Recently Apollo Tyres shares perked up when it announced it had called off the acquisition of the much larger Cooper Tire. Given the strategic nature of the deal for Apollo with access to technology and markets, one might have expected the reverse to happen. But markets, which are often seen as the arbiter of effective strategy voted otherwise. If one considers recent announcements where Tata Steel wrote off a part of the acquisition value of Tata Steel Europe or Tata Chemicals writing off a part of the price it paid for some of its UK acquisitions (Brunner Mond in particular) or Mahindra Systech and Bharat Forge struggling to earn handsome returns on their acquisitions in Europe or JSW Steel struggling to make money on its pipe and plate mill acquisition in the US (the author has in the past been associated with JSW group), then it becomes apparent that even when there has been a strong strategic rationale to acquire firms in developed markets, Indian firms have had a fair share of the winner’s curse.
It’s not that the acquisitions have failed to deliver access to markets/technology/customer relationships. But the quick succession of recessions since 2008 and the aftermath of the banking crisis has meant that the expected returns on the acquisitions have simply failed to materialise. In fact, even acquisitions in emerging markets have been a mixed bag. Take Essar Oil’s strategic stake in Kenya Petroleum Refineries or Tata Power’s acquisition of stake in Bumi group’s coal mines in Indonesia; both have failed to deliver economic returns that would justify even the management attention and time involved in the acquisition.
When investment bankers talked of the model of using the arbitrage between high price to earnings (P/E) ratios of Indian firms to leverage and acquire targets with lower P/E ratios in other geographies, the idea seemed salivating. But slowly corporate India is realising that the Japanese model of ‘build at home and export worldwide’, which has been so successfully adapted by China, is a better return, lower risk gambit even if it entails taking a longer road. In the classic story of the hare versus the tortoise, the ‘build at home and export worldwide’ strategy seems to have delivered better returns for firms both in China and Japan and also for the chosen few that have done this in India.
Take for instance the Indian two-wheeler industry. Bajaj Auto, the country’s second largest motorcycles manufacturer now derives almost a third of its sales by volume and more than that by value from exports. By setting up an extensive marketing network and in some cases near shore assembly operations, India’s leading bike manufacturers Hero MotoCorp and Bajaj Auto have effectively adopted the Indian software industry’s strategy of make in India and sell everywhere. In doing so, they have effectively adapted what was thought possible only in the services industry to manufacturing. A closer look at Bajaj’s exports strategy shows that it’s key to Rajiv Bajaj’s vision to upping the firm’s global market share by 50 per cent. Bajaj three-wheelers, too, have a profitable market in Sri Lanka, while its bike sales are well diversified across continents with its lower end Boxer more popular in Africa and its higher-end Pulsar rules the roost in Latin America. Even within a continent, the firm has effectively diversified beyond Nigeria to other markets and is penetrating new markets in Asia too. All this without any meaningful acquisitions. The same strategy is now being adopted by Hero MotoCorp, the world’s largest bike manufacturer by volumes. Having built a large domestic base of sales, Hero has been following Bajaj to markets such as Africa and Latin America often opening up new geographies and selling to markets where Indian brands may be underrepresented.
The success of these firms only brings home a truth more and more firms across corporate India are realising; manufacturing in India isn’t dead. Building scale at home and then going global the organic way is better than buying overseas assets in the hope that the seller is a fool who is selling the business to you for less than it’s intrinsic worth.
It’s not that the acquisitions have failed to deliver access to markets/technology/customer relationships. But the quick succession of recessions since 2008 and the aftermath of the banking crisis has meant that the expected returns on the acquisitions have simply failed to materialise. In fact, even acquisitions in emerging markets have been a mixed bag. Take Essar Oil’s strategic stake in Kenya Petroleum Refineries or Tata Power’s acquisition of stake in Bumi group’s coal mines in Indonesia; both have failed to deliver economic returns that would justify even the management attention and time involved in the acquisition.
When investment bankers talked of the model of using the arbitrage between high price to earnings (P/E) ratios of Indian firms to leverage and acquire targets with lower P/E ratios in other geographies, the idea seemed salivating. But slowly corporate India is realising that the Japanese model of ‘build at home and export worldwide’, which has been so successfully adapted by China, is a better return, lower risk gambit even if it entails taking a longer road. In the classic story of the hare versus the tortoise, the ‘build at home and export worldwide’ strategy seems to have delivered better returns for firms both in China and Japan and also for the chosen few that have done this in India.
Take for instance the Indian two-wheeler industry. Bajaj Auto, the country’s second largest motorcycles manufacturer now derives almost a third of its sales by volume and more than that by value from exports. By setting up an extensive marketing network and in some cases near shore assembly operations, India’s leading bike manufacturers Hero MotoCorp and Bajaj Auto have effectively adopted the Indian software industry’s strategy of make in India and sell everywhere. In doing so, they have effectively adapted what was thought possible only in the services industry to manufacturing. A closer look at Bajaj’s exports strategy shows that it’s key to Rajiv Bajaj’s vision to upping the firm’s global market share by 50 per cent. Bajaj three-wheelers, too, have a profitable market in Sri Lanka, while its bike sales are well diversified across continents with its lower end Boxer more popular in Africa and its higher-end Pulsar rules the roost in Latin America. Even within a continent, the firm has effectively diversified beyond Nigeria to other markets and is penetrating new markets in Asia too. All this without any meaningful acquisitions. The same strategy is now being adopted by Hero MotoCorp, the world’s largest bike manufacturer by volumes. Having built a large domestic base of sales, Hero has been following Bajaj to markets such as Africa and Latin America often opening up new geographies and selling to markets where Indian brands may be underrepresented.
The success of these firms only brings home a truth more and more firms across corporate India are realising; manufacturing in India isn’t dead. Building scale at home and then going global the organic way is better than buying overseas assets in the hope that the seller is a fool who is selling the business to you for less than it’s intrinsic worth.
