What makes MNCs quit India

Ministers talk of new measures to increase foreign direct investment, which has stagnated at around $ 4 billion a year, and approach China’s level of $ 45 billion.

Few seem aware that foreign investors are leaving India in such numbers that it deserves to be called the second Quit India movement.

The most obvious example is power. The biggest foreign investor of all, Enron, is pulling out of Dabhol. The Maharashtra government has terminated the contract, and the US company has decided to sell its equity at a loss rather than fight through the courts.

Its huge LNG terminal at Dabhol is also up for sale. Earlier it sold oil and gas stakes in the Bombay offshore area as part of a global strategy.

Other foreign investors also find the power sector impossible. It suffers from an ingrained culture of non-payment of dues of every sort.

Indian companies are used to this, but not foreigners, who cannot explain away non-payment to their shareholders. AES, an American major that took over generation and distribution in Orissa, is quitting.

It cannot collect dues; cannot sack the crooked staff it has inherited, who fix meters in collusion with consumers; and cannot get the support of the state government in collecting dues or combating theft.

Cogentrix earlier pulled out of the Mangalore power project, and China Light from Hirma. CMS Energy, another US major, has just announced its exit from three power projects – the 235-MW plant at Jegurupadu, the 200-MW GMR-Vasavi Basin Bridge plant, and the 250-MW ST-project at Neyveli.

It has also abandoned its plan to participate in a huge LNG terminal with a 1,800 MW power plant at Ennore.

The world’s biggest names came into our telecom sector, but today all but a few have quit. British Telecom has sold out to Bharti.

Telstra of Australia, Bezeq of Israel, Shinwatra of Thailand, have all have pulled out. Nynex has sold out to its partner Reliance. Others who have exited are Vodafone, Bell South, Bell Canada, US West and Swiss PTT.

The few remaining foreign investors in telecom include Hutchison, SingTel, and AT&T. Unlike power, telecom is generally considered a successful sector, yet foreigners have left in droves.

Why? First, investors grossly overestimated. Second, bickering between the Telecom Regulatory Authority and department of telecommunications created uncertainties on the interpretation and enforcement of rules. Third, the rules themselves keep changing.

In one case this benefited foreign investors: They were allowed to migrate from an unviable licence fee system to a revenue-sharing system.

But in general, foreigners are not used to and cannot manage constant changes in rules, unlike Indian businessmen enjoying decades of experience with a capricious licence-permit raj.

Often Indian telecom partners have bought out foreigners. This contradicts the traditional wisdom that joint ventures end with foreigners swallowing Indians (something that has indeed happened in other sectors, mainly because Indian partners could not produce enough capital to meet rising losses).

The Quit India movement of foreign investors is not limited to power and telecom. Cigna, a major health insurance company, has wound up its office after months of trying to find a suitable partner.

Kerry Packer, whose media group made the mistake of tying up with HFCL, has quit in disgust. Earlier, Pearson abandoned its losing JV, Home TV.

Foreign investment has not lubricated success in another sector – lubricants. Valvoline has found operations unprofitable and decided to wind up. Caltex earlier pulled out of a JV with IBP.

DuPont faced an unending series of hurdles in producing nylon, first in Goa and then in Tamil Nadu, and quit.

Sinar Mas, a major Indonesian paper company, sold out to Ballarpur Industries, but not because of problems in India. Its parent company in Indonesia went bust.

In the pharma sector, German Remedies recently sold out to Cadila. Astra ADL sold out to the Hindujas.

Foreigners have been quitting this sector for a decade because of price controls, as well as a lack of intellectual property rights.

Rhone Poulenc, Roche, Boehringer Knoll and the research centre of Hoechst have all been sold to the takeover king of the pharma business, Ajay Piramal.

This is not a complete list. I am sure readers will know of other cases. I emphasise that foreign investment has been flowing out as well as in, and many saying farewell are very big global names indeed.

What lessons flow from this? First, India remains a country bristling with hassles, red tape, corruption, difficulties in collecting dues, and (in the Enron case) unilateral abrogation of contracts.

Second, many failures are the faults of foreigners, who overestimated market demand in India. Many believed that India has a middle class of 250 million.

Now, middle class in America or Europe means somebody who owns a car and home. In India, the word has been used to describe anyone that could afford a black and white TV set.

The misunderstanding about what a middle class is, led to exaggerated estimates of demand. This was most striking in telecom, but also affected estimates of demand for Dabhol’s power, and for many consumer goods sectors.

Ray Ban found it could not sell enough dark glasses, Kellogs could not sell enough breakfast cereals, electronics companies could not sell enough TV sets, auto companies could not sell enough cars, Pepsi and Coke could not sell enough fizzy drinks.

In consequence, most foreigner investors have lost a fortune in India, and very few have made money.

Now, I shed no tears for those who overestimated the market, bungled their pricing strategies, or failed to adjust their products to suit the Indian taste.

But in many other cases, India has proved to be a bad, even nightmarish place to do business.

We must improve those conditions, not so much to help foreign companies as to help Indian firms harness their full potential.

What do you think?