Now is the time Indian companies should be pumping up their investments overseas: Richard Fenning & Patrick Lord
Interview with CEO and MD- India, Control Risks
From the Eurozone trouble and the ripple effect of the Arab revolution, to the issues relating to corruption and protests against nuclear power plants back home - India Inc is facing a new era of risk. An air of concern surrounds global players interested in India as well. But there are opportunities round the corner, points out Richard Fenning, chief executive officer, Control Risks, and Patrick Lord, managing director, India, Control Risks. In a recent interaction with Rajarshi Bhattacharjee, the duo emphasises on doing the right homework before exploring new horizons
Times have changed for India and Indian businesses are stretching across the world. While exploring new horizons, what are the common risks India Inc. tends to face or are facing now?
Fenning: It is broadly the second generation of Indian companies that are actually exploring the world and opening up to take risks. Indian companies tend to be characterised by their entrepreneurial ambitions. That's why they are willing to go to new markets even if that involves risks. It is one of the positive aspects of the Indian economy. But it's quite complicated collision of trends at the moment in the world — in the backdrop of quite difficult economic times. Although the situation seems to be improving now, the last year has been characterised by another financial crisis in Europe and North America, particularly in the Eurozone, and slowing growth in other markets including in India itself. At the same time, we're seeing a lot of geo-political turbulence in West Asia around the Arab revolution, the situation in Iran now and the situation in Syria. So, navigating further even for risk-taking entrepreneurial companies can be quite complicated.
How can ambitious Indian companies insulate themselves against the new risk landscape?
Fenning: It's a question of doing homework. A company must try to understand as much as possible about the situation and what it is getting into. International companies in the last few years have been desperate to get into the Indian market because during these years the growth figures have established India among the most dynamic countries of the world. Some foreign companies coming to India may have been tempted not to look into the details in the rush to get a piece of the Indian market.
If Indian companies are going elsewhere, the same rules apply. If you want to make successful long term investment beyond the borders, you really have to understand who are going to be a part of your trade, who are your partners in investment, the complicated local, political and business issues that are not immediately obvious but over time start having impact on your operations.
What are the industry-best practices to manage risk?
Lord: It goes back to part of what we are saying — about doing your homework at every stage of the transaction or investment you are looking to make. So, before you enter a market, you need to know what is the political environment, how stable is the government, the regulatory environment, what kind of laws can be a hurdle in itself for you. If you are looking at a country to form a joint venture, you would have to do much more research about the position of the partner company in the market, what is the competitive landscape, what's in its background, what's its track record, what's its political connection if you are looking at a market that's politically complex and opaque. And when you actually send people on the ground, find out which locations are the best in terms of the various risks we talked about. So, it's about research and homework at every stage of the process.
Again, during investments in projects, it is about how you make sure that your assets are adequately protected, about demonstrating adequate care to your people, because these things affect your reputation. Also worth considering is how much companies are exposed to reputation risks in an age of social media. That's ultimately why companies should do these preparations and researches to avoid any adverse impact on their reputation and balance sheet.
What, according to you, should be the focus of Indian companies in terms of risk management in a post-recession slump scenario?
Lord: I think it will help if we look at real case studies and real examples. At this moment there is a lot of buzz around infrastructure. Look at the amount of investment that is likely to go into infrastructure over the next 25-30 years-about a trillion dollars. Companies getting into the infrastructure sector need to be very aware of a host of issues that can come into play. There has been a lot of publicity around steel projects in the eastern side of India. If you look at some of the projects that are quite well covered in the press, they are having a whole gamut of issues — from local political forces that are at play to the active NGOs and other activist groups. Also, if you look at the social movements around nuclear power plants, some of them can lead to security risks to people and assets in these areas.
Can you talk about the kind of integrity risks that one must be wary of with reference to Indian businesses?
Lord: Integrity risk covers, in simple terms, corruption issues. Though it is not unique to India, but corruption has been in the news for a couple of years now — starting from the 2G scam, the Commonwealth Games, the Adarsh Housing Society scam in Mumbai and more. It is a real issue that companies need to be aware of and ultimately protect themselves against for a number of reasons. First, from an international regulatory point of view there are a number of laws now that can impose heavy penalties for companies that are found taking part in corrupt practices. Second, corruption doesn't make good business sense. Corruption is inefficiency and actually lures cost to business.
Talking about risk, a company can also be affected by its competitors that indulge in such practices. For instance, what you think is an open competitive tender process can be a loss-proposition in a corrupt scenario. Again, these are not problems unique to India; Indian companies come across similar issues when they invest outside India as well — in other emerging markets like Africa, West Asia. Companies need to be aware of how they can protect themselves, how they can counter these kinds of issues when they invest overseas.
At a time when economic uncertainties seem to prevail across the globe —take the Eurozone and the US — this a good time for the India Inc. to venture out?
Fenning: Of course, it's the right time. If you look at the state of the American economy, it's certainly improving. It's also the election year in the US; therefore the economy has been brought back on the track and it looks like the crisis has been dealt with in the Eurozone. It's a delicate situation. But if you look outside those two areas — say Africa, it is predicted to grow somewhat between 7 and 8 per cent this year, according to the International Monetary Fund. Look at a market like Nigeria that has suffered a lot from violent, volatile and corrupt market forces. But it is also true that it's a very attractive, very dynamic and entrepreneurial market. If you are careful, you can have successful business in Nigeria. Nigeria is predicted to grow by around 8 per cent this year.
It's the same story in many parts of Africa. But the reality of doing business on the ground is often a lot better, a lot different than how people actually understand it. Those opportunities exist and they have been taken up by the larger Indian companies. Parts of South East Asia, Indonesia offer very strong dynamic markets with healthy growth rates at the moment. The story of Vietnam is also very similar from a long-term point of view. Thus, I would say the opportunity lies in looking beyond the markets in Europe and North America and go to some of the markets that have so far been off-limits for companies. As Indian companies grow in their international experience, these are some of the markets they should be looking at.
Lord: If I can add here, now is the time Indian companies should be pumping up their investments overseas particularly against the backdrop of the hints from the recent Union Budget that there aren't any major reforms expected in the next two years, probably till the next general election — it's just a political reality. So on the issues like land acquisition, FDI in retail etc not much is likely to change. Now is the time for companies looking for growth to explore possibilities in emerging markets.
Taking it from here, how do you assess the Asia-Pacific region? What are the new trends emerging in this region?
Fenning: I mentioned some of the South-East Asian countries — Indonesia, Vietnam etc — all these countries have performed well over the last few years. Thailand has been affected last year by the floods. But generally speaking South East Asia still holds enormous opportunities and of course Indian companies are deeply familiar with that part of the world for historical reasons. We should look at the increasing bilateral trade between China and India — China is now India's largest trading partner. The world market has been reshaped in the last few years and the Asia-Pacific region holds immense possibilities for Indian companies aiming to venture outside.
What is it that the global investment community is looking for in India? Where does India stand in terms of offering the facilities global players coming to India expect?
Lord: I think companies come to India with different business reasons and these reasons evolve as time goes on. Traditionally, India is seen as a rich source of human capital, for services companies and of course that's been a major part of India's growth story. But it now goes beyond that — it is moving up the supply chain and offering to the world value added services in terms of research and development.
It's a country of 1.2 billion and comprises a large growing consumer class that no company can actually ignore. Combine that with the demographic dividend which is again an over-used phrase, but the fact is you have 40 to 50 per cent of the population in the age group of around 25 years. This is a tremendous opportunity — this is the kind of work force the country will have. The challenge will be with the government in terms of education and creating jobs. The important thing is, despite the slowdown that we have seen over the last 18 months, companies interested in India are taking a long-term view and are actually becoming encouraged by the strong market fundamentals that you see here.
Now is the time Indian companies should be pumping up their investments overseas: Richard Fenning & Patrick Lord
