In India, Japanese consumer electronics giant Panasonic noticed that its customers gazed at the split air conditioner (AC) and commented on how much more efficient and easier it was to install than a window AC. But they ended up buying the window AC anyway because it was cheaper. Panasonic doesn’t manufacture window ACs and Manish Sharma, managing director of Panasonic India’s consumer products business, realised the company was losing business to rivals.
Its Japanese technology and Indian marketing teams got together to work on a frugally engineered split AC. Called Cube AC, it was launched in 2010. While Panasonic’s other split ACs start at Rs 25,000, the Cube costs Rs 21,900 and is only about Rs 3,000 more than a window AC. It was a sign that Panasonic was reconsidering its India strategy: It would manufacture products that suit the Indian customer’s needs and not push products from its global range like it did earlier.
Panasonic wasn’t the only one to rethink its India strategy. From 2007, many Japanese investors were beginning to look at India differently. And since then, nearly 50 deals have been struck by Japanese businesses and $13.6 billion (Rs 74,882 crore) invested—the largest contributor being Daiichi Sankyo’s $4.5 billion buyout of Ranbaxy Laboratories in 2008. This has put Japan among the top five investors in India, after Singapore, Mauritius, the U.S., and Britain (the first two being tax havens from where funds are routed to India).
Japanese partnerships have existed since India’s liberalisation in certain sectors such as automobiles and electronics. But this new wave of capital investment is marked by a whole new approach to India and influenced by the recession in other developed markets.
Recession has hit Japan’s biggest markets: Europe and the U.S. Its exports to China, a large destination for manufacturing parts and assembling, have also been affected by political tension over a chain of islands in the East China Sea known as Senkaku in Japan and Diaoyu in China. In such times, India’s mixed economy, its democracy, and demography suddenly find a new appeal among Japanese firms, especially the small and midsize ones. The market is large and heterogenous, and the cost of labour and operations second only to China.
The rupee weakening against the yen too has been a boon as the deflated valuations of Indian companies make them more attractive to Japanese investors. Many have expanded shareholdings in their companies: Hitachi Construction Machinery became the majority owner in its Indian joint venture and Honda Siel became a 100% Japanese subsidiary. According to Venkataraman Sriram, CEO of Infosys Japan, there are nearly 1,000 Japanese companies operating in India, up from 300 in 2009.
“It’s clear that Asia is going to lead this century, and Japan has an opportunity to lead the change by taking strong positions in the region,” says J. Suri, director of ICMG Consulting India, a firm that studies and rates Indian companies, distributors and investors that Japanese businesses may have an interest in.
What’s different now is that they are more willing to empower partners who understand the local market better. Traditionally, the Japanese have depended entirely on their tech prowess, and never bothered with the foreign market’s preferences. For instance, Panasonic would phase out products to cope with its mature Japanese customers who looked for new technologies. This would leave Indian suppliers and distributors somewhat in the lurch. That policy has changed with its localisation drive. While Panasonic India’s 50 Japanese mid-level and senior managers retain roles in finance and product planning, it has empowered Indian managers with marketing, supply chain, and business development functions.
The strategy seems to be working: Cube AC’s launch was a success and in FY12, Panasonic sold 1.25 lakh units—21% of all ACs sold that year. Panasonic earns higher profits from its more expensive split ACs, but Cube helps it grab market share. Panasonic has created a capacity to make 10 lakh ACs.
COPING WITH THE MARKET PECULIARITIES in India is something that Japanese managers need help with. In Japan, telecom operator NTT Docomo bundles postpaid mobile services in handsets sold from company-owned shops. In contrast, the focus here is on prepaid connections sold through multi-brand outlets, even medical stores and groceries. Its local equity partner, Tata Teleservices (TTSL), helps plan the distribution mix. So, in some cities it has exclusive shops for 3G users—not having too many of them has helped Docomo keep distribution costs low.
To help Japanese businesses handle local tax and accounting laws, Infosys is offering a software solution called India in a Box. Sriram says that earlier the Japanese would send in-house system integrators to set up IT systems in their branches and dealerships here, but now they are willing to outsource this function.
As for real estate, the Japanese were surprised to find that property developers got involved in all purchase decisions, even that of switches, cabling, and flooring. In Japan and other developed markets, it’s the project managers, architects, and contractors who are considered best qualified for that. Says Suri: “It doesn’t surprise us because we’re used to businesses being run by families.” Most family-run businesses like to keep tabs on the cash spent and the regulatory issues involved. If a project faces a regulatory threat, it’s the owner who defers further expenditure or even cancels the project.
When ICMG saw the Japanese perplexed by this, the consultancy helped them understand how family businesses operate. ICMG, in which the Hitachi group has a 20% stake, has over 700 clients, nearly 300 of them large and midsize Japanese companies. “Most Japanese managers are infants in this market. Their bosses want them to learn the local management techniques,” says Hitoshi Funahashi, founder and CEO, ICMG.
While the Japanese may have modified their strategy vis–à–vis India, they continue to retain their behavioural traits. That’s unlikely to change; it’s the Indian businesses that may have to modify their habits. For instance, the Japanese continue to be as meticulous and focussed on details as before. The Japanese also have short meetings, beginning and ending on time, with their executives well prepared. They keep their communication short and precise, and they prefer predictability in business.
“Two-thirds of their time is devoted to meticulous planning, and the rest to spotless execution,” says Deepak Gulati, executive president of TTSL’s mobility business division. He has been involved in the joint venture with NTT Docomo right from the beginning. “Indians tend to do the opposite,” Gulati says with a laugh. The Tata Docomo partnership began in November 2008, with NTT investing $2.7 million for a 26% stake. By June 2009, it had kick-started TTSL’s 3G service.
“We need the Japanese kind of detailing from the bottom to top levels, not just the other way round,” says Pranay Dhabhai, MD, Akai India. Consumer electronics manufacturer Akai entered India in the early ’90s. After a lull, it made a comeback in 2009, this time partnering with Global Brands Enterprise Solutions, founded by Dhabhai, who has helped it with access to more than 4,500 shops and 20 branch offices, besides 26 warehouses. Akai’s queries are on identifying specific problems that may crop up and how to solve them. And so, Dhabhai has already mapped out his growth plans and sales targets for FY14. Exactly like the Japanese work.
These are reasons why finding an Indian partner with matching qualities is crucial. For the Japanese, the financials of the Indian partner are just the basics; it’s the intangibles that they are more keen on ascertaining. And so, ICMG is spending a lot of its effort in identifying prospective Indian partners for its Japanese clients after analysing their culture, habits, ethics, and processes. Then it rates a company in terms of its intellectual capital.
For India Inc., the new wave is an opportunity to learn a different way of doing business. Just as it is for the Japanese to harness a new market.