India Comes of Age

When New York investment firm Blackstone Group LP announced last month that its first foray in Asia would be a $1 billion fund targeted at India, the decision seemed to ratify the country’s slow -- and sometimes painful -- approach to economic development. Unlike China, where transformation has been captured by daily headlines of rapid growth on the macroeconomic level, India’s conversion occurred quietly on the corporate level.

Now, after decades of relative isolation, corporate India has become a showcase for the benefits of globalization, the free flow of capital across borders and competition.

India hasn’t managed to replicate China’s astounding record of sustained annual economic growth. But then, corporate India hasn’t had many of the advantages of China, notably cheap capital and supportive government policies. Fears that India would be marginalized by China instead have proved a catalyst for India’s private-sector awakening. The enthusiasm for India reflects the country’s strong management culture. "Indian companies are very return-focused," says Jim Walker, chief economist for Credit Lyonnais Securities Asia in Hong Kong. "By contrast, China is just market-share driven."

What the world is discovering is that India’s handicap of high-cost capital has become a blessing; it has forced companies to become efficient. Indian companies "couldn’t waste money," says Chip Kaye, co-president of Warburg Pincus LLC, one of the earliest U.S. private-equity funds to invest in India. "They became good at managing because of the bad years." Warburg has deployed nearly $1 billion in India and has taken more than it has invested in profit, with another $1 billion in value that hasn’t yet been realized.

The case of textile maker Welspun India Ltd. demonstrates how far Indian companies have come. Textiles were one of the more highly regulated sectors in India, reserved for so-called small-scale industry. Now, textile companies are expanding, frequently with the help of foreign capital. A few years ago, Welspun was a second-rate producer without any economies of scale. The company now is moving upmarket to higher-profit-margin areas and looking to expand internationally. Last year, a unit of Singapore’s Temasek Holdings Pte. Ltd., an investment fund, bought a 14% stake in the company.

Now, Welspun makes towels, bedsheets and bathrobes and is positioning itself not as a low-cost maker of a commodity product but the high-end maker of a fashion. It produces for such brands as Nautica and Tommy Hilfiger. Moreover, with the Temasek name and money behind it, Welspun is looking to acquire distressed U.S. textile companies that it can turn around. "We would keep their branding and distribution and move a lot of the production to India," says Welspun Vice Chairman B.K. Goenka. "In a few years, we will be a multinational, too."

Mahindra & Mahindra Ltd., which started life as a tractor maker and now is a conglomerate making everything from cars to consumer loans, also is a testament to the newfound confidence of Indian executives. Its Scorpio sport-utility vehicle competes successfully with a comparable SUV from Toyota Motor Corp. in India. It recently formed a $165 million venture with Renault SA to make sedans.

It recently purchased a tractor enterprise in China’s Guandong province and is upgrading the technology to give it a foothold in that market. "In the past, nobody bothered to upgrade because we all had a captive market," says Hemant Luthra, president of a unit of Mahindra & Mahindra. "But now, the cost of capital has come down and everyone is [boosting] capital spending. And lower costs mean that economies of scale kick in earlier."

Change is coming even to India’s inadequate infrastructure, particularly at India’s ports, thanks to a policy shift that has opened ports to private-sector and foreign competition.

A decade ago, India was so uncompetitive that the conveyor belts in the port of Mumbai (formerly called Bombay) went one way -- to unload goods from ships. Those conveyor belts came to symbolize all that was wrong with India: The lack of roads, the congested railways, the paucity of runways at even major airports.

The difficulty of exporting didn’t matter much because there was little India had to export anyhow. Today, the conveyor belts go both ways, and there are more exports leaving the port than imports arriving at it.


from an article in THE WALL STREET JOURNAL By HENNY SENDER