Business acquisition in India: why due diligence is an essential step

Acquiring a company in India is not without risks, noted Johan de Boer, managing director of KROV. The Dutch manufacturer of train, office and store fittings decided to abandon the acquisition of a manufacturing partner in the Indian city of Bangalore after extensive due diligence.

Have thorough research done before you engage with an Indian partner

"It's not down to the products the Indian company makes," De Boer reflects. "The quality is fine. We offer their products in Europe and they themselves sell directly to customers in America." After the owner indicated a desire to sell the company, De Boer visited the factory in August for an initial thorough inspection. Then began the due diligence process, conducted by an Indian accountant and a local lawyer. In December, they delivered their report with the advice: don't do it.

Both financially and legally, the producer was found not to have its affairs in order. Those figures did not match the reporting. That was surmountable, according to De Boer, but the findings of the lawyer were less innocent. The company turned out to be incorrectly registered, irregularities regarding personnel contracts came to light, and the administration and payment of social security contributions were not in order. "That not only carries hefty fines, as an owner you can even end up in jail for that," he said.

Work with local advisors

For De Boer, this experience reaffirms the importance of recruiting good local consultants in India. "If we had conducted this process independently, we might not have been able to bring this to the surface. Then you are suddenly liable for a company in which things are not properly arranged. Afterwards, you can't fix that. The consequences, financial or worse, are then yours." To put it mildly, the current owner was not happy that De Boer renounced the deal. "He still tried to tone down the irregularities, but I didn't hire advisors for nothing. It would be stupid to go against their advice."

Still, De Boer remains interested in the Indian producer. "I know that this factory in India delivers quality and the relatively low production costs are of course attractive. That is why we have now discussed an alternative route. If the Indian owner liquidates the company, we would then like to take over the factory premises, machinery and some of the employees. That would remove the legal risks for us. The current owner is keen on this. We have agreed to discuss this further in the coming year."

Producing in India has interesting advantages

De Boer has another reason for wanting to manufacture in India. "KROV has a good reputation worldwide as a supplier of train equipment, such as tables, chairs and backrests. India has the ambition to build a nationwide network of high-speed trains and we are already in talks about this through main manufacturer Kawasaki. Our position is stronger when we have a production facility in India, because the Indian government would like to create as many jobs in India as possible. So an Indian plant would also be interesting with a view to sales there."

Do you want to enter the Indian market, but are unsure what is the best first step for your business? Or are you looking for a local party to conduct market research or due diligence for you?

Differences in the way of doing business among Indian states

India is almost as large as the European Union and has more than twice as many inhabitants. No wonder, then, that there are major differences between the various Indian states in terms of language, demographics, politics and economic growth. For a successful start-up in India, it is therefore important to take these differences into account when drawing up a business plan. Because what works in Gujarat does not automatically work in West Bengal.

Image via Harvard Business Review

The regional differences among Indian states

For a European company to succeed in India, you must be aware of the country's vast regional differences. India is a fragmented market with large, and often underestimated, regional differences in language, culture, infrastructure and wealth, all of which affect the regional business culture.

Indian states are therefore better compared to individual countries than to, say, the Dutch provinces. Indeed, India's most populous state, Uttar Pradesh, has as many inhabitants as Brazil, and the southern state of Tamil Nadu has an economy as large as that of Hungary. 

There are also large demographic differences between Indian states. For example, southern India is older, has more to spend and is more educated than the rest of the country. Northern India, on the other hand, is younger and relatively poor.

North Indians primarily speak Hindi, while South Indians prefer to communicate in English or in their regional state language, such as Kannada or Malayalam. The German wholesaler METRO, better known in the Netherlands as Makro, found out after their start in India that there are big differences between the groceries that customers in a certain region put in their shopping cart and adjusted the assortment accordingly by adding more local products. Logical really, Finns also have different preferences than Spaniards.

"METRO found out that there are big differences between the groceries that customers in different regions in India put in their shopping cart."

- Mark Alexander Friedrich, Head of International Affairs for METRO

Do not make one business plan for all of India

For a successful start in India, thorough market research is a must. Regional differences are not only obstacles, but can also work in your favor depending on your sector and product.

The southwestern states, such as Maharashtra and Karnataka, are a suitable base for technical sectors such as automotive, engineering, as well as outsourcing IT and Research & Development teams.

Northern states such as Punjab and Haryana, among others, have thriving agricultural sectors, creating opportunities for food processing and renewable energy industries.

Starting in the right regions is also essential for selling your product in India. European products almost always fall in the highest market segment in India, so it is smart to start in the regions where people have sufficient income and there is real demand for a more exclusive, expensive product.

"Approaching India as one country by working with only one distributor or partner is one of the most common mistakes European companies make in India," says Klaus Maier, CEO of Maier + Vidorno, IndiaConnected's partner in India.

"In Europe, you wouldn't ask an Italian distributor to set up your network in Norway either. An Indian partner or distributor operating in a specific state has a good network only there and will not succeed in successfully expanding sales to other states. Therefore, those who take India seriously start with about four dedicated, local managers or distributors who understand your product and the regional market well. With them, the market can be mapped and the logistics network set up, one of the biggest challenges for international companies in India. In this way, the Indian market can be conquered step by step, successfully." 

Selling successfully in India with the right strategy

For anyone looking to conquer the Indian market, IndiaConnected has put together a special guide in which we offer you insight into the steps to take to successfully start and grow your sales in India.

From preparing your first export shipment to India to setting up a solid after sales service, we guide and advise throughout your India journey.

The purchasing power of the Indian consumer

India is one of the fastest growing consumer markets in the world, but what do those figures mean for your business? What percentage of the Indian population actually belongs to your target group? And how big is the customer base for your products or services?

The size of your potential customer base in India and their purchasing power depends entirely on the industry you are in and the type of products you offer, but there are some general assumptions we can make:

• On the one hand, we see that the vast majority of India's nearly 1.4 billion people are young and poor and lack sufficient purchasing power to buy high-end, European products. Genexis, the European market leader in fiber optic modems, found that out too. Their modems were far too developed for the Indian consumer, so they built a special model for the Indian market. 

• On the other hand, India's middle class is expanding at lightning speed, increasing the demand for better products. The Indian middle class often sees foreign products as being of better quality, and this creates opportunities for international companies such as the Dutch clothing brand Scotch & Soda noticed. They opened 8 stores in India in 3 years and are now serving the fast-growing middle class online through their e-commerce platform.

This schematic representation of the Indian market provides a better understanding of what to expect and how best to rate your product or service:

The top end of the Indian market

In some sectors in India, there is no high-end market, but for others, such as fashion and electronics, for example, there is a large market. These consumers are often located in and around the largest cities, such as Delhi, Mumbai and Bangalore, but they cannot all be grouped under the same customer profile.

In India, having a specific, regional strategy is important to sell successfully. That means that within this segment, in principle, you must assume a small, exclusive group of consumers. Many companies think they can get around the regional approach by focusing entirely on e-commerce. A smart move when you consider India's rapid digital development.

However, as an entrepreneur, you must take into account the strict regulations in this area, it is currently still not possible for foreign companies to sell online directly to Indian consumers.

The Indian mid-segment

Many European companies have the idea that they can offer their high-tech, European products in the growing middle segment as well. But once they make their market entry, they find out that the Indian middle class still has much lower purchasing power than elsewhere.

In the first instance, therefore, it is smart to leave this segment out of the calculations for a while and in time, after you have started up in the higher segment, start thinking about how you can adapt your product to better suit the needs and price level of the Indian middle segment. After all, if you start focusing on the middle segment in addition to the high end, you might triple your sales market in a short time.  

Workshop: Market entry in India

Starting to export to India can be challenging for European companies who are not so familiar with the country. IndiaConnected helps over 100 companies every year with their activities in India. We work with local experts in all sectors and can therefore offer you a helping hand in shaping a successful market strategy for your business in our tailor-made workshops:

• We will give you more insight into what is involved in your market entry in India.

• You will receive valuable feedback on your current India strategy from independent experts.

• Expertise in every field: sales, manufacturing, legal, tax, finance, supply chain, recruitment, etc.

Our workshop usually lasts about 2 hours. Our experts will work with you to explore your issue and formulate possible answers and strategies. Afterwards, you will receive a report.