Internationalisation is the priority

Indian firms need to engage with global peers in their production reconfiguration

Large Indian firms, on average, did rather well in the recovery from mid-2020. Private investment growth has shown a unique recovery when compared with the preceding decade. This strong performance has been assisted by a nice exports boom. But the main elements of global macroeconomics have now changed, resulting in weaker exports growth. There remains an important window of opportunity for India to play a bigger role in the global stage. This is a time for strategic thinking in Indian firms to push the accelerator on firm internationalisation to harness the global mega trend of shifting production away from China.

The sales and operating profits of large Indian firms, expressed in real terms, have been sluggish for a while. These firms did rather well in recovery from mid-2020. Firm productivity went up through management practices that absorbed and exploited the digital transformation in the work-from-home environment. Large firms, which have greater organisational and financial depth, gained share at the expense of smaller firms, who lost heart. And, India benefited from a nice exports boom.
 

Back in 2020, there was a simple story about the exports boom. The developed markets’ (DMs’) macroeconomic policy mightily fought the pandemic downturn with a monetary and fiscal policy stimulus. The DM households were stuck at home, unable to buy many (non-tradeable) services, and their expenditure profiles emphasised tradeables. This generated an imports boom in DMs. Firms in India were beneficiaries of that boom. The strategic picture for Indian firms in 2020 was one where local demand was stuck and export demand was booming. This was a time for the leadership of Indian firms to allocate financial and human resources into exports and foreign direct investment (FDI).

That story played out for 2021 and 2022 and has now ended. The DM fiscal policy has returned to careful levels. Its monetary policy is now fighting to rein in inflation. The DM households are out and about, rotating their consumption basket away from tradeables, like exercise equipment to non-tradeables, like gym memberships. The best measure of Indian exports — the monthly data for exports of goods and services excluding petroleum products and gold — has been stuck at about $55 billion a month for five months. 

Illustration: Ajay Mohanty

The mega trend of the world now is the reconfiguration of production away from China, with finance, FDI, and sourcing retreating from the Asian giant. We should get our minds away from the practical drama of the supply chain disruption — which is largely subsiding — to the grand phenomenon which is the reconfiguration of global production. This reconfiguration will not be swift and easy, given the immense size of the Chinese economy and its central place in global production. But the phenomenon is underway and has important implications to build best firms in India.

Some think that India is an irrelevant corner in global production and will not harness this mega trend. There is a belief too that India is the only large alternative for low-cost production outside China, and will inevitably harness the bulk of the transition. The truth, though, lies in between. A large shift away from China is underway and India can perhaps harness 20 per cent of this, which adds up to very large numbers. 

The exports boom of 2020-21 was a relatively simple environment for Indian firms. Global buyers urgently wanted more widgets, it was a matter of doing the business development to land export orders. A tactical / execution orientation sufficed in that period to snarf deals, obtain raw materials, and transport products. Now, it is a slower and more strategic process where the leadership of global, financial and non-financial firms is finished with the fire-fighting of the pandemic, followed by war, and is carefully reconfiguring their organisations to reduce their exposure to China.

Global firms are making decisions about strategic partners and production arrangements: A slow process that is imbued with care. Indian firms need to rise to the level of materiality in this planning process. There is some anecdotal evidence about global firms even accepting prices worse than “the China price”, in the short run, in order to reduce the share of China in their production.

The role of India in globalisation can go up by 10 times as global firms play out their strategic quest for this grand reconfiguration. The priority for Indian firms is to become strategic partners in this process. We in India should not take our eyes off the firm-internationalisation ball on the grounds that exports growth has been weak in the latest five months of the data. The mega trend — of the big decisions in altering the organisation of global production — is alive and well for about three years. This is the disruptive period — the window of opportunity — where there are opportunities for Indian firms as big decisions are being taken at global boards.

The puzzle for Indian firms is to walk up the ladder of quality, from domestic orientation to exporting to FDI. It takes effort to launch initiatives for achieving stage 1 (over 20 per cent of revenues coming from overseas) and then stage 2 (at least 20 per cent of revenues from outbound FDI) of firm internationalisation. Each of these stages of firm maturity requires investment of human and financial resources. The better firms tend to take the plunge on these objectives. When these initiatives succeed, two benefits are obtained: Higher productivity, and a vastly enhanced and addressable market. The top 1,000 Indian firms should be applying these two tests. Are we at stage 1? Are we at stage 2? And for the firms where these two beachheads are not in place, how should these initiatives be constructed?

Indian firms need to change themselves so as to become trusted participants in global value chains. They will require establishing legal persons in advanced economies, recruiting locally, and establishing a personal rapport with the leadership teams of global firms. The Indian diaspora is present in these leadership teams and can assist this process of trust-building. Trust capital in leadership teams across the world and the willingness of Indian firms to reshape themselves will determine the outcomes.

The writer is a researcher at XKDR Forum