The $80 billion Indian opportunity that’s too good to ignore
Wednesday, April 4, 2012/
While most of the focus for our exporters has been on China, India presents the big opportunity – possibly larger than what Australia can get out of China. Leading companies are already doing business in India, and it is among the top 20 export destinations. Now, with forecasts of Australian investors pouring in $80 billion in the next year, further opportunities abound.
Consider the numbers
India has a population of 1.2 billion people. That makes it second to China (1.3 billion), but India – with its higher birth rate – is set to eclipse China and become the world’s biggest country.
According to demographers, India adds 181 million new people every decade while China, with its one-child policy and with its ageing population, adds just under 74 million. Over the next few years, China will undergo a profound demographic shift. Demographic forecasts see the share of people over 60 in China’s total population increasing from 12.5% in 2010 to 20% in 2020. By 2030 their number will double from today’s 178 million.
China is likely to become the first country that got old before it got rich. India, by way of contrast, has a young population with a median age of 25 – compared with 35.5 years in China and climbing. While Europe, China, the US and Australia have a shrinking workforce and skills shortages because of an ageing population, India has an ever-growing and young labour force which, demographers say, will increase by 135 million by 2020 because of that high birth rate.
India, the world’s largest democracy, also has the world’s biggest middle class, which is growing fast. The Asian Development Bank estimates that India’s middle-class population will generate at least one billion consumers over the next decade, making it the world’s biggest buying economy.
Indian consumers are becoming more brand conscious and are willing to pay premiums for products of their choices – presenting opportunities for Australian business.
Significantly, Woolworths has established a joint venture there with Tata in retail.
Still growing fast
Add to that India’s impressive GDP figures. In 2010-11 while the rest of the global economy was limping along, India’s GDP came in at 8.6% with manufacturing sector growth firing on all cylinders at 8.1%.
While India’s forecast GDP growth has tapered down to 7.5% this year, it’s the kind of growth that more developed economies are nowhere near. Meanwhile, China is putting the brakes on its growth, with the Chinese government trying to orchestrate a gentle slow-down in the property market.
Tim Harcourt, a former economist with Austrade who is now professor of international business strategy at the University of New South Wales, sums up the contrast between India and China in cricketing terminology.
“While we’ve seen China grow as an export destination at Test match pace, India has moved up our export ranks like a T20 match,’’ Harcourt says.
“Ten years ago, India was not even in our top 10 export destinations. Now it is in the top five. In fact, it recently passed the US as our fourth-largest export destination, accounting for $18.8 billion, or 6.6%, of our exports.” According to figures from the Department of Foreign Affairs and Trade, China is ranked as Australia’s number one trading partner, followed by Japan and then India. The Republic of Korea, United States and United Kingdom come in after that.
Drivers of Indian growth
Indian growth is driven by rapid urbanisation, poverty alleviation, and the desperate need for infrastructure and road building. Indian infrastructure developers are now shopping around for equity investments in an as many as 40 projects, particularly roads, according to experts quoted in The Economic Times.
Anyone who has tried driving from Delhi to Saharanpur will discover that Indian roads are bad stretches of tarmac filled with potholes. The road surfaces often wash away during the monsoon. Most national highways are two lane – or one. Their repair is in the hands of the Ministry of State for Surface Transport in India (and the Indian mafia, some say).
Other state roads are managed by state public works departments while minor roads in the country are run by various districts, municipalities, and villages.
With these congested roads, the supercar moves at rickshaw speed.
What makes it worse is that many Indian cities are still unconnected by road in a country where goods are trucked around. One of the big issues in India is that the food produced in one part of the country becomes inedible, and therefore can’t be sold, by the time it gets to the other side because of the long trip on such bad roads.
This represents a big opportunity for any company specialising in refrigerated logistics. Early movers are already taking a piece of the market. Linfox established operations over there in 2006 and now manages 10 warehouses and a fleet of more than 160 trucks.
Where the opportunities are
So what does that mean for leading companies? Opportunities abound. The Australian High Commissioner in India, Peter Varghese, has stated that Australia investors intend to put nearly $80 billion into India’s resources sector over the next 12 months. That will create flow-on opportunities in power, infrastructure and information technology.
Australian companies are already doing business with India. “There are now over 2100 Australian businesses exporting to India which puts it in the top 20 exporter destinations,” says Harcourt.
One area of growth is mining. With more Indians joining the middle class and the country industrializing at a rate of knots, demand for coal-fired electricity is rising.
India’s big problem, however, is its inability to extract sufficient coal to meet domestic demand. The Indian electricity system is plagued by blackouts. The system delivers 10% less electricity than customers want during peak periods and there is an inadequate grid that does not reach some 300 million people – or one quarter of the population.
Indians need to produce more coal and as a result, Indian companies have now been targeting Australian coal mines. At the same time, however, India knows it needs to modernise its mining sector. As a result, Australian mining software, especially mine management systems, is much sought after in India. With surface coal exhausted, India is now working to build underground mines and Australian companies see significant potential for growth in equipment and services for underground mining. Already Thiess, a subsidiary of Leighton, has started a contract there for a $25 billion project in the mining industry.
Many sectors offer opportunities
But Harcourt says it’s not just happening in “rocks and crops”. Sectors such as education are also booming. “It’s been happening at the chalk face as well as the coal face,’’ Harcourt says. “There are opportunities in education to do joint ventures in research. They are pretty strong in R&D and business and there are a lot of them there who are under the age of 25.”
In the financial sector, three of Australia’s top four banks have a presence in India.
Several Australian IT companies have already found footholds in India. For example, health software firm iSoft has 2000 employees there.
There are other opportunities in telecommunications and IT.
Internet penetration in India is one of the lowest in the world. Only 8.4% of the population is connected but at the same time, India has the third-largest internet subscriber base in the world, with more than 100 million users as of December of 2010.
These are numbers that have our IT companies and ISPs salivating. The Indian telecommunications industry is worth more than $US48 billion and it has more than 881 million subscribers.
Nevertheless, total landline connections in India are under 35 million, or less than 3% of the population.
Fire up your competitive zeal
Still, India is not an easy place to do business. India is ranked 132 out of 183 in the annual World Bank “Ease of doing business” ranking.
Early movers have found that Indian consumer more fickle than they expected and very demanding of value for their rupee. They have faced stiff opposition from local firms who have learnt the tricks of marketing and developing quality products for the new middle class. Incumbents protect their turf fiercely.
Australian companies would also have to deal with the politics. Minority governments and cabinet instability are now staples of Indian parliamentary life. Indian government’s regulations are relatively restrictive when compared to other developing economies, such as Brazil, China and Russia.
Australian companies need support wherever they can find it. To get into India, leading companies have found local partners for joint ventures to provide local representation and to make sure that contracts are tight enough to protect intellectual property.
Leading companies advise entrants to start investing in those relationships and warn that it will take time. India is a waiting game, and much like a 20:20 game of cricket, it’s subject to tighter rules. But, they say, the opportunities there are too big to ignore.
This article first appeared on LeadingCompany, Australia’s new daily publication for leaders and managers. Sign up for our free newsletter and receive a free eBook, 101 Great Leadership Insights.
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