Foreign based companies in India: How can they survive?

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Quick briefing on India

In the previous articles we explored how local startups find their stance in India and how newcomers can keep up with the competition as long as they come up with creative solutions.

In this article, we will learn about how foreign-based companies attempt to get established in India and how their approach towards the Indian market determine their success. But before we do that, it is necessary to understand why it can be tricky for anyone to have a sustainable growth.

People think doing business in India is simple but actually, in reality that is not the case because of the population, democracy, language barriers, politics, rules and regulations etc.

World Bank ranking

One method to determine the difficulty of establishing a business is by looking at ease of doing business ranking. The ranking for India has been oscillating between 80s-130s range out of 190 over the last few years (doingbusiness).

The report published by doingbusiness is based on several factors including registering property, paying taxes, enforcing contracts, resolving insolvency, trading across borders, dealing with construction permits etc. These factors affect the overall rank of ease of doing business.

It can create complications when companies overlook such details, making it difficult for them to tackle unfavorable regulatory environment without prior knowledge and easily incapacitating themselves from foreseeing their next step.

This was the case in the past few years and there have been improvements in regulations to encourage businesses since the new government came into effect in 2014.

DOINGBUSINESS

In the beginning of 2019, several changes were made to reforms that helped the ranking to improve when compared to previous years. India’s rank climbed to 77th from previously being at 139th position in 2016; a massive improvement! India can score better in terms of ease of doing business rankings if this trend continues for few more years.

That being said, the ranking only indicates the difficulty of establishing a firm. It is up to a company to take the time to understand the market and exercise patience for long term growth.

There are many examples of foreign based companies that have gone through these challenges and failed to succeed in India. Apple, Walmart, General Motors, Gillete and Kellogs etc. These companies required a complete restructuring from within and time to adapt to local conditions which they failed to do so.

On the other hand, tech companies may have a slight advantage in India. They can be successful without having to change their entire internal structure simply because of how they deliver their services.

Let’s look into two cases where one succeeded and the other failed. By looking at their history, we should get a good idea on how a company’s actions determined its success rate.

Amazon

According to Engadget, Amazon was launched in India in 2004, but it was not until 2013 where it began its retail services. Amazon India has come a long way in capturing the Indian market and it can be seen from the below graph that the number of monthly active users (MAU) was +100 million users in July with a steady and constant growth over the past year.

Also when compared to local counterparts such as Flipkart and Snapdeal, Amazon is leading the charts. So, how did Amazon find its way into the Indian Market?

According to Quartz, there are three reasons why Amazon is winning in India; Long-term commitment, Localize and Adapt, and Trusting Local Managers.

Long term Commitment– Amazon’s strategy was to contain their international expansion plan with 5- 10 years of vision in mind rather than short term achievements. This enabled Amazon to invest in the country to expand into every corner without holding its breath for profits during its growth.

Localize and Adapt– Amazon is a retailer similar to Walmart in terms of selling goods and digital services. It recently surpassed Walmart as the world’s largest retailer. Especially with Amazon prime subscriptions, investments in movies and purchase of Whole Foods etc (Forbes).

However, Amazon could not continue to run its business in similar fashion when it was launched in India due to FDI policy limitations. India permits foreign direct investment in the multi-brand retail sector with a cap of 51 per cent ownership by overseas players (economictimes).

Therefore, Amazon consolidated itself to act as a marketplace (which have lower restrictions) rather than staying as a retailer and adapted to the local rules and regulations without expecting the country to change for it. They even implemented cash on delivery because many Indians still don’t use credit cards to make purchases. Moreover, Amazon Prime is offered at the lowest price when compared to anywhere else in the world.

Trusting Local Managers– Amazon left leadership and organization to local managers who understood the intricacies of the Indian market and let them take spot on decisions without relying too much on the global headquarters for assistance.

Their strategies can be seen as a success because according to the Livemint, Amazon was the fastest growing e-commerce firm in India as of 2018 with $7.5 billion gross sales that year, exceeding the growth rate of Flipkart.

Recently, Amazon also inaugurated its largest campus outside of their global headquarters in Hyderabad. It can house 15000 employees and provides employment to thousands of Indians which in itself is enough to build strong relations with the local government and create excellent brand recognition for long lasting prevalence in the country (Engadget).

eBay

When eBay was launched in 2004 there was no competition, so it had the “first mover advantage”. It ran its operations in India just like it did in other countries, with auctions being its main component for online shopping. However, the concept of auctions in online shopping was as foreign as Pluto was to many Indians, and eBay had the chance to successfully take over an entire e-commerce market by educating them in that regard, but it did not take any action!

Since Indians only cared about upfront pricing and auctions were never really a thing, eBay continued to stay as it is instead of raising awareness regarding auctions. It could have gained brand recognition by making necessary changes, but adapting to an unfamiliar market seemed like its least priority. So, it was left unchanged for the most part which made eBay a tough sell for many people.

The inability to change accordingly made eBay to gradually lose its ground to local and global competition when they came into action. In fact, when we look at the below graph, we can see that its MAUs were less than a million in July, suggesting its unpopularity.

According to The Hindu BusinessLine, eBay struggled to stay in business from 2008-2012, and it was bought out by Flipkart for $300 million in 2017 to improve its market share. Even that collaboration didn’t help grow sales and recognition.

In its entire term, eBay only invested $250 million until 2016 whereas Amazon has invested nearly $5 billion since the time its retail operations went live in 2013. It even laid off over 300 employees before shutting down its eBay.in website and finally exited the country a year later.

Despite its presence since 2004, inability to adapt to local conditions could have been the main factor for its eventual demise from the country.

Final thoughts

It is important to understand that monetization schemes are crafted after implementation and expansion of services and products in India. First, a company usually begins to offer its services with heavily discounted prices and variety of offers to grab audience’s attention and then once it succeeds in its goals, the pricing starts to creep upwards after a certain time. This has been a staple for majority of the tech companies, whether local or international.

A good example for such strategy can be seen in Reliance Jio’s Fibernet deal. It is currently offering a 4k tv and a 4k set-top box for free with 10$ monthly subscription for 1 year(Livemint). Once the trust is gained, the loyalty to which Indians depend on can be truly mind-blowing.

The fact that politics play a major role in India can interfere with the ease of doing business which can be an inconvenience for anyone starting a company. But, India is an emerging market with potential for growth, so there is still future.

Moreover, when companies can’t adopt long term strategies to strike a balance between building their presence steadily and spreading awareness to profitability, they cannot sustain this chaos.

This is where only a handful of companies like Amazon which spent decent amount of time to understand the local conditions and invested enough to spread awareness was able to succeed. And eBay which didn’t make any changes to adapt to local conditions has failed despite having immense global presence and decades of experience.

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