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and making more selective bets. In the process, they are rediscovering their home market too by Indrajit Gupta, Cuckoo Paul | Oct 18, 2010
S anjay Reddy shudders as he remembers the nine months of competitive madness. The GVK Reddy group scion recalls the media frenzy sometime in 2007, when arch rival GMR group won the bid for expanding and managing a secondary airport near Istanbul. Stock market analysts, who often compared the two groups, wanted to know if GVK had a matching global strategy. GMR’s share price had zoomed. And as the head of new business development, 42year-old Reddy was feeling the heat. He quickly formed a core team to evaluate transactions in infrastructure all around the world. “We literally combed the world,” he says. GVK chased projects in Russia, Prague, Mexico, Singapore, Spain and many other places. The team even looked at a small airport next to a church in London. Such was the hurry. But after crisscrossing the globe, Reddy and his team took stock. The market was at an all-time Image: Vidyanand Kamat high. The deals were highly leveraged. And there was the tell-tale sign: almost all the sellers were large private equity funds. That’s when the penny dropped. “We realised that we had been completely carried away by the hype around globalisation,” admits Reddy. “As developers, the maximum value for us as developers lay in green-field [new] projects, and not in brown-field [upgrade] operations.” The GVK group may have escaped the blushes in the heat of the three-year mergers and acquisitions frenzy that started in 2005. Not all Indian frontline entrepreneurs were quite as lucky. Take G.M. Rao of GMR group. In 2008, the Bangalore based infrastructure entrepreneur spent $1.1 billion for a 50 percent stake in InterGen, a US-listed power company that owns 12 power plants across Europe and South America. The idea was to use the InterGen experience to bid for Ultra mega power projects in India. Today, faced with a huge debt burden and a falling stock price, Rao is looking for a buyer for his group’s stake in InterGen. In fact, his global misadventures may have partly resulted in Rao dropping five places in the Forbes India Rich List since last year, losing 18 percent of his net worth. So here’s the key question: Where would frontline Indian entrepreneurs place their big bets over the next five to ten years? With growth in India offering compelling opportunities, it is perfectly
intuitive that they turn their attention away from globalization and focus on home. the growth in India is clearly unprecedented. . says Janmajeya Sinha. In each of these cases. needs resource mobilization at an unprecedented level. “Other than China. And Asia will jump from $7 trillion to $21 trillion. Over the next ten years. Nokia. the logic of globalisation has undergone a subtle shift. Put simply. expect some of them to continue buying assets overseas. We’ll come to that in a bit. The action is palpable even in a somewhat troubled sector like Pharma: The recent Abbott deal to buy out Piramal Healthcare for $3. shopping for technology or even selectively hiring expat managers. but let’s first get a handle on how the eastward shift in the centre of gravity of world business is shaping the Indians’ strategy. Asia Pacific.” says Adil Zainulbhai. Dabur bought Turkish company Hobi Kozmetic and Reliance bought stakes in three shale gas assets.4 trillion making it the fifth biggest economy in the world. IBM. That’s not to say that all Indian entrepreneurs have bid goodbye to their global ambitions. Multinationals in a diverse set of industries like GE. Wal-Mart and Toyota are expected to ratchet up their investments here over the next five years. led by China and India. And it. Growth across developed markets in the US and Europe have petered out. Naturally. Almost on cue.5 trillion over the next decade. Boston Consulting Group. The US will move from being a $11 trillion economy to $13. continues to be on a roll. P&G. Samsung. exactly as it did in China over the past five years. “The world is likely to see two-paced growth. the Indian economy is expected to treble in size from the current $1.7 billion has reignited the buzz in the domestic pharma industry. the global trip of many Indian companies is reaching its destination back home. There are several examples of this: Mahindra & Mahindra recently agreed to buy Korea’s Ssanyong Motors. managing director.” says Boston Consulting Group’s managing director Arindam Bhattacharya. But Asia. some of the biggest firms around the world are either here in India or on the verge of entry. On the contrary. McKinsey & Co. The competitive intensity will mount. the Asian economy will grow by adding two and a half times India’s current size every year. chairman. therefore. And the reasons are fairly obvious.
Duggal has been driving the firm to expand in Africa. Middle-East and South-East Asia. This year. Since he took over as group CEO in 2002. Plus. even as the benchmark for entry into the list has risen too (see page 56). We are betting on the premise that this churn will gather momentum. “We are ready for a round of shoe-pinching in the mainline toiletries and foods business. in the past couple of years. What’s more. Mature with experience. there’s the advantage of a first-mover advantage. operating profits have been coming down as multinationals like Unilever. The valuations of any acquisition targets have shot up. The strategy seems to be on track. the operating leverage would become healthy. So what are the new rules of the game? Hedge Against Home Sunil Duggal would count as the favourite man of the Burmans (of Dabur). Duggal set up an entirely separate supply chain (read local manufacturing) to serve these markets.Anand Mahindra: Indiatodayimages.” admits Duggal. Duggal has seen Dabur’s market value quadrupling. they are now going in for a more selective and considered approach. GV Krishna Reddy: Indiatodayimages. The Forbes India Rich List over the last two years offers some evidence. As he sees it. Yet for the last few years. but once the break-even mark was crossed. Over the past five years.com On the other hand. India is the big prize for most multinationals around the world. As a strategic response. Already 22 percent . P&G and Pepsico trained their guns on the Indian consumer packaged goods business.com. there are 12 new faces which have broken into the List. the entrepreneurial renaissance in India has led to even unknown entrepreneurs discovering new sources of value creation. The upshot: incumbents will face the music from competition from hitherto unknown sources. “Today. Time was when Indian entrepreneurs embraced globalization with a “We-can-Conquer-theWorld” mindset. And Africa is at a stage of evolution that India was ten years ago. the crucial question is how to remain competitive even while being focused on the home market?” says Zainulbhai. he’s quickly trying to ramp up Dabur’s presence in markets like Africa. much of the rhetoric in business circles was about being globally competitive. The start-up costs may be high. Already. Africa is almost as big an emerging market as India. competitive intensity is a lot less compared to India.
” says Prashant Ruia. Sunil Duggal: Indiatodayimages.com . low margin business and changing the profitability of the business as well. group chief executive officer of the $15 billion Essar group. And today. Turning around the 4-million-tonne Algoma plant wasn’t an easy proposition. he’s decided to avoid head-on competition. oil and gas. “We’re taking a proven business model from India to these markets. Essar is doing much the same in Kenya and Nigeria. With their minute factory model. Ruia points out that almost 80 percent of his group turnover straddling power. where multinationals have no presence or knowledge.” says Duggal. says Duggal. The Ruias had to face union protests and returning it to profitability took nearly four years. And to defend his turf in India. given the spectre of large overcapacity in the industry. How the Algoma experience has influenced Ruias’ ambitions in buying any future steel manufacturing capacities is not clear. India is set to become the world’s second biggest steel market after China. “We also have a relatively free run in categories like Ayurveda and herbal. Prashant Ruia: Vikas Khot. Essar and Bharti have begun moving the business into high volume.of Dabur’s top line is from overseas and its operating margins there are actually higher than in the Indian business. Algoma and Minnesota (largely for iron ore). shipping. African telcos have a high-cost high-price model that keeps penetration levels low. Ruia led a big foray into the US and Canadian steel market with two major acquisitions. and instead settle for positions that lie at the periphery of the core markets—and cede the centre to multinational competition. And that won’t change over the next five years. Business Model Advantage It’s a variation of the same logic that has driven Sunil Bharti Mittal to expand his telecom business in Africa and a string of emerging markets at a time when margins in the Indian market are coming under pressure. Yet in 2006. telecom and BPO originates from India. The chances are that they may desist from making any big buys in steel manufacturing assets.
India has large tracts of unexploited shale gas deposits. The world’s biggest auto makers are headed to India.” he says. Perhaps he was looking to develop beachheads in the US market. And that experience is making him future-ready in India. It is also in the process of setting up six such centres across India. Ambani is shopping for shale gas assets. the largest steel processor in the UK. an incumbent like ONGC has simply not been able to get its act together. was in the queue with Ratan Tata to buy the firm. Its big constraint: lack of technological prowess. this time to buy out Korean SUV maker Ssangyong Motors at a more modest valuation and thus gain the product portfolio to reach out to emerging markets like Russia and Western Europe. So far. Sanjay Reddy and his team were placing bids for a series of major road projects being awarded by the Centre. Just as GE and Nokia are waking up to unknown competitors from emerging markets. But fortunately for him. Soon after. the international markets tanked. In the same period when Ratan Tata and Kumar Birla were making big-bang acquisitions. Two months ago. That means setting up large service centres in key markets to convert basic steel into customized sizes for local customers. insiders suggest that he plans to acquire the knowledge and the technology required to focus on shale gas assets back home.” says Mahindra. and money supply and demand both dried up. you could miss out on new sources of innovation. the deals didn’t go through. Innovation Capital When Jaguar Land Rover was on the block. it is able to improve margins and deliver better returns than its manufacturing led model. Although Ambani hasn’t revealed his hand. The price of insularity is simply too high.But under their new chief executive Malay Mukerjee. many of them new to the business and unaware of its . Today. The level of competition was stunning. There were as many as 50 bidders in the fray. But once the valuations soared. Ambani too nearly ended up doing a mega deal or two in the petrochemical space. Last month. “At the risk of sounding trite. causing considerable grief for both the Tatas and the Birlas. in terms of fuel standards and emission norms. Not only does it help Essar serve global customers better. which are seen as the next frontier in the energy space. we are in a global village. Australia and Malaysia. it acquired Servosteel. Essar Steel is taking a strong position in value added steel both in India and in markets like UK. “Today. M&M vice chairman and MD. the senior Ambani may have a problem of plenty. Finding new avenues to deploy the cash where it’ll earn a more than the hurdle rate of 20 percent isn’t easy. The obvious question is: why target a declining market like the US for pickups? The level of sophistication is so much higher. And there’s no way that M&M will be able to defend its turf in SUVs and pickups without the requisite portfolio. Anand Mahindra. he again stepped into the ring. Shopping for Technology Mukesh Ambani may be India’s richest businessman. Post-script: A few months ago. Mahindra get out of the race. Mahindra says his firm needs to alert to any new player anywhere in the world who can disrupt the global game. if you’re not in touch with the world. but with a cash hoard of nearly $6 billion.
just in case. It was all the way a race to the bottom. GVK managed to win just one project. Surendar and Ashish K.com/article/india-rich-list-10/for-indian-entrepreneurs-the-worldbegins-at-home/18312/0#ixzz17acepOyb . “I hadn’t even heard of at least half of them. This bidding frenzy in India has made Reddy take another good look at international opportunity.” Eventually. Mishra) This article appeared in Forbes India Magazine of 22 October.risks. (Additional reporting by T. 2010 Read more: http://business.in.
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