India has seen an explosion of Business Process Outsourcing (BPO), which now accounts for over a third of the country's Foreign Direct Investment (FDI). Within two years it is expected to generate over £40bn a year and create well over a million new jobs. In some parts of India this has led to increased prosperity for many and in turn has created a marketplace which in terms of size is second only to China's.

Whether you are looking to enter India to outsource your business processes, or as an opportunity to exploit the new and expanding market, there are several points to consider. This article aims to outline some of the most important issues.

Setting up in India - do you know what you are getting into?

If you are looking to run a business in India you should be aware of the following:

•  As part of the liberalisation process the Indian government has provided significant corporate tax breaks. Other incentives include local tax concessions as well as subsidised land and utilities such as electricity.

•  Labour restrictions covering length of working week and overtime restrictions have been dispensed with and contract workers can also be used freely. In addition there are often other local incentives available as states regularly enter into informal bidding wars.

•  Labour laws throughout the economy are particularly restrictive and in all but a few approved open industries, employers with even a hundred employees must obtain state government approval when altering the structure or size of the work force.

For the most part the remainder of India's economy is highly regulated despite three terms of reforming parliaments. Foreign ownership is not allowed in many industries, notably agriculture, defence, retailing and real estate. It is also limited to minority stakes in others such as financial services and telecoms.

Selling to India - what you should know

 Imported (finished) goods are liable for tariffs of over 35%, which means that they are prohibitively expensive and demand is artificially constrained. There are also heavy tariffs on imported raw materials and stiff indirect taxes (mostly sales and VAT) that make goods with even a small foreign element uneconomic to produce in volume. As a result many Indian manufacturers are forced to focus on servicing relatively low demand in domestic markets with production by small inefficient plants by international standards. Achieving the type of economies of scale and flexibility required to make the navigation of export red tape worthwhile (i.e. profitable) is beyond most local enterprises.

Know your market

 Large Western and Asian consumer goods manufacturers have been quick to take advantage of booming consumer demand and have adapted well to the restrictive environment. They have carefully segmented markets, developed detailed understandings of local buying decisions and invested for the long term by creating and shaping their own markets in India. The basis of their approach is a pricing structure that creates a reasonable demand with an acceptable profit margin. A business model is then engineered where cost equals price less profit. This helps margins significantly, as does buying as many components as possible locally. There is also a general understanding that simply transplanting global brands at global prices will not work and is a recipe for disaster. The recent Indian patent law reforms have importantly enabled businesses to protect their investments more effectively and certainly make India a more attractive place to invest.



Getting into the Indian market

 Entry into the Indian market used to be consigned to joint ventures. These are relatively low risk and take advantage of local knowledge, relationships and most importantly, distribution networks. However, in many cases this is no longer the obvious choice, and of the major joint ventures established in the early 90's only a handful remain. One of the reasons is that local businesses were unable to make the investment that foreign partners required. In many cases organisations have achieved success by tapping directly into the excellent regional and local distribution networks. There is also the trend of consumer goods businesses investing in major city flagship stores to raise awareness of their products. Manufacturers then use sales support packages and advertising campaigns to directly encourage local and regional retailers to act as channels for their products. Evidence then, that if you make good decisions regarding channel arrangements there are opportunities to be had.

What's in store? India's future growth

 Relying on BPO and IT to drive the development of the Indian economy and sustain a continuing consumer boom is not a long term solution. Other destinations such as Eastern Europe and South America as well as other parts of Asia are starting to compete aggressively for this type of work. Many have similar cost bases and skill levels and are increasingly providing equivalent if not better incentives. There is also an underlying realisation by outsourcing organisations of the cultural and project management issues involved in making BPO work successfully. This will slow further expansion in these sectors but growth is still expected to be substantial. The result is that if India is to retain its pre-eminence in BPO it must encourage the development of a value added offering. More importantly, if India is to continue its consumer boom then protectionist barriers must be reduced and liberalisation of key industries specifically agriculture, retail and financial services speeded up.

Summing it up

This article endeavours to offer an insight into some of the key issues to consider if you are thinking of outsourcing business processes to India or, alternatively tapping into the vast emergent consumer marketplace in the country. We welcome any questions that you may have and leave you with some of the most important points to remember:

•  Whilst India is a popular destination for BPO, evident by the £40bn a year that it is expected to generate within the next two years, other countries are competing aggressively. Eastern Europe, Asia and South America have similar cost bases and skill levels and offer other attractive incentives and advantages.

•  Whilst the local Indian market is becoming less regulated in some sectors, other industry sectors are still restricted for the foreign investor, particularly agriculture, defence, retail and real estate.

•  If you are looking to sell to the Indian market you need to take a very different approach than you would in a Western market place. This will involve gearing your product's functionality and pricing to this unique market, which may make it unrecognisable to its Western equivalent.

Mark Blunden is a Partner in Boyes Turner's Commercial and Technology group and can be contacted by email on mblunden@boyesturner.com