Why every Indian subsidiary should have a local HR manager

Is your subsidiary in India not achieving the results you expected in terms of turnover, profit or customer reach? Then it's time to take a hard look at your organisation's HR policies in India. "HR is the driving force behind a successful Indian entity," says our expert Deepmala Datta.

A survey we conducted among 100 companies with an entity in India revealed that 42% consider finding and retaining suitable staff the biggest challenge. 61% of these companies indicate that good, local HR policies are the solution to this problem, yet only 20% of them actually have an HR team in India. "A good HR policy is an under-appreciated issue among Indian subsidiaries of European companies," says Deepmala. "I have assisted hundreds of companies in finding suitable staff, but never has the HR team from the head office travelled to India to participate in such an interview process. Many companies see it as a by-product, when in fact it is the driving force behind a successful business in India."

Focus on talent retention

"I have a very controversial view on turnover," Deepmala says. "I like turnover because it gives a company a chance to bring in an employee with better skills than his predecessor. Of course, it depends on which positions have the highest turnover. If they are critical positions, high turnover is very problematic for the results that a company can achieve." It is therefore important, she says, for the local HR department to identify which skills, positions or people the company cannot do without. "Instead of wasting all your energy and a lot of money on keeping 90% of your employees on board, it is smarter to focus on the most important talents, about 20% of the organisation. Despite the fact that a good salary is essential to retain an employee, Indian employees, like their European counterparts, are no longer satisfied with just a pay rise, but want to develop professionally and personally. Therefore, make sure you have appropriate HR policies in place that offer growth opportunities to these talents."

Lack of structure

Is your Indian entity stagnating in growth, but you are not questioning your business strategies? Then, according to Deepmala, it is good to check whether everyone in the company is in the right place. "When a company comes to IndiaConnected with such a problem, we start with a corporate restructuring process. We take assessments of the employees in key positions within the company and conduct interviews with all employees. This is the only way we can find out what the underlying problem is that is causing the growth to stagnate. One problem I often encounter is a lack of structure. There is a big cultural difference between India and Europe that needs to be kept in mind: hierarchy. In India, we have a strong need for a clear leader. If there isn't one, employees tend to build their own power structure, which doesn't always work in favour of the company."

How an imbalance in the company structure resulted in a hostage director 

"I have been involved in an extreme example myself," Deepmala says. "I was sent to a factory in Mumbai where the staff had been on strike for three days. The head office in Europe had no idea why and could not get in touch with the managing director. Once I arrived, I found a man standing guard at the door of the managing director's office. I had to bargain with him to get access to the office and once inside I understood why. The workers of the factory had been holding the managing director hostage for three days. After many talks with the strikers, I came to the conclusion that the problem was actually very simple and that there was absolutely no need to go on strike to solve it. But it had gotten so out of hand, because the manager was not a good match for the position. He had been chosen for his impressive CV, but had no experience of managing such a large group of workers, let alone factory workers. If the HR team had checked for these skills when recruiting the manager, this misery could easily have been avoided."

HR as a sparring partner of management

HR should not be treated as an administrative department. "We have touched on it several times, but the success of a company depends on its people. My advice for any company with an Indian entity is to be smart about costs and hire only one senior HR manager. This HR manager should have a strong position in the company, where he or she can not only intervene and handle abuses in the right way, but also give guidance to the management. In addition, this HR manager must be a sparring partner of the executive. After all, future objectives can only be realised with the right people in the right places. The HR manager can not only ensure that the right people are retrained and moved on, but can also recruit new suitable staff with these future objectives in mind."

Common mistake

"Many companies choose to start with one agent or manager and then also make them responsible for building a team once the entity starts to grow," Deepmala explains. "That doesn't work well in many cases. What we often see is that European companies choose their first agent or manager based on his past success, but don't take into account how he was able to achieve those successes. Is that all to his credit or did he have a support team?" 

In almost all cases, it is the latter, according to Deepmala. "Such a manager or agent therefore embarks on a very tough trajectory in a start-up company, in which he is completely on his own and not performing at his full capacity. This is often already visible in the results, but is attributed to the fact that the entity is in the start-up phase. As soon as this manager can start hiring people, he will immediately choose former colleagues with whom he could work well in his previous work environment. They are the right choices for him, but not necessarily for the positions they will fill within the company. In addition, these employees are taken away from their current employer, which means a substantial increase in salary in their new job. I have seen situations where this practice led to the company selling more, but never making a profit." According to Deepmala, this situation can be avoided very simply. "Don't think lightly about HR, but dare to invest in it from the very beginning."

Financing your business in India: these are your options

What is the smartest way to finance your subsidiary or branch in India? This is often a thorny issue for European companies, partly due to Indian regulations. We have listed the various strategic options for you.

Start-up capital

The financing options for your Indian business depend on the legal form of your business in India. The most common legal forms are the Private Limited (Pvt. Ltd) and the Joint Venture (JV), with an Indian company as co-owner. At the time of incorporation, the capital the company will start with is determined by the number of shares issued.

The minimum start-up capital of an enterprise in India is set by law at INR 100,000 (EUR 1,200). Many companies choose to contribute this minimum start-up capital, but bringing in more capital at the outset can solve financing issues in the future. This is because bringing in working capital at a later stage is subject to more rules.

Working capital

Do you need working capital in India? A quick and easy way to raise working capital is to pre-invoice planned exports of products or services to the parent company. The subsidiary may invoice services it supplies or plans to supply in the near future (pre-invoicing) to the European parent company. An advantage of pre-invoicing is that it can quickly generate the necessary cash flow for the Indian company. In case of a joint venture with an Indian partner, financing through (pre)invoicing depends on the agreements between the two JV partners. 

Loan for your Indian entity

Does your Indian subsidiary need capital to make investments in India? There are several options for this, but none of them are easy, quick or cheap. The subsidiary can take out a loan from the parent company in Europe, but this is only possible under a so-called External Commercial Borrowing (ECB) construction. Applying for an ECB is a bureaucratic and time-consuming process, but it has a big advantage: the interest rate on an ECB loan to an Indian party is based on LIBOR + a premium of up to 300 basis points.

Financing through an Indian bank

Indian banks can also provide loans, but the extremely high interest rates rarely make this option attractive or feasible. Interest rates on credit from local Indian banks start at 10-12% and can easily rise above 15%. Only with a cash deposit as guarantee can a lower rate be negotiated in some cases. Apart from the sky-high interest rates, Indian banks routinely ask for collateral if you want to apply for a loan. To organise the paperwork with the bank, you need a local consultant. In addition, you pay the bank an administrative fee of 1% on average. At local banks, you can raise a maximum of EUR 1 to 2 million in this way.

If you need more capital, you can apply to several banks at the same time, which can provide a loan as a consortium. Of course, this only makes obtaining the loan more complex and expensive. In short, borrowing from an Indian bank is really only an option if the Indian branch's cash requirements are extremely high and there will be an almost certain and substantial return on investment by taking out the loan.

International development banks

What other options are there? For projects supported by the Indian government, you can turn to development banks such as IFC (World Bank) and the Asian Development Bank. Chinese banks may also be an option, although these often stipulate that the loan must be spent on products or services of Chinese (state-owned) companies.

Issue additional shares

Finally, it is also possible to raise finance by issuing additional shares in the Indian company. Increasing the share capital is a relatively sustainable, formal and institutionalised way to grow the Indian subsidiary. Moreover, it signals to the outside world that the parent company is serious about developing the services or products of the subsidiary in India.

There are two disadvantages to this route. Issuing new shares is a bureaucratic and time-consuming process and cannot therefore be arranged at short notice. In the event of acute cash flow problems, this does not offer any solace. Another possible disadvantage of increasing the share capital is that it may affect the ownership of the company, especially in JVs with Indian partners.

Want to know more about the best financing options for your business?

Without its Indian joint venture partner, the Swiss global company Ammann would never have become the market leader

The Swiss family-owned company Ammann is the world leader in construction and road building machinery. "In almost all of the 100 countries in which we operate, we have started and become successful entirely on our own," explains Rolf Jenny, Ammann's managing director in India. "Except in India. There we quickly came to the conclusion that without local knowledge and support we would never make it."

Rolf Jenny and Apollo's managing director, Asit Patel, open the joint venture's first factory

"Ammann's first steps in Asia were made in China. At the end of the 1990s, the Chinese government was extremely interested in our technology because they wanted to improve their entire road network in a short space of time. We were therefore given a warm welcome with attractive tax rates and special support programmes," says Jenny. "We didn't have to make many changes to our product in China to be successful, just a small reduction in price. That was easily solved with a local production site and we had the market in no time."

With this smooth experience in his back pocket, Ammann then set off in good spirits for the other big market in Asia: India. "There we were suddenly at a loss for words. The Indians were not interested in our advanced products and certainly not at the price we were offering them," says the managing director. "What worked great in China did not work at all in India. In India, we couldn't get away with just minor adjustments to our products, so we said to each other: 'We're not going to manage this ourselves, we need a partner who understands the Indian way of thinking'."

Know well what you have to offer an Indian partner

Ammann starts a big market research in the hope of finding a company they want to buy, but instead comes across the Indian company Apollo. At the time, Apollo was the leading producer of road building materials in India. "And that was exactly why they were interested in our technologies, but immediately said no to the idea of a possible partnership," says Jenny. "They said that they had been operating at the top end of the Indian market for 50 years and so there was no advantage in entering into a joint venture with an inexperienced European company. With this harsh rejection, they wiped out our possibility of a successful start-up in India in one fell swoop."

But the Swiss company was lucky: two years later, Apollo sought contact again and this time the Indian manufacturer was open to a joint venture. "That was the start of tough negotiations, because we didn't immediately agree on the terms of our partnership," says Swiss top executive. "Ammann is normally always a 100 per cent shareholder in the companies we set up abroad, so for us it was unmentionable to own less than 70 per cent of the joint venture. Apollo, on the other hand, wanted the shareholding to be split 50-50. We also wanted the joint venture to focus only on India, while Apollo wanted to start exporting to neighbouring countries. Once again, we were facing quite a challenge in India."

Bridging differences

In order to bridge the differences during negotiations, Jenny initially focused on the similarities between the two parties. "We are both family businesses, which immediately created a bond. We decided to invite Apollo to Switzerland to get to know our company even better and gain more insight into how we could complement each other," explains the managing director. "We are the world leader in high-tech products, Apollo in low-tech, low-cost versions. So together we could deliver a good quality product at a mid-price. By building up trust and proving that we really saw them as an equal partner, we were able to convince them of the benefits that the joint venture with us would bring them. Without compromising on our own terms."

According to Jenny, a successful joint venture rests on a number of basic principles. "You have to be able to trust each other completely and treat each other as equal partners, even in our case where we owned 70 per cent of the company. All decisions within the joint venture were always made by mutual agreement. From the very beginning, we also had it agreed what would happen if one of us wanted to leave the joint venture. A joint venture should always be equally beneficial to both parties. That is why it is so important to think not only about what a happy marriage will look like, but also about a friendly divorce if one of the two wants to go on alone."

Ending the joint venture 

After eight years of running a successful joint venture together, Ammann and Apollo decided to call it a day last year. "We have learned a lot from each other over the years and have always worked well together without any disagreements. But Apollo was ready to stand on her own two feet again," says Jenny. "The 70-30 ratio meant they were more like investors than the entrepreneurs behind the business and something was starting to itch again - they wanted to get back to work." Apollo sold the remaining 30 per cent for almost 27 million to Ammann. "Not only did they get a very good deal with this sale, but they also benefited from the boom that the company has experienced in recent years. Together, we have not only increased the value of the company enormously, but also tripled its turnover. The joint venture has always been a success for both parties, despite the separation. We are therefore parting as friends and will continue to have a good relationship."

Jenny therefore recommends an Indian partner to every European company that wants to start up in India. "You can only be successful in India if you understand the wishes of the customer and if you adapt your product and price to these wishes. To do that, you have to manufacture in India, the product has to breathe India. If you are confident that you can do that on your own, then go for the adventure. In our case, we knew our products didn't fit the market, but we needed the local knowledge to understand how to improve that. If you go it alone, you have to be in it for the long haul and expect it to be a process of trial and error. We wanted a quick market entry without too many setbacks and we couldn't have done it without our great partner. So do your research and strategise accordingly, but be aware that local help makes a lot easier in India."

Opportunities in infrastructure and construction

Ammann is looking forward to the future in India. "Construction and infrastructure are two sectors that will grow significantly in India in the coming years. Indeed, more infrastructure is needed in the country if it is to maintain the same high economic growth rate in the long term," says the Ammann foreman. "But even though these sectors will offer interesting opportunities, it is important that foreign companies realise that India is not a quick fix. I have seen many international companies come and go, hoping to get a slice of the investment in the road network. But if your product doesn't fit India's needs and Indians don't trust you, you have a choice: either invest for the long term or pack up."