Indians have a long tradition as buyers and sellers with foreign countries, having traded for centuries with their neighbours in the Middle East and Southeast Asia. Since the fifteenth century, this trade also included Europe, though trade with the Romans has been documented as early as the first century. This has led Indians engaged in business to have a “trader” mentality, which has both positive and negative connotations. Positively, this makes them highly entrepreneurial, always looking for opportunities to do business. Perhaps negatively, especially from the supplier’s perspective, this makes them inordinately price sensitive in their purchasing. In other words, Indians are tough negotiators and love bargaining. Any foreigner desiring to sell to an Indian firm should be prepared for this.
Nirmalya Kumar. Photograph: Tessa Oksanen
Indian procurement officers like to be knowledgeable buyers and drive a hard bargain. For example, R.C. Bhargava, former purchase director of Suzuki India, used his knowledge of costs almost cold-bloodedly in purchase negotiations. Car tires have always been sold as proprietary products. Nowhere in the world was their price negotiated on a cost-plus basis. Yet, Bhargava stunned the tire industry in India by declaring: “You show me your cost structure and I will give you a remunerative margin.” Indians use their knowledge of zero-based costing remarkably well in buying situations.
Indians are not shy of using their relationships in business. For example, Shiv Shivram, a veteran buyer of forty years with Imperial Tobacco and Dunlop, is friendly with salespersons at all levels. When the general sales manager of a vendor comes to negotiate a contract, one of the vendor’s salesmen he is friendly with will whisper the bottom price in Shivram’s ear. Thus when Shivram negotiates, he knows the price below which he cannot go as it would hurt the seller. The strategy is to use long-standing relationships to get the best deal while giving a fair return, but not to squeeze the last dollar out of the seller.
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When major purchases, big-ticket items, or capital equipment are at stake, the negotiations can be frustrating to non-Indians. Westerners are often heard complaining that the discussions take forever and the specifications keep changing. Consider, for example, the current rush by foreign vendors to sell arms to India. Reflecting on the experience, Rear Admiral Rees Ward, head of the United Kingdom’s defense manufacturers’ trade association, said: “It is a rapidly growing market of a potential superpower...however, the procurement processes often cause delays and cancellations and therefore overseas companies need to understand that they have (to) commit to the long haul if they are going to win contracts.”
After months of tough negotiations have brought a handshake agreement and the deal is ready to be signed the next morning, be prepared for a surprise. It is too soon to start celebrating. At the eleventh hour, after the lowest price has been negotiated, it will be length of credit that will determine who gets the order. There will be a new negotiation about the payment terms because Indian companies, usually strapped for cash, like long credit cycles.
Price integrity: Indians hate to hear that someone else managed to purchase the same item for less, and price information is transmitted remarkably efficiently in India. Tessa Oksanen
The negotiations are conducted by the professional managers in the company. However, with any significant purchase, the promoter or owner will be brought in to bless the deal at the final stage. The professional managers of family-owned companies are usually unwilling to stick their necks out and complete the transaction without involving the promoter. Doing so may leave the professional manager open to the accusation of having received a kickback from the supplier.
Peter Smith, retired executive vice-president of General Electric, who for thirty years sold power plants to many Indian companies, remarked: “After the negotiations are over and the draft purchase order has been seen by the seller, the real decision maker arrives. Usually the promoter stands in the background till the end. Then the final negotiations begin!” The seller must remember to hold something back because the promoter, to “keep face,” must be able to demonstrate to his managers that he managed to negotiate a little bit more.
With liberalization, the supplier practice of giving bribes to the managers of private companies has mostly died out. However, the vendor may still give the promoter something he or she likes as a gift. Usually, one of the customer’s professional managers will let the vendor know that the boss has a particular soft spot for, say, a watch, which is then dutifully presented to the promoter at this final meeting. However, these gifts are not always one way, as Indian buyers will also give gifts to their foreign suppliers. They will invest in building relationships with the suppliers’ key executives because they understand that in future deals, these executives have the power to reduce prices or extend credit terms.
In meeting the demanding price of Indian companies, foreign companies should bear a few things in mind. First, the price consciousness of Indians is often about the “fair” price rather than the lowest price. Indians hate to hear that someone else managed to purchase the same item for less, and price information is transmitted remarkably efficiently in India. Thus, when dealing with multiple Indian firms, it is best to maintain price integrity.
Second, while quality is important for Indian companies, it is not the most important factor when placing an order. Often to obtain a better price from the vendor, Indian firms are willing to compromise on quality and specifications. Rarely do they need, and are willing to pay for, all the bells and whistles.
Third, with major capital equipment purchases, vendor financing is often important to Indian companies. They will frequently be willing to make concessions on price in order to obtain financing for the deal. For example, Bharti, India’s leading telecom operator, built its entire network using vendor financing from the likes of Ericsson and IBM. There was no way the company could have funded the massive network expansion from its own pockets.
Sometimes, Indian companies may even ask for vendor financing of the promoter’s equity. For example, the vendor agrees to take a stake of, say, $50 million in equity, which will later be sold back to the promoter for a predetermined price. This gives the promoter the funds to operate the business as well as place the orders for the capital equipment needed. To some extent this is changing in India, as capital markets are developing and financing is available. As a result, Indian companies do not need to rely as much on their traditional sources of funding, like family and their own resources. Still, even today, their ambition is frequently beyond the financial resources available.
Nirmalya Kumar is professor of marketing, director of Centre for Marketing, and co-director of Aditya Birla India Centre at London Business School. This is an extract from ‘India’s Global Powerhouses: How They Are Taking On the World’ by Nirmalya Kumar, with Pradipta K. Mohapatra and Suj Chandrasekhar, which is slated for release in April.
Reprinted by permission of Harvard Business Press. Copyright©2009 Nirmalya Kumar; all rights reserved.