront of this journey of outward FDI in emerging economies. The country is ranked 21st in terms of the magnitude of FDI outflows in the world1. On the basis of the value of net purchases – cross-border acquisition deals undertaken by domestic companies in 2010 – India figured among the top five globally after the US, Canada, Japan and China. Likewise, India stood among the top five emerging economies whose state-owned corporations are increasingly transforming into international conglomerates. Leading public sector units (PSUs) in India like National Thermal Power Corporation (NTPC), Gas Authority of India Limited (GAIL), Oil and Natural Gas Corporation (ONGC) and National Aluminium Company (NALCO) have commenced huge overseas greenfield investments in recent years. Also, Indian private conglomerates such as the Tata group and the Birla group have been instrumental in fuelling the rising trend of overseas expansion. 2.2 Investments inclined towards manufacturing & services sector Manufacturing and services are the key sectors in which Indian firms have invested during FY 2008-11. The cumulative FDI outflow during FY 2008-12* was US$ 23.3 billion in the manufacturing sector and US$ 17.0 billion in the services sector. In FY’11 alone, the manufacturing sector attracted US$ 5.0 billion in investments. Within manufacturing, the key sub-sectors that attracted investments include agricultural machinery, basic organic chemicals, drugs, medicines & allied products, refined petroleum products and indigenous sugar. On the other hand, the US$ 6.5 billion invested in the services sector was driven by business services, data processing, financial services, architecture and engineering and 1World Investment Report 2011 by UNCTAD

0%

20%

40%

60%

80%

100%

FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12*

Equity Loan

Indian Manufacturers Going Global 14

……………………………………………………………………………………………………………………………………………........................... other technical consultancy activities. Indian IT companies have successfully established operations hubs in international markets to command higher shares abroad and serve their clients better.

Figure 14 During FY ’12*, the manufacturing sector commanded a 31.4% share in total outflows

Source: RBI, *April 2011 to February 22, 2012 2.3 Country-wise FDI outflows shifting towards developed economies The investment trend also demonstrates a gradual shift from investments in developing nations, which were technologically backward, a decision that was taken with a view to avoid competition. Today, Indian companies are confident and increasingly moving towards investing in developed nations where they can access quality assets at competitive prices. Some of the most sought-after destinations for India’s FDI outflows are Singapore, Mauritius and Netherlands, which accounted for more than half of the total cumulative outflows of US$ 58.0 billion between FY’09 and FY’12*. This higher share is primarily because these countries are used as channels to mobilise funds and make investments in a third country. The most attractive destination over the period is the US – where cumulative outflows worth US$ 4.0 billion were made during FY 2009-12*. The UAE follows with US$ 2.5 billion of outflows during the same period.

31.4%

29.0%

11.5%

4.7%

15.3%

4.2%

2.1% 0.5% 1.1% Manufacturing

Services

Wholesale & retail trade,restaurants & hotelsAgriculture & allied activities

Transport, communication &storage servicesConstruction

Community, social & personalservicesElectricity, gas & water

Miscellaneous

Indian Manufacturers Going Global 15

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Table 2 Top 10 destinations for FDI outflows (US$ billion) during FY 2009-12

Country FY'09 FY'10 FY'11 FY'12* Total Singapore 4.06 4.2 3.99 1.86 14.11 Mauritius 2.08 2.15 5.08 2.27 11.57 Netherlands 2.79 1.53 1.52 0.7 6.54 USA 1.02 0.87 1.21 0.87 3.97 UAE 0.63 0.64 0.86 0.38 2.51 British Virgin Islands 0 0.75 0.28 0.52 1.55 UK 0.35 0.34 0.4 0.44 1.53 Cayman Islands 0 0.04 0.44 0.14 0.62 Hong Kong 0 0 0.16 0.31 0.46 Switzerland 0 0 0.25 0.16 0.41 Other countries 7.65 3.19 2.65 1.23 14.71 Total 18.58 13.71 16.84 8.86 57.98

Source: RBI, Aranca Research, *April 2011 to February 22, 2012 3. M&As, JVs AND GREENFIELD PROJECTS ARE PRIMARY CHANNELS Increasing numbers of Indian companies are now acquiring foreign businesses. A robust economy, cash-accretive Indian firms, a supportive policy environment and entrepreneurial spirit among Indian businessmen have all played a major role in the new acquisition trend. In the last few years, the drive to expand beyond local boundaries is evident from rising overseas investments. While some companies are born global, a majority of them have to undertake a natural path for expansion. Most overseas investments by domestic firms are done by using either their subsidiaries incorporated in overseas companies or by setting up holding companies and/or special purpose vehicles (SPVs) in offshore or any other regional financial hubs. In 2005, Indian firms were allowed to use these SPVs to fund their foreign acquisitions, which facilitated the use of leveraged buy-outs. A majority of SPVs are incorporated in offshore financial centres such as Mauritius, Singapore and the Netherlands, as they offered supportive business and legal considerations, taxation benefits and easier access to financing. The relatively easier and inexpensive modes to enter foreign markets would be by means of exports, licensing, management contracting and turnkey operations, among others. However, these are short-term approaches. The long-term strategic decision of entering overseas markets is facilitated through organic expansion, i.e. greenfield (establishing new manufacturing facilities) or inorganically, i.e. joint ventures (JVs) and mergers & acquisitions (M&As). Trends reflect that while companies foraying into the markets of developed economies usually exercise the inorganic route, those entering the developing nations adopt the organic path. 3.1 Inorganic expansion a preferred route in developed markets The market scenario in developed economies tends to be saturated and mature. At the same time, these economies, with their high levels of disposable per capita income coupled with a regulated and well

Indian Manufacturers Going Global 16

……………………………………………………………………………………………………………………………………………........................... funded business environment, offer a lucrative opportunity for domestic firms. However, it is difficult for any new entrant to gain share in these markets organically. Therefore, a majority of Indian companies prefer to augment their presence and increase their market share through acquisitions or JVs rather than greenfield investments. In line with this, trends reflect that developed economies, such as Singapore, US and Europe, contribute a higher proportion of total cross-border M&A activity carried out by India in the western developed markets. Cross-border M&A activity declined in the post-crisis period. The average annual value of cross-border M&A deals carried out by Indian entities during 2009-11 was US$ 11.0 billion compared to the annual average of US$ 23.4 billion during the pre-crisis period of 2005-07. In 2012, the value of global cross-border M&As declined by 41 per cent y-o-y to its lowest level since 2009. The underlying global uncertainty and the low confidence levels among enterprises, especially in developed markets, are affecting market sentiment. However, the Indian market picked up in 2012, where 72 acquisitions worth US$ 11.0 billion took place – an 81.2 per cent jump over 2011 in terms of value. More than half of these investments went into into energy, mining and utilities2.

Figure 15 Cross-border M&A activity (US$ billion)

Source: UNCTAD, World Investment Report 2012, *Pre-crisis annual average

2Kroll Advisory Solutions

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2005-07* 2009 2010 2011 2012

Indian Manufacturers Going Global 17

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Table 3 Major global M&As by Indian companies Source: UNCTAD, Cross-border M&A database, Aranca Research 3.2 Greenfield projects are preferred in developing markets Entry into developing economies is observed to be mainly through greenfield investments. This is because the cost advantage offered by other developing nations in terms of competitive assets such as raw materials acts as a medium of maximising gains for Indian players. It can also aid in building networks for supporting trade abroad. Moreover, the success of these players in Indian markets boosts their confidence to replicate it in other similar developing economies. From 2005-073 to 2011, the aggregate value of the total number of greenfield investments undertaken by Indian companies was US$ 102.3 billion. In 2011, greenfield investments recording an impressive y-o-y growth of 73.9 per cent to reach US$ 34.6 billion. This was way higher than the 20.8 per cent growth witnessed by China.

Figure 16 Greenfield investments overview (US$ bn)

Source: UNCTAD, World Investment Report 2012, *Pre-crisis annual average 3Pre-crisis annual average

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2005-07* 2009 2010 2011

Acquiring company

Target company Value (US$ mn.) Year

Tata Steel Corus (UK) 13,000 2007

Hindalco Ind Novelis (Canada) 5,766 2007

Tata Motors JLR (UK) 2,500 2008

Essar Steel Algoma (Canada) 1,467 2007

United Breweries White & Mackay (UK)

1,176 2007

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Table 4 Major greenfield investments from India Source: UNCTAD, World Investment Report 2012, Aranca Research

4. KEY DRIVERS The motivating factors behind Indian firms’ expansion abroad are manifold. Having established themselves in the domestic market and on the back of strong balance sheets, many Indian firms have crossed the border in search of growth and new markets. Furthermore, strategic objectives such as acquisition of key resources, technologies and brands have pushed Indian companies to acquire global assets. The introduction of finance and regulatory reforms has also been an additional factor in driving this expansion. 4.1 Getting a foot in the door in new markets and expanding offerings Indian companies are looking for opportunities to expand globally with a view to increase their market presence. They aim to gain access to developed and emerging markets through the organic or inorganic route. The major sectors attracting investments by Indian firms are FMCG, pharmaceuticals and automobile & auto components, among others. A good example is Tata Tea’s integration with Tetley, which provided it with access to over 40 countries and 60 additional brands. Pharmaceutical companies invest abroad primarily to gain access to the trade networks of developed markets with their cost-competetive offerings. Indian firms having US Food & Drug Administration (USFDA)-approved facilities look for acquiring companies in the regulated markets with a view to achieving quick registration. These companies continue to operate their manufacturing facilities in India; thus providing them with the low-cost advantage, while simultaneously catering to international markets. For instance, Dr Reddy’s Laboratories’ acquisition of Betapharm in 2006 helped it expand its geographic reach to Germany – the second-largest generics market in the world after the US. In addition to its plants in India, the company has built US Food & Drug Administation (USFDA) inspected plants in Mexico and UK, and 2 USFDA inspected plants in the US to cater to the global markets. Likewise, Glenmark Pharmaceuticals’ (Glenmark) acquisition of Brazil-based Laboratorios Klinger in 2004 and Czech-based Medicamenta in 2007 marked its entry in Latin America and central and eastern Europe respectively. To better serve global markets, Glenmark has also established manufacturing facilities in the Czech Republic, Argentina and Brazil. Through a series of acquisitions and greenfield investments, the company has expanded its operation to 29 countries in Africa and Middle East, 12 countries in Asia and

Investing company

Host economy Value (US$ mn.) Year

NTPC Iran 5,150 2009

Gail India Saudi Arabia 4,150 2007

Tata Group Vietnam 3,500 2008

ONGC Iran 3,000 2008

ONGC Iran 2,000 2006

Indian Manufacturers Going Global 19

……………………………………………………………………………………………………………………………………………........................... 12 countries in Latin America. In addition, the company has a major presence in Europe and Russia. Companies in the Indian automobile and auto component sectors have also been at the forefront of global acquisitions for expanding their market presence and product portfolio. For instance, Amtek Auto Ltd (Amtek), one of the largest integrated Indian auto component manufacturers, acquired Germany-based Neumayer Tekfor Group in June 2013. This will expand Amtek’s global reach to Germany, Italy, US, Mexico and Brazil. Also, the acquisition of SsangYong Motor enabled Mahindra & Mahindra (M&M) to foray into markets like Europe, Africa, Latin America and Southeast Asia. Likewise, Bharat Forge Limited acquired Germany-based CDP Aluminiumtechnik GmbH & Co KG in a bid to include aluminium forged components to its product offerings. Apart from these, Indian firms such as Motherson Sumi Systems Ltd (MSSL), Ashok Leyland, TVS Group and Hero MotoCorp, among others, have also been active in making investments abroad. FMCG companies have also been successful in expanding their international presence. For example, Godrej Consumer Products (GCPL) has made around ten acquisitions totalling US$ 600 million, which include Indonesia-based Megasari Makmur Group, Africa-based Darling Group, and companies in the UK, Chile, Argentina and the Middle East. This helped the company extend its household, hair care and personal care offerings in these markets. Likewise, Dabur’s acquisition of Turkey-based Hobi Kosmetik Group and US-based Namaste Group supported its global expansion strategy. The acquisition of Scottish whisky distiller Whyte & Mackay by United Breweries added 150 brands to its product offering. In addition to the above mentioned firms, other FMCG companies like Marico, ITC, Emami and Wipro have also made overseas investments.

Table 5 Investments by Indian companies targeted to achieve larger market presence

Host company Target company Target country Deal value (US$ mn.)

Deal type

M&M SsangYong Motor South Korea 463 Acquisition Wipro Consumer Care

Unza Holdings Singapore 246 Acquisition

Sakthi Auto Component

Internet Europe Europe 130 Acquisition

Tata Steel Vietnam Steel Corporation

Vietnam – JV for a greenfield investment

Tata Steel KZN Pty Ltd (Tata

steel’s Africa-based subsidiary)

South Africa – JV for a greenfield

investment

Source: Aranca Research

Indian Manufacturers Going Global 20

……………………………………………………………………………………………………………………………………………........................... 4.2 Pursuit of technology: Moving up the value chain In order to manufacture value-added products, Indian firms have leveraged the expertise of international players offering market expansion alongside technology to produce high-end products at affordable costs. Indian firms have been moving ahead with acquisitions of global firms to gain access to their technological advancements. They tend to seek state-of-the-art technologies and applications, which could aid them in developing their own knowledge and technical know-how. For instance, the acquisition of Corus empowered Tata Steel with cutting-edge steel manufacturing technology. It has implemented the high‐end technology developed by Corus in its greenfield steel plants to reduce production costs. Tata Steel has also gained access to several of Corus’s process patents, its high-end R&D and raw material sources, which would enable the creation of longer-term synergies. The recent acquisition of Germany-based Neumayer Tekfor by Amtek Auto was also driven by the need for technological advancement. Through the acquisition, Amtek gained access to Tekfor’s warm & cold forging technology and also to its state-of-the-art processes for development and production of transmissions, engines, drivelines and safety fasteners. Pharmaceuticals is another key sector attracting investments for enhancements in technology. Interestingly, as per a research by Institute for Studies in Industrial Development (ISID), a majority of overseas investments made over the period 2000-07 were executed by companies from the technology-intensive domain, especially from the pharmaceutical sector. Indian pharmaceutical companies are trying to move up the value chain by acquiring companies that will give them access to cutting edge technology, new markets and branded drugs/drug pipelines. For instance, Indian drug maker Dr Reddy’s Laboratories acquired US-based Trigenesis Therapeutics, Inc in 2004 for US$ 11 million, thereby gaining access to its technologies and proprietary products in dermatology therapy; primarily in the US pharmaceutical space. Also, Dr Reddy's Laboratories has set up technology centres in US, UK, China and Netherlands to formulate leading edge research in order to meet its innovation needs. Glenmark, too, has established R&D centres outside India. Its biopharmaceutical research facility in Switzerland is dedicated to the discovery and development of novel monoclonal antibodies (mAbs) and a research centre in Oxford, UK has been deployed for clinical development of molecules.

Table 6 Acquisitions where technology synergies were achieved

Host company Target company Target country Deal value (US$ mn)

Deal type

Tata Motors Land Rover & Jaguar

Europe 2,300 Acquisition

Suzlon Energy Hansen Transmissions

Belgium 565 Acquisition

Bajaj Auto KTM Power Sports

Europe 81 Acquisition

Source: Aranca Research

Indian Manufacturers Going Global 21

……………………………………………………………………………………………………………………………………………........................... 4.3 Seeking resources The need to secure raw material supplies has been an important factor in the global acquisitions of companies. State-run enterprises and public sector undertakings (PSUs) have been driving such acquisitions. Furthermore, outbound investments for gaining access to resources have become significant, as it is necessary to support rapid economic growth, urbanisation and industrialisation in the domestic sector; in order to ensure a long-term, stable supply of natural resources to the economy against a background of rising commodity prices. This is specifically evident in the metals & mining sector, which witnessed significant ramp up in overseas investments. Indian firms in this domain have widened their global presence in search of captive access to natural resources. An instance is Coal India’s acquisition of coal assets abroad through its subsidiary Coal Videsh Ltd. It also invests in metallurgical and thermal coal assets outside India through its JV set-up International Coal Ventures Ltd. The private sector is also expanding abroad to gain access to resources. Indian aluminium and steel giant Hindalco’s acquisition of Atlanta-based Novelis catapulted Hindalco to the top five ranks in global aluminium production. Tata Steel increased its stake in Australia-based Carborough Downs coal mines to gain access to coal assets, thus enhancing its raw material sourcing. Similarly, Jindal Steel has also bought assets in Australia, France and Indonesia.

Table 7 Investments driven by resource-seeking motives

Host company Target company Target country Deal value (US$ mn) Deal type

Essar Global Algoma Steel Canada 1,580 Acquisition GVK Power Hancock Coal Australia 1,260 Acquisition

Tata Power PT Kaltim Prima

Coal Indonesia 1100 Acquisition

GMR Energy PT Golden Energy

Mines Indonesia 550 Acquisition

NMDC Kopano Ke Matl South Africa – JV for greenfield

investments

Nalco Kerman

Development Iran – JV for greenfield

investments Source: Aranca Research 4.4 Association with brands supports global profile of domestic firms Indian firms also enter the international market, with a view to attain a global image and vision, thereby promoting their brand value. The global leadership goals set by Indian multinationals also play a crucial role in this outbound acquisition process. Firms seek to attain global leadership in specific product categories or in niche segments. For instance, Tata Motors’ acquisition of Jaguar Land Rover from Ford Motors marked its entry into the luxury automotive segment. Also, the acquisition of UK-based Axon by HCL technologies drove the company’s entry into transformational consulting business segment.

Indian Manufacturers Going Global 22

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4.5 Easing government regulations The government of India has relaxed the norms concerning its overseas investment policy. This has enabled Indian multinationals to capitalise on global opportunities. Additionally, domestic economic conditions have become more favourable, thus complementing the government’s new framework.

Figure 17 Timeline for regulatory framework for overseas investments

Source: RBI, *April 2011 to February 22, 2012

4.6 Improved access to fund overseas investments

Improved access to fund cross-border investments has aided the rising ambitions of Indian corporate entities to go global. Corporate profit growth did slow down during the financial crisis, but remained in high single digits. Growth in the domestic business has also helped firms shore up their balance sheets. Strong balance sheets have lent confidence to Indian companies’ global ambitions. At the same time, it

2011

2006

Ceiling for overseas investments by MFs increased from US$ 1 billion to

US$ 7 billion

2006–08

Allowed investment of up to 100% of company’s net-worth in overseas

JV/WOS

2004

Allowed investment of up to 200% of

company’s net-worth in overseas JV/WOS

2005

With prior approval of RBI,

proprietary/unregistered firms can set

up JV/WOS outside India

Limit under the automatic route increased from 200% to 400%

2007

Limit for portfolio investments increased from 25% to 35% of the net-

worth of the investing companyWith prior approval of RBI, Registered

Trusts & Societies in manufacturing/educational domain

allowed for overseas investment in the

same sector in JV/WOS

2007

2008

50% of performance guarantee amount

allowed to be considered for computing financial commitment to its

overseas JV/WOS

PRESENT

There has been notable progress in overseas investments with the development of a regulatory framework. The government is planning to make more amendments to its policies, with a focus on small players.

Indian Manufacturers Going Global 23

……………………………………………………………………………………………………………………………………………........................... is now easier for Indian companies to raise capital in overseas markets. Favourable credit norms by the government have bolstered growth in outbound investments. In 2003, Reserve Bank of India allowed domestic banks to extend credit/non-credit facilities to wholly owned subsidiaries and Indian JVs (companies having more than 51 per cent Indian stake) abroad, setting the limit of their unimpaired capital funds (Tier I and Tier II capital) at up to 10.0 per cent. With a view to further aid overseas expansion, the limit was extended to 20.0 per cent in 2006. The government also facilitates funding for outbound investments through Export and Import Bank of India (EXIM). EXIM Bank is the chief outfit for funding overseas investments made by Indian firms. Through 'Overseas Investment Finance' programme, EXIM provides financial support throughout the entire investment cycle. Till date, EXIM has funded 387 projects of 313 firms across 69 countries. Aggregate funding for overseas investments totaled US$ 4.6 billion4 spread across sectors ranging from pharmaceuticals, home furnishings, readymade garments, construction, paper & paper products, textiles & garments, chemicals & dyes to IT, engineering goods, natural resources, metal & metal processing and agriculture & agro-based products. In the recent past, many hedge funds and private equity (PE) players have shown increasing interest in funding Indian acquisitions abroad. With a view to moderate the risk factor, these hedge funds and PE players have modified their propositions and shifted to a mix of equity and debt from a pure equity offering. However, financing through these sources is comparatively expensive vis-à-vis traditional sources. Also, Indian companies have access to foreign financing to fund their expansion plans in domestic as well as foreign markets. The trends reflect that funding through external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs) has increased over the years. For March 2013, investments through these routes have increased by 32.5 per cent y-o-y to US$ 5.1 billion. 5. VALUE PROPOSITION Indian firms investing abroad bring several benefits to the host country’s economy. The key advantages that Indian manufacturing companies bring to the table include strong entrepreneurial and managerial skills, high quality standards and cost benefits. 5.1 Employment generation and turning around loss-making units FDI outflows from Indian companies have supported the economies of host nations in many forms – inducing capital generation, transfer of technical & managerial knowledge and employment generation – among others. As per the estimates of Europe India Chamber of Commerce (EICC), investments worth € 43 billion made by Indian enterprises between 2003-12 have led to the creation of 40,000 new jobs in greenfield projects in Europe. Indian management has had a decent track record and proven experience of turning around sick units acquired in foreign countries. The acquisition and turnaround of South Korean loss-making firm 4As per FY ‘13 exchange rate conversion for Rs 250.52 billion

Indian Manufacturers Going Global 24

……………………………………………………………………………………………………………………………………………........................... SsangYong Motor by India’s M&M saved the former from bankruptcy. With M&M revamping its product line, it is expected to turn profitable by 2015. In the past, companies such as Bharat Forge, Wockhardt, Essel Propack and Continental Engines, among others, have been successful in increasing the profitability of their international acquisitions. Tata Group has also proved successful in turning around sick units (like Tetley) and allaying fears of job cuts. 5.2 Strong leadership values and managerial expertise Indian companies have been developed on the strength of the entrepreneurial drive and management skills of their leaders. The experience of thriving under a highly regulated environment in the pre-liberalisation era followed by the onslaught of competition when the market opened up, has moulded exceptionally competent management skills. Leaders such as Ratan Tata of Tata Group and Anand Mahindra of M&M have energised the global ambitions of their respective companies. In turn, trailblazers such as Birla Group, Bharat Forge, Godrej, Wipro and ITC, among others, have raised the collective ambitions of the Indian private sector. For success abroad, the core management must have strong conviction and commitment. Furthermore, value is placed on innovation and entrepreneurship. Indian companies, therefore, have high motivation to learn and gain required expertise of local markets. Acquisition targets, in turn, benefit from the knowledge transfer of these hard-earned management skills. 5.3 Competitive quality at low cost The Indian manufacturing industry has adopted high quality standards. Best-in-class operational excellence programmes such as the TQM approach have enabled enhanced efficiencies and cost savings. This bodes well for overseas partners, as the emphasis on quality management can help save costs across the value chain. 6. DEAL ANALYSIS In 2012, the overall outbound activity considerably improved with deals aggregating to US$ 13.8 billion as against US$ 10 billion in 2011. Activity remained lower as compared to the high of US$ 22.5 billion in 2010 amid a cautious global investment climate. However, cross-border transactions such as that of Gulf Oil Corporation’s acquisition of Houghton International and Rain Commodities’ acquisition of Ruetgers highlight the continued significance placed by Indian companies on acquisition of assets abroad. Of the total number of 265 deals in 2012, 125 were outbound vis-à-vis 140 inbound deals. Three of the six deals above the US$ 1 billion mark were outbound.

Indian Manufacturers Going Global 25

……………………………………………………………………………………………………………………………………………...........................

Figure 18 Outbound deal matrix

Source: Grant Thornton, Aranca Research Of the total of 125 outbound deals, manufacturing contributed 52.0 per cent (65 deals) followed by IT & ITeS accounting for one-fourth of the deals. In terms of value, oil & gas sector dominated with 44.0 per cent share, followed by manufacturing (34.0 per cent) and IT & ITeS (7.0 per cent). The average size of outbound deals was US$ 110.2 million, up from US$ 75.3 million in 2011.

Figure 19 Cross-border outbound deals (value wise)

Source: Grant Thornton, Aranca Research

190

137

125

0

50

100

150

200

0

5

10

15

20

25

2010 2011 2012

Outbound deal value (US$ bn) - LHS Outbound deal volume - RHS

44%

34%

7%

4% 4%

7% Oil & gas

Manufacturing

IT & ITeS

Hospitality

Infra mgmt

Others

Indian Manufacturers Going Global 26

……………………………………………………………………………………………………………………………………………...........................

Figure 20 Cross-border outbound deals (volume wise)

Source: Grant Thornton, Aranca Research 7. SNAPSHOT OF MANUFACTURING DEALS (2012)

Table 8 Top investment deals in manufacturing domain (2012)

Acquirer Target Sector (US$ mn) Deal type

Gulf Oil Corporation Houghton International Plastic & chemicals 1045.0 Acquisition

Rain Commodities Rutgers NV Manufacturing 915.0 Acquisition

Piramal Healthcare Decision Resources Group Pharma 680.0 Acquisition

Binani Industries 3B - fibreglass company Manufacturing 360.0 Acquisition

Grasim Industries Terrace Bay Pulp Textile & apparels 360.0 Acquisition

India Hospitality Corp Adelie Food Holdings FMCG, F&B 350.0 Acquisition

Sun Pharma DUSA Pharmaceuticals Inc Pharma 230.0 Acquisition

Cipla Cipla Medpro South Africa Pharma 220.0 Majority stake

Crompton Greaves ZIV Group Electricals 192.0 Acquisition

Wipro L.D. Waxson Group FMCG, F&B 144.0 Acquisition

Tata Power Company PT Baramulti Sukses Sarana Mining 136.4 Strategic stake

Varroc Engineering Visteon Corporation Automotive 92.0 Acquisition

Fortis Healthcare RadLink-Asia Pharma 50.0 Majority stake

The Serum Institute of India Netherlands Vaccine Institute Pharma 41.0 Acquisition

Dr Reddy's Laboratories OctoPlus NV Pharma 36.0 Acquisition

Sesa Goa Western Cluster Metals & ores 33.5 Majority stake

Topsgrup The Shield Guarding Others 33.4 Acquisition

Jindal Steel & Power Gujarat NRE Coking Coal Mining 25.0 Minority stake

25.6%

52.0%

4.0%

3.2% 2.4%

2.4% 2.4%

8.0% IT & ITeS

Manufacturing

Oil & gas

Hospitality

Education

Retail

Real estate

Others

Indian Manufacturers Going Global 27

……………………………………………………………………………………………………………………………………………...........................

Acquirer Target Sector (US$ mn) Deal type

Dhunseri Petrochem & Tea Makandi Tea &

Coffee/Kawalzi Estate Agriculture 24.2 Acquisition

Air Works India Engineering Empire Aviation Group Aviation 24.0 Acquisition

Trivitron Healthcare Ani Labsystems Pharma 22.0 Acquisition

TVS Logistics Services Universal Components UK Automotive 20.0 Majority stake

NMDC Legacy Iron Ore Metals & ores 19.5 Strategic stake

TRF York Transport Equipment (Asia)

Automotive 18.0 Majority stake

Zicom Electronic Security Phoenix International WLL Engineering 15.0 Strategic stake

NMDC Amplus Metals & ores 15.0 Strategic stake

Kanoria Chemicals & Ind APAG Elektronik AG Electricals 8.8 Majority stake

TRF Dutch Lanka Trailer

Manufacturers Automotive 8.3 Majority stake

Piramal Enterprises Bluebird Aero Systems Aviation 7.3 Strategic stake

LG Balakrishnan & Bros GFM Inc Automotive 5.5 Acquisition

Innoventive Industries Salem Steel North America LLC

Metals & ores 4.7 Majority stake

Indegene Lifesystems Aptilon Holdings Inc Pharma 4.0 Acquisition

Kansai Nerolac Paints Nepal Shalimar Plastics & chemicals 1.5 Majority stake

Superhouse Linea De Seguridad. S. L Manufacturing 1.1 Acquisition

Jindal Steel & Power Apollo Minerals Metals & ores 1.1 Minority stake

Source: Grant Thornton 8. CONCLUSION Indian multinationals have widened their global footprint led by the country’s competent manufacturing sector. With increased competition and higher domestic growth, companies are increasingly looking at international markets to maintain their growth momentum. This is reflected through India’s growing exports and increasing overseas investments in the manufacturing domain. In general, India’s outward FDI has trended higher post-liberalisation in 1991, resulting in a rapid rise in overseas investments by Indian firms. Periodic amendments in government policies have led to significant increase in FDI outflows. This is evident from India’s strong standing in emerging economies for outward FDI. Geographically, India’s overseas investment has been more concentrated in developed regions with the US and UAE as the top two destinations, led by the manufacturing and services sectors. Trends indicate that while companies foraying in the markets of developed economies usually take the inorganic route, those entering the developing nations adopt the organic path. Outbound investments from India have been motivated by multi-faceted objectives of expanding into new markets, enhancing access to resources and incorporating technological advancements. These

Indian Manufacturers Going Global 28

……………………………………………………………………………………………………………………………………………........................... investments are bolstered by favourable changes in regulatory policies for credit availability by private and public bodies. Strong fundamentals displayed by Indian companies have enabled them to emerge as global players in foreign markets. Not only have Indian companies created jobs abroad but have also added value through operational synergies. Similarly, there are a number of instances where the Indian companies have helped their foreign counterparts in successfully restructuring their businesses. Increasing investments by Indian companies in these global economies is therefore a trend that will certainly benefit India as well as these host countries in the long run.

Indian Manufacturers Going Global 29

……………………………………………………………………………………………………………………………………………........................... DISCLAIMER India Brand Equity Foundation (IBEF) engaged Aranca to prepare this report and the same has been prepared by Aranca in consultation with IBEF. All rights reserved. All copyright in this report and related works is solely and exclusively owned by IBEF. The same may not be reproduced, wholly or in part in any material form (including photocopying or storing it in any medium by electronic means and whether or not transiently or incidentally to some other use of this report), modified or in any manner communicated to any third party except with the written approval of IBEF. This report is for information purposes only. While due care has been taken during the compilation of this report to ensure that the information is accurate to the best of Aranca and IBEF’s knowledge and belief, the content is not to be construed in any manner whatsoever as a substitute for professional advice. Aranca and IBEF neither recommend nor endorse any specific products or services that may have been mentioned in this report and nor do they assume any liability or responsibility for the outcome of decisions taken as a result of any reliance placed on this report. Neither Aranca nor IBEF shall be liable for any direct or indirect damages that may arise due to any act or omission on the part of the user due to any reliance placed or guidance taken from any portion of this report.