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Indian Investment: The Quiet Achiever Turns Up the Volume

Published: August 06, 2012 in Knowledge@Australian School of Business
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With all eyes focused on China's rapid growth, voracious needs and acquisitions, India has been comparatively overlooked. Typically, Australian businesses have found the Indian market tough going. Despite the vast opportunities it offers, there are still fewer than 2000 Australian companies selling into that market – that's half the number of businesses exporting to China and a mere portion of the firms peddling their wares to either Singapore or New Zealand.

A number of Indian entrepreneurs have made significant acquisitions and built up businesses in Australia, among them major companies including information and communications technology giants Infosys, Wipro, Mahindra Satyam and conglomerate Tata, to name a few. Indian steel companies – Tata Steel, Bhushan Steel and Jindal Steel – have been steadily buying assets in Australia and overseas for years. More recently, as clean energy has become a corporate competitive asset due to increasingly stringent environmental laws, there has been a flurry of deals by Indian firms in renewable energy businesses as well.

Globally, there is unprecedented interest in India and its potential as the world's next economic superpower alongside China. Last year, Indian companies made a number of high-profile acquisitions. Investments by Indian companies overseas more than doubled to US$43.9 billion in the 2010-11 fiscal year. Conglomerate Sahara India Pariwar bought Grosvenor House hotel in central London in early 2011. Tata snapped up the luxury British car brands Jaguar and Land Rover from Ford. Even during the economic downturn, Indian firms continued their global shopping spree.

While China has been the focus, Indian groups have been equally successful in racing to secure coal and infrastructure assets across the globe, including in Australia. The value of India's outbound investment in the mining and metals sector globally reached US$4.6 billion in 2010, for the first time surpassing China's outbound investment of US$4.5 billion. At the same time, Indian companies overtook those from China, Korea and Japan as the biggest Asian buyers of overseas' coal assets.

Yet none of India's efforts in Australia have grabbed the headlines as Chinese companies have done – sometimes for small and seemingly insignificant purchases.

The reason Indian companies have not attracted the same sharp focus as their Chinese counterparts is partly due to their preference for greenfield sites and building from scratch rather than making controversial acquisitions. But even when they have acquired companies and entered joint ventures and partnerships, these deals were scarcely noticed because, until recently, the assets were never in the "hot" sectors.

Tim Harcourt, the J.W. Nevile Fellow in Economics at the Australian School of Business, suggests another reason India's global expansion has not attracted so much focus. "Indian companies have learned how to invest internationally without rocking the boat," he says. "They're private companies – not state-owned enterprises – and they're more diversified with a tendency to move in a streamlined and unobtrusive fashion. Plus, they're buying infrastructure not a key stake in a marquee company, such as Rio Tinto."

Common Traditions

Lip service is always paid to the common traditions Australia shares with India, but Australia's main interest is China, argues Gautam Bose, associate professor in economics at the Australian School of Business. While he believes Chinese companies do not have a different or unique investment style as such, China has greater foreign currency reserves available for its corporates and companies to tap. Arguably, China is seen to present a unified front whereas Indian companies are perceived as a bunch of disparate entities.

As in any capitalist country, Indian companies are independent and when they invest offshore they do so without government support. "Whether an Indian company succeeds or fails in Australia is determined by the same forces as whether a South African, UK or US company succeeds or fails. It's just one more company doing a deal," Bose says. "Even if the Indian government had foreign reserves, these would not naturally become available to Indian companies since they are private entities."

Indian companies do not have a national stamp on them. By contrast, Bose says, Chinese state-owned enterprises (SOEs) have government machinery behind them, which means they can often be caught up in the politics and the Sino-Australian diplomatic relationship. "Thus, their investment strategies become that much more visible, and are perceived as part of a broader Chinese strategy."

Inevitably comparisons are made between India and China because of the relative economic success of China over the past 20 years, notes Harcourt who calls India "the quiet achiever". "If you look at India's development, and the policy stances of the two nations, they're very different. In 1980, China and India were about level pegging when it came to GDP and per capita income. By 2000, however, China was about twice India's size in terms of GDP and per capita income and eight times its size in terms of exports. Since 1979, China has transformed itself from a Maoist, closed-economy to a more market-based, open economy, keen to engage in the world. It relied heavily, though, on inward foreign direct investment."

By contrast, Harcourt observes that India stuck to a closed economy model with state planning dominating economic policy and import-replacement policies, instead of the export-led development approaches of its East Asian neighbours. Ironically, India's economic nationalism held it back until 1991 when it opened up its economy under the reforms of then finance minister, now the prime minister, Manmohan Singh.

"Interestingly, it is because India had an anti-colonialist tradition of economic nationalism that many Indian companies that have set up in Australia own strong global brands. They are genuinely international companies compared to China's generally state-owned enterprises," Harcourt points out.

China has a long economic relationship with Australia. India has more recently tightened its economic ties, but has plenty of catching up to do – and fast. Along the way, Harcourt predicts the Australian and Indian trade relationship will lose some of the traditional emphasis on "the three Cs – cricket, curry and Commonwealth". "This is partly because of India's enormous appetite for commodities and due to its comparative advantage in the export of professional services," he says.

The relationship between Australia and India is certainly significantly better than in the past, says Indian-born Neville Roach, chairman emeritus of the Australia India Business Council and chairman of Tata Consultancy Services advisory board in Australia and New Zealand. Roach has lived in Australia for 50 years and has watched the Aussie-Indian relationship change dramatically. But he sees plenty of room for improvement. "Clearly, Australia has a somewhat negative attitude towards India and tends to neglect it," he says. Historically, Roach believes this dates back to India's decision to remain non-aligned. (In 1961, India was instrumental in creating the Non-Aligned Movement (NAM) of nations, which are not formally aligned with or opposed to any power bloc.)

"Both countries see each other less favourably than they deserve to be seen," asserts Roach. "Australian business seems to focus unduly on all the risks and problems in India and there's very little willingness to acknowledge the inevitable and unstoppable liberalisation process and all the benefits that will bring." In Australia, Roach often hears talk of how restricted the Indian market is for legal, insurance and financial services. However, US and UK companies are doing business in India to the extent that the current rules permit, because they see long-term value, Roach emphasises. Those who actively engage with India today are likely to be very successful there in the future.

Securing Energy

Like China, India has its sights on energy security. Roach notes the very enthusiastic attitude towards China investing Down Under and the relatively lukewarm response to Indian approaches. "This might explain why the Chinese often get the better of Indian companies when assets are up for grabs. Also, the Chinese economy is further down the development path and its companies are going about investment in a very deliberate and aggressive way," he says. This has put them in a stronger bargaining position. But Roach is seeing changes there too as Indian companies become more determined and more willing to compete aggressively in the bid process, and consequently enjoy greater success.

An obvious example is India's foray into the hottest of all sectors through its investment in Queensland's huge Galilee Basin coal reserve, Australia's largest untapped coal resource. As the world's second-biggest coal exporter, Australia now ships about 140 million tonnes of thermal coal overseas a year, and by the end of the decade Galilee could be exporting 195 million tonnes of thermal coal annually.

India's increasing involvement in coal-related mergers and acquisitions in Australia has culminated in the subcontinent's largest coal importer, Adani Group, spending about A$5 billion to buy up reserves in Galilee from Linc Energy, as well as Queensland's Abbot Point coal terminal. GVK, one of India's largest power and infrastructure groups, has bought major shares in Australian coal mines in Galilee from Hancock Prospecting – controlled by the world's richest woman, Australian Gina Rinehart – for about US$2.4 billion. The company, which has formed a joint venture with Rinehart's Hancock Coal, plans to spend at least US$10 billion more to develop the mines, dig out the coal, build rail facilities and expand the ports.

Others planning multi-billion dollar thermal coal mines in Galilee include Meijin Energy, China's biggest private coke producer owned by Chinese billionaire Yao Junliang, and Vale, the Brazilian resource house. The only Australians in the basin are Bandanna Energy, which is looking to sell to Indian buyers, and Australian billionaire Clive Palmer's Waratah Coal, which is joining forces with the Metallurgical Corporation of China to develop the project.

The GVK purchase is the latest in a spate of deals by Indian groups in Australia and elsewhere driven by India's private thermal power plants, which are rapidly increasing generation capacity to meet rising demand. Although India is rich in coal, it risks facing a coal shortage by the end of next year as the number of power generators doubles. Production has also been constrained by rigid environmental regulations and a localised Maoist insurgency has put many local coal reserves out of reach.

The need for energy security was highlighted in August when India suffered the world's biggest blackout that left 600 million people without power. The massive outage, which left half the country without power, was blamed on an overloaded system.

Cooperation Required

Galilee Basin has long been considered too remote to be viable for mining. The closest port is 500 kilometres away and there is no way of getting the coal to market. Rail lines need to be built to Abbot Point, Australia's most northerly coal terminal, where the coal can be loaded on to ships. The reality is that Galilee requires massive capital investment of at least A$50 billion dollars in the short term.

In May, the Queensland Government granted conditional approval to GVK and Hancock Coal's joint A$6.4 billion Alpha coal project to build one of Australia's largest coal mines in the Galilee Basin. However, the project still needs federal government environmental approval to proceed. The state government also approved GVK to provide a railway corridor from the basin to Abbot Point – on the condition third-party access is allowed. In July, Adani Group and freight company, QR National, announced they would collaborate to build an "east-west" rail line to service the Galilee Basin operation.

The future of Galilee depends on collaboration between the major players but getting the high-flying investors to work together in Galilee has been one of the biggest challenges. At least two of them are Indian companies whose interest it is to form a consortium. Most would rather build their own rail lines and port facilities than share and split the costs, but this is not practical.

Harsh Mishra, president of corporate planning for the Adani Group, says creating infrastructure is viable because the resource is extensive and potentially large-scale production is possible. "Control over the logistics chain is essential in the case of low-grade thermal coal as the cost [of bringing the coal] to market comprises, to a very large extent, the logistics costs," he says. "This might even exceed the mining costs in some cases."

Cooperation is essential for development of the Galilee Basin, Mishra highlights. "Individual and piecemeal development would impose an uneconomic cost on the proponents and would be a sub-optimal way to provide infrastructure (resulting in duplication)," he says. "Given the low-grade nature of Galilee coal, it's simply not viable for an individual proponent. [Also] service and infrastructure providers would not encourage it as it duplicates their efforts and creates inefficiencies in planning."

Companies, including Adani and GVK, have built airports, seaports and railroads at home and abroad, and are leveraging their expertise to win projects offshore. "If Indian companies have a significant network in other regions of the world, it makes sense for them to own port and rail facilities and build infrastructure here in Australia too," suggests Bose.

But there are questions about just how successful Indian companies have been. As late investors in Australian coal assets, in some cases they have been forced to pay a premium and then splurge big money to build or buy infrastructure assets, such as ports. Yet this view ignores how Indian companies deal at home and offshore; Indian companies are certainly experienced in mergers and acquisitions and are considered serious contenders for acquiring global businesses. The prominence of Indian business interests in Australia is growing further with widespread and diverse investment in pharmaceuticals, IT, manufacturing and professional services. And just paying lip service to the opportunities to forge stronger links with India may not be enough.

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