General Motors India exit shows limits of multinationalism
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Enough has been written about how General Motors Co. (GM), the world’s third largest car maker, made a hash of its India business till it was finally forced to pull the plug. Not enough though has been said about how little it matters. The fact is GM never made a difference to India and in turn, India contributed little to the auto maker’s fortunes.
Twenty years after its re-entry into India, the Detroit-based company, which was once the apogee of multinational ambitions, has precious little to show for its exertions barring the small matter of a billion dollars in losses.
Nor is India the only country off GM’s radar. In quick succession over the last few years, it has now pulled out of Russia, South Africa and Europe preferring to save its ammunition for the US market, where it is under threat from manufacturers like Toyota Motor Corp. and Volkswagen AG.
GM’s retreat, and that of many other multinational companies, suggests that the mantra of global expansion that has driven companies to seek markets and sourcing bases across the world is in some doubt. For the last two decades, as India eased its entry barriers, it had become almost an article of faith for large global corporations to include the country in their plans. Betting on India became almost a mandatory pre-requisite for a business plan.
A number of those bets have turned sour. In 2007, the UK-based Vodafone Group acquired a majority stake in Indian telecom services provider Hutchison Essar for roughly $10.9 billion. Over the next 10 years, in the world’s fastest growing market for telecom services, despite robust growth in terms of subscriber numbers as well as revenue, Vodafone’s shareholders found little joy in its Indian venture. Even before the Reliance Jio sledgehammer hit all the incumbents, Vodafone had piled up huge losses and this March, it announced a merger with Idea Cellular in a clear sign of waning interest in the India business.
In the banking space, the last 6-7 years have seen a number of foreign banks like Royal Bank of Scotland, Barclays Plc, Morgan Stanley, Deutsche Bank and ING exiting all or part of their businesses in India. Indeed, for a business which saw the entry of foreigners nearly 100 years ago, multinational banks have steadily lost market share in the country with their share of advances dropping to 4.41% in 2015.
Lurching from crisis to crisis in their home markets following the financial crash of 2008, the world’s biggest banks are now focusing on sacrificing geographical spread in the quest to maintain profitability. We saw a similar exodus 15 years ago when power sector companies like Enron, AES, Cogentrix and CMS Energy pulled out within a few years of rushing into India.
With this, the oft perpetrated myth that a long-term commitment to India is bound to pay off eventually stands dispelled. For all its promise, India hasn’t been a runaway success for multinationals. Estimates by Bain & Co. indicate that while in Brazil, MNC sales as a percentage of top 100 company sales grew from around 25% to 40% within the decade of the 1990s, in India, the figure was around 8% in 2014.
Not one of the top 10 companies in Fortune’s ranking of US corporations by revenues— Walmart, Exxon Mobil, Apple, Berkshire Hathaway, McKesson, UnitedHealth Group, CVS Health, General Motors, Ford Motor and AT&T—has a significant share of its business coming out of India.
In the past, many MNCs were pushed into global expansion by high taxation rates as well as labour costs in the US. Adding to that were the incentives newly liberalizing countries were willing to hand out. Not any more as US firms are increasingly being incentivized to stay at home. According to Good Jobs First, a Washington D.C.-based non-profit that tracks federal, state and local economic development subsidies, a few years ago, Washington state awarded Boeing Co. the largest corporate tax break any state had given any corporation—a massive $8.7 billion handout aimed at encouraging Boeing “to maintain and grow its workforce within the state”. That’s the kind of red carpet India isn’t willing to lay out for MNCs.
It isn’t just India. An equal number of multinationals have found China a bridge too far. McDonald’s spent 26 years in the country before selling off 80% of its operations this January to a consortium led by China’s CITIC and the private equity firm Carlyle. Mattel shut down its ambitious 36,000 square feet store in Shanghai within two years of opening it.
In the spirit of Donald Trump’s America for Americans, older US MNCs are in retreat while a new generation of them, companies like Google and Facebook are now laying their markers. So far though, even this latter set has little to show by way of returns on their investments. Could it be that the cult of multinationalism, the favourite prescription of every consulting firm over the last 30 years, isn’t quite what it has been cracked up to be?
After all, what’s the point of Coca Cola when the very US triumphalism that it represented is itself under threat!
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider will look at current issues and trends in the corporate sector every week.
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