The Ice Flow

By Red Sox Steve

I recently attended a program called the University of Rhode Island Honors Colloquium, which took place in Kingston, RI. The subject of the colloquia this semester is Demistifying India, and the topic of last night's discussion was "Doing Business in India, With India". Follow this link to find out more about this presentation. I want to comment on what I saw and learned because I found this presentation extremely informative.

I've travelled to - and lived in - the developing world, but have not yet been to India. From all that I've read about the "BRIC" countries, these are the places that will lead the world in a half-century. Their massive size, massive population, and access to natural resources means that their standing in the world will dramatically improve between now and 2050. At the same time, these nations are still very much developing countries. I'm also afraid the average American doesn't understand the magnitude of this transformation. Pay attention and learn about India, China, Brazil and Russia at every opportunity to understand how life will unfold in the 21st century.

There were three speakers, two of which were alumni of URI, who presented in the order as listed below:

1) Mr. John Struck, alumnus of URI (undergraduate economics), managing director at venture capital firm Wand Partners and Director of SeedWorks India Private Limited
2) Mr. Tobias Leuhrig, alumnus of URI (undergraduate engineering, graduate MBA), head of strategy at German truck parts manufacturer
3) Mr. Shivan Subramaniam, CEO of FM Global, a global insurance company based in Johnston, RI.

Mr. Struck's presentation was on the development of an agricultural company in India called SeedWorks. Struck, having graduated from URI in the early 1970s, has travelled extensively around the world, visiting over 50 countries in the last 35 years. His perspective was well-rounded, highly experienced and well-informed. The agricultural company that his venture capital firm financed over 10 years ago has performed as one would expect, when considering the nearly 10% growth in Indian GDP over the last decade - amazing! They've seen revenue growth in the double digits year after year, climbing every year. Agriculture makes up about 19% of the Indian economy, and employs over 100 million people. In contrast, the IT outsourcing industry employs a mere 2 million. Unfortunately, because of poor infrastructure and other challenges, a whopping 40% of SeedWorks' product is lost on its way from the farm to the market.

The investment has worked well for investors, and SeedWorks employs about 300 people; but losing such a high percentage of crop on delivery seriously cuts into profits. In addition, SeedWorks owns no buildings in India - it rents every property it occupies because, according to Struck, getting a building permit is so difficult there. In addition, the electrical grid is so unreliable, SeedWorks runs its system of backup generators almost 6 months a year. This business has done a good job of taking advantage of human capital - one of their lead Indian scientists was educated in America and has experience working for an American multinational firm, prior to managing SeedWorks. This is no surprise: many in the Indian diaspora have returned to India to seek employment after receiving educations abroad.

Mr. Leuhrig's presentation was a bit more technical in nature. He described the differences in technology in the trucking industry between Germany and India - with the best automotive engineers in the world, Germany is second to none when it comes to innovations in transportation. India, being an emerging economy, faces a great deal of challenges in the transportation sector, including a lack of safe and reliable trucks and busses on its poorly maintained roads and highways. Where Struck was well-informed and easily able to understand the nuances and differences between doing business in his own (and many other) countries and India, Leuhrig, unfortunately was not.

Coming from a developed nation, going to a developing nation, I understand the temptation to want to inject superior technological knowledge in the interest of progress and development. After all, we are all looking for the best solutions to the problems we find aren't we? Well, it's not as simple outside the sphere of engineering. India is a developing nation, and things like technology, transportation, and infrastructure are not going to resemble what we see in the developed world most of the time. When they do, it's a small victory for progress, but when they don't there are a number of reasons why this would be the case. Here's the thing - Leuhrig is a highly skilled engineer, and, knowing a few other engineers myself, I know they instinctively apply formulae to problems, working out the solution as efficiently as possible. That works, but only in engineering. Yes, India has inferior trucking capacity and technology. Yes, in order to grow its economy it will need the best technology in the world, but it's the structure of the economy in its present form that prevents this from being the case.

Leuhrig made great points about the technological differences between trucks in Germany and trucks in India. Germany, though, has the human capital, infrastructure and technology to support a network of high-end, high-performance vehicles. India, with a delapidated road system, intermittent access to mechanics and even less access to the technology required to maintain a system of high-tech trucks, won't benefit from an investment in the trucks Leuhrig is selling. His presentation confirmed that despite the best efforts of those that espouse the virtues of technology, a more holistic analysis of the situation in India, as well as a much higher level of self-awareness, would help point Mr. Leuhrig and his firm in the right direction.

The last presenter was Mr. Subramaniam. His presentation was on the services that FM Global provides to Fortune 500 and Fortune 1000 clients around the world. According to Subramaniam, it takes FM Global at least 3 years to develop and train an engineer for fieldwork. Unlike many other insurance companies, FM Global employs no actuaries, only engineers who contemplate and model outcomes with the intent of providing affordable insurance to clients around the world. He feels, as do most multi-national CEOs, that as the Indian economy grows, opportunities for companies like FM Global to increase market share there will grow as well. There is no stretch in that logic; however the only catch is that in India, in order to sell insurance, foreign ownership of an insurance firm can be no greater than 26%. In other words an FM Global insurance subsidiary must be at least 74% owned by an Indian-domiciled corporation. It is clear that India has little interest in allowing foreign financial firms to move insurance premiums or profits out of India.

The entire presentation was as interesting as it was diverse. The first presenter gave a great example of the success of aligned interests - a foreign financial firm made an investment completely appropriate for India's level of development, in a sector that will only increase with an improvement in India's developing economy AND skills and technical know-how were put to use in order to create a business that will contribute to economic growth in India. The second presenter provided an excellent analysis of the technological disparities that still exist between a high-tech nation and a low-tech nation in the trucking industry, while also confirming that cultural understanding is just as important as technical understanding. The third presenter gave a much more globally oriented presentation as he discussed the challenges facing a multi-national corporation trying to get into the Indian marketplace.

In their own way, each of the presenters confirmed that India will remain an attractive place for foreign investment and strong diplomatic ties for decades to come. While it retains many of the characteristics of a developing country, the economy is growing far faster than many other nations in the developing world. Because of this rate of growth, foreigners are advised to take advantage of opportunities for cultural and economic exchange. India is the largest democracy in the world, and borders some very dangerous nations - because of its geographic location and growing economy, India and the nations of the developed world must maintain and even strengthen their partnership, in the interest of mutual benefit.