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CEO toons

What
makes MNCs quit India
4 Nov 2001, 0042 hrs IST,SWAMINOMICS/SWAMINATHAN S ANKLESARIA AIYAR

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ministers talk of new measures to increase
foreign direct investment, which has stagnated at around $ 4
billion a year, and approach china’s level of $ 45 billion.
few seem aware that foreign investors are leaving india in
such numbers that it deserves to be called the second quit
india movement. the most obvious example is power. the biggest
foreign investor of all, enron, is pulling out of dabhol. the
maharashtra government has terminated the contract, and the us
company has decided to sell its equity at a loss rather than
fight through the courts. its huge lng terminal at dabhol is
also up for sale. earlier it sold oil and gas stakes in the
bombay offshore area as part of a global strategy. other
foreign investors also find the power sector impossible. it
suffers from an ingrained culture of non-payment of dues of
every sort. indian companies are used to this, but not
foreigners, who cannot explain away non-payment to their
shareholders. aes, an american major that took over generation
and distribution in orissa, is quitting. it cannot collect
dues; cannot sack the crooked staff it has inherited, who fix
meters in collusion with consumers; and cannot get the support
of the state government in collecting dues or combating theft.
cogentrix earlier pulled out of the mangalore power project,
and china light from hirma. cms energy, another us major, has
just announced its exit from three power projects—the 235-mw
plant at jegurupadu, the 200-mw gmr-vasavi basin bridge plant,
and the 250-mw st-project at neyveli. it has also abandoned
its plan to participate in a huge lng terminal with a 1,800 mw
power plant at ennore. the world’s biggest names came into our
telecom sector, but today all but a few have quit. british
telecom has sold out to bharti. telstra of australia, bezeq of
israel, shinwatra of thailand, have all have pulled out. nynex
has sold out to its partner reliance. others who have exited
are vodafone, bell south, bell canada, us west and swiss ptt.
the few remaining foreign investors in telecom include
hutchison, singtel, and at&t. unlike power, telecom is
generally considered a successful sector, yet foreigners have
left in droves. why? first, investors grossly overestimated.
second, bickering between the telecom regulatory authority and
department of telecommunications created uncertainties on the
interpretation and enforcement of rules. third, the rules
themselves keep changing. in one case this benefited foreign
investors: they were allowed to migrate from an unviable
licence fee system to a revenue-sharing system. but in
general, foreigners are not used to and cannot manage constant
changes in rules, unlike indian businessmen enjoying decades
of experience with a capricious licence-permit raj. often
indian telecom partners have bought out foreigners. this
contradicts the traditional wisdom that joint ventures end
with foreigners swallowing indians (something that has indeed
happened in other sectors, mainly because indian partners
could not produce enough capital to meet rising losses). the
quit india movement of foreign investors is not limited to
power and telecom. cigna, a major health insurance company,
has wound up its office after months of trying to find a
suitable partner. kerry packer, whose media group made the
mistake of tying up with hfcl, has quit in disgust. earlier,
pearson abandoned its losing jv, home tv. foreign investment
has not lubricated success in another sector—lubricants.
valvoline has found operations unprofitable and decided to
wind up. caltex earlier pulled out of a jv with ibp. dupont
faced an unending series of hurdles in producing nylon, first
in goa and then in tamil nadu, and quit. sinar mas, a major
indonesian paper company, sold out to ballarpur industries,
but not because of problems in india. its parent company in
indonesia went bust. in the pharma sector, german remedies
recently sold out to cadila. astra adl sold out to the
hindujas. foreigners have been quitting this sector for a
decade because of price controls, as well as a lack of
intellectual property rights. rhone poulenc, roche, boehringer
knoll and the research centre of hoechst have all been sold to
the takeover king of the pharma business, ajay piramal. this
is not a complete list. i am sure readers will know of other
cases. i emphasise that foreign investment has been flowing
out as well as in, and many saying farewell are very big
global names indeed. what lessons flow from this? first, india
remains a country bristling with hassles, red tape,
corruption, difficulties in collecting dues, and (in the enron
case) unilateral abrogation of contracts. second, many
failures are the faults of foreigners, who overestimated
market demand in india. many believed that india has a middle
class of 250 million. now, middle class in america or europe
means somebody who owns a car and home. in india, the word has
been used to describe anyone that could afford a black and
white tv set. the misunderstanding about what a middle class
is, led to exaggerated estimates of demand. this was most
striking in telecom, but also affected estimates of demand for
dabhol’s power, and for many consumer goods sectors. ray ban
found it could not sell enough dark glasses, kellogs could not
sell enough breakfast cereals, electronics companies could not
sell enough tv sets, auto companies could not sell enough
cars, pepsi and coke could not sell enough fizzy drinks. in
consequence, most foreigner investors have lost a fortune in
india, and very few have made money. now, i shed no tears for
those who overestimated the market, bungled their pricing
strategies, or failed to adjust their products to suit the
indian taste. but in many other cases, india has proved to be
a bad, even nightmarish place to do business. we must improve
those conditions, not so much to help foreign companies as to
help indian firms harness their full potential.

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