This post is part one of a two-part series on local partnership models in India. These posts have been developed carefully based on FrontierView’s numerous interactions with clients and experts and will have significant value for senior executives of western multinational companies operating in India. Next week’s update: Evaluate your partnership strategy for India using FrontierView’s three-step process.
Local partners are crucial to multinationals’ India strategy. Multinationals use local partners to overcome challenges in the Indian market and as a possible strategy for growth. As part of our research, we conducted interviews with numerous senior executives to understand why local partners are crucial in the Indian context. These conversations reiterated our understanding of the importance of local partnerships in India.
Varying business cultures:
India is culturally very different from western countries and as a result the business culture also differs substantially. Furthermore, even within the country, business cultures tend to differ from region to region. Local partners can help multinationals understand local cultural nuances. Building relationships with local customers may also be easier through a partner who better understands local customers.
Complex regulatory landscape:
India remains one of the most difficult places to do business because of its complex regulatory and business environment. Corruption and bribery are rampant, with 80 percent of companies in India reporting that they are affected by fraud. India’s rules and regulations also make local partnerships necessary. Foreign direct investment is restricted or capped for certain sectors like insurance and defense, among others. Local partners have more experience and know-how in India, and also understand the most efficient way to operate in the country. Multinationals can leverage this knowledge through partnerships.
High infrastructure and logistics costs:
Poor logistics and lack of well-developed infrastructure are major reasons why local partnerships are important in the country. Issues of last mile connectivity and customer reach continue to be major concerns for multinationals. As a result, multinationals tend to look toward local companies that are more likely to have the necessary infrastructure in place rather than trying to establish their own networks from scratch.
Fragmented and price sensitive market:
A related challenge for multinationals in India is the fragmentation of the market. India has a large and informal economy with numerous small players that make partnering with local companies crucial. Additionally, Indian consumers are also among the most price-sensitive, making a cost-reducing localization strategy important to increase market access. Local partners may be able to more effectively reach widely dispersed and untapped markets. They also have a deep understanding of the consumer and can be instrumental in building a localization strategy.
Based on our conversations with executives we discovered that commercial agreements were the most commonly used partnership models in India. The low initial investment is a possible reason for their popularity. This is because while India is a growing market, it has not yet reached the size or sophistication of many of its counterparts. Many multinationals therefore prefer a soft entry as they develop a deeper understanding of the market. India is also a fragmented market with numerous small companies, and while these small companies may serve as good partners for commercial agreements, multinationals should carefully consider entering joint venture (JV) or merger and acquisition (M&A) deals with them, as long-term financial stability could be a concern.