Eyes on India & Latin America

In two separate conferences this spring, Wharton students, business leaders and government officials discussed the major economic and political forces shaping today’s business environment in India and Latin America.
Surindha Talwatte, a student organizer of the India conference in March, and Alejandro Bulgheroni, a student organizer of the Latin America conference in April, invite others to share in the economic progress of their respective regions.

It’s the Right Time to Do Business in India

By Surindha Talwatte, WG’97

For centuries India has been the destination of philosophers, explorers, buccaneers and adventurers. The prizes they sought ranged from jewels and spices to philosophy and spiritual enlightenment. After a relative lull in India’s most recent history, the influx of foreign visitors has begun to swell once again. This time they are in search of corporate profits. General Electric, General Motors, Texas Instruments, Motorola, Coca-Cola, Pepsi, Philip Morris, Daimler Benz and AT&T have together committed to India more than $5 billion of investment capital in the last few years. Additionally, India’s stock market has seen unprecedented levels of foreign institutional investment. More than $1 billion has come in during the last three months alone following Morgan Stanley’s rating of Indian opportunities as investment grade.

Foreign institutional investment (FII), while welcome, can be withdrawn rapidly, so how solid is this Indian resurgence? One clue comes from looking at the investor profile. There are the traditional large-scale emerging market investment funds, although the current crop is now greater in number and spending more money than in the past. There are more foreign direct investment (FDI) and joint venture relationships than before. And finally, there are the growing ranks of erstwhile émigrés and wealthy non-residents. These increases in FDI, joint ventures and individuals seeking to commit resources over the medium- to long-term provide the best proof that this time, the Indian economic giant is truly awakening.

Many foreign and joint venture companies are doing well, including Hindustan Lever, General Motors, Ford, Nynex, Raytheon and investment banks such as Morgan Stanley, Jardine Fleming, Merrill Lynch and Goldman Sachs (and some not so well; witness Enron’s recent difficulties). For the uninitiated India presents dazzling complexity. This nation of more than 900 million people speaks 20 separate languages in several hundred dialects and follows 25 major religions. Basic differences are compounded by ethnicity, caste and regional variables. India is a market with enormous potential , but it is clearly not an easy one.

Many of the issues shaping India today were discussed at the inaugural conference of the Wharton-India Economic Forum (WIEF), whose theme was “India, Opportunity of the 21st Century.” The conference brought together business leaders from India, the U.S. and beyond to share their insights with 120 corporate delegates and more than 200 students and faculty. Guest speakers included Victor Menezes, CFO of Citicorp and Citibank; Anil Ambani, managing director of Reliance Industries; N. Vaghul, chairman of Industrial Credit and Investment Corporation of India ICICI; S.M. Datta, chairman of Hindustan Lever; Deepak Parekh, chairman of Housing Development Finance Corp.; Robert Staley, chairman of Emerson Electric Asia Pacific, and Roger Davis, managing director of Jardine Fleming India. More information on this ground-breaking event is available on the WIEF Web site at http://dolphin.upenn.edu/~whindia/

The consensus of the conference was that inflation will remain between 9 percent and 10 percent in the coming year, with GDP growth settling just below 6 percent. The conference distilled the myriad issues facing India into two main areas: the need for infrastructure and the need for growth capital.

Laying the Groundwork for Growth

Currently the competitiveness of Indian industry is handicapped by bloated supply chains, inflated work-in-process inventories, extended lead times and reduced responsiveness. These effects are due to infrastructure problems ranging from irregular power supply and unreliable telecommunications networks to inadequate roads. Infrastructure development will provide huge investment opportunities and help improve the competitiveness of Indian firms by establishing a more reliable operating environment. Estimates predict infrastructure investment of some $500 billion over the next ten years. Increased liberalization, greater private sector participation, and the adoption of market-driven pricing will increase competition and service levels, and maximize fund raising efforts.

The government has created the plans for a system of national highways to connect all major cities. Private investment is being encouraged by allowing the operation of these roads as toll highways. Daewoo, Hyundai and a number of European contractors have already expressed interest in the project. The first phase of construction will be fully underway by 1998. Project completion is scheduled for 2005.

With the foreign limit on ownership of joint venture companies raised to 51 percent, telecommunications companies from around the world have been struggling over the landline and mobile sectors of the Indian market. Reliance Nynex, HFCL Shinawatra of Thailand and HFCL Bizeq have secured many of the landline rights. Other winners include Tata, Hughes and the Ispat steel group. On the mobile front, AT&T and the Aditya Birla Group and US West and BPL are already operating cellular networks in Bombay, New Delhi, Calcutta and Madras.

The power sector has been liberalized, with each state given the responsibility to attract investors. While encouraging the use of renewable resources where appropriate, the government is pushing for the development of gas, coal and oil fired power stations as the power generating mainstay and is continuing research into nuclear energy. Regular, efficient power supply will go a long way to improving the operating environment for businesses in India. The major companies working in this sector include Tata, The Bombay Suburban Electric Supply Company, Calcutta Electric Supply, General Electric, Siemens, ABB and Enron.

While there is much work already underway, new projects in the telecommunications, roads and power sectors, together with the development of railways, ports, airports and water supply, will provide large-scale investment opportunities for years to come.

A Capital Investment

India needs tens of billions of dollars of capital investment per annum to sustain her present rate of economic growth. Currently the capital markets and local financial institutions can generate much of this requirement, but as growth continues the annual shortfall will increase. The government must create the economic climate and incentives necessary to increase foreign investment.

In the meantime, how should an investor assess the risks of doing business in India?

For those making a comparison with other developing economies, it is important to note that India has remained a democracy since it gained independence in 1947, has a well-developed legal system and a truly free press. Despite occasional problems, India’s diverse population has a history of cultural tolerance and acceptance. The problems of religious and ethnic violence, nationalism and age-old border disputes at first sight bear some resemblance to the tragic situations in eastern Europe and the former Soviet Union. In fact they are far less bitter and far more likely to be ameliorated by improved economic prospects for all.

Increasing internationalization, the weakening of the caste system and the increasing role of women in society are all pulling India forward. In a country once dominated by Maharajas, perhaps the most significant social trend is the growth of the middle class. This aspiring group is ambitious, hard-working and business oriented. It is providing India with a growing market for consumer goods and a core of entrepreneurs that will only strengthen her economy. The Bombay night now throbs to the beat of clubs such as the Cellar, 1900’s and Cyclone’s. While social change is far slower to reach India’s rural population, Pepsi, McDonald’s and MTV together with the more fundamental agents of change are beginning to weave their transformational spell.

A perennial fear that has kept investors away from India in the past is concern over corruption. Recent years have seen a crackdown in which the leader of the opposition and four ministers were indicted for taking bribes from an industrialist. It is significant that the anti-corruption campaign started at the highest levels. This should give reformers sufficient credibility and momentum to carry their efforts into every level of society.

India has just finished going to the polls, and the count is in — no mean feat in a country where the number of people actually voting exceeds the entire U.S. population. Narasimha Rao’s reforming government was soundly defeated. No party achieved a clear majority and while a number of political coalitions are forming, it is unlikely that reform will be derailed. Atal Behari Vajpayee, head of the Bharatiya Janata Party (BJP), was invited to form the new government. However, his tenure as India’s 13th prime minister was shortlived. Fears that the BJP’s Hindu nationalist views may increase ethnic and religious tensions led to the formation of an opposing coalition headed by Deve Gowda. Gowda’s United Front forced a no confidence motion, and Vajpayee resigned in the face of certain defeat. Gowda was sworn in as prime minister on June 1 and given 12 days to secure a vote of confidence for his 13-member coalition of regional and national parties. While not an enthusiastic reformer, Gowda strongly supports foreign investment. Further, the inclusion of regional parties in decision-making will ensure that India moves forward together. The important point here is that the forces driving India’s future are those of economic reform and fair, open debate.

In conclusion then, the economic outlook is promising. India’s infrastructure is being geared up to meet the needs of her growing economy. The capital markets are being reformed to encourage internal and external capital investment and efforts are being made to curb corruption.

Reform will in all probability continue and further economic progress is likely to lessen the religious and ethnic unrest. The strong foundation built by Narasimha Rao’s government and the sheer momentum of the middle classes suggest reform will succeed. India is far closer to delivering her promise than others who are part of the new emerging market. There are many risks and uncertainties and the learning curves are daunting, but the richest rewards have always demanded the greatest reserves of vision and courage. Foreign investors with an eye to the future should take note, and take action before they miss out on what will surely be the opportunity of the 21st century.

Surindha Talwatte, WG ‘97, is a civil engineering graduate of the Imperial College of Science, Technology and Medicine in London. He came to Wharton after working for Midland Bank plc and the Hong Kong & Shanghai Banking Corp. in London and New York. Talwatte is working for Goldman Sachs in London this summer and intends to work in the investment sector in South Asia and the ASEAN region once he graduates from Wharton. He was born in Sri Lanka and grew up in London.

Latin America: Partnering for the Future

By Alejandro A. Bulgheroni, WG’96

The theme of last April’s Latin American conference — “Partnerships for the Twenty-first Century” — sums up the view of many of the conference organizers: That this region of the world will grow and prosper only through forming partnerships across countries and across firms.

Over the last few years, many Latin American countries have tried to reform their economies by pursuing policies of deregulation, tariff reduction, privatization of state-owned corporations and reductions in government spending. Although some countries are further along than others, the speed with which change has been occurring is truly astounding. New ways of doing business are evident in everything from the retailing environment to the telecommunications industry. However, to harness the full potential of Latin America’s opportunities, certain additional steps must be taken.

In order to visualize the magnitude of the need for change, let us go back a few years and look at the world from the perspective of a firm operating in a closed economy with accelerating inflation, as was the case in most Latin American countries. The single most important element in a firm’s success was how it played the financial markets. The way in which managers handled the firm’s funds could easily mean a 50 percent gain or loss. Reducing costs or even increasing sales by 10 percent was not worth management’s time or energy. Reengineering? It wasn’t important. Customer service? Why bother: Customers have no choice but to buy our products and they better do it fast before their money loses value.

Now, let us fast forward to the present. In Argentina, for example, the past few months have seen a slight deflation in prices. This means that merchants are discounting to increase sales and customers are shopping around for the best bargains in the market. Concepts such as optimizing costs and gaining market share have become essential parts of doing business. Firms are starting to compete for clients.

From their unique perspectives, each of the speakers invited to the Latin American Conference shed greater light on what growth and progress in the region will entail. “The difficulties in Latin America are the opportunities for you,” stated Jorge Paulo Lemann, chairman of Banco Garantia of Brazil, who opened the conference by sharing with his audience the key elements of accomplishment in Brazil. He presented a video in which he alternated examples of his management style at Banco Garantia with clips from the last World Cup soccer event. The video keyed in on both the goals scored by the Brazilian team and the emotion that followed. By “doing things well,” the message went, the “partnership way” will lead to a successful future.

For Jorge Paulo Lemann, doing things well means establishing a meritocracy with continuous flows of information and communication, unbiased performance evaluations and compensation systems which allow employees to share in the firm’s profits. Nothing out of the ordinary, one might think. But that, of course, is the point. The fact that Lemann has applied these “ordinary” management concepts places him a step ahead of most others in Latin America. He has literally torn down walls and applied his formula — with huge success — in several industries, such as banking, beer brewing and distribution, and mass retailing, to cite a few.

Arely Castellon, another conference participant and general manager of the Americas of Global One, a worldwide joint venture between Sprint, Deutsche Telekom and France Telecom, spoke from the perspective of European and U.S. companies looking at Latin American markets. Castellon views the region’s difficulties — such as low teledensity levels, weak infrastructure and small share of global telecommunications — as great opportunities for Global One to generate revenues and grow. As competition comes to the telecommunications industry, countries such as Chile, the Dominican Republic, Argentina, Colombia, Mexico, Peru, Venezuela, Brazil and others will provide immense opportunities for capturing market share. For Castellon, particular knowledge of the market and profound cultural awareness are essential controlling factors that determine success in each individual country.

As the conference progressed, speakers also addressed Latin America’s current economic environment. The financial crisis triggered by the devaluation of the Mexican Peso more than a year ago is proving difficult to overcome. However, as governments follow through on tough political decisions to counteract this crisis, they gain credibility. Argentina, for example, responded by raising taxes and maintaining its economic direction. Mexico responded by drastically cutting its government expenditures. A decade or two ago similar circumstances would have been devastating; today they are only challenging.

The Importance of Privatization

Throughout Latin America, countries have achieved varying degrees of progress in reforming their economies, with differing levels of success. Luis Carlos Mendonça de Barros, president of BNDES, the Brazilian Development Bank, spoke about how Brazil’s privatization process — which is in its early stages — is vital to lasting reforms. In Argentina, many of the industries have been deregulated and privatized very fast and change now needs to be solidified. Peru has shown impressive progress. Chile started its reform process long before any other country in the region, overcame early difficulties and consolidated its reforms. As a result, it has been rewarded with sustained growth over the last decade.

Toward the close of the conference another facet of this vibrant and explosive region was discussed. Latin America has been, and will be, a laboratory for the development and implementation of new ideas. The fast pace of change and the nature of the challenges faced are strong drivers for arriving at creative solutions. José Piñera, current chairman of the International Center for Global Pension Reform at the CATO Institute in Washington, D.C. and former Minister of Social Welfare of Chile, described the design and progress of the pension system reform which he implemented. Today, the average Chilean worker’s largest asset is the net balance of his/her pension savings account. The system gives workers the freedom to choose when they wish to retire, and, equally importantly, has created an industry of institutional investors who have provided depth to the Chilean capital markets. The Chilean capital markets have, in turn, financed the acquisition by Chilean firms of utilities and other companies privatized in other Latin American countries. It is estimated that by the year 2005, the aggregate pension fund system will be as large as the entire Chilean GDP. Meanwhile, Piñera’s pension fund system has been adopted in other Latin American countries and studied by U.S. pension experts. It could eventually become a world model for modern social security.

More than 500 students and executives gathered to participate in the Latin American conference. Those assembled were encouraged by multiple examples of successful business stories as well as warned about the possible obstacles. At the end of the day, one thing was clear: While most Latin American countries are clearly interested in economic reform, the way the reforms are carried out depends on the unique historical-political-cultural characteristics of each country. The business leaders who bring modern management practices and develop a sensitivity to the cultural differences among countries will be the winners in this region rich with opportunities for investment and growth.

Alex Bulgheroni grew up in Argentina and is now a management consultant for The Boston Consulting Group in Buenos Aires. Before coming to Wharton he studied industrial engineering at Lehigh and worked in Argentina as a reservoir engineer in the oil and gas industry.

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