Indrajit Gupta: Global ambitions, local risks

In 2012-13, while researching a story, I came across an interesting trend that blue-blooded investment bankers and country strategists had been advocating then: buying insurance from regulatory risks. For nearly four years starting 2009, many Indian corporations had been struggling to grow, mired in bureaucratic red tape and in some cases, beaten down by the heavy hand of the regulator. Those were the days when the controversy around the retrospective tax, among others, had completely spooked Big Business.

There was one simple way that large established businesses in India could de-risk their businesses: by not putting all their eggs in one basket. By exploring new opportunities outside India, it offered a way out of the economic logjam in India. And within that, the strategists argued, it was better to focus on two of India's long-term strategic partners: US and Japan. Big bets in these two markets could offer a way to develop equity with governments in these two markets. If there was any regressive move by the Indian government that could cause harm to their local business, the Indian conglomerates could always lean on India's strategic partners to help mediate in any potential crisis.

Even while it is far from clear if the strategy delivered results, the wheel has now come full circle: a new clutch of global digital businesses are now headed lemming-like to India in the hope of snagging growth in developing markets. Take Uber, the world's most valuable start-up, which has been in the eye of a controversy. It has already announced that India will be second-biggest focus market outside of the US. Xiaomi, too, is on a roll. For the mobile phone brand, China and India are the two key markets that could determine its future. And last week, at a premier TiE conference in Bengaluru, Diego Piacentino, Amazon's chief of international business, confessed that they had missed the bus in China by not investing ahead of demand. And that they wouldn't make the same mistake in India.

Amazon has already announced that it would plonk $5 billion into the Indian market. Equally, protecting their multi-billion-dollar investment in India is a critical priority for all these digital businesses like Amazon. Not too many markets around the world offer the scale and size that China and India do. But being seen as a foreign company without adequate local relationships has its downsides, just as Nestle learnt the hard way. Replacing the expat country head with an Indian face is part of this makeover. This is something Unilever put in place several decades ago. It built a local cadre of business leaders, positioned itself more as a local company, listed its subsidiary, hired locally and used India as a test-bed for emerging-market innovation.

Amazon, Uber and, to a lesser extent, Xiaomi are now taking a leaf out of this book. They are despatching local managers and hunkering down for the long slog ahead. And they're doing one more thing: they are reaching out to influential local leaders and businesses to offer them a stake in the company's future. Simply look at the list of business leaders and companies that have invested in these three global firms: Ratan Tata and the Tata Opportunities Fund, NR Narayana Murthy (through his vehicle Catamaran Ventures), and Times Internet.

In many of the cases, except for Uber, it is no more than a token investment. Even for Uber, the $100-million investment would possibly translate into the money it burns on a daily basis. A couple of months ago, the chief of investments at a leading Indian conglomerate was approached by one of these global players for a token investment. The investment was sought without going through the complex cross-border due-diligence process. If required, they offered a quick discussion with an existing investor or the chief financial officer. While the transaction did not inspire confidence, even with such conditions, the global player was able to snag an investment from a prominent business leader, pretty quickly.

The need for legitimacy and building strong local roots is of strategic importance in emerging markets like India. And the regulatory risks are formidable. In Uber's case, it has already been in the crossfire of various regulators, not just in India, but across the world. Free market pundits are likely to frown on such obstacles being placed before new tech-led disruptors like Uber. And they would perhaps be right. Except that, there is an ongoing case against Uber in the Competition Commission of India of systematically undercutting competition using its vast cache of venture capital funds. The verdict isn't in as yet, but the threat is for real.

Being a Chinese company, Xiaomi has its own challenges. And almost on cue, it has announced its decision to ramp up in Bengaluru, build a substantial software engineering presence in India, open a global R&D centre in India, expand its customer support centres and exclusive service centres in India and even Indianise its mascot, Mi bunny. And, like Alibaba, by offering to invest in a slew of Indian start-ups, Xiaomi has taken an important step to deal with any possible headwinds.

The author is co-founder and director at Founding Fuel, a digitally led media and learning platform aimed at the entrepreneurial community