Most Americans by now have had experience dialing up customer service for a big U.S. company and finding themselves on the line with a young, English-speaking Indian at a call center halfway around the world in Bangalore.That's just one example of how much Corporate America has adopted the practice of outsourcing services and jobs to faraway lands to cut costs. India, given its democratic institutions and its young, relatively well-educated population, has become a favorite outsourcing destination, particularly for information technology and software services. While many Americans have focused on the negative effects of the outsourcing trend at home, a growing number of observers from the business and investment community are watching the explosive growth it has ignited for the Indian economy and its emerging middle class. They see a wealth of opportunity to take advantage of this new wave of consumers, but their expectations still have a long way to go to turn from speculation to reality. "There's no question that India is going to be a very strong market for European and American brands at all price ranges," says Arnold Aronson, a retail consultant with Kurt Salmon Associates. "Retailers are making their way to India in a very aggressive way now. Consumerism is No. 1 on the agenda with all this new wealth coming out of the new expression of capitalism that's flowering there." Despite such enthusiasm, the Sensex, the benchmark index for the Bombay Stock Exchange, has been in a tailspin since deadly bomb blasts hit India's financial capital earlier this month. The index peaked in May, capping an extraordinary 300% gain over the last three years. Since then, it has dropped 21%, despite predictions that its economy will continue to grow at a 7% clip. The recent volatility may have money managers rethinking their exposure there. But huge U.S. companies with little room left to grow at home see India's 1.1 billion consumers as a new frontier.
The world's largest retailer, Wal-Mart ( WMT), has been sourcing goods from India since 2001, but its chief executive, Lee Scott, has publicly expressed a desire to start opening stores there. Recently, the company filed an application with the Reserve Bank of India to open a liaison office in Bangalore. It plans to send a small team in to explore ways to navigate India's regulatory restrictions on foreign direct investment in order to tap into the market. Amy Wyatt, spokeswoman for international corporate affairs at Wal-Mart, says the company expects to receive clearance from the Indian government soon. "That office will be researching and monitoring the market for a period of time to basically see if there's any opportunities for building a business plan for entering the market," says Wyatt. "India is a great market that we've been monitoring for quite some time. There's a huge opportunity there, but we need to get on the ground and do more extensive research to develop a strategy." As a general merchandiser, Wal-Mart is prohibited by the Indian government from opening stores in the country, unless it does so through some sort of franchise arrangement or a partnership that is half-owned by a local entity. Recently, the Indian government watered down its rules to allow foreign companies selling a single brand to invest directly in India, opening the door to the likes of Nike ( NKE) and Reebok. But companies like Wal-Mart and Home Depot ( HD) remain sidelined. India's regulatory environment is a vestige of its colonial history and struggle for independence from the British Empire, which created a lasting distrust of foreign interests within its boundaries. Its recent economic gains began in 1991, when Narashima Rao's government averted default on its debt payments by promising to liberalize the economy in exchange for financial relief from the International Monetary Fund. Manmohan Singh served in the government throughout that decade as its finance minister, guiding the country toward economic reform.
India's average tariff fell from 56% in 1990 to 28% in 2004, when Singh took over as prime minister. He has voiced support for lowering economic regulations further, but he operates in a coalition government that includes a strong socialist party supported by local business interests looking to avoid foreign competition. Meanwhile, the country still faces staggering challenges in improving its infrastructure and its labor force. While new apartment buildings and shopping centers are sprouting up throughout its cities by the hundreds, only 195,000 kilometers of its 3.3 million-kilometer roadway system is composed of highways, according to Deloitte Research. Deloitte also reports that while China's population is larger than India's by more than 200 million people, India had a total of 359 million people living in extreme poverty in 2001, exceeding China's 212 million. Also, while India produces many talented professionals, 75% of its population still drops out of school before finishing the equivalent of eighth grade. "
It's expected that global firms hiring professionals in India will soon face shortages of skilled workers," Deloitte said in a recent report. Ira Kalish, economist with Deloitte Services, estimates that only 2% to 3% of India's retail market currently falls under formal Western definitions of industry. The rest consists of "informal" merchants operating in street markets and small kiosks. One of India's largest homegrown companies, a multi-industry conglomerate called Reliance Industries, has unveiled plans to remedy these problems by investing nearly $6 billion to build a retail subsidiary that would span 1,500 cities and towns in India. If successful, such efforts from local players could get a big leg up on U.S. multinationals caught up in India's red tape. "My expectation is that the Indian government will not be able to reform its laws anytime soon," says Kalish. "Instead, I think we're likely to see some major investments by Indian retailers, perhaps obtaining some foreign capital to fund it, developing some big format stores."
Some U.S. companies have had a presence in India for years through local partnerships or franchises. McDonald's ( MCD) opened its first restaurant in India in 1996, and it now has locations in 12 different cities there. In the process, it was forced to abandon its signature ingredient, beef, in order to jibe with local norms. Cows are widely considered sacred throughout the country, and many Indians don't eat beef, pork or any meat at all. Roughly 70% of McDonald's menu in India, which includes such items as a McAloo Tikki burger, now differs completely from its U.S. offerings. Pizza Hut, a chain owned by fast-food operator Yum! Brands ( YUM), launched a tandoori pizza that was more in line with Indian tastes. Yum! claims to be the quickest-growing fast-food restaurant company in India with about 123 Pizza Huts and 11 KFCs there. While these companies have managed to adapt successfully to Indian consumers, it's unclear how much their operations there have benefited their overall sales growth and profitability for shareholders. Other single-brand retailers have established a presence in India, like Tommy Hilfiger ( TOM), but these companies didn't respond to requests for specifics about their performance in the region. "Many companies are just trying to establish a brand presence there at this point," says Aronson. "The passage to India, right now, is largely about expectations for the future."