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India Business Frontier

July 2008

The new Airport Terminal at the Chhatrapati Shivaji International in Mumbai which was built by The GVK-SA Consortium consisting of Indian infrastructure group GVK, the Indian
government, Airports Company South Africa Limited (“ACSA”) and The Bidvest Group Limited (“Bidvest”). Photo Courtesy of: Alex Graves

Incredible investment trend boldly written in India Inc


Dr Martyn Davies, Chief Executive Officer: Frontier Advisory & Abdullah Verachia, Head: India Frontier Advisory

Contents: India-Africa ties are no longer based of China’s state-owned resource firms,
Incredible investment trend boldly written on political affinity originating from their but they are profit-hungry, run by savvy
in India Inc................................................1-4 common colonial past. managers and have tried and tested
India Inc in Africa........................................5 business strategies for emerging markets
A new trend in the global economy — India itself being among the world’s
India: A preferred destination for Foreign
Direct Investment....................................6-9 is the integration of developing world biggest.
economies. As trade and investment
Doing business in India...........................10
between emerging markets grows, so India Inc is coming to Africa
Frontier Advisory Profile..........................11 traditional European and North American
corporate interests are being displaced. Most Indian business across the
continent is micro in size and family-
This is now happening in Africa. The owned. This is why most of us can’t
rise of China and India in close pursuit name an Indian firm of significant size
will change the landscape of African from KwaZulu-Natal.
economies.
Similarly, we don’t know any from Kenya,
Much is being reported of China’s state- Tanzania or Uganda either, where
driven uber-competitiveness, but India’s second and third-generation Indians
private firms will be the winners in Africa. pretty much control the economies of
They may not have the deep pockets East Africa.

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July 2008 Research & Strategy in and beyond emerging markets

But the new wave of Indian investment to Africa is coming from its aspirant
multinationals. Corporate India’s expansion into Africa is replacing the traditional and
typically entrepreneurial small trading business model of migrant Indian labour.

India’s traditional corporates are diverse, family-owned and all-powerful in their home
economy. Firms such as Tata, Reliance, Mahindra & Mahindra, Ranbaxy and Dr
Reddy’s are becoming household brands in developing markets in Africa.

These emerging multinationals are building competitive advantage in the information


technology, healthcare, pharmaceuticals, biotechnology and automotive sectors. They
all have the advantage of a huge domestic market to leverage for global comparative
advantage.

India’s large and growing domestic economy provides a strong resource base from
which to expand offshore. Low labour costs, a sizeable domestic consumer market,
skilled labour, high levels of education and India’s wealthy international diaspora all
contribute to that country’s competitive advantage.

India Inc’s international expansion strategy is primarily focused on emerging markets.


Indian firms, often lacking the capital, products and technology to compete head-on
with Western multinationals, are venturing into less competitive market spaces in
the developing world. This strategy is supported by the Indian government, which
is encouraging its firms to focus on non-traditional markets, the emerging-market
economies with special emphasis on Africa.

India-Africa ties are no longer based on political affinity originating from their
common colonial past. India’s economic diplomacy now leverages old political ties for
commercial gain.

But when setting up shop in South Africa, Indian diplomats and entrepreneurs never
fail to mention Mahatma Gandhi and how his legacy somehow makes its way into
their business plans.

Whereas Chinese state-owned enterprises have little difficulty accessing capital from
China’s policy banks, Indian firms’ cost of capital is market- rather than politically-
determined. This partly accounts for India’s significantly lower outward stock of
foreign direct investment.

To try to rectify this, India’s government is also encouraging its firms to invest in Africa
through offering financial incentives.

Although not financially able to compete with the support given to Chinese state-
owned enterprises by Beijing, Delhi is focusing its financial aid efforts on a handful of
key African economies.

It is doing so through the setting up of financial credit lines to support Indian firms to
win contracts on the continent.

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July 2008 Research & Strategy in and beyond emerging markets

It has provided a 200 million credit line for projects under Nepad. Another 250 million
credit line has been extended to West Africa through the regional grouping Economic
Community of West African States (Ecowas) for the Ecowas Bank of Investment and
Development.

The drivers of India Inc investing in Africa are:

• Vertical integration: Indian firms are acquiring upstream companies to


secure resource assets. Coupled with China, India’s growth is driving global
commodities demand with African states satisfying a large part of this
demand.

• Capturing consumer markets: India’s firms are establishing a wide footprint


across Africa selling an array of products from pharmaceutical to automotive
to consumer goods.

• Energy security: on the back of energy demand and rising oil prices, India’s
energy firms are on the international acquisition trail.

Having to import 70% of its oil requirements, India is strategically vulnerable. To meet
growing demand for energy, Indian firms have embarked on an aggressive energy
investment drive in Africa.

India has invested almost US$ 2 billion in Sudan. ONGC Videsh Ltd is partnering with
other Asian companies Petronas (Malaysia) and the Chinese National Oil Company
(CNOOC) in Sudan. Western nations’ imposition of sanctions against Sudan has
created market gaps that have been filled by Asian firms, Indian included, that have
business models less constrained by political forces.

Head-to-head competition in the energy- and oil-rich economies of Angola and Sudan
for oil concessions has pushed up the cost of acquisitions. China and India are
increasingly exerting greater commercial influence in Africa.

India is emerging as South Africa’s foremost strategic partner in Asia. Japan, Malaysia
and China previously held this title but the rapidity at which Indian firms are investing
in the local economy has increased India’s importance for the South African economy.

As Indian firms are graduating to multinational status, South Africa has become a
preferred investment destination.

Tata is India’s major investor, and it’s no secret that Tata’s chairman Ratan Tata has a
hotline to President Thabo Mbeki’s office.

Tata’s axiom of “benevolent capitalism and intensive community involvement” appeals


to the South African government’s thinking on development.

There are now 35 Indian companies that have invested about US$ 150 million in
South Africa. There is a further US$ 500 million in the investment pipeline.

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July 2008 Research & Strategy in and beyond emerging markets

India will soon become the biggest foreign investor into the economy.

India’s banks are also moving into South Africa. State Bank of India as well as the
Bank of Baroda already have a presence; ICICI Bank will soon move in.

The face of Indian business will no longer be small and entrepreneurial, but corporate
and multinational. This shift reflects the developmental confidence of India itself.
Leveraging traditional relations built up during the colonial period, India is ideally
positioned to take advantage of its durable political ties for commercial positioning on
the continent.

India’s emerging multinationals are being welcomed into African economies and
do not have to contend with the political baggage of being a former colonial power.
Along with China, India’s commercial engagement of the continent will have long-term
strategic consequences for the continent — an economic destiny that is no longer
framed by European interests.

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India Business Frontier
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July 2008 Research & Strategy in and beyond emerging markets

India Inc in Africa


Frontier Advisory tracks India’s commercial movements in Africa. This section provides an overview of key investments in the
last two months.
Niger Uganda Kenya
Prathista to setup fertilizer Essar Oil Buys Into Kenya
ONGC and Mittal India to build
plant Refinery
export-oriented oil refineries
Indian research and technology Essar Energy Overseas, an
in Niger company Prathista Industries Essar Oil subsidiary signed
Mumbai based Taurian Limited (PIL), has revealed an agreement to acquire a
Resources Private Limited won a plans to set up a US$ 75 million 50% stake in Mombasa-based
contract which giving it exclusive organic fertilizer plant and other Kenya.
rights over 3000 sq. km. of the organic agri-inputs in Uganda
Sahara Desert known to be rich to serve the African market for
in deposits of uranium. fertilizers.
DRC Mozambique
India to conclude diamond
Indian firm eyes stake in
cooperation deal with the
Mozambique block
DRC India’s Bharat Petroleum Corp
The Indian government is in and Videocon Industries Ltd
talks with its DRC counterpart to are close to buying a 20 %
initiate a diamond cooperation stake in Mozambique’s Rovuma
deal. India will offer its expertise Offshore Area 1 block from US
in diamond mining, cutting and firm Anadarko Petroleum Corp.
polishing to the DRC. In 2006,
the country produced 28.9
Tata
million carats worth US$ 431.9
The Tata group recently took
million.
a 35% share in Riversdale’s
Benga and Tete explorations.
Ivory Coast
Tata to build Mt. Nimba Iron PK Ores Private Limited
Ore mine In June 2008 P K Ores Private
Tata Steel concluded an Ltd. announced plans to acquire
agreement to build the Mt. coal mines in the Tete province.
Nimba Iron ore mine at a cost of
US$ 1.5 billion. Coal Ventures International
Five public sector companies
Angola have created a joint special
purpose vehicle to bid for coal
Tata to expolore diamonds
projects.
Endiama has entered into an
agreement with the TATA group
It has already conducted due
for the exploration of diamonds.
diligence for two reserves in
Mozambique.

Namibia Sadbhav
Sadbhav holds prospecting
India explore diamond and
Uranium industries Zimbabwe rights and licences for iron ore,
India in talks for coal copper, limestone and coal at
A number of Indian companies four sites in Mozambique.
are in the process of finalising exploration
CVIL is in talks with a number The group has already identified
agreements for investments 350 million tonnes of limestone
in the uranium and diamond of players for coal exploration in
Zimbabwe. in the first mine and are
industries. awaiting prospecting results
South Africa from another two mines in the
country.
India’s Drugmaker Cadila to buy SA drug firm
Indian drugmaker Zydus Cadila announced it will acquire 70% stake in South
Africa’s Simayla Pharmaceuticals for an undisclosed amount. It will be the
second buy by Cadila, India’s fourth-largest pharmaceutical company. Zambia
Vedenta Resources to
India’s Tata plans to lift stake in Neotel to over 50% increase investments
International communications provider Tata Communications announced that it Vedanta Resources has a 79.4%
would acquire a further 30% stake in South Africa’s second network operator, stake in KCM. KCM operates the
Neotel, from state-owned enterprises Eskom and Transnet. Konkola and Nchanga copper
mines, Nkana Smelter and
National Aluminium to build plant in South Africa Nampundwe pyrite mine. The
National Aluminium Co Ltd, India’s second largest producer of aluminium will company’s total investment in
spend US$ 9.5 billion in the next five years on expansion projects. US$ 3.8 the Konkola mine is US$ 700
billion of this has been allocated to the construction of a smelter and power million.
plant in SA.
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July 2008 Research & Strategy in and beyond emerging markets

India: A preferred destination for Foreign Direct Investment


Euan Hope, Analyst at Frontier Advisory

India has retained second position in the attractive global investment detinations
AT Kearney Foreign Direct Investment In this section we provide an economic
Confidence Index ever since eclipsing snapshot of FDI flows into India including
the USA in 2005. The Index lists the most the key drivers of this investment.

3.1 Total FDI Inflows (US$ Millions)

35,000

30,000

25,000
US$ Million

20,000

15,000

10,000

5,000

0
2000 - 2001 - 2002 - 2003 - 2004 - 2005 - 2006 - 2007 -
2001 2002 2003 2004 2005 2006 2007 2008

Source: Department of Industrial Policy & Promotion Ministry of Commerce and Industry

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India Business Frontier
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July 2008 Research & Strategy in and beyond emerging markets

3.2 Percentage Growth in FDI Inflows


180%

160% 153%

140%

120%

100%

80%

60% 52%

40%
40% 35%
28%

20%

0%
April 01-March 02 April 02-March 03 April 03-March 04 April 04-March 05 April 05-March 06 April 06-March 07 April 07-March 08
-20% -14%
-18%

-40% Source: Department of Industrial Policy & Promotion Ministry of Commerce and Industry

Foreign Direct Investment (FDI) flows have increased significantly since 2000, as
evidenced in Figure 1 and 2. In 2002 India was ranked 15th in the AT Kearney FDI
Confidence Index. It has now risen to second and has retained this position for the
last four years. The country has set a target of attracting US$ 35 billion of FDI for
the 2008/09 financial year. However, due to the slowdown in global markets, and
continued volatility on its economic and political front, it looks set to attract around
US$ 28 billion. Despite this investors remain bullish vis-á-vis India as evidenced by
the fact that FDI in April increased by 127% to US$ 3.74 billion over the same period
last year. FDI in April 2007 was only US$ 1.64 billion.

3.3 Top Five FDI Inflows by Country

12,000

11,096

10,000

8,000

6,363
US$ Million

6,000

4,000

3,073
2,570

1,878
2,000

1,129 1,089 1,176


856
669 578 644 695
502
184 267 266 275
101 76
0
April 04-March 05 April 05-March 06 April 06-March 07 April 07-March 08

Mauritius USA UK Singapore Netherlands

Source: Department of Industrial Policy & Promotion Ministry of Commerce and Industry

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July 2008 Research & Strategy in and beyond emerging markets

3.4 Cumulative Inflows from April 2000 - March 2008 (Country)

30,000

25,635
25,000

20,000

US$ Million
15,000

10,000

4,533 4,363 4,357


5,000
2,705

0
Mauritius USA UK Singapore Netherlands
Source: Department of Industrial Policy & Promotion Ministry of Commerce and Industry

India is currently in the process of finalising free trade agreements with a number of
countries/regions which will see a significant increase in investment flows from these
regions.

3.5 Top Five FDI Inflows by Sector

7000
6,615

6000

5000
4,664

4000
US$ Million

3000
2,614

2,179

2000 1,743

1,375 1,410
1,261
985
1000
624
539 543 478
444 467

125 152 151


0 38
0
April 04-March 05 April 05-March 06 April 06-March 07 April 07-March 08

Services Sector (Financial & non-financial) Computer Software & Hardware Telecommunications
Construction Activities (Incl roads & highways) Housing & real Estate

Source: Department of Industrial Policy & Promotion Ministry of Commerce and Industry

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July 2008 Research & Strategy in and beyond emerging markets

3.6 Cumulative Inflows from April 2000 - March 2008 (Sector)

14000

12000

10000

8000
US$ Million

6000

4000

2000

0
SERVICES SECTOR (financial COMPUTER SOFTWARE & TELECOMMUNICATIONS CONSTRUCTION ACTIVITIES HOUSING & REAL ESTATE
& non-financial) HARDWARE (incl roads & highways)

Source: Department of Industrial Policy & Promotion Ministry of Commerce and Industry

India continues to attract investors in the high value-added services industry


sectors, particularly financial services and information technology. Multinationals
seek economies of scale and productivity gains in their IT and business process
outsourcing functions. In addition, companies are locating more sophisticated
functions such as equity research and high-end analytics in India, tapping into its pool
of skilled professionals.

Conclusion
India continues to attract investors in an array of sectors and as a result continues
to place second, behind China, as a leading destination for FDI. While China is the
chosen investment location of Asian investors, India attracts a broader set of global
investors. With a number of global multinationals ‘setting up shop’ this trend is set to
continue.

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India Business Frontier
India Frontier Advisory
July 2008 Research & Strategy in and beyond emerging markets

A Brief Guide to doing Business in India


Abdullah Verachia, Head: India Frontier Advisory

India Frontier Advisory, a division of Frontier • A handshake is the most common


Advisory does a number of bespoke form of greeting, but some women
presentations on navigating the Indian prefer to press their palms together
market place. A key discussion point that in a traditional namaste greeting.
constantly arises is cultural and business A man should wait for a woman
etiquette when visiting India. In this the first to extend her hand before
of a four part series we provide a brief guide extending his, particularly if she is
on cultural and business etiquette when wearing traditional Indian clothing.
visiting India.
• Breakfast meetings are rare; the
• As India’s largest, most multicultural working day tends to begin around
city, Mumbai is a fairly liberal place 9:30-10:00 am. Business lunches
and its business culture tends to tend to be leisurely affairs: 90
be informal and friendly. minutes is not uncommon.
Mumbaikars are famous for their
chalta hain (laid-back) attitude. India Frontier Advisory assists various
However, traditions still hold in clients in their engagement strategies
many areas of behaviour, and it is with the Indian subcontinent as well as
wise to be prepared. other countries in Asia. If your company
is interested in understanding, exploring
• Mumbai’s traffic is notoriously bad. or expanding into India please email
Allow ample time if you need to averachia@frontier-advisory.com.
cross the city to get to a meeting.
When choosing your hotel, bear in
mind where most of your meetings
will take place.

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July 2008

ABOUT US

Frontier Advisory (Pty) Ltd is a research and strategy company that assists clients to enter and
operate in emerging market economies. We have worked with an array of multinational firms,
small & medium enterprises as well as public sector clients and have assisted them to analyse,
formulate and execute their business strategies in these new markets.

Frontier and emerging economies offer new investment opportunities for companies and are
fast providing new markets for traditional market capital, technology and management expertise.
These economies not only pose new challenges to business but also greater commercial potential.
Our firm’s professional services serve to offset the risk that is inherent in these countries – whether
in the BRIC countries or second or third tier emerging markets.

Within the firm, there are four dedicated business units that include China Frontier Advisory, India
Frontier Advisory, Africa Frontier Advisory and Latin America Frontier Advisory. Our diverse and
international team is well positioned to serve clients’ needs based upon their knowledge and
operational experience and emerging markets.

CONTACT US

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T +27 11 728 6339


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