Putting the flags out: Essel Propack's manufacturing facility in China

Five overseas acquisitions in a year is perhaps the best way to etch in your mind Ranbaxy's hunger for a piece of the global action, but it isn't as if the Delhi-based pharma major's international quest is a recent phenomenon. The company's first foreign foray can be traced back to 1977 when it began production in Lagos in Nigeria via a joint venture. There are other companies too that ventured overseas early, and via JVs. 1977 was also the year Asian Paints ventured overseas, in Fiji, with local equity participation. Other Indian firms that felt the need to have international outposts early-on, not necessarily via JVs, but by building a presence from scratch, include it services major HCL and the A.V. Birla Group, when the late Aditya Birla was at the helm. Just four years after formation, HCL established its first transnational venture, Fareast Computers, in Singapore in 1980. And right through the seventies, Birla built up manufacturing operations in countries like Thailand, Indonesia, Egypt, China and Canada.

Clearly, the itch to become multinational has been there for some time now with India Inc.-the big difference in the seventies and eighties, however, was that few Indian companies could even think about acquiring a foreign competitor as they either lacked the capital or the competitiveness. Greenfield entries and JVs were clearly better options. But even if acquisitions are a swift route to an international presence today, JVs and single-handed overseas entries still have their merits. "A JV can be used as an entry strategy into a particular market or for purposes of risk mitigation," says Ramesh Adige, Executive Director, Ranbaxy. To be sure, along with the companies it has acquired, Ranbaxy also has several JVs across the world in countries like Japan and South Africa. HCL Technologies still takes the JV route, one of the few large it services companies that has hinged its international strategy around such collaborations. The Delhi-headquartered it services giant has had several joint ventures with companies like Deutsche Bank, Jones Apparel and NEC. "Joint ventures are a part of our DNA," says Saurav Adhikari, Corporate Vice President (Strategy), HCL Technologies. "In a merger or acquisition, the risk devolves entirely to the acquirer. In a JV, on the other hand, two partners share the risk. The great thing about a JV is the fact that there is accelerated learning for the partners at lower risk levels," he adds.

The company has been using a strategy of acquisitions and organic growth in foreign geographies to expand its footprint Ashok Goel Vice Chairman/ Essel Propack	Reliance Petroleum is setting up a refinery that will produce 29 million tonnes of oil a year-all for exports, specifically to the US and Europe Mukesh Ambani Chairman/ Reliance Group

The crucial factors for the success of a JV are what each partner brings to the table, how complementary their respective skills are, and the understanding that the partners have about each other's needs. The Chennai-based Sundram Fasteners Ltd (SFL) traditionally has not been a great believer in JVs. Reason for this diffidence? The company felt that a JV partner could muscle the other out. But in 2004, the leading auto ancillary manufacturer entered into a JV with Bleistahl Produktions GmbH, Germany, to manufacture valve train parts in India. SFL invested 76 per cent of the equity capital and Bleistahl chipped in with the rest. It was a first for SFL. Why did SFL get into the JV? SFL found that Bleistahl shared its vision of India being an outsourcing hub for manufacturing. In addition, Bleistahl agreed to transfer its assets, including production facilities to the JV (rather than SFL buying it out and then transferring it). Bleistahl also chose to focus on marketing, allowing SFL to concentrate on its core manufacturing strength. "This way we are ensured of a steadily increasing export turnover and not worry about offtake, sales and people aspects,'' says Sampathkumar Moorthy, President, SFL. "But in this model, one has to be sure of one's partner,'' he adds.

The SFL example is unique because it allows the company to target international markets by manufacturing out of India with some help from an overseas partner. Most JVs, on the other hand, are signposts that Indian companies use while exploring global markets. JVs are an easier way to get used to the nuances of particular markets. "Primarily, a JV allows you to leverage the strengths of the partner who is well aware of the market dynamics and knows the rules of the game," says Ranbaxy's Adige. In 2002, when Ranbaxy decided to enter Japan, the world's second largest pharmaceutical market, they decided to tie up with Nippon Chemiphar Limited of Japan to form a JV called Nihon Pharmaceutical Industry. Japan is amongst the most regulated pharmaceutical markets. "Local knowledge is the key to success in Japan. The distribution system is very different in Japan. Other than language issues, in Japan, doctors dispense drugs. To address the market, a well-connected local distribution partner is almost a prerequisite," says Utkarsh Palnitkar, Industry Leader (Health Sciences), Ernst & Young India. Japan also has a unique pharmaceutical pricing system where the government reimburses medical agencies for drugs at an officially set price irrespective of the actual purchasing price. Says Adige: "The alliance provided us a platform to gain experience of the Japanese regulatory framework and market environment."

In the IT services industry, JVs are being used to strengthen delivery capabilities in verticals. These JVs have often resulted in new client acquisitions. HCL, for example, has managed to beef up its revenues from verticals like retail and telecom by entering into JVs with companies in those spaces. In 2002, HCL Tech had identified the retail vertical as a high growth area and subsequently launched a 51:49 JV with Jones Apparel Group Inc. to provide it solutions in the global retail market space. That JV seems to have paid with HCL Tech bagging a $333-million five-year co-sourcing deal to provide outsourcing services to Europe's leading electrical retailer, DSG International, earlier this year. "When the Jones JV was signed, our revenues from the retail segment were marginal," says Adhikari. In the second quarter of the current year, 12 per cent of HCL Technologies' revenues (Rs 1,379 crore) came from retail clients. HCL also attributes its growth in the BPO space to its JVs in the telecom space. "Thanks to our JV with British Telecom, today more than two thirds of our BPO revenues accrue from the telecom vertical from virtually zero before the BT venture," says HCL's Adhikari.

Feeling The Stones

Even as companies continue to take the 'safer' JV route to expansion in foreign markets, there are others who prefer to start off on their own in distant geographies. "There's a saying in China. 'You cross the river by feeling the stones'." says Girija Pande, TCS' Head & Regional Director (Asia Pacific). What Pande means is that China is a different ballgame and you have to learn the market before you play it. "We were clear that we wanted to enter China not as a JV, or as an acquisition. We wanted to learn China by ourselves," says Pande, adding that the company considered a few acquisitions before deciding to go on its own in China. To achieve this, in June 2002, TCS started its operations by setting up what's known as a wholly owned foreign enterprise (WOFE) in China. Headquartered in Shanghai and with its delivery centre in Hangzhou, TCS today employs 600 people in China, 95 per cent of whom are locals. "Today we know how to hire, fire in China. We have an understanding of how the market works there because we started ground-up in China," says Pande. That's the great thing about starting from the scratch- the progress might be painfully slow, and at times with pitfalls, but the learning is immense.

HOW THEY DID IT Squeezing into foreign shores A combination of JVs and acquisitions have made Essel Propack the world's largest manufacturer of lamitubes.

International presence: 24 plants in 14 countries With a 32 per cent share of the global market for laminated tubes-used to package toothpastes and medicines-Essel Propack is one of India's few companies with overseas clients, overseas bases and overseas employees. The company has manufacturing facilities in 14 countries through 24 plants, in geographies like China, the US, the UK, Russia, Germany, Mexico, Colombia, Venezuela, Philippines, Indonesia, Egypt, Nepal and Singapore, besides India. These outposts have been set up via a mix of organic growth, JVs and acquisitions. In case you're wondering why a company from India, which boasts one of the cheapest labour pools in the world, needs plants spread in high cost locations like the UK and the US, the answer lies in the very nature of its business. "The reality of our business is that an empty tube is not the easiest thing to transport. You are actually transporting air. Therefore, there is a need to get as close to the customer as possible," says Ashok Goel, Vice Chairman & MD. The company has been using a strategy of acquisitions and organic growth in foreign geographies to expand its footprint. Established in 1984, Essel made its first international foray with a joint venture in Egypt to manufacture laminated tubes. In 1997, the company formed a wholly owned subsidiary in Guangzhou, China. The big move came in 2000, when Essel acquired the tubing operations of the Propack group, which was the fourth largest laminated tube manufacturer globally. Propack had operations in China, the Philippines, Columbia, Venezuela, Indonesia and Mexico, which immediately propelled Essel into the big league. "Acquisitions are a smarter and quicker way of acquiring a customer base. But when you are looking at an entry into a mature competitive market, greenfield ventures make more sense," says R. Chandrasekhar, President, Essel Propack. In 2003, the company set up a manufacturing plant at Danville in the US, to supply laminated tubes for Procter & Gamble's North American operations. Essel Propack is also planning to commission a plant that will manufacture co-extruded plastic tubes at the same location by the end of 2006. In addition, the company also recently announced the commissioning of a plant to make plastic tubes in Lodz (Poland). "The key thing to understand is that each geography is fundamentally different. Often, the same customer may have different expectations for different geographies," says Goel. Essel Propack services clients like Procter & Gamble and Colgate across several continents.

TCS now plans to merge its subsidiary into a new JV company it has formed with three Chinese partners and Microsoft. The company plans to target the burgeoning domestic Chinese it services industry with the new entity. "The Chinese domestic industry is four times India's, growing at 20 per cent per annum. But the outsourcing industry is yet to achieve scale there as the industry is extremely fragmented," says Pande. There are nearly 7,000 Chinese it companies, 50 per cent of them have less than 50 people. The TCS JV is a part of the Chinese government's push for consolidation in this fractionated sector. "With the new JV, we give them offshoring capabilities and best practices, while they give us the domestic market. Of course, we will all have to work for it," adds Pande.

HCL Technologies has managed to beef up its revenues from verticals like retail and telecom by entering into JVs with companies in those spaces Shiv Nadar Chairman/ HCL Technologies

Proximity to global markets and cheap labour can also be a major driver for non-it companies to set up manufacturing bases in other geographies. SFL has invested in greenfield manufacturing facilities in China, hoping to service the APAC market. Says SFL's Moorthy: "We opted for a greenfield project in China because costs in China equalled costs in India. China, apart from having a large domestic market, is well-placed to cater to the entire Asia Pacific region, including Japan." Companies like Mumbai-based Essel Propack have opened manufacturing plants in the US and Europe to stay closer to their clients (see Sqeezing Into Foreign...).

There's another way to be multinational-by simply manufacturing in the country and exporting tonnes of the produce. Whilst the it offshore business is based on this premise, in the manufacturing sector, Reliance Petroleum is setting up a refinery that will produce 29 million tonnes of oil a year-or 5.8 lakh barrels a day-all for exports, specifically to the us and Europe. The Reliance Group is anyways a huge exporter-in the first half of the current year, flagship Reliance Industries earned some Rs 32,000 crore of total revenues of Rs 55,000 crore from exports. And Chairman Mukesh Ambani reportedly plans to generate agri-exports of $20 billion annually. Clearly, overseas acquisitions needn't be mandatory to become a multinational corporation.

-additional reporting by Nitya Varadarajan