Indian industry

PESSIMISM, it would seem, is an abiding national characteristic among Indians. The fiscal deficit is way too high, exports are not growing as fast as China's, and the economy is slowing down. These are but some of the innumerable items on our `woes-list'. But by far the strongest wailing has been reserved for the manufacturing sector and its relative lack of competitive ability. But is Indian enterprise really all that bereft of competitive spine that it is unable to stand up to the marauding forces of overseas competition? Far from it. The halfyearly results of listed companies announced recently has more Indian winners than MNCs. And one is not talking of the software industry. There are pockets of Indian enterprise that not only manage to hold their own against competition from imports, but are also one up on MNCs with local operations. The most impressive instance is the performance of the domestic pharma companies. Dr. Reddy's Laboratories, Sun Pharmaceuticals, Cipla, Lupin Laboratories and Ranbaxy Labs registered rates of growth in sales and profits superior to that of pharma MNCs, which did well in revenues and post-tax earnings. The 12 MNCs for which information on second-quarter performance is available actually recorded net declines in sales and profits. One could say the performance in one quarter is not indicative of enduring superior performance. But in the instant case it merely reinforces what has been known for long: that the top-notch domestic pharma companies are equal to meeting the competitive challenge from the MNC counterparts in the domestic market if not in the markets of the West. An indication of the competitive threat domestic companies pose to MNCs is available from another source. The US, despite being easily the top manufacturing economy in the world, does not see much prospect for export to India. This is revealed in an assessment put out last year by the US Department of Commerce. The agency regularly puts out its assessment of the export prospects for American enterprises in different parts of the world. In sector after sector, the Department's assessment of the potential for exports into India is but a small component of the total market size. A classic case is that of power plant equipment. Its estimate of the total market size for such equipment, as of 1999, was $6.720 billion. Against this, the total imports were a mere $1.510 billion, or roughly 20 per cent of the total demand.

Incidentally, the share of US firms as of 1997 was only 18 per cent of the total imports into India. So much for their competitive ability. Of course, MNCs such as Siemens or ABB have a domestic production base in India and, to that extent, are reckoned as domestic sourcing. But a big chunk of the total demand is satisfied by the public sector BharatHeavy Electricals, testifying to its competitive capability. BHEL's critics might say the company is not above playing the `patriotism' or `domestic employment' card in an effort to win orders from local consumers, especially in the public sector. But against this must be set the fact that equipment purchasers are not above rewriting the technical specifications to suit the overseas suppliers, and to the detriment of the public sector BHEL. The US Commerce Department study identified only a handful of sectors (a mere 15), which hold out the best prospects for export of US goods and services. Even in these, the scope for exports into India, barring that of computers and peripherals, telecommunication equipment and aircraft, the prospects are minuscule. That India has an entrenched base of domestic players is evident from another statistic. Western investment interest is confined principally to the infrastructure and services sectors. But in hard-core manufacturing, there is little interest among overseas players. Petrochemicals is a classic case. It does seem strange that not one of the MNCs in this segment, including DuPont, Dow Chemicals, Shell, etc., seems inclined to set up a plant and wean away market share from the two domestic majors, Reliance and IPCL. The latter should particularly seem a soft target if its public sector orientation is anything to go by. It cannot be that these MNC enterprises lack resources. Nor can they be uncertain of obtaining clearances from the Government. MNCs have gained entry even into sectors hitherto thought impossible. But they have still not evinced much interest. The conclusion, therefore, is inescapable. That they have not come into India in quite the expected numbers is simply because they find the competitive environment far too hostile. The story is the same everywhere. MNC interest, such as there is, is largely restricted to automobiles, beverages and food processing -- sectors where the MNC penetration is suggestive not so much of their ability to vanquish domestic opponents, as of their desperation in securing volume growth in the Third World, as the demographics of the West is not conducive for achieving this in their traditional markets. The trouble is that we tend to look at competitiveness from the point of view of exports, where India's performance, it must be said, is not outstanding. But is that the only yardstick by which capability should be measured? Why not, for instance,

measure it in terms of an ability to withstand competition in the domestic market? After all, competitive capability should be able to hold its own in the battlefield of the domestic market place as it has to in foreign markets. If the measurement paradigm of competitive capability is changed, an altogether different picture of a vibrant and competitive domestic industry emerges. This is not to say that Indian industry has reached the pinnacle of competitive performance and that it has no more mountains to conquer. The contention is that the visage of Indian industry is not painted in black with just the occasional streak of silver. Rather, it is awash in silver with only the odd patch of grey.

Opportunities for MNC's in India's North-East

The industrial landscape in India has been going through a phenomenal change. Entrepreneur-driven and globally networked industrial enterprises are fast becoming the emblems of the new India. India's Northeastern states are also taking steps in the industrial sector reform. The North East Industrial Policy has attracted number of multi-national corporations (MNCs) in the last few years. Prior to 1998, the scenario of industrial sector in the Northeast was limited to some small-scale sector except the oil, tea, plywood and some state owned public sector units. But in present days, a number of multinational companies have come to set up industries either themselves or through franchise. The New Industrial Policy of North East offers competitive advantages to foreign investors in settings up industries. Northeast offers certain unique opportunities for investment and the region has a favorable investment environment. There is a perceptible air of optimism, which was missing till few years back. Restriction on entry, diversification and expansion of multinational corporations had been recklessly lifted in the nineties. Direct foreign investment up to 100 per cent equity in a business venture is being allowed on a wide-ranging basis. In a very liberal investment atmosphere, the benefits for MNCs in India's Northeast is very high. There are enormous potential in the large market the Northeast and more so because of the availability of cheap labor. In addition to these State Government incentives, the units will also enjoy all the incentives offered by the Central Government. Most of the Northeast governments

are ready for allotment of land on long-term lease for selected projects and also for sale tax exemption. Apart from that, verity of subsidies on technology, pollution control, quality control, infrastructure facilities, manpower development, investment, project preparation, equipment and furniture are available. Equity participation in projects up to 26 percent is also available in the region. The export-oriented units have some special incentives, which are: Additional state capital investment subsidy of 10 percent subject to a ceiling of Rs.10 lakhs and 20 percent subsidy on purchase of testing equipment for obtaining ISO 9000/BIS 1400 series registration subject to a ceiling of Rs. 2 lakhs.

Special incentives for units other then 100 percent export oriented units with an export effort of minimum of 25 percent of the value of the turnover will be as below subsidy on purchase of testing equipment for obtaining ISO 9000/BIS 14000 series registration@ 30 percent of the cost of the equipment subject to a ceiling of Rs. 5 lakhs. This is proposed to support quality improvement effort. The Export Promotion Industrial Park (EPIP) in Amingaon is a highly sophisticated and environment friendly industrial park developed to provide infrastructure facilities of high standard for export oriented units. The thrust areas are tea blending and packaging, jute yarn and jute blended fabrics, diversified jute products, silk garments, handloom and handicrafts, food processing, ayurvedic medicine, spice based units, software development , cane and bamboo products. Apart from the above projects, any viable and potential export oriented units is welcome in the park. In the shifting industrial atmosphere, the Assam Industrial Development Corporation Limited also stands as the catalyst in all aspects of support to MNCs. Under the Industrial Development Corporation, growth centers at Chariduar, Matia, and Integrated Infrastructure Development Center at Bhomoraguri, Dalgaon, are already in progress. MNCs are changing the rules of the game and coming to India's Northeast in traditional and non-traditional sectors. North East Pure Drinks, a franchise of the Pepsi, was the first MNC in the Northeast region. This has an investment of Rs. 450 million. Having different products like mineral water, juice, and soft drinks, this company has started a new industrial climate in this region. Like North East Pure Drinks, many other companies like Cosmo, a franchise of the Joolen International from America has also set up a unit for the production of toothpaste, hair dye, and shampoo. In a very short span of time the turn-over has increased

many folds. The company has started trading products inside and outside India. In the financial year 2002-03, the total export of this unit is around Rs. 600 million. Acknowledging this fact, various MNCs have opened their units in this region. Prominent MNC, M/s Glaxo SmithKline Consumer Health Care has also set up a Horlicks Processing & Packaging Plant at Mongaldoi with an investment of Rs. 60 million. and an employment of 100 persons in franchisee with M/s SRD Nutrients. It is true that these are only a few MNCs that have taken interest after the incentives provided by the Northeast but it is also possible that many MNCs will come very soon to this region because the region itself is a gateway of trade with China, Bangladesh and South East Asia.

MNC subsidiaries in India to be hit

The new transfer pricing norms laid down in the recent Budget are going to impact MNC subsidiaries in India doing business with their overseas parents. "The income tax department is going to look into any attempt to understate the income of the Indian subsidiary or over-state its expenditure," Amarchand Mangaldas & Suresh A Shroff & Co managing partner Shardul S Shroff said. The portents are ominous in particular for MNC subsidiaries in the country carrying export obligations. For instance, automobile majors like Daewoo Motors India Ltd, Ford India Ltd and Hyundai Motor India Ltd are all committed to making certain fixed export earnings. Many of these companies are exporting to their parent. This is where problems might arise. "The income tax department is likely to question whether or not these exports have been priced at an arm's length," says Ernst & Young director Amitabh Singh. One such company is Daewoo Motors India Ltd. It exports 1500 and 1600 cc engines and gear box to Daewoo Korea, while importing engines for its bestselling car, Matiz. "All such transactions are at arm's length price. Daewoo has an inter-company arm's length transfer pricing policy," says managing director and chief executive officer Young-Chang Kim.

Other MNCs too deny any wrongdoing. "All that is imported from LG Electronics in South Korea is done at global prices. Also, LG products are sold at a 10-15 per cent premium in the market. So there is no question of unreasonable pricing," LG Electronics India vice-president Ajay Kapila said. However, Singh of Ernst & Young points out a loophole in the new transfer pricing norms. As per him, many MNC subsidiaries in India are straddled with excess capacity. To cover the losses arising out of the capitalised investments, some of them export, often to "associated enterprises", at low prices so as to cover the variable costs and a part of the fixed costs. As per the new norms, the subsidiary is required to sell at the same price at which another Indian company is exporting. "This will lead to a lot of litigation," says Singh. The exhaustive definition of associated enterprises given in the Budget only worsens the problem. The long-standing complaint of the swadeshi lobby that MNCs operating in India are under-invoicing their imports from their parents to price their products below those of Indian companies is unlikely to be addressed by the new transfer pricing norms. "This is for the customs to decide who have their own norms," says PricewaterhouseCoopers partner Vivek Mehra.

mnc The multinational corporation (MNC), often seen as a primary agent of globalization, is taking on a new form, one that is promising for both business and society. From a business perspective, this new kind of enterprise is best understood as "global" rather than "multinational." The corporation has evolved constantly during its long history. The MNC of the late twentieth century had little in common with the international firms of a hundred years earlier, and those companies were very different from the great trading enterprises of the 1700s. The type of business organization that is now emerging -the globally integrated enterprise -- marks just as big a leap.

Many parties to the globalization debate mistakenly project into the future a picture of corporations that is unchanged from that of today or yesterday. This happens as often among free-market advocates as it does among people opposed to globalization. But businesses are changing in fundamental ways -- structurally, operationally, culturally -- in response to the imperatives of globalization and new technology. As CEO and chair of the board of IBM, I have observed this within IBM and among our clients. And I believe that rather than continuing to focus on past models, regulators, scholars, nongovernmental organizations, community leaders, and business executives would be best served by thinking about the global corporation of the future and its implications for new approaches to regulation, education, trade, and commerce. CORPORATE EVOLUTION In its early forms, the corporation was a creature of the state. Governments chartered and sanctioned corporations to perform specific duties on behalf of the nation and its rulers. This changed somewhat during the nineteenth century, when the United Kingdom, the United States, and other countries granted company owners limited liability, and corporations gained a more liberated status as independent "legal persons." The mid-nineteenth century saw the emergence of what can be called the international corporation. An entrepreneurial joint-stock company, organized in simple hub-and-spoke networks, it established and controlled international trade routes, often relying on its home state's armed forces for protection. In some industries, corporations used these routes to import raw materials (diamonds, rubber, tea, and oil) and export finished products (chocolate, soap, margarine, and other manufactured consumer goods). The basic structure of home-country manufacture and international distribution applied across almost every industry. A second phase in the corporation's life began in 1914, with the conflagration of World War I and the subsequent collapse of economies in the United States and Europe. International corporations found their trade-based networks blocked. The spread of protectionism in the 1920s and 1930s led to the rise of tariffs, exchange controls, and other trade barriers. In response, businesses began to evolve into what is today recognized as the MNC. The MNC was a hybrid. On the one hand, it adapted to trade barriers by building local production. American MNCs such as General Motors and Ford, for instance, built auto plants in Europe and Asia, thus allowing them to sell to important local markets without incurring tariff penalties. On the other hand, the MNC ...