Lead Story

The new French colony

Companies from the European nation are quietly making inroads into India

There is a glint in Arthur de Montalembert’s eyes when you ask him about his first trip to India, in 1974. “I decided to take two months off to come here,” he starts. The 23-year-old student landed in Bombay accompanied by a friend and a small suitcase stuffed with jeans. The first stop was Ajanta, after which they travelled to Bhopal, Jaisalmer, Delhi, Agra, Varanasi and Calcutta. “We travelled by train, bus and even a truck. From Calcutta, we went to Bhubaneswar and then to Hyderabad and Hampi,” recalls de Montalembert, chuckling about his bout of Delhi belly on a long-distance train. “I was sure I would come back.”

He did, several times, before moving here in November 2008 as chairman and MD of Areva India. And now, when the 61-year-old travels around India, it’s not to tourist hot spots but to rural Jaitapur and Dhursar. Those are the places in Maharashtra and Rajasthan where Areva is working on a $9-billion (Rs.49,500 crore) project with Nuclear Power Corporation of India and is building a 125 MW solar plant for Reliance Power. “We have interesting products to sell and India is experiencing rapid and exponential growth. It’s a good combination,” points out de Montalembert happily. 

de Montalembert and Areva aren’t the only French nationals saying oui to India. There are an estimated 450 France-headquartered companies here that are stepping up their operations, from Dassault Aviation’s $10-billion deal to supply 126 fighter jets to the Indian Air Force; DCNS inking a deal to make submarines; Accor Hotels looking to have 14,000 rooms by 2015 from the current 3,600; Carrefour opening its cash-and-carry retail outlets; or the more recent instances of Limagrain and Roquette making acquisitions in the agro space. 

For these companies, India is the flavour du jour, especially given how bad things are back home. The French economy grew just 0.1% over the past four quarters, debt is at 90% of GDP and unemployment is at a 14-year high. President Francois Hollande’s budget increased the tax burden on big companies and he recently blackmailed ArcelorMittal into not cutting jobs at a steel plant, a few months after he tried to stop Peugeot Citreon from doing the same. None of which is doing the economy any good; as it is, incoming foreign direct investment (FDI) has halved over the past five years. Understandably, French businessmen are a worried lot. And little wonder that they’re looking outside Europe, willing to do what it takes to make things work. 

Royal beginnings 

France’s commercial ties with India go back 500 years; traders from Europe first came to this country in the early 17th century. More recently, though, French interest in India really stepped up at the turn of the millennium, perhaps triggered by a tangible improvement in relations between the two countries (France was among the few countries that didn’t criticise India’s nuclear tests in 1998). This isn’t a story told through numbers, though: France isn’t among India’s top trading partners (bilateral trade stood at €7.46 billion, or Rs.48,042 crore, last year, up 5.8% over 2010) and since April 2000 French companies have invested just $3.01 billion (Rs.13,870 crore) in FDI, which is less than 2% of the total foreign direct inflows until August 2012. 

That’s a pittance, especially when compared with Sino-French trade. French interest in China actually started rather late in the day, after arms trade between France and Taiwan stopped in the early 1990s. Still, France has quickly made up for lost time and is currently China’s fourth-largest trade partner in Europe ($57.6 billion in 2011) and has over 1,000 companies with administrative offices in the East Asian country. 

France has a growing presence in Brazil as well, having spent $14.1 billion in acquisitions between 2006 and 2011 alone. It is now the biggest inbound investor in Brazil, followed by China and the US. While a strategic alliance between the two countries, signed in 2008, has given a fillip to defence deals, many of the 400 French companies in Brazil are likely to have key roles in building the infrastructure for the 2016 Rio Olympics.

The numbers for India aren’t in this league but the spectrum of interest cuts across industries as varied as defence, nuclear energy, cement, drugs and pharma, banking and ITES, to hotels, luxury goods, advertising and consumer products. Some of the world’s best-known French companies are already here — Dassault Aviation, Lafarge, Legrand, Accor, Publicis, Schneider, Capgemini, Michelin, Renault, L’Oreal, Saint-Gobain and Pernord Ricard — and more are waiting in the wings. Even with French interests straddling so many sectors, it’s still easy to trace some commonalities in how French companies operate in India. They prefer the inorganic route to growth, focus on building strong consumer brands, are people-centric and, most significantly, bring with them a wealth of patience when it comes to understanding this unfamiliar market.

Room for growth

It’s early afternoon in mid-October and Jean-Michel Cassé walks into the Ibis property near Mumbai’s domestic airport. He’s just come off the Delhi flight and is headed to Navi Mumbai to open Ibis’ new property later in the day. “We opened a hotel in Hosur yesterday and will open one in Nashik tomorrow. I’m told this is an auspicious week and we need to make the most of it,” says the senior VP of operations for Accor in India.

Cassé’s learnt a lot about India since his first recce trip four years ago, including the importance of the festival season. When he first landed in Mumbai in mid-2008, the monsoon was in full swing, an unusual sight for an executive based in Egypt. The next stop was Delhi where election fever was just about picking up. “There was a political demonstration and things were chaotic,” he recalls. Still, a week later he said yes to moving here — and hasn’t regretted the decision. “It is rare to have a destination like India, which is at an early stage of development,” says Cassé. And he plans stay on to see the chain grow from its current 20 hotels, including Ibis, Sofitel, Novotel, Mercure and Pullman, to 55 properties by 2015. “We will look at tier 2 towns such as Nagpur and Coimbatore since land is cheaper and airline connectivity is good,” he outlines. There are plans to launch Accor’s boutique high-end luxury brand MGallery. “We are talking to people to have themes like a historical palace or classic cars. That should take three years,” adds Cassé. Accor has committed an investment of $250 million in India so far, although Cassé thinks it is still too early to speak of numbers. “Growth will take time since we are still investing.”

 Accor’s attempt to make the most of India is similar to what Michelin has done. The tyre major entered into a JV with Apollo Tyres in 2003 to manufacture truck and bus radial tyres, only to separate two years later. An understanding with MRF in the mid-1990s for aeronautic tyres preceded this, which too never saw the light of day. Now, Michelin has gone alone with a Rs.4,000-crore facility in Thiruvallur district in Tamil Nadu. 

According to Karel Cool, professor of strategic management at Insead, weak growth prospects in Europe and the US prompted Michelin’s then CEO, Michel Rollier, to “accelerate the company’s expansion in fast-growing countries”. Between 2011 and 2016, Michelin will spend €1.6-1.7 billion per year on capex; three mega plants in Brazil, China and India will take up €2.75 billion. Michelin did not participate in this story.

The inorganic route

The time: around noon, 2002. The place: a five-star hotel in Singapore’s historic Clarke Quay. An ongoing meeting in one of the hotel’s large business chambers seems set to culminate in a historic deal for the Indian advertising industry. Suddenly, one of the men in the room stands up in an explosive burst of anger. 

“F*** your offer. I am walking out of this f****** room right now,” declares Ashok Kurien, not trying hard to control his voice. The founder chairman of Ambience Advertising has been made an offer that entails merging his agency with Zen Communications. Ambience, founded by Kurien in 1987, has an enviable client list that includes Marico, P&G and Lakmé. Merging this into the much-smaller Zen, an agency that Publicis acquired in 1999, is an unacceptable comedown. 

The team from Ambience, which includes partner and creative director Elsie Nanjie, watch dumbfounded as their boss storms out of the room. Publicis Group chairman and CEO Maurice Lévy, too, is taken aback. For the Paris-headquartered Publicis Groupe, which is among the world’s three largest advertising networks, a significant presence in India is critical and Lévy is very keen on bringing Ambience on board. (Ambience’s controversial 1995 ad for Tuff Shoes has perhaps swung the vote in the agency’s favour. While the campaign was lambasted as obscene in India, the folks at Publicis think it fantastique and “a work of art”). In a couple of minutes, a furious Kurien is at the hotel’s entrance when Lévy taps him on the shoulder and gives him a bearhug. “Ashok, let’s make this deal work,” is all he says before the two men make their way back to the meeting room.

Narrating the incident a decade later, Kurien gives up trying to control his laughter. As he recovers, he says, “My admiration for Lévy just grew after that. He did not have to do that for a small guy like me.” The final deal allowed Kurien to run both Ambience and Zen before eventually selling out to Publicis for “a fabulous sum”. “The French are tough negotiators but if they think you are of value, they certainly recognise it,” says Kurien. “They think strategically and are not brash.”

The strategic thinking bit bears true. At the turn of the century Publicis was nowhere in the reckoning for India’s top advertising network. Today, after a string of global buyouts, it is the third largest with ad agencies such as Saatchi & Saatchi, Leo Burnett and Bartle Bogle Hegarty, as well as digital and media outfits such as Starcom MediaVest and Zenith Optimedia under its belt. Overall, the Publicis Groupe in India has a turnover of around Rs.550 crore (the Martin Sorrell-owned WPP leads at Rs.2,000 crore). Publicis has also retained Kurien as senior advisor for the group in India, recognising the importance of local knowledge and people. 

Indeed, the emphasis on local people is a frequent observation when speaking with French companies in India, even though most have expats leading India operations. Leo Burnett India chairman Arvind Sharma recalls how in early 2002, when Publicis acquired Bcom3 (which owned Leo Burnett), Lévy personally addressed the staff through videoconference, allaying their apprehensions. “We want to learn from you,” he told Leo Burnett’s workforce. Adds Sharma, “The French have a more amiable approach than, say, Americans. They are flexible and willing to examine options.”

Cultural integration and handling people is something French companies seem to take very seriously — it’s an area where they’ve had lots of practice, too. Most French companies in India have grown inorganically, buying their way into markets. Interestingly, though, they’ve stayed away from big-bang buyouts. No French company has broken into the billion-dollar acquisition club in India and till date, the largest inbound French transaction remains the 2009 acquisition of Shantha Biotechnics by Sanofi-Aventis for $665 million. 

Making small buyouts or investing large sums over time appears to be the preferred option. That’s how Group Legrand India has grown in the country. Yves Martinez, CEO and MD of the company, points out that in the past 50 years, the €4.25-billion electrical installations group has made 100 buyout globally. Some of those have been in India. Indeed, the company’s entry into India was through the acquisition of MDS Switchgear in 1996, after which it has bought into Indo Asian Fusegear’s switchgear business for Rs.600 crore and Numeric Power Systems’ UPS division early this year for Rs.806 crore. “The heads of all the companies we acquired are on the board of Legrand India. We need their view in a new market, in addition to getting a strategic direction for our business,” says Martinez.

A keen marathon runner (he runs the Mumbai half-marathon every year), Martinez believes India, too, is a long race, not a sprint. “We have learnt that to succeed in India, you need to approach it as if it were a continent — each state and region is different and requires a different approach.” Legrand India, says Martinez, is a Rs.2,000-crore company that grew 25% last year. India is the fifth-largest market for the group, after France, Italy, the US and Brazil. “It has the potential to be among the top four. The company already has a 15% share in the wiring devices market and 30% in the protection market,” he adds. The ambition now is to be three times larger in the next five years.

Seeking an edge

The biggest advantage in buying up companies is access to local manufacturing facilities, which most French companies believe is key to success in India. Consider Schneider. The energy management company entered India back in 1963 through a joint venture with the Tatas and set up a 100% subsidiary only in 1995. In the past 12 years Schneider has made eight buyouts, including Meher Capacitors, Conzerv, Zicom and Diglink. Its latest purchase was in May 2011 when the company acquired a 74% stake in Luminous Power Technologies for Rs.1,400 crore. Luminous, which has eight manufacturing sites in India and one in China, had revenues of Rs.1,100 crore in FY11. In all, Schneider has spent over Rs.2,000 crore just on buyouts in India.

What helped it grow is Schneider’s manufacturing capacity. Seven years ago, it had three factories; today, it has 31. “India is a price-sensitive market and when we manufacture locally, we ensure we have control over costs by buying from local suppliers, improving deliveries and reducing our exposure to currency fluctuations,” says Olivier Blum, country president and MD, Schneider Electric India. Blum declines to share numbers, but research by Outlook Business indicates that on a standalone basis, it had a total income of Rs.2,057 crore in FY11, 45.67% higher than FY10’s Rs.1,412 crore.

Another company that confirms the need for local manufacturing facilities — either set up by the company or acquired through buyouts — is Saint-Gobain. In the 16 years that the construction and high performance materials company has been in India, it has made about 10 acquisitions. “This is a capital-intensive business and our total investment in India has been about Rs.2,500 crore,” says Anand Mahajan, country head, Saint-Gobain Glass India. After making a Rs.300-crore investment in 1997, Saint-Gobain commissioned its manufacturing facility in Sriperumbudur in Tamil Nadu in 2000; it has invested Rs.1,000 crore in that plant to date. Today, Saint-Gobain Glass India and its subsidiaries manufacture floatglass, high performance materials and construction products. “For CY11, all the entities together had revenues of Rs.3,215 crore. We have had a CAGR of 22% since 1996,” he adds. 

The inorganic route seems to be working. The company claims to be No.1 or No.2 in most of its businesses and is now targeting a group turnover of Rs.10,000 crore by 2017. Now, further growth will come from expansion, additional facilities and, of course, acquisitions. “India, China, Indonesia, Turkey and parts of Eastern Europe have been identified as critical markets. The French are very number-driven,” says Mahajan.

Slowly, slowly

As we said right at the start, they’re also very patient. “France’s corporations are very comfortable about being in a business that takes time to build,” agrees Insead’s Cool. That would mean organisations such as BNP Paribas, which has been in India for over 150 years (it began branch operations in 1860 in Calcutta). “If you are patient by nature, you become impatient in India and if you are impatient, you become patient,” laughs Jacques Michel, chief executive and country manager, BNP Paribas. It’s not easy for a foreign bank to grow in India, given restrictions on the number of branches (the Reserve Bank of India sticks to a World Trade Organisation agreement and gives 12 new branch licences across all foreign banks every year). After 150 years, BNP still has only eight branches across India.

Having spent three years in India, Michel is slowly discovering how the country functions. He’s watched IPL cricket matches although he didn’t understand what was going on. There’s no hesitation or doubt, however, when it comes to identifying BNP’s growth drivers in the near future. Corporate and investment banking, Michel says promptly, in addition to equity and capital markets (ECM), debt capital markets (DCM) and mergers and acquisitions. “French companies have had a steady approach to business,” he adds, sitting back and lighting a cigarette. “We see our own story unfolding over the next 50 years.”

Are there times when patience translates into sloth? There’s certainly criticism that French companies are a little too unhurried in taking decisions and moving forward — witness their painfully slow progress in India. Consider Lafarge, which came to Indian in 1999. In the next year, the cement major acquired plants from Tata Steel and Raymond for Rs.1,300 crore, which gave it a capacity of 4 million tonnes per annum (mtpa) when total capacity in India was 115 mtpa. Even today, Lafarge India’s capacity (8 mtpa) is minuscule compared with total capacity in the country (336 mtpa). Rivals such as the AV Birla Group have, during the same period, increased their cement capacity over three-fold to reach 52 mtpa. Not surprisingly, Martin Kriegner, country CEO, Lafarge India, doesn’t buy the slow tag. “We were able to act very successfully in Lafarge India by merging the good parts of our business model with the needs and specifics of the Indian environment,” he insists.

In contrast, Insead’s Cool accepts the French are slow but puts a diplomatic spin on this tortoise pace. “The French will spend more time studying a market before taking any decision. By contrast, US companies typically are more open and entrepreneurial than French.” Still, that may be changing. Aruna Jayanthi, CEO of Capgemini India, recalls meetings in Paris about a decade ago where the conversation centred on competitive pressures and whether the existing model was the right one. “Today, it is only about how to scale up,” she smiles. The French ITES and consulting major entered India in 2000 after its global acquisition of Ernst & Young’s consulting business. The business took off after 2006 when it acquired a 51% stake in Indigo, then a subsidiary of Hindustan Unilever that provided BPO services to its group entities globally. At the time of the buyout, it had 600 employees of which 75 were chartered accountants and operating centres in Bangalore and Chennai. “They were doing a lot of BPO work in finance and accounting. We did not have that platform in India and that made it important for us,” she explains. In 2010, Capgemini acquired the balance 49%.

The buyout of the US-based Kanbay International for $1.25 billion by Capgemini was another key development that brought financial services to the table. Of Kanbay’s 6,900 employees, 5,000 were based in India, while 85% of business came from North America. “In both cases, we did not change the management since they had a very sharp understanding of their businesses,” emphasises Jayanthi.

Capgemini currently employs 40,000 people across nine locations and aims to get to 70,000 employees over the next three years. While Jayanthi declines to share numbers, the global annual report says Capgemini Business Services (India), which was previously known as Indigo, had revenues of Rs.405.7 crore in CY11, up from Rs.22 crore at the time of the buyout. 

It’s not been all smooth sailing for French companies in India. F&B major Danone had to part ways with its Indian partner. The company had a presence in India since 1993 through a 25.5% stake in Britannia Industries. It was an uneasy partnership, though: in 2006, the Wadias accused Danone of violating intellectual property rights by launching Tiger biscuits in some Asian countries without Britannia’s consent. In Q32006, Danone’s results didn’t include Britannia’s numbers and matters worsened in early 2007, when Danone acquired a 5% stake in bio-actives firm Avesthagen; the Wadia group claimed the deal compromised its JV with Danone. That’s the time Danone decided to launch Evian bottled water and probiotic health drink Yakult with a new JV partner, Narang Beverages. In April 2009, the Wadia Group acquired Danone’s stake in Britannia for an undisclosed sum; Danone has since moved on to launch dairy products on its own. 

Last August, Danone’s baby food division, Nutricia Baby Nutrition, bought Wockhardt’s nutrition business for Rs.1,600 crore, gaining brands such as Farex and Protinex. “It was difficult to stay much longer out of the country that has the highest number of babies,” exclaims Laurent Marcel, managing director, Nutricia Baby Nutrition. It won’t be easy, though, he acknowledges. According to Marcel, a challenge is the typical preference of Indian consumers for fresh food over packaged food. He remains tight-lipped about the future and merely says the plan is to drive growth by providing high-quality products designed specifically for Indian nutritional needs.

Swing and a miss

There have been as many instances of failure as there are of success here. Consider the telecom sector. France Telecom, for instance, exited its 26% stake in BPL Mobile in late 2004, soon after it quit other Asian markets such as Thailand and Indonesia. Four years later, it entered the race for a 26% stake in Tata Teleservices, but lost out to Japan’s NTT DoCoMo. Meanwhile, French telecom gearmaker Alcatel is struggling: of the planned 5,000 job cuts announced in July, some 1,000-odd are reportedly in India.

 The really big flop in India is Peugeot, which has been twice unlucky in the country. Three years after entering India through a joint venture with Premier Automobiles, differences with the partner and labour unrest led the French company to exit the country in November 1997. It returned in 2011 and began construction of a plant in Sanand, Gujarat, as part of a Rs.4,000-crore investment to manufacture 170,000 cars with roll outs starting mid-2014. Now, financial troubles in Europe and falling sales worldwide have put those plans in limbo. Media reports say Peugeot’s India entry has been shelved indefinitely.

Another notable miss has been Total, the world’s fifth largest oil and gas company, with revenues of €185 billion, which has been in India for over a decade. Globally known for oil exploration, Total hasn’t made any headway in India and remains largely in the business of LPG and lubricants. Industry observers say decision-making is still out of Paris, which is why the company hasn’t succeeded in India. 

Then there’s home appliances company Groupe SEB, known for brands such as Tefal and Moulinex. It tried and failed to break into India with imported products and so, last year, bought 55% of Maharaja Whiteline Industries. But now problems with the local partner seem set to short-circuit the company’s plans. Recently, SEB ousted Harish Kumar, Maharaja’s promoter, as the managing director, and replaced him with an expat, which may yet end in a legal wrangle. How that plays out will decide Groupe SEB’s future progress.

There are other companies that have had a mixed run in India. Renault, for instance, was driven here by external factors. Marc Nassif, managing director, Renault India, points out that around 2000, Western Europe accounted for 85% of the company’s sales. “It was clear that we were vulnerable. That is when we sat down for a global strategic analysis,” he says. Within five years, the company joined hands with Mahindra & Mahindra to manufacture the Logan passenger car. The target was to sell 30,000 cars a year but actual sale numbers were barely 20% of that. Already more expensive because of its low localisation component, the Logan attracted higher excise duties, too, on account of its larger size. It didn’t help that the car quickly became popular as a taxi. In FY09, Mahindra Renault posted a Rs.490 crore loss on sales of Rs.740 crore. “It was not very successful,” admits Nassif, “but fruitful with respect to what we learnt about how things operate in India.”

In 2010, M&M bought out Renault’s stake, after which the French company went solo in India. Renault is now speeding ahead with its plans for the country. It has launched five models in two years — “ahead of schedule,” Nassif says — and is investing Rs.4,500 crore in the first phase at its plant in Tamil Nadu. But it will be a while before the 400,000-unit plant operates at full capacity —  Renault expects to sell 30,000 units in 2012 and is targeting 80,000 units in 2013. “We should have a 5% market share by 2017,” says Nassif. 

Long stretch ahead

Their market share may be climbing but when it comes to cold, hard numbers, the French don’t have much to show for their years in India. How, then, do they measure their performance in the country? And what gives them the confidence to stick on?

One reason for their persistence in India is, of course, the dearth of opportunities elsewhere. Even if the numbers in their books aren’t too attractive, the numbers in India — the growing middle class, rising income levels and aspirations — are compelling enough to make them stay. Cassé of Accor Hotels is candid, using a Bollywood metaphor to explain his company’s point of view. “We didn’t come here to play the second lead. We are building on the Accor brand name here from scratch but it’s more difficult in the rest of the world where the slowdown puts all kinds of constraints.” The parameters of success, too, then get tweaked to suit the market and circumstances. Cassé, for instance, takes pride in Accor being the only international hotel group in India that spans all segments of the market, from luxury to budget. He’s also measuring growth in terms of “great quality products and developing people”. That’s a thought echoed by Danone Baby Nutrition’s VP, Asia Pacific, Darius Kucz: “Success cannot be judged just by numbers, although we’re growing faster than the market. For us, success means how well we address vulnerable consumers such as toddlers.” 

Schneider’s Blum repeatedly speaks of the need to be agile and patient in India. “You cannot always expect to make a healthy return on investment in three to five years. You must have a long-term view and see how you will build your set-up for the next 20 years.” That could well be the secret to success in India. Did anyone say BNP Paribas?