India’s Mini-Multinationals Make Waves in Western Markets

MUMBAI, India: Early on July 1, the Pierre Hotel in New York added an unusual accouterment to its golden marquee on Fifth Avenue: the saffron, white and green of the Indian flag.

The flag, decorated by a Gandhian spindle, once symbolized India's struggle against Western capital. But at the Pierre it marked a reversal of roles: A Western hotel had been acquired by Indian capital.

And in that, the hotel is, increasingly, not alone. Evoking earlier waves of foreign takeovers - Japan Inc., most famously, and China Inc., most recently - India Inc. is making a quiet push to swallow bite-size chunks of the world economy.

Indians have bought a Sudanese oil field; a German metal forge; a South Korean truck maker; a British tea company, a French television manufacturer operating in Poland, Mexico and China; a Singapore paint company with plants in 12 countries; and about 60,000 kilometers, or 37,000 miles, of undersea communication cables.

In the first eight months of this year, Indian companies paid $1.7 billion - more than quadruple the tally for all of 2001 - for 62 overseas companies, according to the accounting firm KPMG.

India's purchases still pale next to China's, forming a trend of deals in the millions, not billions. But bankers in Mumbai and Hong Kong argue that, in contrast with China's state-backed globalizing companies, heavily reliant on cheap domestic production, India is in the grips of a grass-roots, entrepreneurial bubbling of mini-multinationals.

These companies, though small, could become industry shapers, growing through proprietary business models that can operate anywhere, not just in India - business models like finding new medicines more cheaply than competitors or cutting projects into more easily outsourced chunks.

Meanwhile, more and more US private equity firms are giving Indian companies funding for acquisitions in the West, according to Somasekhar Sundaresan, a Mumbai lawyer involved in the deals. The transactions amount to foreigners' hiring Indian managers to turn around companies in the foreigners' own markets.

Psychologically, the Indian as global owner marks a reversal of fortunes for a country whose recent economic history has been dominated first by colonialism, built on foreign capital, and then by socialism, built on fear of that capital.

"Indians became subordinate to the West through the dominance of foreign capital," said Francine Frankel, director of the Center for the Advanced Study of India at the University of Pennsylvania. "I think this demonstrates that they have shaken off this feeling of having to make excuses for why India has lagged behind."

That confidence is just one ingredient in a complex stew of forces nourishing the new Indian takeover artists.

Restrictions on spending once-scarce foreign exchange have eased. Captains of industry once complained of having to break the law to invite colleagues to lunch on a foreign visit. Today, with India holding $143 billion in foreign exchange, Indian companies can buy not only foreign lunches but also foreign companies, for as much as twice the buyers' own value.

"What we're right now seeing is the manifestation of the pent-up desires of a couple of decades," said Amit Chandra, head of investment banking at DSP Merrill Lynch in Mumbai.

Those desires are coming to fruition in a favorable business climate, with interest rates down, major companies restructured and robust economic growth that has fattened corporate profits and stock valuations. More than $400 billion of equity is traded on India's stock exchanges, where dozens of companies boast market capitalizations greater than $1 billion each.

The rise of these potential acquirers is the Indian wave of a recurring pattern in Asia's economic rise. But while many Asian companies have gained the scale of multinationals, few - Sony of Japan and Samsung of South Korea are exceptions - are considered truly multinational by business scholars. That is to say, they are able to manage differences in a multicultural firm; able to transfer a business model from a low-cost market to a rich foreign market; able to compete via innovation rather than just with cheap manufactured goods.

Now, some of India's acquiring companies appear to be breaking the East Asian mold: the pattern that domestic companies must first get big through exports and only then, in their maturity, cultivate the more intangible skills of being multinational. In India, where large scale production for exports remains unattractive in many sectors, the mini-multinationals are seeking to become innovative global companies, doing everything everywhere, even before they reach global scale.

Jayant Sinha, a New Delhi-based partner of the consultancy McKinsey, said: "The Chinese companies are saying, 'I can make things cheaply in China. How do I take over foreign brands and hollow out the manufacturing and sell more of the stuff that I'm making in China? How do I put old wine in new bottles?"'

He cited Chinese attempts to take over makers of Western brands like Maytag, the home appliances manufacturer. In those cases, analysts say, the Chinese companies are working from a long-term strategy of transferring production to low-cost Chinese factories while tapping distribution and sales networks in the United States.

"The Indian companies are not saying, 'How should we continue to leverage cheap labor?"' said Sinha, who has advised leading Indian and Chinese companies on their globalization strategies. "They're saying: 'We've learned to do certain things really, really well in India. Then how do we do that in France?"'

India's acquirers do include many companies whose strategy is simply to exploit the cost advantage of producing in India. Some, notably the state-owned Oil & Natural Gas, are seeking reliable access to resources. But it is a small group of mini-multinationals that has caught the eye of global investors.

Bharat Forge is a prime example. An Indian maker of steel car components, the company recently bought forges in the United States and Germany.

The company is pursuing what its chief, Baba Kalyani, calls the "multishore model" - carrying out both production and marketing in each of the major markets of Europe, Asia and North America.

"Being a global auto-component player does not only mean growing exports," Kalyani told shareholders recently. "It also requires a strategic vision that skillfully combines the comparative advantages of each location so that the whole is significantly greater than the sum of its parts."

Another mini-multinational is Videsh Sanchar Nigam Ltd., or VSNL, the former state monopoly for international telephone calls that was privatized in 2002. The company recently paid $130 million for 60,000 kilometers of undersea cables owned by the US giant Tyco International. Now, with trans-Atlantic, trans-Pacific and inter-American cables, the company's ambitions stretch beyond India. VSNL wants to establish itself, as a company Web site says, as a "one-stop telecommunications provider for global businesses."

These mini-multinationals provide a stark contrast with China's global acquirers, analysts say.

In China, the new global acquirer "is not necessarily doing the state's bidding, but is fostering the state's national sovereign desires around the world," Mark Renton, head of investment banking for Asia at Citigroup in Hong Kong, said by telephone. "Indian corporates have been much more stimulated by an entrepreneurial spirit."

Many Chinese companies get government backing and state-subsidized loans, and China's low wages and growing infrastructure have made it a hub of mass production. The result is a series of big-ticket acquisitions whose objective is often to transfer production from the acquired company back home. A notable benefit of the Chinese strategy is in translating acquisitions into jobs - something India sorely needs as it straddles the paradox of brisk economic growth occurring even as 390 million Indians live on less than $1 a day.

India remains an uncompetitive mass-production locale for several industries, given its irregular electricity supply, choked roads and seaports and restrictive controls on hiring and firing.

But analysts say its private banking system and open capital markets force better discipline than China's in assessing which acquisitions are likely to succeed. And India boasts what is widely acknowledged as world-class managerial talent, reflecting its heavy investment in higher education since its independence in 1947 and the growing trend of thousands of professionals returning home after long stints overseas.

That mix of factors - a poor domestic production environment but well-run, well-staffed companies - has prompted a number of companies to grow overseas instead of at home.

As those companies reach out into the world, their strides are finding echoes in popular culture, suggesting that the trend satisfies not just bottom lines but also a postcolonial desire to be foreign owners, not the foreign-owned.

In a recent television advertisement for a mouth freshener, a young Indian on a foreign trip drives by the headquarters of East India Co., the British colonial trading company. On a whim, the man declares his intention to buy out the company. At a lavish handover ceremony, he signs documents as British officials look on, smiling.

And in a nod to present trends, the young man is not a freedom fighter in homespun but a tycoon in pinstripe.