Saturday, June 2, 2012


There is a synergy between the need for more foreign investments and vast size of the markets in India and China. While many trans national food and beverage companies are eying the potential for expanding their business in these high population countries, the governments are bending backwards to accommodate them through a slew of facilities and friendly policies expecting that their operations would generate vast employment opportunities. What is missing in these calculations is whether the style and practices adopted by the business models transplanted into these countries really serve the purpose and probably this factor can account for failures of many foreign companies in these tradition bound societies.

Recent policy fiasco reported from India regarding the flip flop in deciding on the issue of FDI in the retail sector supports such a view. Government of India fell for the propaganda that FDI in retail could be a "bonanza" for the country and declared a policy, rather prematurely, to allow majority investment by foreign retailing giants, only to keep the policy in abeyance after encountering fierce opposition to such an open door policy from most stake holders involved in the economic development of the country. Most intriguing argument in support of allowing FDI in multi brand retailing was that it would help the farmers to get more price for their produce which has never been proved any where in the world. Rather the perceived damage that can be caused to small traders and unorganized retail players by the enormous economic clout of MNCs was overlooked causing such a massive resistance in the country against the open policy being advocated by government supporters. 

China has been cited as an example of what a country can achieve by courting MNC retailers because most international companies are now operating in that country under its liberalized but tightly controlled investment policies. It may be true that China was able to attract vast foreign investments in almost every manufacturing sector because of its huge population and rapid economic growth. But no realistic assessment has ever been made about the trials and tribulations faced by them in operating in an environment not considered very friendly. It is now realized by many of them that the safety enforcement in China is often selective with the local industry getting away lightly for committing serious violations while foreign companies are hauled up even for minor faults. Examples are many which include Melamine tainted milk, toxic cabbage episode etc. It is another matter that the resource rich MNCs are able to "manage" the situation with no one quitting the country on account of stringent enforcement of country's food laws. 

A reputed MNC coffee player has shown how a foreign entity can survive and even flourish in the Chines environment by subtle changes in product profiles to suit the local tastes and by playing on to the Chinese aspirations to be in the lime light in the society. This company realized the folly of trying to persist with the same products that work in the U.S. and accordingly developed flavors, such as green tea-flavored coffee drinks that appeal to local tastes. Rather than pushing the system of take-out orders, which account for majority of American sales, it adapted to local consumer wants and promoted dine-in service. By offering comfortable environments in a market where few restaurants had air conditioning in the late 1990s, their outlets were made a defacto meeting places for executives as well as for the gathering of friends. One of the features of this model is that revenue per square meter turned out to be far less compared to American operations but the profit margin became almost double. Chinese do not seem to be unduly bothered about the fact that the coffee preparations offered here cost much more than that in the US. This is in sharp contrast to other major foreign players who tried to cut down on the price to garner higher sales, a strategy that does not seem to be working for improving their market share.

Another issue that clouds the working of foreign firms in China is the ability of these investors to "manage" the employees without significant attrition. It is reported that average attrition rate in China is running as high as 30% which is a major handicap in running a decent show. Those who succeed in China have been able to reduce the turnover of personnel to less than half of the average rate through good compensation packages, intensive training, decent working environment and building loyalty through motivational policies. With GDP of the country growing at a frenetic pace and more disposable income in their hands, Chinese seem to be prepared to spend liberally on any thing that reflects a higher status in the society. Naturally such economic changes generate higher aspirations among working class also and unless the salaries match with these expectations, attrition rate is bound to be high in organizations which do not look after the local employees well.

Any strategy based on mass marketing of cheap foods and working on thin margins is vulnerable to severe competition from local players who have low over head expenses. Besides, MNCs getting into cheaper segments of products spend enormous amounts on their promotion and the market so created benefits local players also peddling same type of products. Taking the case of India itself if the MNCs think that they can corner the market and displace millions of the so called low end "mom and pop" stores spanning the entire country, it is just not going to happen. If the recent experience of big domestic retailers in India is any indication penetrating the retail market is not an easy task and large domestic players in the organized retail sector have not been able to capture even 5% of the national market, let alone dominating them! The strategy of targeting the "creamy" layer of the society with lot of money to throw around may be the only right approach, if foreign investors want to survive and flourish in the newly emerging economies like China and India.

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