Capitalizing on opportunities in India and China
Highlights from a panel discussion on investing abroad
Despite the huge advantages of investing in India and China, the risks are considerable.
Even a cursory review of the numbers makes it clear that India and China are bucking global trends. Amidst a worldwide economic contraction, India has increased domestic demand, raised foreign asset investments and realized an economic growth rate of 7% for the year, supported by a market capitalization of nearly $600 billion. China, too, has enjoyed a 7% year-over-year growth rate as of June 2009, fueled by expanding fixed asset investments, strong consumer demand and a rising stock market – up 75% since January.
For Canadian businesses in search of growth opportunities, these numbers serve as a clarion call for global expansion. Yet, doing business in India and China remains fraught with challenges. To help you identify ways to capitalize on opportunities in India and China, while mitigating risk, Deloitte and Blake, Cassels & Graydon LLP hosted a seminar on July 21, 2009. At the event, a group of preeminent panelists discussed strategies for overcoming business risks and structuring sound investments within these two countries. Here’s what you need to know:
Track the trends
As one speaker noted, “This is no ordinary recession.” The American consumer is about to cede its role as the engine of growth to India and China’s massive emerging middle class. This represents a significant shift for Canadian companies that have long relied on American consumerism to drive profit. As growing demand in India and China offsets declining demand elsewhere, businesses must track these countries’ rapidly evolving consumer behaviour and consumption trends and adapt where necessary. Only in this way can they position themselves to take advantage of opportunities as they arise.
Identify the right deal
In seeking out avenues for growth, not every opportunity is created equal. To avoid missteps, aim to:
- Focus on the most promising sectors, such as energy, infrastructure, agri-food, healthcare, communications, financial services, real estate and India’s domestic tourism industry.
- Locate in the most promising regions, which may not be the big cities. In India, land costs in urban areas are rising so it makes sense to set up facilities in second-tier cities. In China, some central and western inland regions now lead the traditionally export-oriented regions in fixed asset investments.
Choose the right structure
Companies that do decide to go global, or expand existing international facilities, should also adopt the right structure for their needs. This can include setting up a branch office, entering a joint venture, participating in a private equity placement or qualifying as a foreign institutional investor. In India, many European companies are also taking advantage of the Qualified Institutional Placement (QIP) route – a capital raising tool that allows domestic companies to issue convertible debentures or warrants to qualified buyers.
Although many companies have cast their eyes on distressed investment opportunities in India and China, speed is critical to the success of these ventures – and neither country is known for its speedy sales process. India lacks a comprehensive bankruptcy code, making restructuring difficult. And while China has application laws related to bankruptcy and insolvency, the legislation remains new, enforcement is sketchy and the risk of personal liability exists.
That said, opportunities remain. As Brent Houlden, Deloitte’s Financial Advisory leader in Toronto, notes, “There are more distressed investment opportunities in the U.S. than in India and China, but would you rather invest in a country experiencing economic contraction or, one with 7% GDP growth?”
Look for long-term opportunities
Despite the apparent strength of both the Indian and Chinese economies, some market watchers wonder if the trend is short-lived – particularly in the case of China, which is currently fueled by $600 billion in stimulus spending. When the cash infusion runs out, can growth be sustained? Yes, says Bob Kwauk, managing partner of Blakes Beijing office.
“China’s turnaround started well before the stimulus package and is fueled by three main policies – the rising price of agriculture products, which put more money in the hands of farmers and rural communities; aggressive lending by Chinese banks, which resulted in more than US$1 trillion of new bank loans during the first half of 2009 (compared to US$400 billion for all of 2008); and the creation of an environment conducive to infrastructure investment, which will see new construction projects running for at least two to three more years.” Thanks to this latter policy in particular, China’s fixed asset investments rose 30% since last year, with growth in central and western regions outpacing that of the coastal and southern regions. Infrastructure investments are rising in India too, where the country’s recent budget identified over US$750 billion in investment opportunities over the next three years.
Protect your intellectual property
Over the past decade, both India and China have vastly strengthened their intellectual property laws. Today, both countries are signatories to the World Trade Organization (WTO) TRIPS Treaty, which sets minimum international standards for the protection of intellectual property. Enforcing these rights, however, can be both costly and time-consuming, making it critical to draft strong contracts, retain financial control and take other creative commercial approaches, such as maintaining financial holdbacks and discussing dispute arbitration before entering any deal.
In India, fairly rapid injunctive relief is available in the face of intellectual property infringement, but World Bank statistics show it takes over three years, on average, to get a court date to resolve the underlying dispute. In China, cost effective injunctive relief is also available under an administrative process, but it may not be granted in all situations – and if it is, it can only be enforced locally. The court system works more quickly in China, but it’s both expensive and difficult to collect any damages awarded. As an alternative, companies can reduce infringements with customs enforcement in both the country where the infringement occurs (from which items are exported) and in the country of destination (to which items are imported). Despite the present limitations in China’s and India’s intellectual property enforcement regimes, their markets are too important for businesses to ignore, making it critical to develop an IP protection strategy for these countries.
Manage the risks
Doing business in any foreign country can be risky, but this is especially true if you do not understand local customs and culture. In India and China, for instance, companies often face critical business risks that range from logistical bottlenecks, human resources challenges and competition from manufacturers of unbranded goods to unanticipated tax treatment, a lack of clear business standards and even the danger of corruption and fraud. To mitigate these risks:
- Conduct comprehensive due diligence – both before investing and on an ongoing basis – to ensure local partners continue to adhere to the agreed terms.
- Draft contracts for maximum enforceability. For example, a contract governed by the law of a foreign jurisdiction and subject to the jurisdiction of a non-Chinese court will be extremely difficult, if not impossible, to enforce in China. In addition, suing on a contract subject to local law and written in the local language can help maximize the odds of obtaining judgment against a foreign party that has no assets outside its country.
- Enter into comprehensive, written contracts. Do not be bullied into foregoing contractual protections on the argument that contracting for goods and services is not the local Chinese way of doing business.
- Recognize that standard form contracts provided by local governments typically include and only require the bare minimum of information required by approval authorities. Usually, these standard forms can be expanded to include key business and legal terms.
- Draft contracts using language that can be easily translated. This means reviewing your existing standard forms to ensure they can be translated into Chinese or Indian without introducing unwanted ambiguity.
- Scratch below the surface before investing. As the recent fraud investigation at India’s Satyam Computer Services Ltd. makes clear, fraud remains a danger even among apparently reputable companies – making in-depth research a must.
Despite the huge advantages of investing in India and China, the risks are considerable – particularly if you try to do it alone. To succeed, it’s essential to build a team that includes both local and foreign agents and to provide your local managers with strong head office support. Above all, make sure to work with specialists who not only possess country-specific insights but also have knowledge of your industry and business objectives.
To learn more about how Deloitte and Blakes can help you capitalize on the opportunities of doing business in India and China, please contact your local advisor.