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EICC Study Report on Indian Companies in EU 21032013.pdf


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EXECUTIVE SUMMARY

1) Creation of new Jobs

Our study finds that Indian companies have invested $56 Billion in Europe since 2003. Of this, $38 billion was spent on
mergers and acquisitions while $18 billion was canalised for Greenfield projects. During this period, Indian investors financed
511 Greenfield projects and acquired interests in 411 companies. Majority of the M&A transactions are in the $15-$100
million range. Despite the sovereign debt crisis having a negative impact on Indian investments for 2008-09, there has been
a significant pick up in the following years. Our analysis shows that Indian companies spent $15.2 billion between 2009 and
the first half of 2012. There was a noticeable slowdown in the quantum of overseas acquisitions with only 159 deals taking
place. This drop coincides with an overall decline in the number of acquisitions pursued by Indian investors worldwide in the
last three years. Decline in M&A activity was made up for by an increase in Greenfield investments. Between 2009 and the
first half of 2012, Indian companies spent $8.7 billion for setting up 240 Greenfield projects.

In UK, Germany, France, Belgium and The Netherlands, Indian companies have a collective workforce of over 1,34,000 as
against a few hundreds in the late 90’s. For Western Europe as a whole, Indian firms generated 5,000 new jobs in 2011. A
private study by FDI Markets shows that close to 40,000 openings were created by Indian Greenfield investments. Generally,
it is difficult to determine whether M&A activity can create new employment opportunities. New jobs may be created through
upselling, cross-selling and new product development opportunities if the acquired company has a complimentary business
model. In the absence of complimentarities, the employee base can shrink. Such a scenario could happen especially if the
acquirer embarks on a restructuring exercise or decides to merge the acquired entity with itself. However, our dataset shows
that Indian companies can preserve jobs in firms that are on the brink of shutdown, and add new jobs once a troubled firm
is stabilized. The biggest pan-European employer is the salt-to-software Tata Group, which counts approximately 80,000
workers in Europe on the rolls of its 19 group companies. In UK alone, the group continues to be the largest industrial
employer, with an active headcount of around 50,000.

GEOGRAPHICAL PRESENCE
Geographically, India’s OFDI preferences look typical for a developing country, with United Kingdom, Germany, Netherlands
and Belgium in the lead. An economy’s competitive advantage, size and scale of the domestic market, investment sops,
and proximity to large customers play a major role in attracting the first time investor. Between 2003 and 2012, close to 43
per cent ($24 billion) of Indian corporate investments were directed towards the UK, followed by Germany (12.4 per cent,
$6.9 billion). UK continues to be the most favoured investment destination as Indian companies are well versed with its
strengths: Open economy, significant financial sector, key IT markets and many more. The share has been amplified by mega
deals such as Tata Motors’ $2.3 billion acquisition of Jaguar and Land Rover and Tata Steel’s $13.3 billion (final enterprise
valuation) purchase of Anglo-Dutch steel maker Corus. In Germany, Indian companies are attracted to the country’s strong
Manufacturing sector, particularly for Automotive and Industrial tools. One could also argue that the four countries also
score due to their structured approach in reaching out to foreign investors. Today, Indian companies are present in all the
major European countries. Corporate activity has also picked up in countries such as Italy and Spain, especially in recent
years. India Inc’s exposure to peripheral countries Portugal, Ireland, Greece and Spain, however, continues to be relatively
limited. Apart from country specific challenges, we also find that there is a lack of information about the opportunities that
exists in several European markets.

BENEFITS OF INDIAN INVESTMENTS IN EUROPE
Foreign Direct Investment (FDI) increases the welfare of both producers and consumers. It allows companies to explore
new markets and operate more efficiently across borders. FDI reduces reduces prices of goods and services, lends itself to
economies of scale and promotes specialization. In the case of Indian firms, we have pinned down the following economic
benefits to the host economy.

2) Pricing and Productivity Gains
Indian companies are able to competitively price their goods and services in Europe as they have mastered the concepts
of frugal engineering, reverse engineering and offshore delivery. However, only limited pricing and productivity gains can
be transferred through exports without direct presence in the target market. Three Indian sectors, IT/ITES (offshoring),
Pharmaceuticals and Manufacturing lead the pack. Indian IT Services companies are performing the important economic
task of propping up demand for goods and services by reducing cost overheads. In the longer term, their services help to
tide over the shortage of trained professionals by giving access to new pools of highly skilled labour, both in the offshore
and home market. The European Commission had recently estimated that the across Europe there could potentially be a
shortfall of 700,000 trained professionals in the IT sector by 2015. India’s talent surplus in the IT sector could significantly
help in mitigating this gap for Europe in an area that is crucial to the future competitiveness of European firms. FDI by Indian
IT/BPO (Business Process Outsourcing) companies has benefited the economies of Romania, Czech Republic, Poland and
Hungary as they are emerging as new hotspots for outsurcing. While several new jobs are being created in these countries,
they are also mastering the nuances of services through the process of technology transfer. Apart from direct employment,
offshoring and outsourcing generate employment opportunities in tertiary sectors such as construction, housekeeping,
catering, security and many more. The exchequer stands to gain, since there is an increase in indirect tax collections.
Offshoring sector employees generally enjoy higher wages in comparison to their domestic counterparts. Higher disposable
income means higher consumption which results in a GDP increase for developing countries.
Indian generic drugs are made at a fraction of the cost of a patented drug and hence they can be major major contributors
to social welfare. Indian generics are cheaper in comparison to generics made in other countries. Debt ridden countries
have a great opportunity to reduce their overall healthcare budgets without tinkering with quality and safety by opening up
to Indian generic drugs. At the moment, Indian drug makers are clamouring for a level-playing field in Europe, since there is
a union-wide tendency to label generics’ as counterfeits.

3) New Capital
Europe needs to adopt pro-growth measures and increase spending. Under normal circumstances, Governments would be
expected to fiscally stimulate the economy, which is currently not feasible. Intra-European cross-border FDI has also dried up.1
Given these complexities, external capital infusion is the need of the hour. Hence, the expanding footprint of Indian OFDI is a
positive indicator.

4) Value for shareholders
Greater investment interest from Indian companies increases the notional value for assets, thus raising the prices for
European sellers. Indian investors, especially industry leaders, have a tendency to overpay for acquisitions as they find
themselves competing with global brands. Industry captains tend to be aggressive when it comes to deal financing, not
shying away from raising external capital. Shareholders exiting a company benefit as valuations usually rise when an Indian
party enters the bidding fray for an asset.
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1. China invests in Europe Rhodium Group, 2012

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