Globalization: Japan-India PE perspective (continued)

In the last post I touched the issue of 4 ways of looking at the PE/VC relations between Japan and India. In this post, I would try to elaborate on these 4 ways about how the Japanese PE/VC firms could look to seek a pie of the India story cake.

  1. Invest in Indian Companies – After talking to various PE/VC firms in Japan I noticed that they have very less exposure to the Indian markets. They almost have no Indian company in their portfolio. We need to understand that to capitalize on the emerging economies; companies need to understand the local markets and who can know these markets better than the local Indian companies? I completely agree that to have companies from other country on the portfolio, someone from the investment firm needs to understand the target country’s culture and people. But that should not be an issue for Japan, since many Indian business professionals work in Japan and they are bilingual too. Off-course in the beginning aligning to some new county’s customs and business would be a problem for the investment firm, but that’s fair enough given the better IRRs.
  2. Streamline the Indian companies – Now once the Indian companies are in the portfolio, the Japanese GPs can streamline their operations while restructuring the company. The GPs can then use the knowledge of their world-class quality tools such as TQM, JIT to improve the efficiencies and take the company to new avenues. They can also restructure the company to serve the Japanese markets, like Daiso’s main suppliers are from China and Indonesia, similarly companies in India can also have products catering to Japanese markets, become suppliers to companies such as Uniqlo.
  3. Bring LPs from India on board – As I said in the last post due to not up-to mark performance of the Japanese GPs, some LPs here might have turned a bit unwilling to invest. The unwillingness is but natural because the LPs would always be expecting for much above market returns, which may be high expectation over the short run. However with the recent boom in India, there would be cash-rich LPs in India, looking for fundamentally strong companies in Japan, to invest in. In India basically most of the PE firms, are arms of business conglomerates, Birla, Fortune, Premji and now even Infosys to name a few. These firms would be willing to invest in companies having businesses allied to their business, such as Fortune could invest in a brilliant technology catering to the Retail markets, Premji Capital could invest in some brilliant embedded technology company.
  4. Take the Portfolio company’s products to India – Japan, a technology power has immense potential in terms of technological innovations, the need of the day is to synchronize the applications of these innovations to the needs of emerging economies, and if the GPs can achieve this during the restructuring of portfolio companies, planned to cater to India markets it would be very fruitful. Let’s take an example of this aspect; India has set a target of generating additional 78,500 MW of electricity by 2012, of which Solar and Hydro Power also form a crucial part. India has set an immediate target of 1000 MW of Solar energy by 2013 under the Solar mission and 20,000 MW by 2022. Some days back I was reading in Nikkei Weekly that due to high costs Japan has lost market of photovoltaic cells to Korea and Taiwan, but these days there is some movement for regaining the lost place. If PE firms having such companies in portfolio can have an offering for Indian markets, it would be a right offering at right time. But not to forget, in India cost and durability play a vital role, so due care should be taken of these aspects. Some days back I was looking at a hydropower Japanese product, it is a box, which just needs to be placed in a stream of water, may be river, city sewage drains, industrial drains and it would in turn generate power. Now if this product can be adaptable to Indian needs it would be interesting. Suppose it can generate enough electricity to pump water for a river side farm, than farmers would readily use it, even the government could pitch in with subsidies, because it’s addressing the immediate need of power shortage in India.
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Globalization : Japan-India PE perspective

We understand that Globalization means sourcing resources from places, where we get them in the right amount, at the right rate and in the right quantity; this in turn results in efficiencies.

Now let’s analyze India-Japan Private Equity-Venture Capital (PE/VC) viewpoint using this principle. A General Partner invests time, capital, talent and energy in the enterprise and optimizes its performance, if required restructures it. The result is a better enterprise with improved revenues, efficiencies, bottom lines and off course better valuations. Post this they sell their stake in the enterprise through various exit strategies; IPO, sale in secondary markets and sale to a strategic investor to name some. In today’s globalized world the PE transactions need not be limited by boundaries and in many cases it’s happening so, however if we look at the Japan-India PE activities we do not see much happening on this front.

Japan has always been a technology power and being a developed nation and high per capita income has the capital to invest, however due to shrinking domestic markets does not have much promising investment opportunities, if the invested enterprises aim only local consumption. Also the Limited Partners from Japan these days are turning a bit reluctant. India on the other hand has an increasing customer base, incomes, investment opportunities, HNIs, Institutional Investors and companies looking for advanced technologies.

If these two nations can bring about a proper synchronization between all these resources and needs of them, it would be a win-win situation for both the nations. Not to forget India and Japan share a lot common in their cultures and this can help them in doing businesses successfully. However today if we see the portfolio of any big PE/VC firm in Japan or India they have negligible cross investments.

This disparity could be looked in four ways; I would discuss more about it in my next writing.

Rethinking Globalization and Employment

The World Economic Forum works towards building a world-class corporate governance system through its motto “entrepreneurship in the global public interest”. The forum believes that social development and economic progress go hand in hand in hand and hence depend on each other.

The Annual Meeting 2010 of the World Economic Forum just ended in Davos, Switzerland; this meeting had special importance given the gloom in the global economy. While everyone agreed that the effort for a better future has to be a collaborative effort, let’s understand the key issues discussed at this meeting.

Globalization:

Globalization originally meant corporations going abroad and helping the local economies their grow through value addition provided, but the price wars that resulted from globalization basically resulted in lessening share of local companies and sometimes these companies even got wiped off. This eventually resulted in change in the employment scenario there. In the globalization race only present mattered, future did not matter and the value system was skewed. We need to understand that Globalization is meant to bring a conducive growth of global societies; in the financial crisis we realized that while globalizing, enterprises exploited the imbalance between various economies, which may not be a good idea considering the social responsibility that all corporations owe.

Another aspect to this, today the emerging economies which were export oriented are trying to concentrate on their local consumption whereas the developed nations are trying to slower their consumption to beat the recession, but if this goes on for long it would be no good for the global economies. To take one step further, post crisis if the developed world takes a protectionist outlook for say movement of services from developing nations to them, than the developing nations would easily take a counter action for movement of products to them. We should understand that post-crisis power blocks would be different; the developing nations can easily leverage their power with the vast customer base on their side. However with a multi-polar existence of powers, uncertainties and volatilities would also increase.

With this in mind the Leaders of today should act as trustees of long term prosperity of societies and not just by short term benefits, they should be able to enable co-ordination between economies. We need a new global economic model – the rules of 21st century need to be different. These rules need to be simple and both the governments and private sector should understand that they together can contribute better for the wellbeing of the society rather than going alone. New relations need to be established between these entities, Public-Private partnership is the way to go ahead. Josef Ackermann, CEO Deutsche Bank put forth an excellent proposal to create a B20 forum, where business representatives from member nations come together and collaborate for the betterment of global economies. Last but not the least, come what may immediate Action is required, actions matter more than ever today.

Employment:

Mr Larry Summers, key economic advisor to Mr Obama commented on the current economic state of US as Statistical recovery and a Human Recession. We should truly understand that employment is going to be one of the key issues in this crisis, so creating jobs is going to be the foremost task for the government’s world over.

One of the views on this is, encourage Entrepreneurship; Ventures are essential for growth, encourage entrepreneurs to take risks, they in turn would recruit people and fuel the growth. We cannot play very safe in the financial markets because it would bring in its own tradeoff such as credit becoming costly and in turn spending going down.

Mr Azim Premji, chairman Wipro Technologies rightly suggested that, we should not rely only on large industries for creation of employment, small scale and medium scale industries are also competent enough to create them.  He put forth a rationale, that in places like India, youngsters, who drop out of school after 10th Grade schooling are not skilled enough to fit in highly skilled jobs and are highly skilled for jobs such as agriculture, so the issue of harnessing the talent of this population should also be looked after.  The idea of introducing course-work in basic trade such as auto mechanics, computer repair etc in high schools to enable these students to make them self-employed, can off course contribute to the alleviation of this issue. Adding to this point I think in places such as India we really also need to create a shift in mentality to make people understand that no job is small and that every job is at par.

I understood Patricia Woertz’s, CEO of Archer Daniels Midland point of the importance of agriculture and the suggested reforms that should take place to fuel growth in Agriculture and in turn employment. However with more people moving out of Agriculture as an employment source, I doubt how much we can contribute to the employment issue at this moment by concentrating on this aspect. Ronald Williams, Chairman Aetna Inc talked about the importance of healthcare sector in a better tomorrow and employment as well; I agree with him on the issue of better tomorrow but every dollar spent in a non R&D business will create more employment than a R&D business, at this critical juncture we need more jobs.

Peter Sands, Chief Executive of Standard Chartered rightly pointed that there was no “one big idea, one silver bullet” that would guarantee recovery. To me what was important that, during this 5 day meeting everyone understood that the societies had lost trust, institutions made mistakes and the issues need to be tackled both technically and morally for a better future, short as well as long term.