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YOU THOUGHT CHINA WAS HOT? TAKE A LOOK AT INDIA!

TRENDS YOU CAN USE FROM THE KETCHUM GLOBAL RESEARCH NETWORK NOVEMBER 2005

Have you called your computer company’s tech support line recently? If you have, chances are your call was forwarded to a calling center somewhere in India. With an average 20 million Indians graduating from universities each year–-many in the fields of math or computer sciences–-Silicon Valley has taken notice of this highly educated workforce and has outsourced many of their technical calling centers to this region as a way of cutting expenses while still maintaining a skilled workforce.

India is on the rise, and is quickly becoming a booming supplier of—and a thriving market for—backshop software, wireless infrastructure, chip design and more. 1

And, it’s not just the field of computers that is growing by leaps and bounds in India. The country’s airline companies have been on a buying spree this past summer, placing jet orders in record numbers, fueled by India’s recent deregulation measures. And jet manufacturers like Airbus and Boeing are now in heavy competition for this market.

A booming services industry, falling interest rates, and a surging stock market are

also spurring the explosion of the Indian market.

In this edition of the Ketchum Global Research Network newsletter, we examine

how the economic growth of India will impact our clients’ business. Specifically, we look to understand the emerging Indian business and consumer markets that represent a significant opportunity for our clients around the world.

India Versus China September’s Newsletter focused on the emergence of China in the global marketplace. And while China is poised to have a huge impact on the global economy, it is India that could have a far greater impact, and in a shorter timeframe.

Why? India will have the world’s largest population by the year 2050–-1.6 billion people versus 1.4 billion in China. And, more importantly, India’s population will be much younger and more highly educated. Sixty percent of India’s population is under age 32, while the Chinese demographic skews much older. In 20 years, China will have an estimated 300 million people age 60 or older. China typically relies on cheap labor from unskilled workers to drive its export business and has largely ignored an investment in high technology industries. India, on the other hand, has an educated workforce that for the most part is fluent in English. As things stand, India will soon have more English-speaking computer operators than the entire rest of the world put together, and it will be organically linked to all the advanced economies. 2

The role of government is also critical to both economies. China still remains a communist regime while India’s government

is a more progressive federal republic. Just

take a look at the billboards plastered around Bombay—these ads speak out on everything from local politics to sex. Such freedom of ideas and expression are almost unheard of in China.

A look at Indian and Chinese publicly listed

companies reveals that Indian businesses have, with a few exceptions, outperformed their Chinese counterparts on return on equity (ROE) and return on invested capital (ROIC). 3

“Of all the emerging markets countries, India

is the one with the solid foundation,” says

Christopher Taylor, emerging-markets portfolio manager at Hudson Fairfax Capital.

Consumerism of the Middle Class The rapid growth in outsourcing has created good jobs in India. As the Indian economy has become more robust, the emerging middle class—some 300 million strong—is now in a much better buying position. That includes being able to buy automobiles, cell phones and other luxury items that they could not have afforded before. For instance, in 1999 India had 2 million cell phone subscribers. Today, that number signs up every month.

Five years ago Indians saved 30% of their income; today the savings rate is 18%. This additional disposable income makes the Indian middle class an attractive consumer market for all the world’s manufacturers. Cell phone companies, banks, car manufacturers and insurers are all looking to sell their products to the growing middle class.

And, more disposable income means more flexibility when it comes to travel. The recent deregulation of the Indian airline industry

makes flying cheaper–-both domestically and internationally.

Moreover, India’s GDP (gross domestic product) increased 8.2% last year, and 7% is expected in 2005. 4 Advertisers and retailers have quickly gotten on board with this economic boom. Shopping malls are popping up in major cities. With only a handful of malls in existence only three years ago, it’s anticipated that there could be 100 malls in and around New Delhi alone within the next several years.

“The increase in the number of households headed by salary earners, professionals and business persons, and the emergence of a thriving consumer finance business, are expected to continue the consumerism boom in India.” —Ernst & Young

of a thriving consumer finance business, are expected to continue the consumerism boom in India.” —Ernst
of a thriving consumer finance business, are expected to continue the consumerism boom in India.” —Ernst
of a thriving consumer finance business, are expected to continue the consumerism boom in India.” —Ernst

Poverty Affects Education While its middle class is indeed growing, India is still one of the poorest nations on earth, with as many as 70% of its people living in poverty and having a per capita annual income of only $500. 5 In just two decades, China’s people have become twice as rich as India’s.

India is a nation striving to be a global leader in brainpower and produces four times as many engineers annually as does the U.S. But it struggles to provide adequate education for its poverty-stricken youth. 6 “Education is the ticket out of poverty,” says New Delhi economist Surjit Bhalla.

In 2001, an education law was passed to help boost enrollment and graduation rates. Public education was to be free and compulsory for all children. Increasingly, Indian parents want their children educated, particularly in English and computing.

The Affluent Indian Market With the middle class gaining economically, so too are the elite Indian upper class. It is estimated that there were 61,000 Indians whose financial assets exceeded $1 million in 2003. That number rose 22% from the previous year, thanks to stock market gains and solid economic growth. 7

Louis Vuitton, Zegna, Porsche and Bentley are among the cachet brands being purchased by affluent Indians. And there’s a sort of turf war between the super rich and the regular affluent. India’s super rich are buying luxury goods to maintain their distinction from the merely affluent and showcase their place in Indian society. The super rich status is bestowed on only the top 1,000 families in the country. Their high- end taste is derived from travels to other Asian destinations such as Singapore, Thailand and Hong Kong.

Foreign Investment Is Now Welcome Another key component of the Indian economic boom is the influx of foreign investment into the country.

Take the media sector, for example. Just last year, New Delhi changed the rules barring foreigners from the media sector. Now, foreigners can hold up to 26% of Indian news media companies (radio, television, newspapers). In the past 18 months, Indian media ventures have raised $3 billion in foreign funds and an additional $250 million is expected to be added later this year. 8

Although progress has been made, investors are still holding back due to shortcomings in India’s infrastructure, according to a study by KPMG. The electricity is unreliable. Poorly maintained roads and ports, as well as corruption and bureaucracy, make transporting goods difficult. Pockets of excellence do exist, such as the campuses built by the big software firms. While China is way ahead in this area, a more positive attitude by the Indian government toward foreign investment is helping India start to catch up. 9

Indian Companies—Shedding Traditional Business Practices With all of the changes happening on the Indian economic scene, the biggest change of all is expected to be the internal business practices of Indian companies.

Until now, Indian companies have conducted business almost exclusively in India, selling products and services to Indian customers and managing a workforce comprised almost entirely of Indians.

Reaching out to the worldwide marketplace means that Indian execs must now learn to deal with a multi-ethnic, multi-cultural workforce and consumer. And to compete globally, they will need to focus on employee issues, corporate social responsibility and ethics. 10

“A solid period of domestic economic growth, the perception of India as a premier destination for international outsourcing, the rise of India- based multi-nationals, and an explosion in direct foreign investment by Indian firms have thrust Indian business practices into the global spotlight.”—Poonam Barua, Director of The Conference Board’s India Operations

Indian companies, which had a very small presence in foreign locales just a few years ago, have inked 62 overseas deals worth $1.38 billion so far this year, buying up a variety of foreign outfits, from engineering design house INCAT International in Britain to Valeant Pharma in the U.S. That compares with just $202 million in deals in 2002. 11

Keys to Success:

Learn that having a true global perspective means more than just having a physical presence in other countries. Think globally in terms of size of operations, quality, processes, talent and best practices.

Go beyond platitudes and focus on execution. Strategy, ethics, and principles of good management that are written in textbooks may look relatively easy to introduce, but their successful implementation is difficult, requiring sustained efforts by senior management.

Develop skills in talent management, retention, and recruitment. Indian CEOs must create and communicate a vision that is knowledge-led and shared by all employees.

Embrace technology developed throughout the world, not just in India.

Aggressively manage performance and benchmark competency standards against global norms.

Be prepared to meet regulatory compliance on an international scale.

Source: “India: A Quiet Shopping Spree,” Business Week, October 10, 2005

Media Habits Generally speaking, when we refer to media consumption in India we’re talking about urban Indians. That’s because of 750 million Indians, 200 million don’t read any publication. Print readership in urban India is 3 times that of rural areas. TV has only penetrated 30% of homes (the urban penetration is 2.5 times that of rural). 12

TV is the news media staple, according to a study released by the market research company Synovate. While one in 10 Asians now access web blogs on a weekly basis for news and current affairs information, blogs have not yet caught on with Indian consumers. A majority of Indians (78 per cent) and Indonesians (73%) trust a lot of the news stories they see or hear. Indians (71%), Filipinos (68%) and Thais (67%) are the strongest believers that news and career success go hand in hand. By comparison, only 32% of respondents in Hong Kong agree that keeping up with the news is important for their work. 13

4

India falls behind many other major nations when it comes to Internet penetration. However, growth of greater than 20% through 2008 is expected. The greatest growth in usage is in increased time online by established users. 14 Consumer purchasing online in India is beginning to pick up as well. According to the most recent figures published by the Internet & Online Association of India (IOAI), annual online consumer purchasing totaled roughly $130 million in 2004-2005. That total is expected to grow sharply over the next two years, topping $550 million by 2006-2007. 15

In Vogue With the current trend toward heightened interest in spirituality and the quest to find purpose and meaning in life, India has enjoyed a resurgence in cultural appeal. Madonna and other celebrities have lent their glamour to all things Indian. Exemplifying this trend is graphic designer Sanjay Patel’s “Little India” book, a guide to the Hindu gods for children. From Shiva to Ganesha to Kali, the text explains each of the 14 deities’ mythological origins. The self-published book’s first run numbered just 500, but it has proven immensely popular with kids and adults. 16

Similarly, India’s wine reputation is beginning to flourish, both domestically and internationally. Indian wines are especially popular in England and other places where Indian food has gained traction. Wines from Indian wineries like Grover, Sula, and Chateau Indage are spicing up cellars and complementing menus. Wine importers in England say that demand for Indian wines has jumped by as much as 30% annually in recent years. And according to the consumer trends analysts at Iconoculture, Indian wines appeal to the timeless consumer values of authenticity, deliciousness, experimentation, quality and discovery. 17

Implications for Our Clients

Now that India has conquered the IT sector, Indian CEOs believe that the country is poised to become one of the low-cost manufacturing hubs of the world. 18 Manufacturing may lack the glamour and cachet of IT, viewed by some as a stodgy, slow-growth sector, but with the growth of outsourcing and the success of Indian businesses in attracting international clients, more of our clients should be rethinking Indian manufacturing.

India’s new patent legislation has forced the Indian pharmaceutical industry to focus on research and development of new drugs, like its Western counterparts. Estimates are that the drug industry will raise more than $3 billion in the stock market in the next year for overseas acquisitions, which will facilitate research collaborations and “cross-border brain transfers.” 19 This will necessitate investment in cultural sensitivity training for both U.S. and Indian pharmaceutical company employees.

There is great disparity in media consumption between urban and rural India. Marketing spending on below-the-line promotions and PR is likely a good choice, since access to mass media is limited. While Internet penetration is currently low, it is on the upswing and so is the popularity of online shopping. Our online retailer clients will want to use this new business environment to their advantage.

India is a land of promise for luxury goods makers, a sleeping giant whose potential is only now beginning to emerge. "Luxury brands have to use strategy and determination toward a market which has the highest consumer potential in the immediate future," says Leonardo Ferragamo, head of Altagamma and chief executive of the family-owned business Salvatore Ferragamo. 20 Messages of opulence, sumptuousness and indulgence will reach a receptive audience.

Marketers looking for potential partners, spokespersons and cultural trends to capitalize on will want to keep the global appeal of Indian foods, celebrities, movies and spirituality in mind.

Top Sectors to Watch

It is expected that India will play a greater role in global industries outside of IT. Here are a few that are expected to expand through global acquisitions in the next couple of years:

Pharmaceuticals

Automotive parts

Telecommunications

Steel and aluminum

1 “India Rising: A Silicon Valley Vet Scours the Subcontinent for the Next Great Tech Company,” Forbes, September 5, 2005

2 “Look to India,” Forbes, September 5, 2005

3 “China and India – The New Corporate Model,” Business Week, August 22, 2005

4 “Look to India,” Forbes, September 5, 2005

5 “Indian Summer,” Forbes, July 25, 2005

6 “China and India – The Education Gap,” Business Week, August 22, 2005

7 “FT Report: India and Globalisation,” Financial Times, March 22, 2005

8 “Read All About It: India’s Media Wars,” Business Week, May 16, 2005

9 “Investors ‘Put Off by Weak Infrastructure’ in India,” Financial Times, July 26, 2005

10 “Indian Companies Must Shed Traditional Business Practices to Continue Becoming World-Class Players,” The Conference Board, July 6, 2005

11 “India: A Quiet Shopping Spree,” Business Week, October 10, 2005

12 “Future of Mass Media Audience in the Two-in-One Nation!” Business Recorder, March 19, 2005

13 “Asia: Survey Finds TV the Main Medium of Choice For News,” BBC Monitoring Media, September 12, 2005

14 “Internet Use Remains a Rarity in India,” eMarketer, August 15, 2005

15 “Online Shoppers in India,” eMarketer, July 07, 2005

16 “Little India, a Kiddie Guide to Hindu Gods, Gives Dharma Deities a Dose of Cuteness,” Iconoculture, May 26,

2005

17 “South Asian Wineries like Sula and Chateau Indage Putting India on the Wine Map,” Iconoculture, September 6,

2005

18 “Indian Companies Must Shed Traditional Business Practices to Continue Becoming World-Class Players,” The

Conference Board, July 6, 2005

19 “India: A Quiet Shopping Spree,” Business Week, October 10, 2005

20 “Courting the New Russian and Indian Luxury Consumers,” International Herald Tribune, September 30, 2005