The obstacle course for business investments

"India is facing its hockey stick moment," argue entrepreneurs. By this they mean that after a long period of slow growth, an industrial boom is coming[1]. Last year saw announcements from big international names such as Amazon, Apple and Ikea. But despite the huge opportunities, the decision to invest in India is not an easy one for companies.

Taiwan’s Foxconn plans to build 3 new factories in southern India, representing a total investment of $1.2 billion. It already has 3 campuses and 36 factories in India, according to an internal presentation seen by the FT. However, its chairman has said that building a chip ecosystem in India is only for the "very brave". In July 2023, Foxconn pulled out of a deal with India's Vedanta to build a $19.5 billion chip factory. The reason: the project "was not moving fast enough". The joint venture also failed to secure government subsidies under the "Production Linked Investment" scheme, which is often the deciding factor for any new investment project.

Difficult production transfer at Apple

Apple, Foxconn's main customer, announced that it would increase its production in India fivefold to $40 billion. However, the company has recently complained about India's difficult logistics and infrastructure. In February 2023, the Financial Times reported that only one in two components produced at a casing factory owned by India's Tata Group was of sufficient quality to be used in Apple iPhones.

"But this fault doesn’t just lie with the Tata Group," confides a contact who follows the case closely and wishes to remain anonymous. "Apple has completely outsourced the production of its smartphone to China since the iPhone 8. For the production of subsequent versions, Apple handed over the specification of all the extras to the Chinese. They had to see how to produce and integrate everything. So that knowledge is in Chinese hands. And now that they have to transfer that knowledge to India, suddenly there is no one there to explain it, and certainly not in English." The Chinese make it difficult to transfer production, so technology 'transfer' is a process of trial and error. Nevertheless, it is reported that India’s iPhone output is expected to be around 12% of global output in FY24, up from a planned 9%.

Complex labour laws

Excessive business regulations also make life difficult. The government is working on simplification but progress is slow. "I think a lot of companies are waiting to invest until after the elections," says Mukesh Malhotra , CEO of Solvay India. "They want assurances that Modi will be re-elected with a majority. Then the key reforms are more likely to be implemented and everything will be easier for business."

Today, labour laws still vary widely from state to state. In the state of Maharashtra, where most industrial companies are located, it is very difficult to fire workers, which hurt many entrepreneurs during covid. In other states, it is easier. "You don't come to India," says Chief Economist Roopa Purushothaman of Tata Group. "You come to a state. It is the policies of the state that make it difficult or easy for you as a company. Some of these states are run on almost communist lines, while in others, capitalism reigns supreme. The regulation of land ownership, employment and much more is largely in the hands of these states." A good illustration of the power of the states is the fact that the labour laws passed by the centre were not implemented by the states, even those run by Modi’s BJP.

Scarce trained workforce

Besides labour laws, there is the problem of finding suitable workers, a consequence of poor basic education. Skilled workers, in turn, are difficult to retain. "For years, I struggled to keep my good IT workers," says Mantavajja Gajjar, boss and co-founder of Odoo India. Odoo, the first Walloon start-up to reach the billion-dollar threshold in Belgium, employs 450 IT professionals in India. "After a few successful projects, they were soon bought out by large Indian companies or set up their own companies," he says. High salaries are now needed to attract people. And attractive working hours, from 10 am to 7 pm. Unlike in China, among others, the balance between work and leisure time is very important to young people in India[1] .

"India has the absolute top-notch talents and a huge number of low-skilled workers. But it’s in between, the medium-skilled people, that we have a problem," says CEO Malhotra . "In factories, you have three levels. The middle level is a problem. These people have to go through an in-company training programme. They can read, write, do maths and so on. But they don't know how to use the machines. This training is organised within the industry associations." The government’s Skill India programme is being adapted accordingly. "There is a skills gap, but it can be bridged," he says.

Chaotic India

India is chaotic, and you have to be able to deal with that, says Poul V. Jensen , Managing Director of the European Business and Technology Centre. "Nothing happens in a straight line here. You have your plan in the morning, but by the end of the day, chances are that you may have had to change your whole schedule. My employer came here a few years ago with a full schedule for Monday. On the Sunday they arrived, it was decided that Monday would be a public holiday. You never know what will happen in India."

The same goes for government decisions. Sudden policy changes discourage investors. On 3 August 2023, a ban on the import of laptops, tablets and personal computers without a government licence was imposed with immediate effect. A day later, the licensing requirement was delayed by three months to 1 November 2023. This gave companies time to adapt their operations to the new rules. This was necessary because while the government encourages domestic production of these products, India imports more than 80% of its laptops and 63% of its tablets. An effective import ban would therefore have been disastrous... a fact they realised a day later. 

Price sensitivity

The typical Indian is very price sensitive. "They want value for money," says Jaimini Bhagwati , "Distinguished Fellow" at the Centre for Social & Economic Progress. "That's why Maruti Suzuki [the alliance between Japan’s Suzuki and India’s Maruti] succeeded and General Motors failed in India, apart from the fact that GM was just not well run from the US at the time." The Maruti Suzuki is small and made in India. But Maruti Suzuki also succeeded because "not only did they come out with a cheap car, but at that price average Indians began to consider replacing their two-wheelers."

India is the world's largest producer – and market – for scooters. Its growing middle class is upgrading to a - safer - and highly fuel-efficient four-wheeler at little extra cost. And the fact that this four-wheeler is backed up by good after-sales service is just the icing on the cake. "I will only buy something if I am sure there will be good after-sales service," explains Dr Bhagwati. "That was the problem with Ford: they had good models, like the Fiesta, but they had a very limited after-sales service." Maruti Suzuki dealerships can be found from the biggest cities to the smallest rural villages. Today, more than one in two Indian car buyers chooses a Maruti Suzuki.

Intellectual property rights and price caps

Raman Madhok , Diplomatic Advisor on Economics to the Consul General of Belgium, sees two other specific issues that are difficult for foreign companies in India. "First, there is the issue of intellectual property rights. The laws have improved, but some multinationals still don't trust them. Also, companies want to protect their manufacturing processes. Why hasn't Tesla set up a production facility here yet? Because there is a lot of pressure from the government for companies to build a whole local supply chain instead of importing components. Some companies are not ready for that yet." But India adjusts when needed. By cutting import duties on electric vehicles, India is trying to make Tesla reconsider and the latest reports are that it is looking to set up factories in India now.

A second challenge is pricing. "You have to sell at a - low - price here, a price at which the government is not inclined to intervene. Take paracetamol, for example. My American colleague buys it on his trips to India because it is so cheap. A strip of 10 tablets costs less than half a euro. Why is that? Because of DPCO, which stands for Drugs Price Control Order."

One and a half billion consumers with individual tastes

Should this deter companies from coming to India? Madhok: "India's advantage is the numbers: one and a half billion people. Then small margins become big profits. But you have to be willing to adapt your products to the Indian market. Look at companies like Unilever, Cadbury, Kraft: they have adapted their products to Indian tastes and local products. Nestlé's Maggi noodles, one of the most popular snacks in India, have Indian spices added to them." 

Sales of Maggi noodles were virtually non-existent in the first few years after the company entered the Indian market in 1983. Nestlé studied the market and saw a need for an easy, quick to prepare and relatively healthy snack: the quick 'evening snack', for when children and students came home hungry and did not want to wait long for food. The '2-minute noodles' slogan caught on and catapulted Maggi noodles to cult status. A vast distribution network ensured that noodles were available everywhere, even in the most deprived areas.

The example also shows what India is all about. "You don't invest in India for the short term. If you are not prepared to invest for several years before you start making profits, then you are out of place." Poul V. Jensen agrees with Madhok. "You have to have deep pockets to make it in India: there is the cultural adjustment, convincing the Indians, the huge capacity that needs to be set up and so on. When a global top-5 management consulting firm set up here, it factored seven years of losses into its business plan."

Low ESG awareness yet

"You should also know that there is still a lot of work to be done on the 'Environmental, Social and Governance' (ESG) framework. The whole production system may be perfectly set up, but far from all Indian companies are awake to ESG today," Jensen continued. "And that has to change." In 2024, the new Corporate Sustainability Reporting Directive will come into force in the European Union. Between 2024 and 2028, 50,000 companies will have to provide as much detail as possible about their supply chain emissions. This will increase the pressure on suppliers to meet more stringent requirements. There will be increasing trade restrictions between the European Union and emerging markets as a result of new rules to combat deforestation (Deforestation-free Regulation[1] ). And from 2026, the first carbon border tax will be introduced, which emerging markets have called "unilateral" and "discriminatory".

On the other hand, these climate 'sticks' are also leading emerging economies to revise their climate ambitions upwards. Indonesia and India, for example, have made progress in their plans to launch their own carbon markets. Emerging countries, including India, are well aware of the huge potential for those who adapt.

India grows at night

"India grows at night while the government sleeps." This popular saying by author Gurcharan Das illustrates the country's excessive bureaucracy. Acquiring land for business expansion and infrastructure projects, for example, is a long and slow process. "The legal system is independent," says Shumita Sharma Deveshwar of GlobalDataTSLombard, "and there is a level playing field for foreign and domestic companies. But it can take years to resolve disputes."

"That’s why it’s crucial for foreign companies to work with local partners who know how things work. And how to do it faster." Dr Bhagwati agrees. "These partners often contribute nothing in capital and have little technical expertise. But they do know all the legal hurdles and how to get approvals faster. They know the local government people and the local way of doing things. And yes, sometimes money has to be passed under the table to make things go a little faster. As a foreign company, it is best to take into account that you will have to pay this or that tax, and such and such a payment."

Of course, the government is trying to reduce this corruption. "But even then you need local help, just as you would if you were a Belgian company in Greece. You would want a Greek guide. In India, you have different languages, different eating habits, different religious practices, that vary from state to state." Raman Madhok adds: "The way people behave is different and some things are very sensitive here. You have to know them to be successful. For example, foreigners believe that everyone can be trusted, but Indians do not. Remember, we were colonised before, and we don't forget that easily." Madhok concludes, "The global statistics are very clear: 7 out of 10 mergers and acquisitions fail largely because of people issues. And this is doubly true in India. You cannot run India from abroad."

[1] Deforestation-free legislation aims to ensure that commodities such as palm oil, soy, beef, coffee, cocoa, rubber, timber and related products imported into the EU do not contribute to deforestation. Monitoring is done through strict traceability requirements and fines of up to 4% of annual EU agricultural revenues for offenders.

[1] Nico Tanghe, India is more than ever the back office of the world: 'The future is ours' The Standard, 2 November 2023

[1] Nico Tanghe, Will everything soon be 'made in India'? De Standaard, 28 October 2023