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Potential rises with India’s booming middle class

Japan Inc. urged to re-evaluate market as purchasing power, discerning consumers grow

by Takashi Kitazume

Staff Writer

Japanese firms need to — and some are starting to — better understand the changing behavior of Indian consumers to succeed in the region’s new economic powerhouse, journalists from Indian media organizations said at a recent symposium in Tokyo.

The Indian economy rapidly decelerated over the past few years to an annual growth of 4-5 percent — compared with the 8-9 percent growth in the preceding years — amid the global slowdown and the country’s own twin deficits. Still, political stability and economic reforms will likely continue even if the 2014 general election should result in the first change of government in a decade, they said.

The four Indian journalists discussed the country’s economy mainly in terms of the changing consumer market conditions, infrastructure development, investment opportunities and political prospects during the symposium organized by the Keizai Koho Center on Sept. 20.

“In the past, Japanese companies did not understand the Indian market and its price sensitivity as the Koreans did. Now they’re making a special effort not only focusing on the high technology, but adapting themselves to the reality of the market,” said Bharat Bhushan, a senior academic consultant to the Indian Council for Social Science Research.

Bhushan, a former reporter for various Indian business publications, cited the recent moves by Japanese automakers as examples. “Companies like Suzuki concentrated on the lower end of the market, while Honda concentrated on what is considered the upper end of the market (with its models like City, Civic and Accord). But the space left (between them) has been occupied by South Korean companies who brought in smaller and cheaper cars,” he said. “Now Honda has adopted a model for India specifically for India … that’s smaller and more suited to Indian needs.”

Bhushan said that in the development of the car, Honda brought in female employees from India to test how women wearing sari can get in and out of the vehicle. “This is what I mean by Japanese companies trying to understand not only how price sensitive the market is, but also culturally who are the people who drive, who makes the decision to buy the car or who’s going to drive it,” he said, adding that these are the efforts that help companies expand their market share in the long run.

Suzuki Motor Co.’s joint venture with local partner Maruti has often been cited as a success story of Japanese investment in India — even though the venture suffered a labor dispute that resulted in fatalities in one of its plants last year. Kaushik Mitter, managing editor of the Asian Age newspaper, said that while Maruti did not have any presence in the Indian market before its venture with Suzuki, finding a good local partner can be crucial for Japanese investments to succeed.

Japanese firms may make good products, but they may not have adequately studied the requirements of the market specific to India, “and that’s why sometimes it took longer for them to make headway,” Mitter said. To find a good local partner, “you have to look at the sector you wish to enter and which are the successful Indian companies and look for possible collaborations with them,” he noted.

“Indian market conditions sometimes vary widely from those of other Asian economies. … Purchasing power of Indian consumers are much lower than in Southeast Asia. The same products that may be hugely successful in Malaysia and Indonesia may have to be tweaked quite a bit to be successful in the Indian market,” he said.

Still, these conditions including consumers’ price sensitivity are also changing rapidly, said Sankhadip Das, a special correspondent for the Anandabazar Patrika daily.

With its young demographic pattern, India has a huge population in the 25-35 age bracket, and typical consumers in this group are ready to pay a price for good technology, he said.

“They have large disposable income. … They may be earning more salary than the amount their fathers were getting when they retired from service 10 years ago,” he said. “Five or six years back, nobody could have thought of buying a cellphone for 35,000 rupees. Now people of my age group across gender are buying iPhone, Samsung and Sony Xperia.

“They’re not thinking twice as soon as the products arrive in the market, and are ready to pay for more technologically advanced products. This spending pattern has been the same across sectors — cars, mobile phones, personal computers, tablets and everything,” Das said.

Bhushan of the Indian Council for Social Science Research said it must be noted that nearly 60 percent of India’s entire population even today has a spending power of only up to $2 a day. “So what we’re catering to is really the top 1 or 2 percent of the population, but in India’s terms it’s a huge market given the population,” he said.

“The middle class is growing by leaps and bounds and that is really the market you should look at. It’s not limited only to big cities but now tier-two cities and that’s where special marketing effort is required,” he noted. “Purchasing power is growing. Every year 1 percent of the population goes above the poverty line, and that will tell you how dynamic the Indian society is.”

Mitter of the Asian Age newspaper said that when compared to China, the purchasing power of Chinese consumers is still far ahead and it would take some time before India can catch up. Still, the gap with China is much narrower when it comes to consumers in rural areas, he said.

Subhomoy Bhattacharjee, deputy editor of the Indian Express daily, said studies by consumer research organizations indicate that Indian consumers today are “much more discerning.”

In their choice of consumer products, people in India “are basically asking the same question they are asking abroad. Consumers (in India) may be more price sensitive, but price sensitivity is something that happens in any economy,” he said. The answer for companies is “basically being able to cater to a smart market, which wants the latest and is wiling to pay a price (for it). That’s becoming evident.”

Infrastructure has long been cited as a key problem for foreign firms eyeing direct investments in India. Bhushan said that while Japanese companies are not the only ones that suffer because of the infrastructure problems, Japan “identified infrastructure as the problem and started investing in infrastructure.”

Since 2002 Japan has extended $21 billion in economic aid to India for infrastructure development, which resulted in the Delhi metro system and the Delhi-Mumbai Industrial Corridor project, he noted. Japanese companies are investing in additional infrastructure based on these projects and that’s a positive factor for the country’s investment climate in the future, he said.

The journalists gave mixed assessments of how a new land acquisition law recently enacted by the central government would help improve the ability of land acquisition for foreign investors.

“One of the biggest problems Japanese companies face is land acquisition. Land is a state subject in the federal structure of India. The central government can make laws related to land, but land is actually acquired by the provincial governments,” Bhushan said. With the introduction of the new law, he said, the process of acquiring land from people for public purposes will become more transparent than under the previous law.

Bhattacharjee gave a more negative view of infrastructure development in India “because there are too many players — I mean the governments — which are interested in infrastructure.”

He said the new land law will not improve matters “for the simple reason that land is not a central government subject,” and that it “will actually ensure that the cost of buying land (for industrial purposes) will rise several times.”

By ensuring flat differentiated rates of compensation for urban and rural landowners, “you actually create a problem at city borders — that’s where the maximum acquisition takes place and that’s where the (compensation) ratio is going to be difficult,” he said.

“But the more genuine problem is that infrastructure development needs long-term financing,” Bhattacharjee said. Due to the problem of asset-liability mismatch for Indian banks financing infrastructure projects, companies rely on borrowing from abroad. But because of various restrictions on loans from overseas, “only richer companies can borrow, whereas the demand is obviously from the poorer companies — companies which are less able to leverage,” he said.

“The reason why the Delhi-Mumbai Industrial Corridor project is successful is that it is partially financed by the government of Japan and so it is providing a backstop. But every project cannot be financed by government agencies,” he said. “The reason India is struggling in infrastructure is not just isolated issues. It’s a systemic problem of financing.”

Das said the new land law was necessary because under the previous law farmers and landowners were not well informed of what they can expect to get when their land was acquired for industrial purposes. “Land acquisition will be more costly now because of the higher rehabilitation and resettlement packages,” but there are opportunities for companies to directly buy land from the owners “who will be ready to sell” now that they’re more informed about the prices of the land, he said.

“Basic infrastructure in India is still not there. India needs infrastructure. We need foreign investments and private investments,” Das said.

And while the Delhi-Mumbai Industrial Corridor, which connects the major industrial clusters on the west coast of India, is often cited as the ongoing major infrastructure project, there is also a huge potential in infrastructure development on the east coast as it’s relatively intact, he said.

The eastern part of India is highly populated, so a large chunk of land will be scarce but labor remains cheap — potential benefits for investments by small and medium-size firms, Das said.

Currently, about 40 percent of Japanese investments in India have been made in Chennai, with its links to two major ports and availability of large numbers of engineering graduates in the Tamil Nadu state on the southern tip of the country, said Bhushan. Many Japanese firms locate in the area because they want to integrate their production and distribution with their manufacturing bases in Southeast Asian countries like Thailand and Indonesia, he said.

The journalists also discussed the prospect of India’s politics after the general election next year, in which Prime Minister Manmohan Singh’s Congress Party-led coalition is challenged by the opposition BJP. Even though the election comes just as the economy faces serious difficulties after years of rapid growth, a possible change of government would not in itself mean political instability, but the pace of reforms could be affected by the makeup of a new coalition, they said.

A coalition government is “the practical situation” in India’s recent history where not a single national party like the Congress Party or BJP has gained a majority of its own and needed support from regional small parties, Das said. “I don’t expect either of them will get a majority (in the 2014 election). If either of them comes close to a majority, there will be a stable, decisive government who can make decisions without depending too much on its allies. If it does it, I fear there will be difficulties.”

Bhushan said the high growth over the past two decades took place while India was led by a coalition government at the national level. “When Atal Behari Vajpayee was prime minister from 1998 onward, there was a coalition of 23 political parties. When Manmohan Singh took over in 2004, he led a coalition of 15 to 17 parties. So coalition itself does not mean instability,” he said.

Bhushan said that there is a broad consensus in Indian politics on economic liberalization. “So my feeling is that it would not matter who comes to power in 2014. Economic liberalization and deregulation will continue,” he said. When parties need to compromise, the pace of reforms will be slow but the decisions will be more permanent because “every stakeholder is on board and it will be more sustainable,” he noted. “It does not matter whether it is a 14-party coalition or a 30-party coalition.”

Das said that while growth in India did happen under coalition governments, the smaller allies in the coalition tend to take populist positions on issues of economic reforms. Under the current Singh government, some coalition allies support FDIs while others oppose, and there are many powers “who are pulling the government from different sides,” he said.

When it comes to governmental decision making, prospective investors also need to understand the division of power between the central and state governments in India’s federal system, the journalists said.

The Indian constitution stipulates on which matters the jurisdiction goes to either the central or state government, “and if you get that clear, most of the confusion will go away about who controls what,” said Bhushan.

It depends a lot on which sector you’re talking about, Mitter said. “If you go into financial services or telecommunications, you have entirely to deal with the central government because on these subjects the states have almost no role. If on the other hand you want to set up a consumer-durables retail outlet, if you want to set up a low-end consumer-products shop, then you will have to deal with states,” he said.

“If you want to set up a factory only in one part of India, you have to deal with the state in which you wish to set it up. If you wish to establish facilities across several states across the country, then you will have to deal with all the state governments as well as with the central government,” he said.

Bhattacharjee also pointed to the difference in how the central and state governments are run. While both work on parliamentary democracy, states are a de facto presidential system and state governments can move far faster in implementing their decisions than at the national level, he said.