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India’s
openness to global trade and investments has seen a
remarkable increase in recent years.
In the
year ended March 31, the sum of money flowing into and
out of the country rose to $913 billion, or 110 percent
of gross domestic product.
As late
as 1997, annual flows had amounted to only 50 percent of
GDP, says Ajay Shah, an economist at the National
Institute of Public Finance and Policy in New Delhi.
“India
has changed beyond recognition,’’ Shah says.
The
progress is perhaps best reflected in the speed with
which Indian companies are buying businesses overseas.
So far
in 2007, foreign acquisitions have amounted to more than
$39 billion, a fivefold jump from last year. The biggest
purchase this year—and in India’s corporate history—was
the $12.8-billion leveraged buyout of Britain’s Corus
Group Plc. by Mumbai-based Tata Steel Ltd.
While a
liquidity crunch in the leveraged-loan market could rule
out a similar big acquisition in 2008, the smaller deals
might be even more numerous next year as the Indian
economy, barely affected by the subprime-related credit
crisis in the West, continues to power ahead.
India
doesn’t have the sovereign wealth of an Abu Dhabi or Singapore,
whose state-sponsored funds recently bought large stakes
in Citigroup Inc. and UBS AG, respectively. Nor is the
overseas expansion of Indian companies spearheaded by
government-owned companies looking to capture energy
resources.
Private
entrepreneurs are driving the agenda in India, with
state-owned oil companies making a few small
investments, such as Bharat Petroleum Corp.’s purchase
this year of a 20- percent interest in an Australian
exploration area in the Timor Sea.
Fight
for Jaguar
Just
because Indian acquirers have scant links to the state,
their journey to Western boardrooms isn’t a cakewalk.
Out of
the three companies vying for Ford Motor Co.’s Jaguar
and Land Rover brands, two bidders—Tata Motors Ltd. and
Mahindra & Mahindra Ltd.—are Indian carmakers.
A recent
report in the Wall Street Journal cited the head of a US
trade body representing Jaguar dealers as saying that
the perception of the luxury brand may take a beating if
it was owned by an Indian company.
The
financial clout of Indian companies has grown to a point
where it’s impossible to stop them with snobbery.
Last
year, Arcelor SA chief executive officer Guy Dolle had
ridiculed the takeover bid by Mittal Steel Co. by saying
that the steel made by Indian-born Lakshmi Mittal was
like eau de cologne when his company produced perfume.
Investors judged the cologne to be good enough to be
merged with the perfume.
Survival
instinct
Mittal’s
success in building the world’s biggest steel empire—ArcelorMittal—with
acquisitions around the world has been a tremendous
source of inspiration for Indian entrepreneurs.
But
ambition alone isn’t enough.
Several
other forces have come together to make Indian acquirers
strong contenders for global assets.
The
modernization of the country’s equity market and the
loosening of capital controls have improved Indian
companies’ access to finance, while a strengthening
rupee has made overseas assets more affordable for them.
At the
same time, the import tariffs that protected local
manufacturers from foreign competition have come down
significantly. The only way domestic producers can now
compete is by going global themselves.
That is,
increasingly, the strategy which even midsized companies
are pursuing.
‘Huge
aspirations’
Suzlon
Energy Ltd., a maker of wind turbines based in Ahmedabad,
Gujarat, has seen its assets grow sixfold in two years
through acquisitions of Germany’s Repower Systems AG and
Hansen Transmissions International NV, a Belgian gearbox
maker. The company is now the world’s fifth-largest
maker of windmills and expects to become the
third-biggest by 2010.
“The
remarkable thing about Indian companies is that they
have huge aspirations to be global companies,” Tarun
Jotwani, chairman of Lehman Brothers Holdings Inc.’s
Indian operations, told Bloomberg News in an interview
this month. “They’re extraordinarily confident about
buying companies abroad and integrating them with their
companies in India. We think the pace will pick up.”
Jaya
Prakash Pradhan, an economist at the New Delhi-based
Institute for Studies in Industrial Development, has
found that 75 percent of the money spent by Indian
companies on overseas acquisitions since 2000 has been
in manufacturing. By the number of deals, the
pharmaceutical industry is the clear leader, followed by
transport equipment and chemicals, he says.
Two-way
flows
All of
these industries are skills-intensive, in line with the
core competence of India’s homegrown entrepreneurs.
Together with computer software, these businesses will
continue to be at the forefront of corporate
India’s
expansion overseas.
Meanwhile, foreign direct investment into India
will—once the country has better airports, roads and
power supply—come to be dominated by labor-intensive
industries in which the local business tycoons have
acquired very little expertise.
A
progressively more open Indian economy may be able to
expand even faster than the current 9-percent pace.
Higher economic growth will, in turn, invite more
overseas money into
India
and give more local businesses the confidence to go
global.
For
investors,
India
will be equally important as a provider of capital as
well as a recipient. |
