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.

More and more foreign companies are producing in India

Over four years ago, the Modi government launched the Make in India campaign to lure foreign manufacturing companies. What has it achieved? 

Atypical economy

The Indian economy has developed atypically over the past thirty years. Usually, countries develop agriculture first, then manufacturing and then services, but India is taking the opposite route. From the moment India opened its economy to the outside world in 1991, the country grew into a hotspot for software development and business process outsourcing. In other words, services. Meanwhile, Indian agriculture and manufacturing lagged far behind. In the financial year 2013-14, the Indian manufacturing industry even showed negative growth.  

Attractive manufacturing country

Sufficient reason for the Indian Prime Minister to launch a large-scale Make in India campaign in 2014 with the aim of transforming India into an attractive manufacturing country. By eliminating unnecessary laws and regulations and all kinds of incentives, India wants to attract international companies to manufacture in India. The aim is to create employment, especially for unskilled Indians. "I want to tell the people of the whole world: Come, make in India," Prime Minister Modi said during his Independence Speech on 15 August 2014. "Come and manufacture in India. Go and sell in any country of the world, but manufacture here. We have skill, talent, discipline and the desire to do something. We want to give the world an opportunity to come make in India."

Why manufacture in India

Apart from the reforms and incentives discussed in more detail below, Indian ministers and officials never miss an opportunity to stress how interesting it is to produce in India. They point, of course, to the abundance of labour which, even compared to China, is cheap. India's young labour force - the average age is 27.6 years - which is relatively well educated and speaks English, is also an important argument for attracting foreign manufacturing companies to India. Finally, unlike China, India is known for its high-quality production.

Relaxed FDI legislation

The Make in India campaign covers as many as 25 sectors: automotive, aerospace, chemicals, IT & Business process management (BPM), pharmaceuticals, construction, defence manufacturing, electrical machinery, food processing, textiles and garments, ports, leather, media and entertainment, wellness, mining, tourism, railways, automotive components, renewable energy, biotechnology, space, thermal power, roads and highways and electronic systems. So pretty much everything. Foreign investors who want to invest in any of the above sectors no longer need permission from the Reserve Bank of India and/or the Indian government. This is known as the automatic route for FDI, as opposed to the approval route, for which specific permission has to be obtained. The automatic route, of course, saves companies a lot of time and bureaucratic hassle.

Wide-ranging reforms

Apart from the relaxed FDI legislation, the Indian government has implemented numerous other reforms to attract foreign manufacturing companies to India, such as eliminating the minimum capital requirement for start-ups, introducing online portals (like eBiz, Sharam Suvidha), shorter and digital procedures for starting a business and introducing e-visas. In addition, several laws have been passed in recent years that benefit almost all sectors. The Goods & Services Tax Bill and the Direct Taxes Code Bill, for example, lead to greater transparency and uniformity for foreign investors. But the most important law in this regard is the Land Acquisition Bill which promotes the twin goals of social justice and industrial development. 

Incentives

The Indian government not only makes it easier to produce in India, but also cheaper. Here are some of the incentives:

• Sector-specific incentives: To encourage electronics manufacturing in India, the central government offers a subsidy of up to 25% for a period of 10 years.

• The government provides an additional 15 per cent depreciation allowance for manufacturing companies that invest more than 1 billion rupees (nearly $15 million) in factories and machinery.

• There are various incentives under the Income Tax Act, including, for example, deductions equal to 30% of additional wages paid to new regular employee employed by a company with more than 50 employees.

• Export Incentives: Under the foreign trade policy, exports have been provided with various incentives such as duty drawback, tax waiver schemes on inputs used in the export product, etc.

• Incentives at the state level: Each state offers specific incentives for industrial projects. Some of the states also have separate policies for different sectors and special incentive packages for mega-projects.

Results

The relaxation of FDI rules saw India receive over USD 150 billion in FDI (Foreign Direct Investment) between April 2014 and February 2018. According to a report by the investment bank UBS, this will increase to USD 75 billion a year over the next five years, some of which is investment in the Indian services sector, such as the merger of Vodafone and the Indian telecom provider Idea and the high-profile multi-billion dollar takeover of e-commerce platform Flipkart by the US company Wallmart. In addition, Ikea and Apple, among others, knocked at the door to start manufacturing in India. In the long-awaited first Indian Ikea that opened in Hyderabad in August, 20% of the assortment is made in India. Ikea will steadily increase local production to 50% over the next few years. Apple wants to produce their new iPhones in India, but then sales in India will have to take off.

Production hubs 

The following production hubs have attracted large foreign companies in recent years:

• Greater Noida (Uttar Pradesh)

India's top auto manufacturing hub. Its location and connectivity, on the outskirts of the capital New Delhi, has attracted major international companies such as Yamaha, Honda Siel Cars and LG Electronics India.

•  Nashik (Maharashtra)

Located about three hours drive northeast of Mumbai, has electrical and automobile component industries. This location is well connected with two roads and runways, but does not have an airport.

•  Manesar (Haryana)

About an hour's drive south-west of New Delhi. Manesar is a favourite auto parts manufacturing centre. It is well connected by roads and railways. Infrastructure reform is underway to increase production capacity.

• Hospet (Bangalore)

Located in southern India about five hours drive north from Bangalore. Hospet is an important centre for the production of steel and iron. The city has recently attracted huge investments that will undoubtedly increase its production capacity.

•  Aurangabad (Maharashtra)

Located about six hours drive east from Mumbai is the manufacturing hub for major pharmaceutical companies.

High-tech manufacturing company from Helmond now also produces in India

The Helmond-based machine builder actually ended up in India by accident, but now sees the country as an important strategic production location, says director Robert Manders. "Our Indian factory provides us with long-term competitive advantage."

Director Robert Manders with colleague Simran Oberoi at the office in India (Photo: MTA)

Ludhiana is the Hellmouth of India. The capital of Punjab state may have a population of nearly two million, but by Indian standards it is a provincial town. Like Helmond, Ludhiana is known for its manufacturing industry - from textiles to high-end machinery. For example, Ludhiana is Asia's largest bicycle manufacturer and makes all kinds of car and motorcycle parts, including for Mercedes and BMW. Viewed this way, it is not surprising that Robert Manders, director of the Helmond-based mechatronics machine builder MTA, ended up in Ludhiana. 

Yet the choice of Ludhiana was not the result of extensive market research-coincidence did its job. Manders: "In 2005 an Indian came to visit our neighboring company, with whom we shared a production location at the time. We got talking and he turned out to be the owner of a radiator factory for the automotive sector. He wanted to buy second-hand CNC machines from our neighbor. While talking, he told us that he had overcapacity in his tool shop. That's how we came up with the idea of using that capacity exclusively for MTA to produce parts."

"This was definitely not a farmer's barn, but a serious factory where a few hundred men worked."

A year later, Manders travels to India for the first time. For the first few days he was taken to local networking events, cut ribbons at receptions and didn't even come close to the Indian factory - let alone to see what it was like inside. Only after four days and a great deal of insistence do the gates open for him. The social affairs appear not to be intended to conceal anything. Manders: "For Western standards, there was a well-equipped tool shop with CNC machines from A-brands. This was definitely not a barn, but a serious factory where a few hundred people worked."  

MTA Engineers work on a new machine (Photo: MTA)

However, the cooperation comes with fits and starts. The Indian company lacks a good structure for this type of work and, as a result of staff turnover, expert knowledge is constantly disappearing on the Indian side. In 2016, the collaboration takes a new turn when production manager Simran Oberoi resigns from the Indian supplier and reports directly to Helmond. Manders invites Oberoi for a work placement of one year in the Netherlands and gradually the idea arises that Oberoi will set up and lead an own production location for MTA in India. With advice and support from IndiaConnected the possible scenarios are mapped out and the entire process is set up and rolled out. Equipment and processes from Helmond are copied and in April 2018 the Indian factory opens.

"The Indian plant provides much-needed additional capacity that is scarce in the Netherlands."

Manders: "We are still working with our first Indian supplier, but in our own factory we can produce more high-quality parts. We control the production ourselves and the knowledge is retained more easily because we have more control over our employees." The Indian factory provides MTA with much-needed additional machining capacity that is scarce in the Netherlands. "Especially with us in the region where giants like ASML dominate the supply market, it is essential to have stable and high-quality production capacity ourselves at an attractive cost level."

In India - as in Helmond - parts are made for mechatronic machines and systems that MTA develops and supplies to leading Original Equipment Manufacturers (OEMs). Applications and sales markets are very diverse, says Manders. "For example, we contributed to the development of the first industrial 3D metal printers with which metal parts can be printed 24/7. We also developed equipment for a non-stop film supply to a shrink film packaging line and are currently working on a robot for application in tomato cultivation." These are just a few examples where MTA takes care of the industrialization and serial construction of systems in addition to development. From Helmond and from the Helmond of India.

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