Mumbai: Investments in some German companies by Indian firms have turned sour in recent times partly because of a high-cost base and a clash of cultures. Dr. Reddy’s Laboratories Ltd’s €480 million (about Rs3,163 crore now) acquisition of German drugmaker Betapharm Arzneimittel GmbH is a case in point.
Ferry Wittchen, a 23-year veteran at management consultancy Ernst and Young, and currently coordinator of the firm’s German business network, differs. These acquisitions, he said, were bargains for Indian companies hunting abroad, and they would have to infuse more capital now to revive the cheap assets they invested in.
For investments in India, German companies preferred greenfield projects and quick returns, he said. He also pointed at the German businesses that invested during the Asian economic crisis in the late 1990s. Those ventures have paid off, he said. Edited excerpts:
Do you think business sentiments about India have changed in the two years since your previous visit?
If you look at BRIC (Brazil, Russia, India and China) nations, of course it has changed. We have growth rates of 50% in companies. If it continues for some years, it will mean a lot of change for German business. That is why we see a change in the focus. India is much more in focus in three or four years. A lot of investments are coming to India.
But so far, only a few German firms have made any big investment in India.
Bosch and Siemens made long-term investments in India. They are already using the equity they raised in the past years. If Siemens and Bosch have investments in India made with funds generated in India, we should count it as well. A lot of German companies invest through their holdings in the Netherlands. You may say that is a Dutch investment but to be true, you have to look behind and you will find that it is either UK, French or German investment.
Upbeat: Ferry Wittchen says there is growing interest in India.
Are German companies investing more in India than in the past?
There is growing interest in the Indian market. China is first, but India is catching up. Investments in India are growing. I don’t see the current uncertainty affecting industrial investments in India. Just to give you an example, 15 years ago in Russia, we continued to invest in difficult times. Even in India, German companies will continue to invest during difficult times.
In which sectors are German companies looking to invest in?
German companies prefer to invest in production sites. They will not buy from the market. What Indian companies do in Europe, they buy customers. In a greenfield project you may not need an Indian partner.
German companies such as Volkswagen, Daimler and Bayer are making investments. But you may not forget that in Germany there are a lot of medium-sized companies that are family owned and they are all here. So there are big companies that announce their investments and smaller companies that do not. Half of the investments are made by these medium sized companies.
Lately, Indian subsidiaries of German companies have been buying out their minority shareholders. Why?
It is not in India alone; they do it all over the world. Minority shareholders will always have questions. If you look at companies, normally you have 100% shareholding. It is not German companies alone, it is how industrial groups are structured. They all favour 100% ownership.
Do you see German companies eyeing opportunities in India now?
I am not very optimistic to say you have a real opportunity because I don’t expect the sellers to sell at the moment. I see it unrealistic. You may get some shares at a lower price but you won’t get Indian entrepreneurs to sell at the current ratios. Indian entrepreneurs will wait. From a German point of view, we have a lot of new investments that are greenfield investments. They are not acquisition of an existing Indian company.
But there is pressure now. A buyers’ market is emerging.
If there is a chance, German industry might take a chance. If you look at the Asian financial crisis in 1997, 98-99, yes, we did investments during those times. And they were good investments.
What role will the German business network play in these times?
In India and other countries, we are part of the local practice. We understand ourselves as a door opener, as a communicator between our local practice in India and our German companies because we are the same culture and same contacts. So our role would be communicating and advising such investments in India.
Some of the investments made by Indian companies in Germany have turned out to be painful. For instance, Dr. Reddy’s investment in Betapharm Arzneimittel, and another by Bharat Forge Ltd in Germany, are in trouble because of the high-cost base and a different culture. How can the Indian companies cope with this going forward?
I can attempt a difficult answer to a difficult question. It might be that investments made by Indian companies abroad, they looked for bargains. Which is fine, but if businesses acquired bargains then it is obvious that in a different situation it will have some trouble.
The companies might have been in a difficult economic situation and therefore the price of the company was low. In such a case Indian companies have to put in a lot of effort to make a turnaround. Of course, that needs a lot of equity investment and liquidity, so I would not say look at Indian investments and say they all struggle. That case may be with every buyer of a company in a difficult economic situation.
There is a liquidity crisis globally and in India, too. What if Indian companies cannot cough up more investments?
We were surprised the same way you were... We are an audit firm and we are worldwide, but we were still surprised by what happened last week in the financial markets. I cannot tell you what will be the outcome of the global crisis. As in the past, we trust we will find a solution. I hope it will not affect the longer term.
In the past, there were grand alliances such as DaimlerChrysler. And then they disengaged. Do you see Indian companies who were too ambitious doing likewise as their investments turn to haunt them?
Ten years ago, DaimlerChrysler was looking at the stars. It didn’t work. It could have worked well. There were other mergers that worked well. If you see some other companies in the oil sector, it worked. But DaimlerChrysler is one example that did not work well and was costly for both.
What we see in our our transactions is that they (alliances) have always been good if you do good research and good diligence. If you have a perspective for the long-term, then you always have positive affects by bringing companies together and merging companies and creating higher value.
Are you apprehensive that some Indian businesses got too ambitious?
I have great respect for Indian businessmen and their investments in Europe. For Indians this is a new territory. Believe me, not every German investment in Russia, China, India and Brazil went well. German business spent a lot of money. In India as a whole, industries are so differentiated maybe Indian companies must learn how to structure investments in a more detailed and planned manner.
What has changed in recent times? When German companies invest in India or set-up greenfield ventures, what do they look for?
There must be an earlier return of investment. (The) world has changed. Companies are not willing to forsake profits for start-up losses. There would only be investments if we have a long-term, clear investment policy that also provides for a scenario to generate profits quicker than before.
What exactly do you mean by “quicker than before?”
Five to 10 years. At least there must be a possibility. Labour here is cheap, but real estate is incredibly high. The costs of real estate and apartments, which is part of the project cost, is higher. A lack of infrastructure and a shortfall in infrastructure spends may result in lower investments.