George KoshyIndependent Consultant

to AMT

What’s Important to Know AboutDoing Business in India

Market Update Breakfast - IndiaSeptember 12, 2006

June 2004

Engineering Industry Snapshot

12 September 2006

George Koshy

Major Cities of India

Pune

Kolkata

BangalorePopulation – 6.5 millionArea – 366 sq.kmKey Industries – IT/ BPO, Aerospace, Silk, CoffeeInternational Airport - Yes

National Capital Region Population – 14 millionArea – 1483 sq.kmKey Industries – Electronics, BPOInternational Airport - Yes

Mumbai

Population – 16.3 millionArea – 437 sq.kmKey Industries – Financial Services, Engineering, FilmInternational Airport - Yes

ChennaiPopulation – 6.9 millionArea – 584 sq.kmKey Industries – Automotive, Hardware manufacturing,International Airport - Yes

PunePopulation – 4.5 millionArea – 240 sq.kmKey Industries – Engineering, Automotive, ITInternational Airport - Yes Hyderabad

Population – 5.5 millionArea – 220 sq.kmKey Industries – IT/ BPO, PharmaceuticalsInternational Airport - Yes

KolkataPopulation – 10.5 millionArea – 1036 sq.kmKey Industries – Automotive, Tea, TextileInternational Airport - Yes

Major Industrial Areas

PuneKolkata

Advantage India

Skilled English speaking technical manpower at competitive labour cost. (India produces 65,000 engineers each year).

100 percent FDI allowed in most manufacturing sectors .

Indigenous availability of raw materials.

Over 2500 companies have ISO 9000 certification.

Large domestic market (India’s middle class families equal the entire population of the United States) with rising disposable income.

Time difference with major world economies allowing for 24/7 off shoring.

Diversified industrial base with supporting ancillary industries.

Many leading world class companies have a manufacturing base in India: US: GM, GE, Ford, Caterpillar, etc. East Asia:Toyota, Sony, Honda, LG, Hyundai, Europe: Siemens, Philips, Daimler Chrysler, Fiat, Lafarge; Other major MNCs include ABB, Electrolux, Volvo.

Engineering Industry Profile

India has a strong engineering and capital goods base.

The Indian capital goods sector is characterized by a large variety of products (almost all major capital goods are domestically manufactured) – a legacy of the import substitution policy.

The range of machinery produced in India includes heavy electrical machinery, textile machinery, machine tools, earthmoving and construction equipment, mining equipment, road construction equipment, material handling equipment, oil & gas equipment, sugar machinery, food processing and packaging machinery, railway equipment, metallurgical equipment, cement machinery, rubber machinery, process plants & equipment, paper & pulp machinery, printing machinery, dairy machinery, industrial refrigeration, industrial furnaces etc.

With total exports of US $ 126.7 billion, and total imports of US$ 182.3 billion in 2005 the engineering industry in India accounts for broadly 18% of exports and employs around 11% of the workforce. (Source: World Bank)

Machine Tools Industry

Machine Tool Industry is the backbone of the industrial engineering sector.

India is a design house, a tooling centre, a components base and a manufacturing hub.

During the last four decades, the machine tool industry in India has established a fairly robust base and there are around 125 machine tool manufacturers in the organized sector as also around 300 units in the small ancillary sector.

Indian machine tools are today manufactured to the international standards of quality/precision and reliability using Computerized Numerically Controlled (CNC) Machine Tools.

A number of collaborations have also been approved for importing the latest technology in the field of modern machine tools and the industry is now exporting conventional as well as NC/CNC high-tech machine tools.

The sector is delicenced and import is permitted. There is a gap in technology for Special Purpose Machines and also some categories of CNC Machine Tools. Import of technology is encouraged to bridge this gap.

The Opportunity – What The Markets Are Looking For…..

State of the art CNC machines and accessories at an affordable price.

Adaptation of indigenously available equipment such as Hydraulic, chip conveyers, electrical equipment etc to reduce the impact of high import duty.

Prompt local service support and supply of spare parts as and when required

Frequent follow-up visits and technology transfers from the parent company which will develop a long term relationship.

Doing Business In India

Foreign currency regulations

Industrial regulations and administrative controls

Regulations for managing business enterprises:

Regulations concerning taxation

Regulations covering capital markets

Regulations concerning business and trade practices and anti trust matters

Trade regulations – conditions regulating export and import of goods and services

Intellectual Property Regulations

The Theoretical: Governed by The Government Of India Policy towards Foreign Direct Investment (FDI)

Broadly the (FDI) policy is industry specific and the government looks at the following 8 parameters when determining what policy should be adopted for a particular sector:

Doing Business In India

Practically……….

Multiple legislation…no single window except for the IT/ BPO sector.

Federal legislation and local state legislation – 28 states and 7 Union Territories.

Dealing with a bureaucratic system with inherent limitations.

Loads of paperwork.

Highly price sensitive but increasingly technology driven market.

Multi skilled, multi linguist, multi cultural workforce that is mobile.

IPR challenges and brand imitation.

Crumbling public infrastructure Vs state of the art private development.

Doing Business In India

In India there are always three sides to a story…..yours…..mine……and…..the right one!

Everything is relative and Relative.

Business !! create an obligation and business will follow!

People tell you what they want you to hear……they put a “spin” onto the response to point you to the direction they want you to take.

I.S.T…..Indian Standard Time or humorously referred to as Indian Stretchable Time.

On the lighter side…..

Entry Options

1. Engage a good and well connected agent who has branch offices with technical staff at all major industrial hubs.

Train the representatives of the chosen agents for technical selling of your products.

(Agency commission on machine tools ranges from 8 – 12 % of which half is towards sales commission and the balance towards after sales service.)

  2.    Set up a wholly owned subsidiary or a joint venture with a reputed local partner.

Basic Laws You Should Be Aware Of When Doing Business in India

Tax Laws: Direct Tax, Indirect Tax, VAT

Employment laws: Labor law is still very much anti employer;however this is changing with the rapid growth of the economy.

Environmental Laws: Still evolving

Tax Rates:Income Tax - 35.77% , VAT – 4% or 12%, Service Tax – 12%, Excise Duty – 8%, 16% and 24%Customs Duty – Peak rate of 15%.

R&D cess: The Research & Development Act, 1986 provides for a levy of 5% on all payments made for the import of “technology”, which includes import of designs, drawings, publications and services of technical personnel.

Take Aways….

Remote control – It does not work.

Assume that the Big 4 are the obvious choice.

Send in people who are not technology savvy.

Choose a trusted tax and legal advisor.

Fall prey to the “friendly consultant” who offers to “do the needful” in obtaining approvals.

Neglect business support functions. It may take 5 years for the law to catch up with you…but it will.

Have a mix of local and expatriate management.

Assume money can't get you the best talent.

Have a physical presence.

Be prepared to wait for various approvals and government clearance.

Setup your back office and support infrastructure right the first time around.

Be prepared for moderate attrition.

DO’s DONT

Thank You