Attractiveness, Merits and Demerits of the Indian Market｜Basic Knowledge for Japanese Companies to Succeed in the Indian Market

The Indian market continues to maintain a high growth rate and is expected to grow significantly in the future. Many people may be attracted to such an Indian market and want to expand their business opportunities.

In this article, we will explain in detail about the Indian market and the reasons for its economic growth, and introduce the needs of Japanese companies entering the Indian market. In addition, the advantages and disadvantages of entering the Indian market for Japanese companies will also be explained, making this article a must-see for those considering business expansion.

Attractiveness of the Indian Market and the Needs of Japanese Companies

First, let's take a closer look at why the Indian market is attracting attention today. It is important to understand why global businesses are choosing India as a base for their operations and what trends are being observed among Japanese companies that have already expanded into the Indian market.

Reasons for India's Economic Growth

India's economy is growing steadily and is said to be the only market in the world that is expected to maintain a 6% growth rate, and by 2022 it will surpass the United Kingdom as the world's fifth largest economy.

The same is true for the stock market, with the Sensex Index continuing to hit all-time highs in 202311. Although only temporarily, its market capitalization has not declined, surpassing that of the United Kingdom to become the fourth largest. The Japanese stock market is also becoming increasingly active in actively seeking business development opportunities in India.

The reasons for the continued growth of the Indian market are as follows

1. There is a prospect of a demographic bonus period until 2040

2. Lower telecommunication costs and a surge in IT-related demand

By 2023, India's population will surpass that of China to become the world's largest. Among the primary reasons is the overwhelmingly large population of young people in their teens and twenties, and the large number of workers.

Another reason may be the lower cost of telecommunications due to the "Digital India Policy. With the rapid increase in the number of Internet and smartphone users, start-up businesses related to web services are gaining momentum.

With prospects for significant growth in the future, this market is attracting attention from around the world as a promising market where a wider variety of services and products will be accepted.

Reference: Okasan Securities, "Japanese Companies Making Great Strides in India Aiming for a New World"

India is an Ideal Country for Startups

India is becoming the second largest start-up country after the U.S. and China. The following is a 2017 survey by the Development Bank of Japan.

Quote: "Attractiveness of the Indian Market" by Zenwaves Japan K.K.

The above data shows that the Indian market is already attracting attention as of 2017 as a promising business development destination for Japanese companies in the medium term.

Furthermore, JETRO's "Survey of Japanese Companies Operating Overseas" reported that as of 2023, about 1,500 Japanese companies will have expanded into India, and about 70% of them will remain in the black. Considering that until a few years ago, 70% of these companies were said to be in the red, this suggests that the foundation for business is now in place.

Many companies have established bases in India, even on a global basis, so it is a good idea to enter the Indian market and take advantage of the growth potential of the market while it is still available. Also, when starting a new business in India, it is a good idea to partner with a startup that has momentum locally, rather than starting from scratch.

Trends of Japanese companies entering the Indian market

The following is the trend of Japanese companies entering the Indian market as of October 2022.

Reference: JETRO "List of Japanese Companies in India 2022

According to the above data, the number of Japanese companies that have entered the Indian market is 1,400, with a total of 4,901 bases, slightly down from 2021, but up from 1,500 in 2023, as mentioned above.

About half of all Japanese companies and one-third of all bases in India are in the manufacturing industry. As for the number of bases by industry, an increasing trend was seen in the wholesale, retail, financial, and insurance industries.

Advantages of Expanding into the Indian Market

The following is a list of specific advantages for Nikkei companies entering the Indian market. The three main advantages are as follows

1. Large number of software engineers and abundant IT human resources

2. Increasing number of local Indian people with purchasing power

3. Local people with investment and entrepreneurial spirit in the R&D field

The ease of securing development human resources and bases, and business opportunities due to the growth potential of the market are the main reasons why India is attracting attention.

Abundant IT-related human resources

India has a large population of young people and tends to be rich in IT-related human resources. India is currently in a "demographic bonus period," and more than 50% of its approximately 1.3 billion people are younger than 30 years old.

In addition, young Indian businesspeople tend to be more fluent in English and have better communication skills than young people in Japan. The abundance of talented people with new values makes it easy to secure suitable human resources for development.

Companies in Japan are struggling to secure human resources due to the aging of the population, but some believe that labor costs to secure human resources in India are only about 20% of those in Japan.

Considering the fact that China, currently the world's most populous country, is entering a period of "demographic burden," India's future economic growth rate is also promising.

Many of the companies that have already expanded into India and are successful there tend to offer innovative services that make full use of India's advanced IT technology. The Indian side needs collaboration with Japanese companies that have strengths in manufacturing and product technology, so supply and demand match, which is probably another reason for their success.

Reference: Digima "Advantages and Disadvantages of Expanding into India｜Latest Trends and Successful Cases of Japanese Companies Expanding into India" (Japanese only)

Increasing number of locals with purchasing power

In India, the number of middle-class locals with purchasing power is on the rise, with the percentage of middle-income earners rising from 28.8% in 2000 to 50.2% in 2020.

Reference: Ministry of Economy, Trade and Industry, "Country Report on the International Expansion of Medical Care in India".

The following document also predicts that the percentage of low-income people in India will decrease and the percentage of affluent and upper middle class people will increase in the future.

Reference: Beyond Next Ventures, "What Japanese Companies Need to Know about the Indian Market Today and Growth Strategies (Part 1)".

The upper middle class and affluent class are also expected to increase to 37% by 2030, making India a market where a variety of business development can be expected in the future.

Furthermore, India is a country with a strong yearning for high-functioning Japanese products and Japanese technology. As a result, there tends to be a high demand for Japan-derived services. Given the growing number of affluent and upper-middle class people and the demand for expensive products and services, India is a market that can be competed with if differentiation can be achieved through quality and design.

Investment in R&D and entrepreneurial locals

India offers "preferential tax treatment" for investment in certain fields. One of the reasons why Bangalore, a city in southern India, has grown so rapidly and become known as the "Silicon Valley of India" is because of one of these incentives: investment in research and development (R&D).

Under this preferential treatment, a 10-year tax holiday is applied if certain conditions are met, such as "the purpose of expansion into India is R&D. This preferential treatment has attracted IT companies from around the world to locate their R&D bases in India.

In addition, many Indians are entrepreneurial and tend to be cooperative in setting up zero-based businesses and establishing new bases. This will contribute to the expansion of Japanese companies into the Indian market.

Disadvantages and Cautions for Expanding into the Indian Market

Finally, we will explain the possible disadvantages of expanding into the Indian market. If you are considering starting up a business or establishing a base in India, be sure to understand the following three disadvantages.

1. Influence of the caste system and ethnic and religious diversity

2. Frailty of the electric power infrastructure

3. Issues related to turnover rate

Influence of the caste system and diversity in ethnicity and religion

First, you will need to be aware of the ethnic and cultural gaps that are unique to India. India has a traditional caste system, and it is important to first have a clear understanding of this system.

The "jati" in the caste system is similar to the Japanese system of occupational succession. Because of the existence of social networks in the community, family monopolies and the preservation of vested interests in Indian companies have often been seen as obstacles to modernization.

However, this is not the case in new industries, including the IT industry. It is known that the caste system tends to have less impact, especially among the younger generation and in urban areas, and is gradually becoming less formalized.

In addition, because of the coexistence of various religions and languages in India, consumer preferences and values tend to differ by region. Religious practices also have a significant impact on business, including changes in purchasing behavior and business hours.

Therefore, it is essential to design products and marketing strategies that emphasize religious values, as well as understanding of religious values among employees.

Frailty of Electricity Infrastructure

India is an emerging country with high demand for infrastructure, but the state of development has not kept pace with the development of domestic industry. There are problems with lifelines, transportation, and means of travel, but the most serious problem is the power infrastructure.

The problems are manifold and are not limited to radio frequency frailty. There is a mountain of problems that need to be solved, such as inadequate power supply to meet peak electricity demand due to insufficient generation capacity, and inadequate systems for stealing electricity and collecting electricity charges.

Therefore, Japanese companies entering India will be required to install in-house power generation systems to ensure a stable supply of electricity. In addition, while infrastructure development will remain a priority issue, it is also an opportunity for Nikkei companies entering infrastructure development-related fields to expand their business.

Issues Related to Turnover Rates

The aforementioned JETRO "Survey of Japanese Companies Operating Overseas" shows that many Japanese companies in India are facing issues related to human resources. The main issues are high employee turnover and rising labor costs.

Behind this are differences in values due to national characteristics and fixed concepts in Japanese companies. The main reasons for local personnel leaving are as follows

Dissatisfaction with personnel and evaluation systems (e.g., too many Japanese in senior positions)

Manuals (procedures and processes) do not match with result-oriented values.

Salary levels and raises tend to be lower than industry standards

In order to prevent local people from leaving the company, it will be important to deepen mutual understanding through flexible management policies that match the values of the local people, rather than sticking to the Japanese way of doing things.

Conclusion

The growing Indian market is an attractive market with business opportunities for Japanese companies. The conditions are conducive for Japanese start-ups and unicorn companies to expand their businesses.

If you are considering expanding your business to India, you should be aware of and always consider the cultural differences between Japan and India. It will also be important to take countermeasures by referring to the cautions and disadvantages introduced above.