Competition heat intensifies for Indian companies

As the world competes intensely for growth, profit margins of companies would be under threat over the next two years.

And Indian companies will have to focus on innovation and keep a tab on rising labour costs to keep up the margins, said a study released by Ernst & Young, the Big Four accounting firm.

The Ernst & Young Competing for Growth survey of 1,400 senior executives — including 56 senior executives from India - from across industries globally, found that maintaining margins in the future would be a “challenge” for business.

About 95% of Indian businesses interviewed in September and October expect the domestic market to become more competitive on account of entry of big global multi-national names.

Unsurprisingly, 57% of the heads of Indian companies — the highest among all countries — reported rising labour costs to be a concern as there are few quality graduates.

A report by Technopak, a New Delhi-based consultancy, last year found that more than 60% of colleges and 90% of universities in the country were of “poor standard” and “hence the quality of the students is low”.

“With over 8.5% GDP growth, India continues to offer enormous potential, it is equally getting more competitive, particularly on key aspects like building market share, accessing talent and other input costs,” wrote Farokh Balsara, partner and national leader - markets, Ernst & Young India.

The Indian economy which grew at 8.9% last quarter is expected to clock 8.75% for the fiscal 2011. Still, a rising inflation has stopped most companies from passing the cost to consumers at a time when rising input costs could dent margins.

A case in point is seen at Advanta, generic seed company and part of United Phosphorus Ltd, country’s largest pesticide maker.

A senior executive at the company told DNA that the company could miss fiscal 2011 revenue target, hurt by droughts in Thailand and floods in Pakistan.

Worryingly, the company’s bottomline could also see a dent on account of higher commodity prices last year.

“(Indian) companies need to increase their R&D spending but it remains to be seen how they will do without hurting their profitability when input costs are surging,” said Rajesh Chakrabarti, assistant professor of finance at Hyderabad-based Indian School of Business.

Research and Development spending continues to be low for 100 of the largest Indian companies.
For the year 2009-10, although R&D spend for large companies increased a little, it remained under at a minuscule 0.7% of GDP, or a fourth of the US, less than half of China’s and lower than Brazil’s.

Some large Indian companies in recent years have come up with ingenious engineering ideas.

Tata Motors’ Nano - the world’s cheapest car - when launched in 2008 received plaudits as a showpiece of low-cost engineering through innovations: the car used only one windscreen wiper and tubeless tyres.

It was launched at a starting price of Rs100,000 before transport charges and tax and many claimed that it would cut into the market share of low-end car market and the high-end motorcycle segment. However, the company reported dismal sales figure of a little over 500 for the month of November.

Ernst & Young study suggest that the success of a company, in this case Tata Motors, rests on “how effectively it can meet the needs of its chosen markets and, increasingly, by how quickly it can respond to the opportunities that emerge in a changing market”.

Still, many in the industry believe that most domestic firms are making innovation as the key strategy as they compete among global brands.