SMEs in India Deserve a Better Deal

First published in The Hindu Business Line: ____________________________________________________________________
How often have we read that small and medium enterprises are a strategic asset for the Indian economy? We are told that they contribute nearly 8 per cent of the GDP, 45 per cent of the manufactured output and 40 per cent of exports. The sector provides employment to about 60 million people through over 26 million enterprises producing over six thousand products.
 However, what is seldom mentioned is that many of them are at the mercy of the larger corporations, with no effective relief from the existing government policies. For instance, delayed payments by large companies and the resultant crippling effects have always been the bugbear of SMEs, but at the risk of losing their large orders, they do not legally complain.
 While the government efforts have always focused on ways to ease credit restrictions, strengthen training, marketing, technological support, exit policies and cluster development, very little thought has gone into the relationship between large corporations and their sub-contractors. At the risk of being accused of bringing back the “control regime,” our policymakers could well take a look at the recent initiatives in South Korea, a country that has built its strong economy on the basis of capitalistic free market principles.
 On May 22, the nation's top conglomerate, Samsung Electronics, found itself in the national anti-trust agency's crosshairs, falling afoul of the unfair practices law for its repeated cancellation of parts' orders to small contractors.
 The Korea Fair Trade Commission (KFTC) announced that it is imposing a $1.4 million fine on the company for withdrawing orders long after payments are due. It said that among 1.5 million parts orders placed by Samsung Electronics between January 2008 and November 2011, some 2 per cent or 28,000 orders were reneged on unreasonably. This left suppliers with bursting inventories, interest payments owed and disruptions to their production schedules. Although the company has strongly refuted the claims, this just goes to show that SMEs in South Korea which have been unfairly treated by their larger counterparts can always bank on help from government agencies. The same may not be true for Indian SMEs.
  RESERVED FOR SMES
 The anti-trust agency's proactive steps can be traced to the ‘shared growth' policy of the present government under President Lee Myung-bak, a former high-profile businessman. He has been pursuing co-prosperity between conglomerates and SMEs since last year as a means of addressing economic polarity.
As a response to concerns that big companies were thriving while small ones weren't under his administration, a ‘‘Presidential Commission on Shared Growth for Large and Small Companies'' was launched in December 2010, as a private institution, which is formally independent from, but actually supported by, the government.
Since its formation, the commission has announced many policy instruments to promote shared or mutual growth of large companies and SMEs through what it calls “cooperation profit distribution.” Representatives from both SMEs and large companies agreed to introduce the system and a number of proposals were then announced, including a list of business areas restricted only to SMEs.
 The commission recently announced a list of 79 products that it believes should be produced by SMEs rather than big ones, an attempt to prevent big companies from driving smaller ones out of promising markets. The conglomerates have reluctantly accepted this proposal.
  INDEX OF INCLUSION
 ‘Name and Shame' is another tool used by the Commission. It released a ‘‘shared growth index'' earlier in May, tracking how large businesses have made efforts to realise shared growth.
 Of the 56 large conglomerates subject to the index calculation, seven companies received the lowest grade of “improvement needed”, while six companies, including Samsung Electronics, POSCO, and Hyundai Motor Company, received the highest grade of “superior”. Twenty companies were ranked as “good” and 23 others were listed as “average”. The index has been calculated by combining the performance assessment of the conglomerates by KFTC, plus a personal survey of 5,200 contractors of the 56 companies.
Large companies that received the lowest mark in the assessment will not face any disadvantages. However, 26 companies with the satisfactory grade or above will be given various incentives from government agencies, including tax breaks and subsidies.
 It is the first time that the shared growth index has been calculated. Although some conglomerates may not be content with the index, it is desirable for them to acknowledge the commission's effort to improve the environment for achieving co-prosperity between conglomerates and SMEs.
 In fact, following its active involvement in the ‘‘shared growth'' agenda, many large enterprises have recently reached mutual agreements with subcontracting SMEs for fair trade and shared growth. Two prominent examples of such arrangements are Samsung and Hyundai's agreements with their respective subcontractors.
  GOVERNMENT PUSH
 Nine Samsung group affiliates, including Samsung Electronics, made cooperative agreements for shared growth with 5,200 subcontractors. The package of financial assistance amounted to $5.7 billion, among which R&D support comprised $1.7 billion.
 Samsung agreed to induce its subcontractors to make cooperative agreements with lower-level sub-subcontractors, and provide them with incentives. Similarly, six Hyundai group affiliates, including Hyundai Motors, made cooperative agreements for shared growth with roughly 1,600 subcontractors. The package of financial assistance amounted to $3.9 billion, with R&D and capacity investments making up $2.3 billion.
Hyundai promised to provide 300 R&D support manpower for its subcontractors. This is just the beginning, and many more large companies have announced similar initiatives.
With a small push from the government, the Korean companies have realised that they need to share the burden of their sub-contractors.
 That is what is lacking in India. Any number of laws can be enacted but effective implementation is crucial. It also requires a concerted effort by the government; so that the large corporations in India automatically devise their own ways to help their sub-contractors survive and share their growth.
Many companies may still be doing it on their own initiative, but if there is a government push, it will make a world of difference.

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Lessons for Retail Giants Hoping to Enter India

First published in Business Standard: __________________________________________________________________
After a quiet period, intense lobbying for opening up multi-brand retail once again seems to be hotting up. On May 24, Carrefour’s India head, Jean-Noel Bironneau, met Commerce Minister Anand Sharma, and his counterparts from Wal-Mart, Tesco and Costco will no doubt follow soon.
 Ever since the government announced its decision to allow foreign direct investment (FDI) in multi-brand retail trade, and then backtracked, there have been a flurry of articles on the pros and cons of such a move.
There is no clear answer and those in favour and against FDI have expressed ample views. So, another attempt to do so would be futile, although it must be stressed that allowing FDI does not mean that the global retail giants will automatically wind up capturing the market.
 Take their experience in South Korea, home to one of Asia’s most dynamic and largest retail markets, ranking fourth behind Japan, China and India, with a relatively wealthy population. Wal-Mart and Carrefour have had to beat a retreat after struggling for years to increase market share. Tesco is the only successful foreign retailer, going from strength to strength.
 The varying success of these three retail giants in South Korea has become must-read case studies for all potential foreign investors. It also holds lessons for them in the Indian market, given the high complexities in terms of a wide geographic spread and distinct regional consumer preferences. Historically, South Korea kept its major retailing operations closed to foreign ownership. It was only in 1988 that the government began a series of three-year plans designed to improve the efficiency and productivity of the retail and distribution industry.
The first stage of this process occurred in 1989 when regulations on the establishment of foreign companies’ subsidiaries and the inflow of FDI were eased. Then, foreign retailers were permitted to establish stores at a maximum size of 1,000 sq m, as prescribed by the second stage of the open-up policy. The regulations on the number and size of retail outlets of foreign companies were further relaxed in the third stage of the programme beginning in 1993, when foreign companies were allowed to open up to 20 stores with each store not exceeding 3,000 sq m.
 It was not until 1996 that FDI in the Korean retail market was completely liberalised and foreign retailing companies began expanding there in earnest. Sensing huge opportunities, Wal-Mart, Carrefour and Tesco entered the country around the same time, but adopted different strategies.
 Wal-Mart attempted to penetrate the Korean market by building stores in distant areas where land prices were low, replicating the US strategy of smaller-city store build-up. It had only 16 stores in all of Korea with just one in the Seoul metropolitan area and could not achieve economies of scale.
The company expected the Korean consumers to drive to its stores for price shopping as American consumers do. However, this location strategy did not match well with the Korean consumers’ lifestyle and shopping habits. They prefer to buy smaller units on a more frequent basis and to have accessibility to a store within walking distance.
 As a result, Wal-Mart faced serious challenges in implementing its core competence in South Korea. Moreover, it could not enjoy its buyer power in the local vendor market and had no control over its Korean supply chain and procurement. Eventually, it packed its bags in 2006.
 Carrefour had a similar story. Despite its experience elsewhere, the company failed to localise its stores to a sufficient extent. Instead, it tried to introduce its global practices and strategies in the country. Its store layout, ambience, products and location failed to attract customers. The company wanted to attract customers by providing them high-quality products in bulk at low prices. Its stores were styled like warehouses and were simple in appearance compared to the stores of its competitors. Initially, customers were enthusiastic, but most of them were not bulk purchasers.
 Also, unlike other markets, Korean customers prefer a clean and sophisticated atmosphere along with low prices. At the time of its exit in 2006, Carrefour was the fourth-largest retailer in the country, with 32 hypermarkets. The company had invested $1.5 billion, making it the largest foreign investor in the Korean market, but that was not enough to guarantee it success.
 In contrast, Tesco had an effective “localisation” strategy for downstream activities. It entered the market by forming a joint venture with a major local partner, Samsung, leveraging its knowledge and expertise of the local market. Tesco devoted considerable attention to transferring its core capabilities to this new market, but did not attempt to iterate the British version of its retail format.
It gradually increased its stake in the company to 95 per cent, but continued to localise its 450 stores, consisting of both large hypermarkets and small Express stores. Also, of Tesco’s 27,000 staff in Korea, only four are expatriates. As a result, it became one of Tesco’s biggest success stories, generating a third of its overseas sales.
 One key factor that contributed to Tesco’s success was its ability to create “value” that is suitable for the Korean tastes and preference. While other foreign brands like Wal-Mart and Carrefour have failed, Tesco’s Korean brand, Homeplus, is moving from strength to strength, as it closes the gap with the market leader E-mart.
It also has leveraged Korean’s love for high-tech, having just launched innovative virtual stores in subway and bus stops where customers can use their smartphones to buy products that are delivered right to their homes.
 These stories contain valuable lessons for the global retail companies who now wish to expand their presence in India, whenever the law permits. Their multi-brand retail strategy has to be different from their wholesale cash and carry stores. Moreover, it is important to heavily localise operations keeping Indian tastes in mind, with or without a domestic partner. Blindly applying western business models for the Indian market will not work.

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Outbound Tourism Policy Need of the Hour in India

It is more or less a quarterly gimmick by reporters in the Indian media who cover tourism. Since early 2011, they have been issuing reports (perhaps on ‘dry news days’) that the list of countries whose citizens will be provided Tourist Visa-on-Arrival (VOA) at international airports is being expanded. Do a Google search for ‘India visa on arrival’ and you will know what I mean. Under the policy implemented since January 2010, India currently issues VOA to 11 countries including Japan, Indonesia, the Philippines, Cambodia, Laos, Vietnam, Singapore, Myanmar, Finland, Luxembourg and New Zealand. Citizens of these countries can get a single entry visa on arrival with a maximum validity of 30 days, at Delhi, Mumbai, Chennai and Kolkata Airports. This list is sought to be expanded to include 13 countries largely from Europe, south-east Asia, even as more entry points will be included. The expansion of the list will no doubt give a major boost to the tourism industry in India, as more visitors land up on its shores. Tourism is not only a growth engine but also a big employment generator. Worldwide, the industry generates eight percent of jobs, and it is estimated that each job in the tourism industry creates two additional jobs in other sectors. As noted in the Declaration adopted by Tourism Ministers from G20 economies at the recent summit in Merida, Mexico, on May 16th, visa facilitation is central to stimulating economic growth and job creation through tourism. In particular, G20 economies could boost their international tourist numbers by an additional 122 million, generate an extra $ 206 billion in tourism exports and create over five million additional jobs by 2015 if they improve their visa processes. The Ministry of Tourism statistics show that foreign tourist arrivals in India during 2011 were 6.29 million, growing from 5.78 million during 2010. Last year, India received 12,761 tourists under the VOA scheme, the largest numbers coming from New Zealand and Japan with 2,762 and 2,344, respectively. These are still relatively low figures, if you compare the number of tourists who visited China last year (135 million). Though, it is still a good start, what is worrying is the fact that MEA is not looking at mutual reciprocity with countries in implementing the VOA policy. Rightly, the focus is to attract international tourist traffic and turn India into a major tourist destination, but regrettably, the plight of the outbound tourist is completely ignored. Today, Indian travelers and the estimated 25 million strong overseas Indian community require a processed visa from their country of residence, to visit all the major G20 economies (except Indonesia which allows for VOA). Information provided by the International Air Transport Association (IATA) shows that some 59 countries and territories provide visa-free or VOA access to holders of Indian passports.These include countries such as Burundi, Bolivia, Cape Verde, Central African Republic, Comoros, Djibouti, El Salvador, Ethiopia, Gambia, Guinea-Bissau, Guyana, Mozambique, Nauru, Sao Tome & Principe, Samoa, St Lucia, Timor Leste, Togo, Tuvalu and Kosovo, which hold little to no interest for the desi leisure traveler. It is only countries on the list like Thailand, Egypt, Cambodia, Indonesia, Hong Kong, Tanzania, Kenya, Madagascar, Maldives, Mauritius and Seychelles that may pique the interest of the Indian tourist. For that matter, the top tourist destinations for outbound Indian travelers last year were Singapore, USA, Malaysia, Thailand, China, Dubai, Hong Kong, UK, Italy, Australia, Switzerland and Canada. Since India’s tourism policy has been focusing on inbound travelers, the policy approach on outbound tourism has been relatively insufficient. This despite the fact that Indian outbound tourists topped 12.5 million, double the number of inbound tourists. The UN World Tourism Organisation predicts that the country will account for 50 million outbound tourists by 2020, while the ‘Kuoni Travel Report India 2007’ predicts that total outbound spending will cross the $28 billion mark in 2020. Pointers should be taken from the new study by London-based Centre for Economics and Business Research (CEBR), unveiled on May 10th. It highlights that outbound travel directly contributes over £22bn to the economy, representing 1.6% of UK GDP. With the inclusion of contributions made by industries supplying the sector, the total economic impact rises to over £54bn, or 3.8% of UK GDP! In addition to its economic contribution, the outbound sector makes a significant contribution to jobs. When jobs that are reliant on supplying the industry are taken into account, this reaches 5.2% of total UK employment. The report also reveals that the total tax take from the outbound sector is £6bn per year, with £1.2bn raised from indirect taxes such as Air Passenger Duty (APD). This is a significant contribution. Although there are no similar studies for India, it goes without saying that the Indian holidaymakers also spend at the local travel agent and shop for clothes, accessories, cameras, toiletries and other essentials before they embark on a trip. This consumer spending has a direct impact on the domestic economy, not to mention employment generation and taxes. Our policymakers assume that by going abroad on holiday, money is being taken out of the Indian economy. On the contrary, outbound tourists make a huge contribution to the Indian economy, both directly and indirectly. The government must recognize and support outbound travel in its current and future policies and plan strategies to deliver growth to the wider economy. The first step should be to simplify overseas travel for Indian tourists. Additionally, it should work to generate and promote demand for overseas travel in cooperation with the relevant ministries, state governments, travel agencies, airlines and overseas national tourism organizations. This segment needs to be tapped to benefit the Indian economy, and the policymakers ought not to ignore it.

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European Investors in Taiwan

European investments in Taiwan have been steadily increasing over the past two decades and the dramatic rise has been in parallel with the founding and rapid expansion of the European Chamber of Commerce Taipei (ECCT). The ECCT started with just 50 founding members in 1988. Since then it has expanded to approximately 400 companies and organizations and 700 individual members. As noted by Mr. Freddie Hoeglund, CEO of ECCT, today, European investors account for approximately 30% of all foreign direct investment in Taiwan, making them the largest group of foreign investors in Taiwan, well ahead of the next largest investors, the United States and Japan. “EU investment in Taiwan has exceeded $30 billion, far exceeding investments from the United States of $22.01 billion and Japan of $16.64 billion. The steady increase in investments over the past two decades indicates that Europeans remain confident in Taiwan’s economic prospects. Also, Taiwan rose five places on the list of the EU’s trading partners to 14th place, up from 19th place in 2009,” he said. Taiwan is of interest to European investors for a number of reasons, notably because of Taiwan’s important and dynamic role in the global economy, especially in global information and communication technology production chains. The country also has many other advantages such as a good transport and communications infrastructure, a relatively consistent legal system, a highly skilled and stable workforce, a functioning and affordable universal healthcare system and a good quality of life. These have been made possible thanks to sensible and progressive policies and programs made and implemented by the Taiwan government, although more needs to be done. Mr. Hoeglund noted that through a network of 28 industry and support committees, the Chamber has been successful in addressing specific concerns and providing concrete recommendations to all levels of government to facilitate improving the business environment. The ECCT annually publishes a series of position papers that comprise issues identified by its committees as hindering the further development of their respective industries and provide recommendations to the government of Taiwan for improvement of the business environment on general issues as well as industry-specific problems. They also serve to keep the European Commission, the European Parliament as well as the governments of individual European Union member states informed about Taiwan’s business environment. “Through lobbying government and formulating Position Papers, the ECCT ensures that the European agenda remains on the list of priorities of the Taiwan government. The government has taken our opinions seriously and taken action to improve the investment environment based on our recommendations. Since we began publishing position papers, we have seen progress made on an average of 20-30% of issues raised by its industry and support committees every year,” he said. The Chamber has a successful track record in promoting the business interests of European companies through communicating with all levels of the Taiwan government on a wide variety of business issues such as tax reform, labor standards laws, improved harbor administration and entry-exit regulations. Through regular committee activities, meetings with government officials and the formulation of Position Papers, the Chamber works with Taiwan's political and business leaders to ensure that conditions for European businesses in Taiwan continue to improve. “The ECCT's lobbying initiatives bring issues, which have an impact not only on European interests in Taiwan, but also Taiwan's economy and society, to the attention of the Taiwan government. Annually, we meet the government officials at least 70 to 80 times. We also frequently provide opportunities for members to meet with government officials, NGOs and the European Commission.” He also noted that recently the Chamber launched the Low Carbon Initiative (LCI). The objective of the LCI is to showcase and promote the best European low carbon solutions and practices in order to help Taiwan to meet its goals to reduce carbon emissions in Taiwan. The LCI will be structured based on its three main objectives arranged in three platforms: Advocacy with the Taiwan government on the best policies to reduce emissions; Best Practices - Showcasing European low carbon solutions ; and, CSR and Education - Raising awareness about low carbon solutions. Fourteen European firms from the Chamber have already signed up as founding members and have begun planning activities. This will include launching a website and holding seminars, workshops and a major exhibition and conference in June this year. European companies already contribute a lot in various fields towards energy saving, efficiency and consequently sustainability but, in order to reduce emissions, more effort is needed to increase Taiwan’s renewable energy installations and improve energy efficiency, especially in buildings, which account for up to 40% of Taiwan’s energy use. The chamber is also involved in the EU’s satellite development program. It has been granted funding by the European Commission as part of a consortium, called GNSS.Asia, of five European chambers (from China, South Korea, Japan, India and Taiwan) under the European Business Organisations (EBO) World Wide Network. The global navigation satellite system (GNSS) Asia project falls under the EU’s FP7 program and is linked to promoting technology development related to the Galileo satellite project. The GNSS.Asia consortium’s objective is to develop potential research and industrial partnerships between EU and Asian organisations, including Taiwan. Among the other recent initiatives, Mr. Hoeglund said that the Chamber recently commissioned Copenhagen Economics to conduct a follow up to its 2008 Trade Enhancement Measures (TEM) agreement study, which analyzed the case for a free trade agreement between the EU and Taiwan. The new study, to be conducted in the first half of 2012, will update the original study, taking into account important developments that have occurred over the past four years, including the Economic Cooperation Framework Agreement (ECFA) between Taiwan and mainland China and Korea’s FTAs with the European Union and USA. The original study made a clear case for a TEM agreement. The report on the study’s findings concluded that a trade deal would boost Taiwanese exports to Europe by €9.84 billion, in particular benefiting Taiwanese manufacturers of electronics and machinery and it would boost Taiwan’s annual GDP by €3.8 billion. The study also concluded that a trade deal would increase annual EU GDP by €2 billion while European exports to Taiwan would increase by €11.8 billion. Such a deal would therefore increase jobs and wealth in both Taiwan and the EU. Since the release of the original study report, the ECCT has been actively supporting a TEM by calling on the governments of both the EU and Taiwan to begin conducting studies and engaging in preliminary negotiations on a potential TEM, he said. In this context, he noted that his visit to Seoul from April 25th to 27th, along with an ECCT delegation was a good opportunity to learn about the FTA negotiations. The agreement was implemented in July last year, and the EUCCK played a very important role in assisting the European Commission. “The visit was part of the ECCT’s ongoing interactions with other chambers in the Worldwide Network of European Business Organisations (EBO). We visited Beijing in 2011 and Shanghai in 2010. During this trip, the delegation was briefed by experts from EUCCK and the EU’s representative in Seoul on details of Korea’s recent free trade deals with the EU and the United States. The delegation also had the opportunity to meet and exchange ideas with their industry counterparts to talk about business developments in their respective industries and regulatory issues in Korea and Taiwan.” He observed that many of the problems that EU investors face in Taiwain are similar to the issues faced in Korea prior to the FTA. For instance Taiwan has double-testing requirements and Taiwan-only standards, which have hindered imports of European electronics products, automobiles, pharma, cosmetics and other goods. Decisive action to harmonize Taiwan’s regulatory environment with international standards would go a long way towards improving Taiwan’s competitiveness and attractiveness as an investment destination, he noted. Speaking on the ECFA, he said that it is a preferential trade agreement between the governments of China and Taiwan that aims to reduce tariffs and commercial barriers between the two sides. The pact, signed on June 29, 2010, in Chongqing, was seen as the most significant agreement since the two sides split after the Chinese Civil War in 1949. The ECFA has been compared with the Closer Economic Partnership Arrangements mainland China signed with the Special Administrative Regions: Hong Kong and Macau. The deal is thought to be structured to benefit Taiwan far more than mainland China. The advantage to Taiwan would amount to $13.8 billion, while mainland China would receive benefits estimated at $2.86 billion. It is too soon to measure the full impact of the ECFA on European business but ECCT members have benefited from efforts so far taken to normalize cross-Strait business relations. The two sides signed off on an initial early harvest list of 539 products from Taiwan and 268 items from China to be exempted from tariffs starting on June 1st, 2011 and have since removed around 600 items from the list of products banned from import into Taiwan from China. This leaves another 2,126 items still subject to negotiation. Many of the items banned or restricted are manufactured by European corporations in China. The ECCT supports the move towards greater cross-Strait business normalization but the benefits of the opening up are being countered by the import ban or restrictions on the import of some 2,100 products manufactured in China. While the number of items on the list has fallen from over 2,700 last year, most of the items regarded as priority items manufactured by European companies in China remain banned or restricted. The ban fosters protectionism, hurts Taiwan’s own industry and consumers and works against the promotion of Taiwan as a regional hub. The ban on numerous models of cars and trucks manufactured by European automakers in China means that local consumers and businesses are deprived of superior quality vehicles at reasonable prices. “The ban on various motors and other electrical engineering equipment forces our member companies to source these products from alternative, more expensive production locations. This directly leads to a cost disadvantage when selling these products in Taiwan.” Lifting the ban and other restrictions would benefit businesses and consumers in Taiwan and make Taiwan more attractive to international investors. In turn this would boost Taiwan’s competitiveness. Tariffs currently in place are already low and the main benefits the EU would gain from a TEM would be in addressing non-tariff barriers (NTBs), just as the recent EU-Korea FTA has done. An EU-Taiwan TEM will be able to tap into the additional trade flows between Taiwan and Mainland China. Gains from an FTA will increase with the ECFA in place and subsequent agreements that would eliminate many of the remaining trade and investment barriers across the Taiwan Strait. Direct beneficiaries will be Taiwan-owned companies and JVs with European partners but ultimately all players will benefit from a more open business environment, he said.

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