Outward FDI Philosophy: INDIA vs China

Outward FDI Philosophy: INDIA vs China

By: Kumar Saurabh (2010-2012)

Outward Foreign Direct Investment (FDI) flows from developing countries especially from the large companies in China and India have of late generated significant international interest. As per the Boston Consulting Group (BCG) study, considering the top hundred companies from the developing world involved in outward FDI, more than sixty are from India and China. Predominantly, Foreign Direct Investments are made for acquiring assets outside the country. (Assets largely take the form of companies operating in developed and developing economies). A typical example is the acquisition of Corus (an English company) by Tata Steel, an Indian company. This is an outward FDI from India.



Traditionally, Indian companies have been into international acquisitions much longer than the Chinese companies and have steadily gained the tacit knowledge and intellect to deal with the complex management issues relating to managing international businesses. However, China in the last two decades has acquired several international assets with the help of its huge foreign currency reserves.

China and India's history and success of outward FDI

The outward FDI of the United States (US) for 2008 stood at $250 billion. Chinese, outward FDI during 2008 amounted close to $60 billion and that of India stood at $20 billion. Though the outward FDI of India and China are lower than the US, their growth has been significant. In recent years, the Chinese companies have become very aggressive; average overseas acquisition during the 1980 was around Rs. 4,500 crores per annum, equivalent of about half a billion US$, which climbed to an annual average of around Rs.12,000 crores during the 1990; Rs. 30,000 crores by 2004 and Rs.125,000 crores by the year 2007. In 2008 it amounted to Rs.200,000 crores.

In the last two years alone close to Rs.200,000 crores, or an equivalent of $40 billion, has been invested by Indian companies abroad; when we compare the same numbers with amount spent by Indian companies in domestic acquisitions, within India, it is less than Rs.50,000 crores, or one fourth the outward FDI figure. Over the last four years Tata Group alone has spent close to Rs.100,000 crores in various small sized and large global acquisitions. Other Indian groups like Aditya Birla, Essar and Bharti have all been very active in global acquisitions, as well. Companies like Jindal Steel and Godrej have also shown activity in term of overseas acquisition. Given the sheer size of such investments; outward FDI by India and China has grabbed the attention of the international community.

Differences in Underlying Philosophy

There is a fundamental difference in the underlying philosophy of the Chinese and the Indian companies with respect to outward FDI, and overseas acquisitions. When we say philosophy, we mean the objective for which the overseas acquisition is being pursued. The reason for such differences is attributed to the diverse political systems and the overall development strategies of the two countries, which is of late blurring.

Chinese Philosophy:

Large Chinese companies are run with the support from the government. There is strong interference of the Chinese government in the day-to-day operations and functioning of these companies. The Chinese government heavily influences the priority and rationing of the global investments by the Chinese companies and most of the outward FDI of China till 2004 has been towards energy security (the Chinese government wanted to secure its long term oil needs). Most Chinese state run oil companies have heavily invested in oil fields around the world, including in Africa and Russia. With foreign currency reserves in China close to US $2,000 billion, liquidity is abundant and is a major driver for the Chinese overseas acquisition; China's cumulative outward FDI is around US $150 billion. Comparatively, India's investment is in the range of US $70 to US $80 billion.
Till recently, China shied away from acquiring professionally run companies possessing strong brands, which has remained a forte of Indian acquisitions. Lack of international experiences and management talent and cultural and language barriers are being cited as reasons why Chinese companies have not been confident to manage geographically diversified operations, away from mainland China. If we analyze the key competencies of Chinese companies, it is their ability to manufacture low cost products for the developed world using their large-scale supply of semi skilled and cheap labor. China has been unable to put to use this key competence in their global acquisitions. Due to these shortcomings China has been unable to add value to its overseas acquisition of professionally managed global brands.
Chinese companies have failed in their acquisition attempts and inappropriately managed their global acquisitions; for example, failure by Chinalco to acquire the Australian mining company Rio Tinto and their failure in executing the North Rail Project in Philippines. But things have started to improve; and one can see a spurt of investments by Chinese companies in acquisition of well-run professional companies abroad. Although few, these include Lenovo's acquisition of IBM's 'think' personal computer business and Nanjing's acquisition of the British car maker MG Rover. Others include China's Bluestar acquisition of Belgium's Adisseo brand.
The sectoral investments too are getting diversified from the traditional energy related investments, with investments flowing into information technology, manufacturing, consumer durables, mining, internet, green technologies, agriculture and fisheries. Such a paradigm shift in the outward FDI philosophy is likely to position China in a competing stance with Indian corporates for attractive overseas assets, in the future.
Off late not only China, but other high growth developing economies like Brazil and South Africa too has shown significant level of outward FDI. These countries, together with India and China are controlling around 15 percent of the global Gross Domestic Product (GDP)

Indian Philosophy:

The outward FDI philosophy of India, contrarily, rests on very different fundamentals. Governmental interference in functioning of Indian corporate sector, for example is virtually non-existent. A large pool of Indian professionals having experience with multinationals and global corporations abroad, have over the last few years moved back to India due to its economic prosperity. They have been able to relate and deal with global corporations and understand management practices; and as a result many large and professionally run Indian companies have been successful in acquiring global and multinational companies.
Performing stock markets, good flow of foreign investments, a strong rupee, easy access to and availability of funds, both domestic and foreign currency, are resulting in fundamentally strong economic conditions in India. This gives an impetus to move forward with more outward FDI deals. Consistent and reasonably good corporate results have also left significant liquid cash, which is also a key driver for increased outward FDI. Further, the global economic crisis has provided attractive investment opportunities for the Indian companies; as a result India's global acquisitions have been much greater than their domestic acquisitions. In line with the Chinese outward FDI model, state owned Indian companies like Coal India, Oil and Natural Gas Corporation and Indian Oil Corporation have also created significant levels of outward FDI in securing energy assets. These companies are expected to pursue this more aggressively in the near future.
Indian companies have reached a stage of maturity in their management style and strategic planning for their operations. To that extent Indian acquisitions abroad have been founded on a strong fundamental synergy seeking behavior with their global acquisition targets. For example acquisition of Corus by Tata and Novelis by Hindalco are not knee jerk reactions; they have been well thought out acquisitions keeping in mind the strategic synergies that will arise.
Talking about Tata Steel's acquisition of Corus, Tata Steel had the worst productivity record during the 1990. In order to improve its competitiveness, it injected new technologies spending billions of dollars; and by the end of the 1990. Tata Steel became the world's most efficient steel maker. The company evolved a strategy to acquire global steel maker Corus, producing high value added steel having a capacity of around 20 million tonnes. Through this acquisition, Tata Steel not only enhanced its overnight steel making capacity multifold, but also secured sophisticated manufacturing technology, access to high value Western customers and achieved lower input costs. This is what we call strategic fit! On similar lines Tata Steel also acquired companies in other attractive markets like Singapore-based NatSteel and Millennium Steel in Thailand. The synergies proposed in this acquisition were very strategic and well thought out. The management expertise of the Tata Senior management and its advisors helped the company successfully conclude this acquisition.
A second example in this category is the acquisition of Novelis by Hindalco. What was the strategic fit in this acquisition? Hindalco being primarily an 'upstream' manufacturer of raw aluminum boasted of higher profitability in comparison to other aluminum manufacturers, but volatile sales price often pulled down its overall profitability. Hindalco wanted to become vertically integrated by getting into value added aluminum products in the form of sheets and foils, (known as 'downstream products'), primarily to stabilize its overall profitability. Profitability of the 'downstream' business is lower than 'upstream,' but is less volatile and also provides access to high value added customers, sophisticated manufacturing processes and access to technologies. Acquisition of Novelis provided this strategic fit to Hindalco. This is hailed as one of the most successful acquisitions in the Indian history.
Hence we can say that Indian companies have good strategies, founded on solid planned rationale; combined with effective managerial skills in successfully acquiring large global brands. Cultural and language compatibility has also helped the Indian acquisitions to be successful, especially in the task of post acquisition integration. The Chinese companies having failed in their acquisition attempts due to lack of the above knowledge, have pulled up their socks and have started to acquire professionally run Western companies and are high on the learning curve. Over time the philosophies of both the countries are likely to converge and pose stiff competition to each other and to the others in a growing global market.

Kumar Saurabh
2010-2012 Batch
IIFT, Kolkata

Indian Institute of Foreign Trade, Kolkata