The impact of foreign investment in the consumer goods sector has been far greater than FDI inflows suggest.
Crush, McDonalds, Mercedes, Samsung, Revlon. For the average Indian in the eighties, these names would have been visible only in foreign magazines. Liberalisation has helped make them prominent on Indian retail chains.
Ironically, though investments in Indias consumer goods industry do not match the kind of mega-money in the infrastructure sector (see page 3), the signs of foreign entry have been most visible here. Also, the small investments in no way reflect the impact foreign brands have had on the sectors they have entered.
Automobiles: A year ago, when the first Cielo appeared on Indian roads, it attracted more than its share of attention. But it soon had to share the limelight with the next new car. That process has been repeated several times over by now. From just three players in the passenger car segment six years ago, today there are eight players from Mercedes Benz to the Fiat Uno. At least three more players, Hyundai, Honda and Mitsubishi, are slated to come in within two years.
Of the Rs 8,500 crore invested in this sector in the past six years, foreign auto companies account for over 60 per cent. Industry sources expect investments of over Rs 20,000 crore to come in over the next five years. Production capacity is expected to double from around four million units in 1996 to around eight million units by 2000.
A lot of the fresh investment will come from new players like BMW, which plans to bring in its 5 series models, Skoda Auto, the Czech subsidiary of Volkswagen which has tied up with Eicher Goodearth, and Hyundai, which has slated a total investment of over $1.3 billion in India including a $700 million factory in Tamil Nadu.
Apart from passenger cars, investments are also being made in the heavy vehicle segment, currently dominated by Telco and Ashok Leyland. The Swedish automobile giant, Volvo, plans to invest $75 million in a truck factory. It expects to start production by 1998 and produce 4,000 trucks a year by 2000. Ford also plans to enter this sector.
Not all of the approved investments has come in yet. Ford had slated an investment of $800 million to set up manufacturing capacity of 25,000 Ford Escorts and one lakh Fiestas but this will come in a phased manner as its Tamil Nadu plant goes under construction. General Motors has invested around $100 million in its Halol production base.
Most of the new players have entered the mid-size car segment, which from offering just the Maruti 1000 and Esteem earlier has become overcrowded today. But the mid-size segment accounts for just 15 per cent of the total automobile market in India.
The point about all these new entrants is that for the first time, Indian buyers dont have to face chronic shortages. According to the Federation of Automobile Dealers Association (Fada), the automobile industry grew by 16 per cent in the first eight months of 1996-97 over 1995-96. But says one dealer, Even if you assume that demand will grow by a healthy 15 to 20 per cent, you still face a situation where the supply far exceeds demand.
The new players have certainly picked up market share but they are only bound to given that they started with a zero base. According to Fada, based on the April to November 1996 sales figures, DCM Daewoo Motors had a market share of 4.89 per cent, Opel Astra a 4.2 per cent share and Peugeot 1.62 per cent.
However, most of these players will need to sell a minimum of 15,000 cars a year, say industry sources, to be viable. With most of the new entrants struggling to achieve this, it will be rough going for at least the next three years.
In fact, it seems that the players have overestimated the size of the Indian market at least in the short run. Moreover, the Indian market will always be a price-sensitive, value-for-money market with the growth being the highest in the small car segment. Thats why Maruti is not unduly ruffled by the competition yet though Daihatsu plans to bring in a small car.
Consumer electronics: This sector has seen a host of new players coming in from Sony and National Panasonic to Samsung and Lucky Goldstar. Most of them have entered the top end of the market
It will, however, be a while before the consumer electronics majors are able to rake in the profits from India. In fact, the consumer durables industry has been facing a massive downslide in the last year. The refrigerator market, for instance, has remained at around 2.2 million units last year. The case is the same for the air-conditioner market.
The colour television (CTV) industry too has grown sluggishly with industry majors like BPL and Onida facing a severe cash crunch and inventory problems. The result has been a crowding of shelfspace and a merciless fight for market share.
Yet, the foreign majors are optimistic. According to R K Caprihan, deputy manager, Samsung Electronics, CTV demand can go up from the current level of two million units to five million units in the next two to three years. He expects that this will happen only once liberalised policies and lowered import duties bring down the price of consumer goods.
Samsung Electronics, part of the $87 billion Samsung group of South Korea, plans to invest $630 million over the next two to three years. The investment will be for audio and video products, white goods, telecoms systems, telecoms products, information systems, electric parts and colour picture tubes.
Like the other MNC CTV players, Samsung too has fared well, picking up market share at the expense of local players. In 1995-96, the multinationals together accounted for less than 10 per cent of the CTV market. That figure is slated to go up considerably this year.
According to industry sources, in the north, Samsung had a 7.6 per cent market share in April-October 1996. This has reportedly risen to 8.5 per cent now. Thompson picked up a 4 per cent share of the southern market in this period.
MNC entry has affected marginal players the worst. In the CTV market, smaller Indian brands like Crown have lost ground to new players like Akai, Sony and Goldstar. Besides, the multinationals entry and increased competition among local players has resulted in a price war. In the CTV segment, this has resulted in wafer-thin margins for all the players.
With falling volumes, this has only further eroded bottomlines.
Liquor: The opening of the Indian economy has certainly opened up the highly regulated Indian liquor industry. In the last four years, as many as 21 new players including International Distillers & Vintners (IDV), United Distillers, White & Mackay, Seagram, Hiram Walker and Bacardi Martini have come into the country.
On the spirits front, the market has certainly expanded in these four years. For instance, the seven-lakh cases per annum scotch market in 1993 was accounted for by 1.5 lakh cases legal duty-free, 1.5 lakh cases personal imports, 2.5 lakh cases smuggled imports and 1.5 lakh cases counterfeit. Today, around one lakh cases of scotch are bottled in India.
Says David W Jones, chief executive officer, United Distillers, which has a 50:50 joint venture with UB and has invested Rs 150 million in India in the last two years, We believe this has reduced both smuggled and counterfeit by around 50,000 cases each. Our prime target is to convert the rest of the smuggled scotch and counterfeit scotch market to locally bottled scotch.
Scotch accounts for just over one per cent of the IMFL market, which is estimated at 50 million cases, and only a minuscule part of Indias liquor market.
While the market has expanded, the new players havent really been able to carve out a large share for themselves or upstage Indian majors like the United Breweries group and Shaw Wallace. Says Vashu Khubchandani, partner, Mohan Distributors, Excepting IDV, none of the players have been able to garner a share.
One reason for IDVs success is its early entry into the market. Besides, it is a multi segment player, having products from regular to the scotch segment. Another multi-segment player that is making a mark is Seagrams. Although UDI is currently only in the scotch segment, Jones plans to introduce products like Gordons Gin, an American Bourbon style whisky, among other brands, over a period of time.
Pricing will always be crucial in the Indian marketplace. Ashok Desai, area sales manager, Hindustan Breweries & Bottlers Ltd, points out that one reason many of the foreign players havent fared well in the IMFL segment is because they priced their products above the Indian brands. The price-sensitive Indian market will never accept that, he says.
So what does the future hold for the foreign players? Industry sources feel while the demand is huge only multi-segment players who can match the marketing and sales infrastructure of their Indian counterparts will survive.
Food and beverages: Suddenly, the capital seems to have acquired a taste for international cuisine. Last November, the famous US restaurant chain Thank God Its Friday or TGIF opened shop there as did PepsiCo Restaurants Internationalss Pizza Hut. Just a month before that, McDonalds laid out its burger feast. Much earlier, in January 1996, Dominos Pizza, the other famous American pizza chain, had set shop in the capital.
Yuppies elsewhere arent starving either. Bangalore saw the opening of the first Kentucky Fried Chicken outlet from the PepsiCo stable in 1995. Last June, PepsiCo also set up a Pizza Hut outlet in Bangalore. And theres McDonalds in Mumbai as well.
But while the food industry is seeing a whole lot of high-profile players, the investments are still small. For instance, TGIFs parent firm, Friday Hospitality Worldwide, hasnt really entered the country. Instead the Punj Lloyd groups Bistro Americana acquired the business development rights for the TGIF brand from its parent company.
Actual FDI has come in from players like PepsiCo and McDonalds. McDonalds has entered India in a 50:50 joint venture with Delhi-based real estate developer Vikram Bakshi, with the Indian partner investing Rs 25 crore. PepsiCo plans to spend $40 million or Rs 140 crore in India over next seven year set up 30 to 40 KFC and Pizza Hut outlets.
But the major investments have so far come in the beverages sector with cola majors Pepsi and Coca-Cola conducting their famous international battle in India as well. In fact, these two were the ones to change the beverages industry right from buying out existing players Coca-Cola has a 64 per cent market share including erstwhile Parle brands like Thums Up to modernising bottling plants, improving crate and bottle designs and even introducing pallet loading of trucks.
Now, the industry may see a further shake-up if Coke has its ways with the bottlers. Right now though, Coca-Cola has a fight on its hands with its 26 odd bottlers forming a federation to fight Cokes plans to set up two bottling companies, through Coca-Cola South Asia Holdings.
The move is part of Coca-Colas strategy to increase the current pace of 20 per cent growth in the 190 million cases per annum Indian soft drinks market so as to expand the whole market. In fact, Coca-Cola recently received FIPB clearance for investing $700 million over the next ten year. Cokes plan to expand its current distribution strength from 3 lakh outlets to expand to 6 lakh outlets alone will require investments worth Rs 1000 crore.
The beverages industry has also seen the entry of players like Cadbury Schweppes, which entered the country in 1994, and is focusing on the non-cola segment.
According to Ashok Jain, vice-president and country head, beverages, Cadbury Schweppes Beverages India Pvt Ltd, the company has so far brought in Rs 14.45 crore into the country. It has acquired FIPB clearance to invest $15 million in India, which are slated for a concentrate and a bottling plant. But these plans are still at an early stage.
So far Schweppes has penetrated nearly 40 per cent of the beverages market, with 12 bottlers in 14 states. However, it has been able to build a 4.5 per cent share of the total Indian beverages market. Jain expects to carve out a 10 per cent market share within the next 5 years.
Cosmetics: With the entry of multinationals like Revlon, Benckiser and Oriflame, the Indian cosmetics industry has expanded to include new categories of products from foot creams to sunscreen lotions.
According to N Chatterjee, general manager and chief operating officer, with Revlon India is a very important developing market with one of the lowest per capita consumption of cosmetics. It is a significant market for the future. This market is growing and going to grow rapidly.
According to him, Revlon has already taken almost 15 per cent of the market share in value terms. However, it plans to be a niche player in the premium segment.
Players like Oriflame on the other hand are innovating marketing in the Indian cosmetic industry. Oriflame is a solely direct marketing player and has no retail sales yet it has been able to create a name in urban markets like Mumbai and Delhi.
While the base for cosmetics is still small in India, the global majors are confident of the market potential. They are even talking of over 35 per cent growth in emerging categories like deodorants and sun creams.
(Additional reporting: Vinay Pandey, Vikram Bhat, Rakesh Sharma)
