The three reasons why Western businesses fail in India

NEW DELHI, India — Since the English East India Company first landed in Gujarat state more than 400 years ago, Western businesses have looked at India and seen profits waiting to be reaped.

India is an attractive proposition for American and European businesses of all varieties. There’s the population of 1.2 billion. English is an official language. The government is democratically elected. And there’s a diaspora of educated expat Indians who can bridge cultures — a key skill set that demands a premium in many Asian countries.

Yet recent history shows that failure comes just as easily.

Motorola, McDonald’s, Coca-Cola, Nokia, Vodafone and Walmart have all struggled, with some abandoning the subcontinent. It remains to be seen whether newer arrivals like Ikea will rise to the challenge.

India’s attributes can be deceiving, according to Adrian Mutton, the founder of Sannam S4, which supports businesses taking their first steps in India.

“Too many companies think they ‘understand India,’” Mutton told GlobalPost. “Something I will unashamedly admit is that after 22 years of doing business in India, I am still learning.”

His key advice is: “Don’t assume anything.”

“The common use of the English language and the fact that there are so many people of Indian origin assimilated into US society gives us a false sense of security when doing business in India.”

Devdutt Pattanaik, the author of “Business Sutra,” a critique of Western approaches to Indian business, echoes this advice.

Westerners assume there is “one truth — that everyone has to do business as we do back home,” he said.

“People are very different, their socio-economic reality is very different, their cultural reality is very different,” said Pattanaik, who is the chief belief officer of retail giant the Future Group and a culture consultant to Reliance Industries, India’s second largest publicly traded company.

For example, “Queues matter a lot in the West. In India, due to an extreme resource crunch, standing in a queue means there is a strong probability that you may lose out, making people extremely uncomfortable with queues.”

So what are the most common mistakes that Western companies make in India?

1. Failing to adapt to local attitudes

“Many big US companies have struggled to truly understand what localization means,” Mutton said. “Calling a Big Mac the Maharaja Mac should do the trick, thought McDonald's but it took years before they realized the serious vegetarianism of the average Indian citizen.”

Anti-beef campaigners from the Hindu nationalist Bharatiya Janata Party and a related group, Shiv Sena, smeared cow dung on a Ronald McDonald figure as part of a protest in 2001. The campaigners filed a lawsuit over claims that McDonald’s used beef fat to cook french fries, and refused to accept the restaurant chain’s assurances that it only used vegetable oil. In 2009 Hindus also objected to TV commercials that referred to pujas — a Hindu religious ceremony.

Now McDonald’s has opened two vegetarian restaurants and has a menu that is almost unrecognizable compared to its American restaurants.

Another big food brand, Starbucks, had difficulties setting up in India. It aborted a joint venture with the Future Group in 2007 and had to wait another five years before opening its first store. Since opening, the menu has become slanted toward Indian tastes — meaning lots of teas.

With many of India’s poorest surviving on less than 45 cents a day, it’s tempting for Western companies to believe that the cost of labor, supplies and infrastructure must be incredibly cheap.

Yet real estate in major Indian cities is among the most expensive in the world, and a shortage of well-trained senior and middle-ranking executives means their salaries can actually be higher than for equivalent colleagues in the West.

Even though less-qualified workers are cheaper to hire, Westerners sometimes underestimate the cost advantages they can bring — something that local competitors seldom miss.

“Offices are fitted out to look like something in New Jersey, not New Delhi and then two to three years down the line the US subsidiary isn't making any money,” Mutton said. “No surprise really, when your local competitor has an office or factory he paid off years ago and typically his salary bill is at least 30 percent less than yours.”

“There is an ignorance about the scale of India” Pattanaik said. “Twenty percent of India is the ‘English-speaking urban upper class’ which is roughly 240 million people. That’s almost the population of USA. That being said, India has only [a fraction] of America’s wealth. So imagine the level of poverty. And like in America, 1 percent owns most of India. There are many Indias within India scattered across geography. Which India are you targeting?”

2. Believing that English-speaking Indians must think like Westerners

Indian companies tend to be much more hierarchical than Western firms, with leaders expecting to micro-manage their staff, who are often discouraged from showing initiative. That’s because although it’s a democracy and English is widely spoken, India has very different ideas about leadership and subordination.

“There is an assumption that since Europe rejected feudalism in the 21st century, after centuries of struggle, and America was created on democratic principles which evolved to include all, over 200 years, India must immediately give up its feudal legacy without struggling with it for some time,” Pattanaik said. “Indian feudalism is very different from European feudalism.”

Moreover, Pattanaik said “India is very strongly driven by personalities, while modern management is uncomfortable with the personality cult and prefers faceless institutions.”

The expectation from Indian leaders that Western firms operate a similar way can also lead to confusion. Swedish furniture firm Ikea has been trying to find a location for its first store in India, and has held a series of meetings with chief ministers of various states.

Many of the ministers and officials have then announced unilaterally that Ikea will be opening its first store in one of their cities — so far Noida in Uttar Pradesh and Hyderabad in Telangana have claimed that Ikea has picked them. The Swedes, on the other hand, say they may not make a decision until 2016.

Walmart also suffered after it accepted the word of Anand Sharma, the former trade minister, that the rules on foreign investment would change to allow foreign supermarkets to set up in India.

When that policy change never arrived, Walmart pulled out — Sharma may have been overruled by more senior colleagues.

3. Imagining that rules operate in India the way they do in the West

Vodafone has been locked in a $2.2 billion tax dispute with the Indian government, which claims it owes the bill for acquiring an Indian subsidiary in 2007.

The mobile phone company won a court battle to overturn the ruling. But then in response, the previous congress-led government promptly enacted new legislation allowing the firm to be taxed retrospectively.

The lack of transparency has been criticized by foreign firms, but according to Pattanaik, Westerners are overly concerned with rules and the legal system.

“Indians hate rules,” he said. “So ‘process culture’ is at odds with the desire of Indians to find a short cut. This is not seen as short-changing the system. This is seen as being smart and innovative and highly appreciated.”

While Indians enjoy and celebrate ‘jugaad’ — an improvised solution that is just good enough — the practice can be problematic for larger corporations that need to comply with regulations back home.

In fact, trying to adopt a jugaad approach is precisely what gets foreign businesses into trouble.

“It’s tricky enough to deal with the bureaucracy, the multitude of taxes, rules and regulations about getting money in and out of the country,” Mutton said. “But to run a successful and sustainable business as a foreign owner in India is altogether something different and considerably more challenging. People need to make a conscious effort to challenge the way you think about how you do business in an across India. Hire people with track records of delivery and success and listen to their opinion and back their judgement.”