Doing Business In India - Us-india Business Council

Doing Business In India Opportunities And Challenges US India Business Council Presentation to Business and Trade delegation from Minnesota

by Manish Mathur Principal, A.T. Kearney

New Delhi, 22nd October 2007

Agenda

n Overview of the India opportunity n Characteristics of the Indian business environment n Key challenges n Summary

A.T. Kearney

2

Overview of the India opportunity

India is the second fastest growing economy in the world and the fourth largest in PPP terms GDP Projection And Adjusted For PPP Nominal GDP Projection (US$ Trillion) 15

2.8%

United States

GDP Adjusted For PPP (2006, US$ Billion) 12,939

10,518

5

Japan

11%

China

France Germany UK

4,069

3,942

Italy

8.8%

Canada

2,605

India

Russia

0 2002

2004

2006

2008

2010

2012

2014

India’s economy would be larger than two of the current G8 countries in 2014 – Canada and Russia

US

China

Japan

India

Germany

India is already the fourth “largest” economy in “Purchasing power parity”

Source: Goldman Sachs BRICs report, World Market Research Centre; A.T. Kearney analysis

A.T. Kearney

3

Overview of the India opportunity

As many as 500 million people will enter the middle class in next 15 years Indian Population By Income Class, 2005-2020 (Millions) 2005

CAGR

2020

Upper-Middle $10,000+ PPP(1)

17m

14%

123m

Middle $5,000-10,000 PPP

94m

12%

478m

Emerging $2,500-5,000 PPP

391m

3%

628m

Poor Under $2,500 PPP

588m

-11%

101m

The size of this new middle class is much more than the total population of countries like US, UK and Germany combined(2) Note: Sources:

(1) PPP denotes Purchasing Power Parity; (2) Population data US~ 300 mn, UK~60 mn and Germany~82 million U.N. Population Studies; A.T. Kearney analysis

A.T. Kearney

4

Overview of the India opportunity

The opportunity is enhanced by young ‘working-age’ demographics and a highly skilled manpower base Population Trends And College Graduates For India Population Trends And Projections (BRIC)

Availability Of Graduates

(MN People) CAGR = 0.7%

>55 years 25-54 years 0-24 years

CAGR = 1.6%

174

246

CAGR 2.5%

1989

Graduates

139 102 370

461

CAGR

573 612 0.7%

Post Graduates CAGR = 1.2% CAGR = -0.5% 20

71 85

87 81

'00

'10

Brazil

28

33

65 49

65 40

'00

'10

Russia

531 555

522 490

36

PhD’s '00

'10

India

'00

9

'10

China

§ India’s working population (25-54 yrs) growth rate is 2.5% compared to 0.7% in China § Brazil and Russia have a smaller population base § Russia will experience a decline in population in the future Source:

258

§ India has large and widespread educational infrastructure – – – –

Over 380 universities (11,200 colleges) 1,500 research institutions and around 9,000 PhDs Over 200,000 engineering graduates Over 250,000 post graduates and 2,000,000 graduates

ICICI-OneSource, Malaysia Ministry of Education — Department of Statistics: China Population Statistical yearbook; Statistical Abstract of India; Bureau of Labor and Statistical Standards, Philippines; AICTE; Asiaweek; IMD World Competitiveness yearbook, Statistisches Bundesamt 2001; A.T. Kearney analysis A.T. Kearney

5

Overview of the India opportunity

The Indian government remains committed to market reforms

Overview Of The Key Reforms Introduced Since 1991 Liberalization Reforms introduced in 1991 External Sector Reforms

Industrial Policy Reforms

Financial Sector Reforms

• Market-determined • Almost all industrial unified exchange rate licensing was system abolished • Import licensing was • Restrictions under the virtually abolished Monopolies and • Peak protective customs Restrictive Trade duty rates were brought Practices Act were down reduced • Automatic FDI approval • Private entry (upto 50%) in several requirements for both industries domestic and foreign • The Foreign Investment players eased Promotion Board was • Sectors reserved constituted exclusively for the public sector, were • Policy to promote participation by FIIs in the opened up for private participation secondary market for Indian stocks

• Abolition of price regulation of IPOs • Setting up of the Securities and Exchange Board of India (SEBI) and the National Stock Exchange (NSE) • Capital market opened for FIIs • Interest rates were deregulated • Stringent capital adequacy norms

Reforms introduced post 2000 Second Generation Reforms • Agricultural reforms — Ease of inter-state movement of food grains — Reform of the Public Distribution System • Fiscal reforms — Rationalization of tax structure — Introduction of VAT • FDI policy reforms — Opening up of sectors to FDI — Raising equity cap for FDI participation in many sectors

The commitment to reforms has continued despite changes in the political regime over the years Source:

A.T. Kearney analysis

A.T. Kearney

6

Overview of the India opportunity

15 years of reform have meant that investment norms are liberal today

Overview Of The Key Investment Norms §§ India India permits permits FDI FDI in in almost almost all all sectors sectors

Investment norms

Repatriation of profits

Other fiscal incentives (SEZs)

§§ except except atomic atomic energy, energy, defense, defense, railways, railways, coal coal and and lignite, lignite, mining mining of of iron, iron, manganese, manganese, chrome, chrome, gypsum, gypsum, gold, gold, diamonds, diamonds, copper copper and and zinc. zinc.

§§ Automatic Automatic approvals approvals are are granted granted by by the the Reserve Reserve Bank Bank of of India India in in sectors sectors where where up to 100%, 74%, 51%, 40% or 26% foreign equity is allowed as a rule up to 100%, 74%, 51%, 40% or 26% foreign equity is allowed as a rule

§§ Dividends, Dividends, capital capital gains, gains, royalties royalties and and fees fees can can be be repatriated repatriated easily easily with with the the permission of the Reserve Bank of India permission of the Reserve Bank of India §§ In In case case of of an an exit exit decision, decision, the the overseas overseas promoter promoter can can repatriate repatriate his his share share after after discharging tax and other obligations discharging tax and other obligations

§§ SEZ's SEZ's are are duty duty free free enclaves enclaves where where up up to to 100% 100% FDI FDI in in manufacturing manufacturing sector sector is is allowed through automatic route barring a few sectors allowed through automatic route barring a few sectors §§ Other Other benefits benefits of of SEZ's SEZ's include include exemption exemption from from customs customs duty duty on on import import of of capital capital goods, goods, raw raw materials, materials, consumables consumables & & spares spares and and exemption exemption from from income income tax tax

A.T. Kearney

7

Overview of the India opportunity

India’s performance in A.T. Kearney’s FDI Confidence Index has consistently improved since 2002 Most attractive investment destinations for global investors September 2002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

China United States United Kingdom Germany France Italy Spain Canada Mexico Australia Poland Japan Brazil Czech Republic India

India’s score = 1.05 Source:

A.T. Kearney analysis

September 2003 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

China United States Mexico Poland Germany India United Kingdom Russia Brazil Spain France Italy Czech Republic Canada Japan

India’s score = 1.04

September 2004 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

China United States India United Kingdom Germany France Australia Hong Kong Italy Japan Russia Poland Spain Czech Republic Malaysia

India’s score = 1.4

December 2005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

China India United States United Kingdom Poland Russia Brazil Australia Germany Hong Kong Hungary Czech Republic Turkey France Japan

India’s score = 1.95 A.T. Kearney

8

Overview of the India opportunity

India is ranked as the most attractive in A.T. Kearney’s Offshore location attractiveness and Global retail development Indices Overview Of India’s Rank On Key Indices A.T. Kearney’s Offshore Location Attractiveness Index

7.12 2.09

5.71 1.36

1.31

5.59

5.58

0.73

0.92

1.77

0.93

5.46 1.36

2.02 2.63

3.72

3.32

3.09

Taiwan

80 Country Risk (Economic And Political) 0 = High Risk, 100 = Low Risk

Financial Score Environment Score People Score

A.T. Kearney’s Global Retail Development Index

Mexico

60

40

2.64

Chile Hungary South Korea Slovakia Malaysia China Lithuania Tunisia

70

50

1.47

On the radar screen To Consider Lower priority

Slovenia

Brazil

Morocco

Latvia Saudi Croatia Arabia Thailand Bulgaria Romania Egypt

Pakistan

Size of the bubble indicates retail sales of food, drink and tobacco in US$ billions, excluding taxes in 2005

China

Malaysia Czech Rep. Singapore

§ India outperformed its peers on the basis of high availability of skilled manpower and its low cost structure

Source:

A.T. Kearney analysis

Ukraine

Bosnia & Herzegovina Macedonia

30

India

Russia

Turkey Vietnam

Philippines Indonesia

India

30

40 Market Potential 0 = Low Potential, 100 = High Potential

50

§ The large size and fragmented nature of the Indian retail market makes it attractive for large foreign players

A.T. Kearney

9

Overview of the India opportunity

The investment and consumption trends are encouraging Outbound M&A Deals

Foreign investment 30

30

Outbound M&A deals (US$ Billion)

FDI Investment (US$ Billion) 28

25

25

20 15.72

20

15 15

15

Global opportunities for Indian corporates

10 4.3

5 0.7 0 2000

2005

2006

Increased foreign investment

10 5.55 5

2.63

3.75

0 2003-04

2004-05

2005-06

2006-07

2007 (Till May)

§ FDI of US$15.7B in 2006-7 compared to US$3.6 B in 2004-05 § From Jan to Oct 2007, FIIs had pumped in a hefty US$ 16.3 billion in equities

§ Global deals by Indian corporates worth US$28 B in first five months of 2007compared to US$4.3 B in year 2004 § Major deals in recent years include Tata’s acquisition of Corus for US$ 12 billion and of Tetley for US$ 2.5 billion; HindalcoNovelis deal of US$ 6 billion

Increased consumer spending

Increased domestic consumer spending

Source:

Government of India websites; A.T. Kearney analysis

§ GDP projected to reach over US$ 1.5 trillion by 2015 § Services are ~ 55% of Indian GDP § 64% of Indian GDP is consumption (Vs. China’s 42%) § Exports-GDP ratio for India is only ~10% compared to ratio of ~30% for China

A.T. Kearney 10

Table Of Contents

Table Of Contents

n Overview of the Indian opportunity n Characteristics of the Indian business environment n Key challenges n Summary

A.T. Kearney 11

Characteristics of the Indian business environment

The Indian political and judicial system are fundamental to the long term sustainable growth of India Executive

Judiciary

§ There is a single hierarchy of courts, with the Supreme Court of India at the top. Indian courts provide adequate safeguards for the enforcement of property and contractual rights

Legislature

§ English is the main court language for the Supreme court § India is a common law country with a written constitution which guarantees individual and property rights.

§ Successive governments have been upholding constitutional law since independence and elections are regular and peaceful § There is minimal intervention of the Executive with the Judiciary and it is quite regular for central or state governments to get reprimands from the legal courts on specific issues

§ Democratically elected legislature has the power to enact new laws and amend existing ones

Source:

National Informatics Centre, India; Supreme Court website; A.T. Kearney analysis

A.T. Kearney 12

Characteristics of the Indian business environment

Being a secular democracy comes naturally to India; changeovers are smooth and economic policy consistent 1991 - 1996 P.V. Narasimha Rao Prime Minister Dr. Manmohan Singh Finance Minister

P Chidambaram Commerce Minister

Regime: Congress • Initiated economic liberalization program • Comprehensive set of reforms covering the external sector, industrial policy & the financial reforms

Note: Source:

1998-2004 (1) AB Vajpayee Prime Minister Dr. Jaswant Singh Finance Minister

Dr. Manmohan Singh Prime Minister Arun Jaitley Commerce Minister

Regime: BJP(2) led coalition • Continued economic reforms • Strengthened India’s status as a growing economic world power • Privatization of key PSUs, initiated the process of VAT • Encouraged investments in IT, Telecom & BPO sectors

(1) There were 3 governments in the interim between 1996 and 1998 (2) BJP: Bharatiya Janata Party A.T. Kearney analysis

2004-present

P Chidambaram Finance Minister

Kamal Nath Commerce Minister

Regime: Congress-led coalition • Impetus to economic reforms through greater focus on agriculture & infrastructure • Continued liberalization of the economy by opening up new sectors for FDI • Targeting a projected real GDP growth rate of 7– 8% per year

A.T. Kearney 13

Characteristics of the Indian business environment

India portrays a landscape of diverse consumer base

Dimensions of Diversity Liberal

§ Language and cultural diversity:

North Poor

– There are 28 States and 22 national languages. Other than these 22 languages, there are hundreds of dialects that add to the multilingual nature of the country

§ Young India Vs Conservative India

Rural

Urban

– While the young liberal India may be clamoring for change and reform, there is a large section which is still fears any further reform in policy

§ Highly educated Vs Illiterate: – On one side, there are established institutes of higher learning, and on the other 28% of the population is still illiterate

Conservative

Rich

§ Rich Vs Poor: – While the benefits of economic development are percolating downwards, 26.1% of the entire population is still below poverty line

South

Sheer scale of diversity makes India a seat for a major world civilization than a mere nation-state Source:

A.T. Kearney analysis

A.T. Kearney 14

Characteristics of the Indian business environment

Culturally, the themes which bind the country are uniquely Indian

Bollywood More than 900 movies (characterized as melodramatic musicals) made every year

Cricket India is truly a cricket crazy nation with top cricketers seen as role models

Value consciousness Indian consumer is fascinated with value and companies have entered into low unit packs (sometimes single consumption) to reach the masses

It is important to understand the popular symbols of the country and what they denote to be able to succeed in the Indian market Source:

A.T. Kearney analysis

A.T. Kearney 15

Table Of Contents

Table Of Contents

n Overview of the Indian opportunity n Characteristics of the Indian business environment n Key challenges n Summary

A.T. Kearney 16

Key Challenges

Indian markets pose a host of significant challenges

Overview Of Key Challenges In India Heterogeneity of the market § The Indian consumer market is a conglomeration of significantly diverse markets and cannot be seen as one market environment

Infrastructure constraints § Poor infrastructure and complexity of logistics coupled with nebulous policy environment in many sectors can form roadblocks

Entrenched Local Players • Given that there are entrenched local players in all the segments, it is important for a new entrant to clearly decide the mode of entry

Complexity in “Doing Business” • India is still significantly behind in “Ease of Doing Business” parameters and familiarity with the Indian context holds significant importance

A.T. Kearney 17

Key Challenges

The heterogeneity of the Indian market means that players need to be clear on the segments they need to target Key Milestones In Evolution of India As A Multicultural Society Consumer Goods example

Story Of Many Indias §Low price points

Prices in INR

Ariel Front-O-Mat 1 kg: 145

Ariel 1 kg: 99

–In order to expand the addressable market, players are constantly introducing low unit packs of very low price points of INR 1,2 and 5. –Due to better value equation and higher packaging cost, most of these products are very low margin ones but help build trials and expand market

§Large packs for consumption Tide 1 kg: 51 Ariel 500 g: 50 Tide 500 gms: 26 Tide 200 gms: 11

Tide 75 gms bar: 5

–While there are low unit packs, there is demand for large consumption packs as well. Ariel sells skus from INR 2 to INR 145

§Range of price index –The value index varies significantly. Ariel Front-O-Mat is three times the value of Tide for the same weight in the same format

Tide 20 gms: 1.5 Source:

A.T. Kearney analysis

A.T. Kearney 18

Key Challenges

Players need to choose their mode of entry carefully

Key Success Factors

High

Potential Benefit

Wholly Owned Manufacturing (18 to 36 months)

Majority-owned Joint Venture (12 to 24 months)

Alliance (6 to 18 months)

Representative Office (Up to 6 months)

§ Deep understanding of doing business in India § Significant attention from senior management § Strong on-site management team

§ Basic understanding of doing business in India § Strong and reliable partner § Good relationship with partner § Senior management attention

§ Strong and balanced team § Established link to and support from headquarters

Low Low Investment, Complexity and Business Risk High

The mode of entry will also be different for different sectors depending on the reforms stage and strength of local competition Source:

A.T. Kearney analysis

A.T. Kearney 19

Key Challenges

There are significant constraints on infrastructure which increase the logistics costs and inefficiencies for operations Overview Of Transport Infrastructure Related Constraints Seaports

The 12 major Indian ports, handle 90 percent of the all-India port throughput § Average ship turnaround time (ASTA) at Indian ports is ~7 days ASTA at Singapore port is six to eight hours § Container moves per hour ranges from (7-15) for Indian ports compared to range of (35-40) for Singapore and Hong Kong

Source:

Airports

There are significant issues of congestion in key international and domestic airports § At many airports, passenger amenities need to be upgraded § There are also deficiencies in respect of ground handling facilities, night landing systems, cargo handling, etc., at some airports

Roadways

India’s road network extends 3.319mn km, of which 1.517mn km (45%) is paved § Average truck speeds=> 30-40km per hour (km/h), in comparison to developed country standards of 6070 km/hr § India also has a poor road safety record, with an average of 75,000 deaths on the road every year

§ Reasons are limited terminal capacity, bunching of flights, delay in passenger clearances, etc

National Informatics Centre, India; A.T. Kearney analysis

A.T. Kearney 20

Key Challenges

India is still significantly behind on “Ease of Doing Business” parameters 1 Low 5 High

Overview Of India’s Rank On Ease Of Doing Business Parameters (2008) Doing Business 2008 rank

Doing Business 2007 rank

India advantage

Doing Business

120

..

2

§ US ranks 3rd and China ranks 83rd in the world

Starting a Business

111

93

2

§ An entrepreneur needs 13 permissions over a duration of 33 days on an average

Dealing with Licenses

134

133

2

§ 20 procedures over 224 days are needed to build a warehouse, including obtaining necessary licenses and permits etc

Getting Credit

36

62

4

§ Measures credit information sharing and the legal rights of borrowers and lenders

Protecting Investors

33

32

4

§ Better investor protection.

Trading Across Borders

79

142

3

§ costs and procedures involved in importing and exporting a standardized shipment of goods

Enforcing Contracts

177

177

2

§ The ease or difficulty of enforcing commercial contracts

Ease of...

Comments

Entrenched local players have become more adept at managing the environment Source:

The Doing Business project-2008, World Bank; A.T. Kearney analysis

A.T. Kearney 21

Table Of Contents

Table Of Contents

n Overview of the Indian opportunity n Characteristics of the Indian business environment n Key challenges n Summary

A.T. Kearney 22

Summary

Indian markets provide a significant opportunity for companies who can overcome the challenges

Opportunities n A vibrant economy – expected to grow at a rapid clip n Favorable demographics n Growing consumer market n Highly skilled manpower n Economic and policy reforms n Increased foreign investment

Challenges n Challenges with infrastructure n Regulatory / bureaucratic barriers n Large and diverse consumer market n Complex distribution structures n Pricing challenges n Evolving markets

A.T. Kearney 23

Thank You Manish Mathur [email protected]

Table Of Contents

Table Of Contents

n The India opportunity story n Understanding the spirit and essence of India n Key challenges n Summary n Appendix: Overview of key industry sectors

A.T. Kearney 25

Appendix

Overview of key industry sectors n Agro-industry and food processing n Textile n Leather n Oil and Gas n Automotive n Tyres n Banking n Insurance n ICT n Pharmaceuticals and Healthcare n Machinery and Equipment n Infrastructure n Aerospace and defense n Tourism n Retail n Petrochemical n Cement A.T. Kearney 26

Appendix

Rising consumption and evolving tastes are driving growth of food processing sector Key trends

India Processed Food Market Forecast (€ billions) 139

10%

87

68

15%

71

7%

78 33

30 47

54

2004

2005

2010 2

1

Primary processed food

Value added food

Level of processing in food processing Industry in India - 2005 (Processed food as % of total food) 37% 21%

Notes: Source:

11%

Marine Fisheries

Meat

Dairy Products

Fruits & Vegetables

2%

Poultry

6%

• Market growth expectation of 10% per year up to 2010 • Today only 2% of India’s agriculture production is processed • Rapid urbanization, and rising per capita income, have led to rapid growth of food processing industry • Diverse climate and land in India results in large raw material base suitable for food processing industries • Primary food processing is highly fragmented with a small organized sector and unorganized sector that includes hundreds of thousands of processing units • Indian food and beverage companies are exporting to regional overseas markets with similar tastes • EU countries such as Netherlands, Germany, Italy and France account for 30 per cent of FDI in this sector • Fiscal incentives by several governments have led to high investments in those regions

Key Players • Indian Players: Amul, Britannia Industries, Dabur, Godrej Beverages Foods, Haldiram, Gits Food Products, MTR, Parle Agro • Foreign Players: PepsiCo Inc, Cadbury's, Heinz , HLL , ITC , Nestle

(1) Packed fruits and vegetables, packed milk, unbranded edible oil, milled rice, flour, tea, coffee, sugar, pulses, species and salt (2) Processed fruits and vegetables, juices, jams, pickles, squashes, concentrate, processed dairy products etc A.T. Kearney 27 Ministry of Food Processing, India, A.T. Kearney analysis

Appendix

Clusters in food processing sector are emerging in areas offering tax and other fiscal incentives

Nabha Jammu Channo

Sonipat

Moga Samalkha New Delhi Gurgaon Jaipur

• Areas of Uttaranchal, Punjab and Himachal produce large varieties of fruits and vegetables • Fiscal incentives in the region are leading to strong growth in industry

Baddi Rudrapur Pantnagar Noida Siliguri Mandideep

Mithapur

Sankrail Kolkata

Nashik

Nagpur

Silvassa Nandur Pune Mumbai

Ghatkeshar Rajahmundry

• Silvassa is a key industrial area in this cluster Bangalore Mysore

Chirala

Chennai

Hosur

Nanjangud Coimbatore Chittur Food Processing Industry

• Major players like ITC, Britannia and MTR have presence in this region A.T. Kearney 28

Appendix

Opportunities and challenges of Food Processing sector

Opportunities

Challenges

• Setup large low cost production bases in India for domestic and export markets by using low cost workforce

• Absence of quality cold storage facilities and transportation leads to high wastage in sector • Existing laws hamper growth of contract farming • Multiple ministries and laws govern the food processing industry increasing complexity for the industry players • Agricultural Produce and Marketing Act leads to most of the food products getting traded through regulated mechanism rather than open market • Essential commodity act restricts free inter-state movement of certain food products • Multiple tax rates and levies across states and locations create procedural complexity • High cost of packaging affect the margins of the industry • Execution of existing law for prevention of food adulteration is time consuming

• Enter ready meal and health food segments as they see burgeoning demand • Customize Italian concepts to suit Indian flavors as successfully done by McDonalds and Pizza Hut

Source:

A.T. Kearney analysis A.T. Kearney 29

Appendix

Overview of key industry sectors n Agro-industry and food processing n Textile n Leather n Oil and Gas n Automotive n Tyres n Banking n Insurance n ICT n Pharmaceuticals and Healthcare n Machinery and Equipment n Infrastructure n Aerospace and defense n Tourism n Retail n Petrochemical n Cement A.T. Kearney 30

Appendix

The textile sector is amongst the largest industries of the Indian economy Textile and clothing products industry size (€ Bn) CAGR 33

49

11%

23

14%

27

9%

• Indian textile and clothing industry expected to grow at a rate of 11% by 2010, driven mainly by exports • Production recently driven by growth of man made fibers based cloth • Problem of market access for international players due to high trade barriers and regulatory burden • Indian textile clusters and Italian company Carrera Holdings have signed a formal agreement to form a textile cluster consortium under which Carrera will provide technology, marketing assistance and financial assistance to various textile parks in India

14 19 2006 Domestic Market

Cloth Production (Bn sq. mt.)

2010 Exports

CAGR

: 4%

45.0 Key Players

38.6 31.5 36%

Notes: Source:

41%

Man made fiber based cloth

27% 13%

15%

13%

Blended1 Cloth

60%

49%

46%

Cotton Cloth

1996

2000

2006

(1) Cloth woven with more than one fibers Compendium of Textile Statistics

Key trends

• Indian Players: Raymond, Bombay Dyeing, Arvind Mills, Vardhman Group, Aditya Birla Nuvo, Welspun, Century Textiles, Alok Industries, Indo Rama Synthetics, Century Enka, SRF • Global Players: Belgian UCO (JV with Raymond), VF (JV with Arvind Mills)

A.T. Kearney 31

Appendix

The textile industry in India has clusters in various parts of the country each specializing in different fibers

Srinagar

• Punjab is a major export base for woolen and cotton textiles • Uttar Pradesh produces cotton and woolen textile

Ludhiana Delhi

Kanpur

Ahmedabad Indore Calcutta

Surat Nagpur

• Gujarat mainly manufactures cotton based fabrics apart from some synthetic fibers • Maharashtra is a manufacturer of cotton textiles in India

• Tamil Nadu is a major manufacturer of cotton textiles contributing to 22% of India’s cotton yarn and textile exports • Karnataka is major producer of cotton and silk and is a apparel sourcing base for many global firms

Bangalore Chennai Coimbatore Madurai

A.T. Kearney 32

Appendix

Opportunities and challenges of Textile sector

Opportunities • Leverage Italian capabilities and quality in machinery and equipment, fashion and design to transfer know how and capacity to Indian industry • Invest in setting up vertically integrated large scale units / retail chains (single brand)

Challenges • Market access in India is difficult due to regulatory/custom duty issues • Industry not self reliant, around 75% of investment is channeled through government aides in promoting the industry

• Enter into marketing joint ventures with Indian companies or brand licensing to Indian players

• Inefficiencies in customs procedures/bureaucracy

• Partner with Indian vendors to import from India, by nominating large Indian companies having credibility in terms of capacities and quality

• Products less sophisticated with a focus on low to medium priced goods

• Export of lifestyle brands of garments and accessories to India

• Highly labor intensive manufacturing with many small and medium size firms • Lack of technological upgradation and economies of scale

Source:

A.T. Kearney analysis A.T. Kearney 33

Appendix

Overview of key industry sectors n Agro-industry and food processing n Textile n Leather n Oil and Gas n Automotive n Tyres n Banking n Insurance n ICT n Pharmaceuticals and Healthcare n Machinery and Equipment n Infrastructure n Aerospace and defense n Tourism n Retail n Petrochemical n Cement A.T. Kearney 34

Appendix

The leather manufacturing industry in India is valued at over € 3 billion and is the third largest in the world India Leather market value 2005 (€ bn) Total value of production: 3 bn € 1.2

National consumption 1.8

Export

India Leather Export trend 2003-2005 (€ bn) Cagr:13%

Key trends • Largest livestock population in the world • In 2005, total production of leather industry was over € 3 bn out of which exports accounted for € 1.8 bn (Leather industry 8th in the export trade of the country) growing at a CAGR of 13% (2003-05) • Around 1600 tanneries in India concentrated in three states Tamil Nadu (52%), West Bengal (23%) and U.P. (12%) • Major leather products are footwear (776 ml pairs per year), skins (170 ml units), leather shoe uppers (112 ml pairs), leather garments, leather goods such as hand bags, belts, wallets, gloves, sports goods, harness and saddles etc. • Footwear production consumes about 60% of the total leather production Key Players

1.4

2003

1.7

1.8

2004

2005

• Indian Players: Superhouse Leathers, Mirza International, Liberty Shoes, Bhartiya International, Lakhani India, Forward Group • Italian Players: Conceria Virginia Italy (JV with Forward Group) • Global Players: Bata, Fossil (stake in Crew B.O.S Products)

Source: IBEF, Exim Bank A.T. Kearney 35

Appendix

There are three primary leather goods manufacturing clusters in India

Jallandhar Haryana New Delhi

• Uttar Pradesh is an important center for tanneries as it has a large population of livestock • Kanpur is a prominent centre for leather processing and specializes in processing hides into heavy leather

• West Bengal is one of the country's top state for export of finished leather goods • Bata which is the largest manufacturer and marketer of footwear products in India is located in Kolkata • The Government of West Bengal has setup a state-of-the-art integrated Leather Complex on the eastern fringe of Kolkata

Noida Agra Kanpur

Kolkata Ranipet Hyderabad

• Majority of the tanneries in India are located in Tamil Nadu • Govt. of Tamil Nadu offers a special capital subsidy to further encourage the leather industry • TALCO-a state govt. organization is setting common effluent treatment plants in leather industry clusters

Bangalore

Chennai Ambur Vaniyambadi Tiruchchirappalli Dindigul A.T. Kearney 36

Appendix

Opportunities and challenges of Textile sector

Opportunities • Focus on manufacture and export of value added products as opposed to raw material • Export machinery to India or to have technology agreements with Indian firms, as technology used by most players is outdated

Challenges • Limited production with respect to raw material: with about 15% of the world livestock population, India accounted for only 8% of the leather production in 2002 • Fragmented sector: Indian leather industry consists of 42,000 small-scale industry (SSI) units, which account for 75% of the total production

• Economies of scale in setting up large scale units • High growth of the local footwear market

• Environmental challenges as leather industry is traditionally considered polluting especially tanning and finishing • Many developed countries are implementing non-Tariff Barriers to restrict leather exports from developing countries like India

Source:

A.T. Kearney analysis A.T. Kearney 37

Appendix

Overview of key industry sectors n Agro-industry and food processing n Textile n Leather n Oil and Gas n Automotive n Tyres n Banking n Insurance n ICT n Pharmaceuticals and Healthcare n Machinery and Equipment n Infrastructure n Aerospace and defense n Tourism n Retail n Petrochemical n Cement A.T. Kearney 38

Appendix

Strong growth is expected in oil and gas consumption spurred by strong economic growth Current and Forecasted Oil Demand in India (in MMT) CAGR 6%

Oil Consumption

CAGR 7%

Oil Imports

Key trends

368 325

172 138

135 101

2007 Oil Consumption

2012

2025

Oil Imports

Current and Forecasted Gas Demand in India in MMTOE) CAGR 6%

Gas Consumption

CAGR 5%

Gas Imports

120

Key Players

58 43

40 26

16

2007 Gas Consumption

Notes: Source:

2012 Gas Imports

(1) TOE:Tonnes of Oil Equivalent Infraline, Crisinfac

• Oil: 36% of India’s primary energy consumption • Expected growth of overall demand to 172 MMT in 2011-12 and 368 MMT in 2024-25 • Natural Gas: India is a relatively new entrant into the natural gas market but is expected to rival both China and Japan in having the largest natural gas demand in Asia • Natural gas volume in the country will partly be driven as a substitute to petroleum products since it is cheaper and cleaner • Reforms in the power sector will also encourage natural gas to be used as a cleaner substitute to coal in the long term

2025

• Indian players: Oil and Natural Gas Corporation, Reliance Industries, Indian Oil Corporation, GAIL, Essar, Indraprastha Gas, Oil India Ltd, HPCL, BPCL • Italian players: Saipem SpA • Other global players: British Petroleum, Cairn Energy, Exxon Mobil, Gaz de France, Shell, Total, OAO Gazprom, British Gas A.T. Kearney 39

Appendix

This industry is centered around crude oil sources or transportation hubs such as ports

• Oil refining capacities in Digboi and Guwhati, • Assam is one of the largest oil producing states in the country

• Significant oil refining capacities exist in Panipat and Mathura Mathura Barauni Panipat • Mumbai High is the key source of oil production in India • Jamnagar has the biggest oil refinery in India

Bongaigaon Digboi Numaligarh Guwahati

Koyali

Jamnagar Haldia

Mumbai

Vishakhapatnam or Vizag • Cauvery and KG basin have some of the largest gas fields in India • Oil refining capacities in Cochin, Chennai, Mangalore and Vizag

Tatipaka

Mangalore Oil & Gas Industry

Cochin

Manali Chennai Narimanam

A.T. Kearney 40

Appendix

The oil and gas sector has recently been deregulated and is still evolving

Trade/Investment Policies & Regulations • Government of India approved the New Exploration Licensing Policy (NELP) under which national oil companies are required to compete on an equal footing with Indian and foreign companies to secure oil and gas petroleum exploration licenses • Under the NELP upto 100% foreign participation is allowed and a fast track approval mechanism is in place through single window Empowered Committee of Secretaries • MoPNG has conceived a more coordinated approach to acquisition of overseas oil and gas assets through : • joint foray (compared to the current fragmented approach) • bilateral engagements with other countries to benefit from each others strengths in areas of technology transfers, R&D, safety and training • multilateral engagements such as the Asian Round Tables, International Energy Forum etc

Source:

A.T. Kearney analysis A.T. Kearney 41

Appendix

Opportunities and challenges of the Oil and Gas market

Opportunities • Leverage on India’s key advantages as an export refining hub like cost competitiveness and location • Alliances and partnerships to diversify the energy supply base and improve long term supply security

Challenges • Natural decline in ageing oil and gas producing fields • Limited infrastructure available for gas transmission and distribution

• Exploring of new resources of hydrocarbons such as CBM and Gas Hydrates

• Distortion in public tenders, subject to custom duty application

• Cooperate in technology assistance programs to improve quantity and quality of power generation

• Absence of statutory framework in the upstream industry • Lack of clarity in Open Access Policy • Incidence of cross subsidy due to social obligations • Long lead times for recent discoveries by pvt / JV companies

Source:

A.T. Kearney analysis A.T. Kearney 42

Appendix

Overview of key industry sectors n Agro-industry and food processing n Textile n Leather n Oil and Gas n Automotive n Tyres n Banking n Insurance n ICT n Pharmaceuticals and Healthcare n Machinery and Equipment n Infrastructure n Aerospace and defense n Tourism n Retail n Petrochemical n Cement A.T. Kearney 43

Appendix

The automotive industry is growing at a rapid pace spurred by both domestic demand as well as increased exports Key trends

India Automobile market value 2002-2005 (€, Billion) R: 1 CAG

• Indian Automotive industry growth of 19% since 2002 • Auto component exports growing at a rate of 30% in the last three year • Increased demand for vehicles created by growing economy and rising per capita income • Increased vehicle ownership due to increased and affordable vehicle financing • Favorable demographic profile with 35% of the population between 15-35 years • Entry of several players and launch of multiple models at various price points • Changing consumer behavior – shorter ownership lifecycles

9%

14,1 8,4

2002

2005

India Auto Components market value 2002-2005 (€, Million)

CA

: GR

22%

CAGR 8.141

1.347

Exports

30%

6.794

Domestic

21%

3.626

469 3.157 2002 Source:

Key Players

2005

ACMA, Global Insight, CrisInfac, AT Kearney Analysis

• Indian players: – Passenger Vehicles: Tata Motors, Mahindra & Mahindra – Commercial Vehicles: Tata Motors, Ashok Leyland, Eicher Motors – Two wheelers: Hero Honda, TVS, Bajaj Auto • Italian players: Fiat, Piaggio • Other global players: Suzuki, GM, Ford, Honda, Toyota, Hyundai, Daimler Chrysler, Audi, BMW, Renault-Nissan A.T. Kearney 44

Appendix

Europe is currently the largest and fastest growing export market for Indian auto components suppliers Export of Autocomponents from India (€ Million) 1.347

C

r ag

0% 3 :

781 10% 11%

469 11% 11% 18%

12%

Others

10%

Africa

16%

Asia

26%

31%

Europe

Segments

28%

2004

Examples of Components Imported from India

Power Train

Fuel injection systems, Pistons, transmission components, Cylinder blocks, engine blocks

Chassis

Brake linings, brake parts

Electrical

Ignition systems, starter motors and parts

Interiors

Interior trims, Instrument panels, HVAC

Exteriors

Small stampings

36% 30%

Source:

Americas

19%

30%

2002

Total

2006

CRISINFAC, A.T. Kearney Analysis A.T. Kearney 45

Appendix

There are three regional automotive clusters in India

• Gurgaon is the only manufacturing location of Maruti Suzuki, the Indian PV leader; and its ancillaries • Gurgaon is also the hub for the leading two wheeler manufacturer: Hero Honda and its component business

• Pune is the main manufacturing location for Tata Motors (largest Indian OEM) and its autocomponent division ; GM is setting up its second facility in Pune • Also Bharat Forge, the world’s second largest forging company is located in Pune

Hub: Gurgaon Gurgaon

Surajpur Noida Lucknow

Halol

Hub: Pune

Kurla

Indore(2) Nagpur

Nasik Igatpuri Mumbai Aurangabad Kanhe Pune

Hub: Chennai Bidadi

Source:

Calcutta

• Chennai is the export hub and component sourcing hub for Ford and Hyundai and the transmissions sourcing hub for Toyota • Chennai is also the manufacturing hub for the TVS Group (two wheelers and components)

Irrungattukottai Chennai Maraimalai Nagar

ISI emerging market, Indiainfoline A.T. Kearney 46

Appendix

Opportunities and challenge of the Automotive sector

Opportunities • The Indian automotive industry has reached a critical size and is expected to show a healthy growth rate driving the development of the auto components industry • India is emerging as a global small car manufacturing hub driving the maturity of supplier capabilities across the entire value chain (product design to delivery) – OEMs such as Maruti-Suzuki and Hyundai have identified India as small car export bases and are working with Indian suppliers to develop their capabilities • The need for greater localization to achieve cost leadership has also driven growth and development of the auto ancillary supplier base in India

Challenges • Infrastructures and access points for car imports still limited • Quality products difficult to be provide on a consistent basis from Indian companies • Many Indian suppliers do not have the capability to supply large scale orders required by global companies • Focus on product development still non-existent in many companies • Localization is essential for international players to enter the Indian market

• India is emerging as a global base for offshoring of engineering design services for the automotive industry

Source:

A.T. Kearney analysis A.T. Kearney 47

Appendix

Overview of key industry sectors n Agro-industry and food processing n Textile n Leather n Oil and Gas n Automotive n Tyres n Banking n Insurance n ICT n Pharmaceuticals and Healthcare n Machinery and Equipment n Infrastructure n Aerospace and defense n Tourism n Retail n Petrochemical n Cement A.T. Kearney 48

Appendix

Expansion of the automotive industry is driving growth in this sector India Tyre Market trend 2003-2005 (€ Mn) C

R AG

:6

Key trends

%

2.408 2.282 2.163

2003

2004

2005

India Tyre national demand forecast (2005-2010) (Mn, Number of Tyres)

CA

GR

7 : 7,

58,7 50.5 6% 21% 22% 50%

6%

CAGR

%

20% 22% 52%

6%

73

LCV1 HCV2

8% 7%

18%

Passenger Vehicles

5%

Two Wheelers

9%

22% 54%

2005 2007 2010 Notes: (1) Light Commercial Vehicles (2) Heavy Commercial Vehicles Source: ATMA

• Market growth driven by high growth in the automotive market • National demand is expected to grow steadily, in particular in the two wheelers sector • two wheelers tyres 50% of total national demand in 2005; expected 54% in 2010) • Industry growth driven by replacement market for a long time but OEM market acquired importance over the last three years • Two tiered industry: – Tier-I players (top 5 tyre companies), account for over 80% of industry turnover and have a well diversified product-mix – Tier-II companies are small in size, mainly concentrating on production of small tyres (for two/ three-wheelers, etc.), tubes & flaps etc.

Key Players • Indian Players: MRF, Ceat, Apollo, JK Industries, TVS Srichakra, Falcon, Dunlop • Global Players: Goodyear India, Bridgestone India

A.T. Kearney 49

Appendix

Six large domestic players dominate the market and their plants are located mostly in Maharashtra and Tamil Nadu

Banmore Kankroli Limda

• Tyre manufacturers located close to the automotive hub around Pune

Nasik Mumbai Pune

• Tyre manufacturers located close to the automotive hub around Chennai

Ponda Vikrant

• Tyre manufacturers located close to the automotive industry in Karnataka

Tiruvottiyur Kalamassery Cochin

Pondicherry Arakonam

• Kerala produces over 90% of India's natural rubber and has many intermediate rubber units making it ideal for tyre manufacturing A.T. Kearney 50

Appendix

Opportunities and challenge of the Tyres sector

Opportunities

Challenges

• Set up facilities for manufacturing tyres for domestic sales as well as exports (notwithstanding the well entrenched competition in the domestic market)

• Narrow product range, large operating overheads and high break-even levels

• Leverage on technology, as Indian tyre makers are technologically behind global competitors • While the PV segment has transitioned over near completely to radial tyres, the penetration levels for radials is only at 5% for CV’s; Indian tyre companies are however rapidly ramping up capacities in this front to not only serve the expanding OE market, but potentially an even larger aftermarket demand going forward • Newer technologies like run-flat tyres have not penetrated the Indian market yet

• High costs due to regulation on ISI mark (additional marking that requires additional investment for foreign producers)

• Sale of equipment / machinery to Indian tyre companies

• Continuous increase in prices of raw materials such as natural rubber, which accounts for nearly one third of total raw material costs • Cheaper imports of tyres especially from China • High capital requirements to set up tyre manufacturing plants

• Other technology transfers

Source:

A.T. Kearney analysis A.T. Kearney 51

Appendix

Overview of key industry sectors n Agro-industry and food processing n Textile n Leather n Oil and Gas n Automotive n Tyres n Banking n Insurance n ICT n Pharmaceuticals and Healthcare n Machinery and Equipment n Infrastructure n Aerospace and defense n Tourism n Retail n Petrochemical n Cement A.T. Kearney 52

Appendix

Banking sector is characterized by high credit demand due to rising consumption Key trend

India Commercial Banks market value (€ billions) 400

299

300 200

266 125

363

310

258 194

146

CAGR 27%

100 CAGR 7%

0 2003 Deposits

2004

2005

2006

Advance

Per Capita Deposit and Credit per branch (€) 300 250 200 150 100 50 0

• High GDP growth rate leading to high credit demand across sectors • Consumer credit in India witnessing a strong expansion for credit led by the housing and the retail sectors • Corporate credit offtake, agriculture and SME sectors are the other major growth avenues for the banking sector • Banks liquidating their holdings of Government securities to meet high credit demand • Stronger banking regulations have led to improvement in asset quality with declining NPAs • Ratio of per capita deposit and credit per branch among the lowest in the world and expected to grow with increasing GDP

€ millions 275 207 165

2.6

1.8 1.3

2001 Per Capita deposit Source: RBI, Crisinfac

2003

2005

3 2.5 2 1.5 1 0.5 0

Key Players • State owned players: SBI, PNB, UTI Bank ltd., Canara Bank, Union bank of India, Bank of Baroda, Allahabad Bank • Private players: HDFC Bank, ICICI Bank • Foreign Banks: HSBC Ltd., ABN-AMRO Bank N.V., American Express, BNP Paribas, Citibank, Standard Chartered bank

Credit per branch A.T. Kearney 53

Appendix

Financial market reforms are paving way for global players to enter the sector

Main Trade/Investment Policies & Regulations • License norms for foreign banks are different from that for Indian banks which makes it tougher for foreign banks to expand network in India • There is a limit of 10% on voting rights for foreign investors which will be removed in year 2009 under RBI plan • Foreign banks operating in India required to migrate to Basel II1 with effect from March 31, 2008 • Foreign banks are currently taxed ay 41,82% versus 35,7% for local banks • Foreign banks in India will have to lend 32% of their net banking credit to the priority sector in the country • FDI: • Foreign bank can enter India through one of the 3 channels: branches, subsidiary or representative office • There is limit of 74% on FDI investments in private banks (of which Foreign Institutional Investors cannot hold more than 49%) and a limit of 20% on investments in public banks • Foreign banks can also operate through wholly owned subsidiary (WOS) • Reserve banks plans to give national treatment to WOS after 2009 under which branch expansion will be easier

Notes: Source:

(1) Guidelines for determining the minimum solvency requirements for banks with a new system for weighting the risks run by banks A.T. Kearney analysis A.T. Kearney 54

Appendix

Opportunities and challenges for Banking sector

Opportunities • Invest in existing Indian banks as they seek large amount of capital to sustain credit demand by Indian economy • Use NBFC route to start operations in India and launch full scale banking operations after obtaining banking license from RBI • Partner with Indian banks to launch products where Italian banks can bring in operational expertise and Indian banks can provide distribution network

Source:

Challenges • With a strong outlook for credit and implementation of Basel II norms, Indian Banks would require additional capital to support their growth plans • Policy hurdles for foreign banks planning to invest in India • Increased competition in the sector as foreign and private players look to expand across businesses • Weak recovery mechanisms and legal procedures increase the cost of doing business in India • Small sizes of most Indian banks with weak balance sheets hampering their growth in global financial market

A.T. Kearney analysis A.T. Kearney 55

Appendix

Overview of key industry sectors n Agro-industry and food processing n Textile n Leather n Oil and Gas n Automotive n Tyres n Banking n Insurance n ICT n Pharmaceuticals and Healthcare n Machinery and Equipment n Infrastructure n Aerospace and defense n Tourism n Retail n Petrochemical n Cement A.T. Kearney 56

Appendix

Growing disposable income and awareness is driving growth in Insurance sector, especially in Life segment Key trends

India Insurance market value (€ billions) 20 % C AG R : 17.1

20 13.9

11.8

15 10 5 0

14.0

9.4

11.2

2.4

2.7

3.1

2003

2004

2005

Non Life Insurance premium

22% 14%

Life Insurance premium

Insurance Penetration (Year 2004, Premiums as a % of GDP)

9.4

• High growing sector (cagr 20% in last two years) especially in life segment • Insurance penetration similar to China but unbalanced towards life premium • 14 insurers companies, among which 1 government insurer in life and 4 in non-life dominate the market • Most private insurance companies are joint ventures between Indian & foreign partners • Banking channels are the preferred distribution modes for private insurance companies accounting for 20-25% of sales • Unit linked insurance plans are popular in life insurance segment • Foreign players like Generali, Fortis, Paternoster, Swiss Re are planning to enter Indian market

7.6 4.1

3.2

3.3

2.5

2.2

0.7

1.1

India

China

Non Life Insurance Penetration

Source:

Key Players

4.9 5.1 2.7 Italy

USA

Life Insurance Penetration

IRDA (Insurance Regulatory and Development Authority), Fitch

• Life Insurance: LIC, ICICI Prudential, HDFC Standard Life, Birla Sun Life, SBI Life, Bajaj Allianz, Kotak Old Mutual • Non-life Insurance: National Insurance Company Ltd., New India Assurance Company Ltd., Oriental Insurance Company Ltd., United India Insurance Company Ltd., ICICI Lombard, Bajaj Allianz and Iffko-Tokio • Reinsurance: General Insurance Corporation

A.T. Kearney 57

Appendix

Insurance penetration is likely to increase with regulatory changes

Main Trade/Investment Policies & Regulations • FDI: allowed under automatic route only up to 26% which is expected to be increased to 49% in year 2007 • IRDA plans to keep a FII limit of 26% over and above the FDI limit of 49% • Every insurer is required to write certain percentage of its policies in the rural sector which varies from 5% to 15% • IRDA plans to remove tariff regulations for non-life insurance premium from Year 2007 which will allow companies to set rates • Banks cannot hold more than 49% stake in an insurance company • Separate licenses are required to enter into life and non-life segment • Any entity can get insurance license in only one category • Pension fund regulation still missing • The minimum paid-up capital requirement presently stands at € 16.9 mn for both life and non-life business and € 33.8 mn for the reinsurance business Source:

A.T. Kearney analysis A.T. Kearney 58

Appendix

Opportunities and challenges for Insurance sector

Opportunities

Challenges

• India’s large rural and small town population largely under penetrated but offering a huge market for all players

• Weak distribution network in small towns and villages is a key barrier in growth of insurance in these areas

• Segments like health, life and disability plans have a large growing market in the Indian middle class

• Lack of trained manpower is hampering growth of insurance sector

• Italian insurers can bring in product knowledge and better risk management practices to Indian market

Source:

• Tariffs in non-life insurance results in losses in segments like motor insurance leading to lower growth

A.T. Kearney analysis A.T. Kearney 59

Appendix

Overview of key industry sectors n Agro-industry and food processing n Textile n Leather n Oil and Gas n Automotive n Tyres n Banking n Insurance n ICT n Pharmaceuticals and Healthcare n Machinery and Equipment n Infrastructure n Aerospace and defense n Tourism n Retail n Petrochemical n Cement A.T. Kearney 60

Appendix

The Indian IT and BPO industry has witnessed strong growth across segments

Indian BPO Industry Market Size (Euro Bn) CAGR = 46%

Key Trends 15.5 0.7

10.7 0.5

1.6 0.2

4.8

3.5

2.4 2004

2005 Exports

2006 Domestic

Indian IT Industry Market Size (Euro Bn) CAGR = 29%

• Americas and Europe remain the key markets for exports accounting for over 90 per cent of IT-ITES exports • India share of global offshore market in BPO industry expected to stabilize at ~50-55% – Companies to diversify presence across multiple locations – Other attractive destinations like Philippines, Malaysia, Czech Republic expected to start competing for offshore pie • Cost advantages combined with emerging success stories expected to be primary drivers in near future • Cross selling between IT services and BPO within same engagement boundaries expected to increase

16.9 13.1 10.1 7.4

10

2.7

3.2

4

2004

2005

2006

Exports

Source:

13

Key Players • Indian Players: Infosys, TCS, Wipro, Satyam, Cognizant, HCL Technologies • International Players: IBM, Accenture, Microsoft, CSC,SAP, HP, American express, Convergys, Genpact

Domestic

Nasscom, A.T. Kearney analysis and research

A.T. Kearney 61

Appendix

India continues to be the preferred destination for offshore services

A.T. Kearney’s Offshore Location Attractiveness Index — 2004

People Score Environment Score Financial Score

7.12 2.09

5.71 1.36

1.31 0.93

5.59

5.58

0.73

0.92

1.77

5.46

5.45

5.44

1.36

0.94

0.86

0.92

2.02

5.42

5.37

5.33

0.7

0.88

1.68

1.57

2.99

2.88

1.94 1.41

2.63 2.64

3.17

Brazil

1.00 Philippines

Singapore

Czech Rep.

Malaysia

China

India

1.47

Poland

3.09

2.48

Chile

3.32

3.59

Canada

3.72

India outperformed its peers on the basis of high availability of skilled manpower and its low cost structure Source:

A.T. Kearney analysis A.T. Kearney 62

Appendix

Government has provided various fiscal and non fiscal incentives to the sector

Trade/Investment Policies & Regulations • Duty-free imports of capital goods permitted for BPO companies • Total income tax exemption on export of IT enabled outsourcing services • Fiscal incentives for IT companies provided by Exim policy1 of India • Many state governments have announced incentives and procedural waivers for the ITITES sector focusing on issues like infrastructure and electronic governance • State governments have announced IT policies to create a manpower pool for IT and ITES industry • Information technology act 2001 enacted to provide legal recognition to all transactions by means of electronic data exchange

Notes: Source:

(1) Policy for exports and imports A.T. Kearney analysis

A.T. Kearney 63

Appendix

Opportunities and challenge in the IT/ITES industry

Opportunities

Challenges

• Leverage the Indian advantage for business process outsourcing of services

• Lack of infrastructure and data protection laws could hamper growth of IT/ITES sector in India

• Use India as a outsourcing hub for content development, R&D services and software products

• Availability of trained manpower for growing needs of industry could be a potential bottleneck

• Indian companies can use Italy as a hub to serve Italy and other European countries • Indian companies can use Indian experience to help development of IT clusters in Italy

Source:

• China and other countries in the ITES sector are increasingly challenge India’s dominance in the sector • Rising labor costs are reducing India’s competitive advantage in the sector

A.T. Kearney analysis A.T. Kearney 64

Appendix

Overview of key industry sectors n Agro-industry and food processing n Textile n Leather n Oil and Gas n Automotive n Tyres n Banking n Insurance n ICT n Pharmaceuticals and Healthcare n Machinery and Equipment n Infrastructure n Aerospace and defense n Tourism n Retail n Petrochemical n Cement A.T. Kearney 65

Appendix

Indian pharmaceutical market is growing quickly, driven by export and domestic market growth

Total Pharmaceutical Market (€ Billion, Year 2003)

Key Trends

9

288 188 144

India Pharmaceutical market trend 2003-2010(1) (€ Billion) cagr: 13,5% cagr: 11% 4.6 3.0 1.6

6

6

6

61

35

5

4

251 187

Key Players

8.4 5,7

• World’s 13th largest pharma market in value terms and 4° in volume terms • High growing market, currently still dominate by domestic consumption but with exports expected to reach 46% of production in 2010 • Exports growing due to the low manufacturing costs and time to market advantages in research • Domestic market growth driven by rising income levels, expenditure on healthcare and introduction of new patent regime • Several 3rd party service providers, including local & international players, are setting up bases in India

CAGR 10.7 5.9

10% 17%

4.9

3.6 2.1

3.5

4.9

2003

2005

2008E

2010E

Exports

Domestic Market

Note: Source:

4

Australia

7

Netherlands

8

India

China

614 388 368 345 331 240

9

Brazil

11

Mexico

14

South Korea

19

UK

21 France

Germany

Japan

Per Capita Spend (€)

USA

30

Italy

49

Spain

233

Canada

Low drug expenditure per capita driven by • Low pricing levels • Vast majority of drug spending concentrated with middle class

• Indian players: Cipla, Ranbaxy, Nicholas Piramal, Sun Pharma, Dr. Reddy Laboratories, • Other global players: Glaxo SmithKline, Zydus Cadila, Pfizer, Aventis, Abbott India, Wockhardt

(1) Domestic market value is for western finished medicines only. India also imports drugs to meet its requirements IDMA, Espicom, IMS, Crisinfac, Secondary Research, A.T. Kearney analysis A.T. Kearney 66

Appendix

The are four major forces driving the Indian Pharmaceutical industry

Changing Demographic Profile

Changing Regulatory Regime

• High GDP growth leading to higher disposable income • Increasing private expenditure on healthcare • Growing consuming class creating a larger target market Increasing rural incomes are opening up new markets

• Recognition of product patents which is encouraging global players to enter the market • More favorable intellectual property laws are promoting India as a R&D hub for the industry Drivers of Indian Pharma Industry

Emerging Distribution System • Complicated multi-level distribution system makes it hard for new players • Alliance based strategy of smaller companies for attaining wider reach create barriers to entry

Changing Healthcare Market • Rapid growth (8-10%) • Shift towards lifestyle diseases • Increase penetration of health insurance • Increasing role of private providers A.T. Kearney 67

Appendix

The pharmaceutical industry is largely concentrated in west India

• Favorable government policies and access to ports for exports has helped in making western India the major cluster of pharmaceutical industry Baddi

Kalol Kandla

Barotiwala

Maloda Kadi Hlrapur

Dholka Valsad Vatva Vadodara Ankleshwar Bhimpore Piparia Thane Mumbai

Halol Ratlam Indore

Athal

Vapi Nashik

Bhandara Aurangabad Chikalthana Waluj

Kurkumbh Verna Margao

Patalganga Vikhroli Solapur Jeedimetla

Vishakhapatnam Pashamylaram Kazipally Hyderabad Bangalore

Pharmaceutical Industry

Mysore Poonoon

Chennai

• Bangalore is the key hub for biotechnology industry A.T. Kearney 68

Appendix

Opportunities and challenges for Pharmaceutical sector

Opportunities • India as a suitable alternative for R&D activities on account of cost advantage (30-50%), time to market advantage (cycle time reduction of 30-40%) and strong people skill availability • Abilities of national companies in-licensing and outlicensing for drugs at different stage of development (preclinical, clinical and manufacturing phase)

Challenges • Intellectual Property Laws regarding patents in India still not stringent; many global companies are hesitant to introduce products in this market • Prices of key drugs still regulated by Drugs Price Control Order

• Availabilities of new Biotech products which may be launched in the regulated markets • 30-40% manufacturing cost advantage in API1 against western markets and also boasts of largest number of US FDA approved sites outside US

Notes: Source:

(1) Active Pharmaceutical Ingredients A.T. Kearney analysis

A.T. Kearney 69

Appendix

Overview of key industry sectors n Agro-industry and food processing n Textile n Leather n Oil and Gas n Automotive n Tyres n Banking n Insurance n ICT n Pharmaceuticals and Healthcare n Machinery and Equipment n Infrastructure n Aerospace and defense n Tourism n Retail n Petrochemical n Cement A.T. Kearney 70

Appendix

Infrastructure development is driving demand for machinery & equipment in India Indian Machinery & Equipment Industry Size(1) (€ bn)

Key trends

CAGR 3%

8.2

3.4

4.8

8.5

CAGR

4.6

35%

3.9

-20%

• Strong designing and engineering capabilities along with low labor cost has made India one of the preferred offshoring destinations • Machine tools was one of the high growth segment in imports while machinery and instruments showed high growth rate in exports • Machinery & equipment (Non electrical machinery) sector is concentrated, with the Top 5-7 companies accounting for more than 70-80% of the market in most industries • Electrical machinery sector as well is highly concentrated with 3-6 players dominating industry • Leading players in electrical machinery sector have collaborations with foreign companies for technology • Key industry bodies are Indian Machine Tools Manufacturer Association and Federation of Engineering Industries of India • Indian companies are leveraging cost advantage in production to increase exports Key Players

2003 Domestic Market Notes: Source:

2004 Exports

(1) Capital goods as per CMIE classification CII

• Indian Players: BHEL, L&T, Crompton Greaves, Cummins India, Elgi Equipments, HMT, Kirloskar Oil Engines • Foreign Players: Siemens, ABB, Thermax A.T. Kearney 71

Appendix

Areas of western India and few northern states are major hubs of machinery and equipment production • The industrial cluster in northern region is centered around Delhi and few locations in Punjab & UP

Goindwal Pinjore New Delhi Gurgaon Faridabad Ajmer Malanpur

Hardwar Rudrapur

Jagdishpur Varanasi Jhansi

Dewas Vadodara Hazira Daman and Diu Nashik

Shirval

Mumbai Kalwa Kirloskarvadi

• Most of the big players like ABB, L&T etc in machinery & equipment have plants in states of Maharashtra & Gujarat

Mandideep

Jamshedpur Jamshedpur

Pune

Ahmednagar

Bhopal

Goa

Ranipet Sitara Hyderabad

Kondhapuri

Bangalore Mysore

Chennai Tiruchchirappalli

Coimbatore

Machinery & Equipment Manufacturers

Ernakulam A.T. Kearney 72

Appendix

Opportunities and challenges for Machinery and Equipment sector

Opportunities • Outsource engineering components from Indian manufacturers to leverage cost advantage of Indian manufacturers

Challenges • Increase in raw material prices has resulted in low profit margins for the heavy engineering industry • Increased competition

• Invest in setting production facilities in India to take advantage of low production cost • Export of machinery & equipment to India as demand of capital goods surges with growing infrastructure needs of the country • Bring in a lot of technical expertise to Indian electrical machinery market as India is compliant with the European standards for electrical engineering

• Indian capital goods manufacturers face cost disadvantages due to high cost of finance, power and poor infrastructure • Duty structure in India is distorted with lower duty on machinery & equipment imports and high excise duties which leads to disadvantage for local manufacturers • Access to technology is a challenge for Indian companies as technology absorption requires large amount of capital

Source:

A.T. Kearney analysis A.T. Kearney 73

Appendix

Overview of key industry sectors n Agro-industry and food processing n Textile n Leather n Oil and Gas n Automotive n Tyres n Banking n Insurance n ICT n Pharmaceuticals and Healthcare n Machinery and Equipment n Infrastructure n Aerospace and defense n Tourism n Retail n Petrochemical n Cement A.T. Kearney 74

Appendix

Infrastructure sector provides a strong opportunity for private players Cumulative Govt. Spend on Infrastructure vs. Industrial GDP Cumulative Government Spend on Infrastructure

(Euro Bn) 15

2003

China

12 50%

2003

9

India 6 3 1995

1995

0 0

130

260 390 Industrial GDP

650(Euro Bn)

520

Proposed Infrastructure Investment (2006-2010) (Euro Bn) Euro 152 Bn

Accruals

52 8

Private 15

44 6

Govt.

5

Power

• India lacks infrastructure to support its growing economy • Ease of regulations and increasing private sector participation has led to strong growth in infrastructure sector over the past few years • Of the Euro 152 Bn plan for investment in infrastructure from 2006 to 2010, 39% is expected from private investment • Multilateral agencies such as the World Bank and the Asian Development Bank (ADB) are funding various infrastructure projects on a large scale in India • The Government is tapping alternative sources of funds for infrastructure development like fuel cess for road development

38 Key Players

23 Debt 24

Key trends

8 7

14 4 1 4 5

4 2

Roads Railways Ports

• Indian Players: RIL, ADAE, Mahindra & Mahindra, IOC and ONGC, NTPC, L&T , Gammon India Ltd , HCC • Global Players: Nokia, P&O, PSA, Maersk, Gammon India, CWC and the Dubai Port Authority

2 Others

A.T. Kearney 75

Appendix

Government has made policy initiatives to attract private investment in infrastructure sector

Main Trade/Investment Policies & Regulations

• Government is offering several projects in the infrastructure sector on a Build Operate and Transfer basis that provide net equity returns of 18 to 25% to construction companies • Electricity Act 2003: promotes competition, privatization, project financing and incentivizes profit making • National Maritime Policy: 228 projects open for public private partnerships • National Highways Development Project financed through BOT route: permission to private parties to invest in NH Development project, levy, collect and retain fees and also regulate traffic on BOT routes • SEZ scheme under which developers of SEZs and SEZ units are provided various fiscal and non fiscal incentives

Source:

Ministry of Commerce, India A.T. Kearney 76

Appendix

Opportunities and challenges for Infrastructure

Opportunities

Challenges

• Investments in power generation and transmission as the power demand increases with the growing economy • Invest under Build Operate and Transfer basis in the national highways segment as they carry more than 40 per cent of the traffic • Deregulation in the ports sector and multiple options for private participation provides opportunity for Italian players with strong expertise in the sector • Growing demand for real estate makes it an attractive prospect for Italian investors • Italian companies can provide expertise in modern ground-handling facilities and cargo-handling facilities to Indian airports • Investments in SEZ as government is providing various incentives to developers

• The massive investment programme for infrastructure has to be funded at a time when government is trying to reduce its fiscal deficit • Private investment in sectors like power was curtailed by the lack of financial sustainability of projects due to subsidy • Government has limited focus on maintenance or road infrastructure • Bulk of the infrastructure is still controlled by government leading to limited private participation

Source:

A.T. Kearney analysis A.T. Kearney 77

Appendix

Overview of key industry sectors n Agro-industry and food processing n Textile n Leather n Oil and Gas n Automotive n Tyres n Banking n Insurance n ICT n Pharmaceuticals and Healthcare n Machinery and Equipment n Infrastructure n Aerospace and defense n Tourism n Retail n Petrochemical n Cement A.T. Kearney 78

Appendix

Modernization of armed forces is leading to rising defense expenditure in India India Defense Allocation for Purchase of Weapons (€ billions) 8% C AG R : 2

5.65

5.80

2005

2006E

Key trends • Indian armed forces are in midst of rapid modernization which has led to increase in defense expenditure • India looking to procure equipment from new suppliers like South Africa apart from its traditional suppliers in Russia, USA and Israel • Focus on indigenization of defense equipment and low returns on local R&D has resulted in India looking for technology transfer, licensed production and joint development of equipment instead of off the shelf purchase • In Aero India 2005 air show, deals worth over €0.91bn were signed between Indian and foreign aerospace firms • Global players looking to collaborate with Indian firms in areas like software for defense purpose

3.54

2004

India Defense Expenditure (€) 16

2.8

12 8 4

3

2.9

2.6 9

11

12

0

2.6 2.4

2003

2004

Defense expenditure per capita Defense expenditure as % of GDP

Source:

2.8 CAGR 18%

2005

Key Players • Indian players: HAL, Mazagon Dock LTD, Ordnance Factories, Bharat Electronics Ltd, Bharat Dynamics Ltd • Foreign companies: Honeywell International • Private Indian players: Tata, L&T, Mahindra & Mahindra, Kirloskar Brothers, Ashok Leyland, Jindal, Max Aerospace & Aviation, and Ramoss India

BMI Research A.T. Kearney 79

Appendix

Aerospace and Defense industry is located across the country with major clusters in western and southern India

Ghaziabad

• There is manufacturing location of Hindustan aeronautical ltd. (HAL ) apart from several Indian ordnance factories

Kotdwara Gurgaon

Kanpur Lucknow

• There are several Indian ordnance factories in Maharashtra • Leading defense shipyard Mazagon dock ltd is located in Mumbai Bhandara Bhusaval Nagpur

Nashik

Ichapur Kolkata

Bhadravati Jabalpur

Ambarnath Pune

Koraput Machilipatnam

Bhanpur

• Missile manufacturing units of BDL are located in Andhra Pradesh

Hyderabad Kanchanbagh Bangalore

Aerospace and Defense Industry

Chennai Aruvankadu

• Key aeronautical establishments of HAL is located in Bangalore • The defense electronics company BEL has units in Bangalore and Chennai A.T. Kearney 80

Appendix

Partnership with local players is the key to enter the Indian market

Main Trade/Investment Policies & Regulations • Government allows state-owned agencies to enter into joint co-development and co-production ventures with foreign companies • FDI: India opened for up to 100 % Indian private sector investments in the defense industry and allowed FDI of up to 26% in select areas of the defense industry • Offset mechanism announced by government under which foreign companies providing equipment with a value of more than € 53.2 mn will have to reinvestment 30.0 percent of the total purchase amount in terms of components and services from India • Foreign defense vendors who are short listed for purchase are required to enter into technology transfer agreement with Indian private players or state owned players

Source:

A.T. Kearney analysis A.T. Kearney 81

Appendix

Opportunities and challenges for Aerospace and Defense sector

Opportunities • Direct equipment sales to armed forces as India plans large expenditure on purchase of defense equipment in its effort towards modernization of armed forces • Joint development of technology and equipment in partnership with Indian private and public players • Italian companies can potentially use India to outsource components for their global manufacturing operations

Challenges • Procurements in the sector heavily influenced by political climate and strategic relationship between governments • Strong international competition due to incumbent players from Russia, Israel and USA • Indirect offset not allowed

• Outsource engineering and design to India as it offers high quality and cost effective design capability

Source:

A.T. Kearney analysis A.T. Kearney 82

Appendix

Overview of key industry sectors n Agro-industry and food processing n Textile n Leather n Oil and Gas n Automotive n Tyres n Banking n Insurance n ICT n Pharmaceuticals and Healthcare n Machinery and Equipment n Infrastructure n Aerospace and defense n Tourism n Retail n Petrochemical n Cement A.T. Kearney 83

Appendix

Rising spending on recreation is leading to boom in tourism sector

Leisure and Recreation Expenditure in India (€ billions) CAGR: 7%

Key trends • Increased spending on non-essential items and easy availability of credit for consumer purchase has led to high tourism expenditure • Rapid growth of low cost carriers and Infrastructure upgradation of airports have led to increase in air travel • Indian travel industry highly fragmented with the small or local players constituting for 83% of the market whereas tour operators account for only 16% • Travel agencies dominated by mid-sized players, which typically offer tours of big tour operators • Disintermediation in lower value services and high volumes are expected to drive consolidation in the sector which will result in closure of several small sized travel companies • Several online players have entered the market over the last year and many more expected to enter in the next 1 year

4.5

4.2 3.9

2003

2004

2005

Leisure Traveler Volume (All figures in ‘000s) CAG C AG R

510

1997 Source:

R 18

%

Key Players

3%

630

700

2003

2004

850

• Large Tour Operators: SOTC, Cox & Kings, TCI • Regional Players: Kesri tours, Rajarani travels • Direct Suppliers: Jet Airways, Indian, Air Deccan, Spice Jet, Kingfisher • Hotels : Indian Hotels, EIH, Hotel Leela, Asian Hotels, Taj GVK • Online Players: Makemytrip, Travelguru

2005

Indian Tourism Statistics 2004 ; International Passenger Survey in India 1996-97 and 2003; Euromonitor report on Indian Tourism 2005 ; Interviews; A.T. Kearney analysis A.T. Kearney 84

Appendix

Evolving market and regulation offer opportunities to Global players

Main Trade/Investment Policies & Regulations • Domestic airlines are allowed to operate international flights • Indian Ministry of Tourism has identified 31 villages across the country to be developed as tourism hubs • Tourism ministry launched scheme for integrated development of tourist circuit where government will fund capital costs for infrastructure development • FDI: up to 100% is permitted on the automatic route in hotel and tourism sector • Government provides a capital grant of 10% on loans for new approved hotel projects • Financial assistance is provided to states for organizing tourism related events

Source:

A.T. Kearney analysis A.T. Kearney 85

Appendix

Opportunities and challenges for Tourism sector

Opportunities

Challenges

• Investment in assets to develop own holiday destination/ hotels as they see increasing demand and limited supply

• Lack of infrastructure facilities like airports, quality roads, sanitation, water quality in the country hampering development of many tourist destinations

• Tour operators looking to enter India should customize offerings to match the tastes and preferences of Indian travelers

• Lack of direct flies between Italy and India

• Invest in existing tour operators and provide technology and expertise to build large scale of operations • Create offerings to make India as one of the preferred tourist destination for Italian tourists

• Health and personal safety concerns due to water quality and hygiene among international tourists • High Governments charges on road, passenger, toll, luxury and sales taxes on the proceeds of travel operators • Competition from the online players create pressure on offline players to build scale and consolidate • Scarcity of budget hotels and affordable rooms • Difficulty in obtaining VISA

Source:

A.T. Kearney analysis A.T. Kearney 86

Appendix

Overview of key industry sectors n Agro-industry and food processing n Textile n Leather n Oil and Gas n Automotive n Tyres n Banking n Insurance n ICT n Pharmaceuticals and Healthcare n Machinery and Equipment n Infrastructure n Aerospace and defense n Tourism n Retail n Petrochemical n Cement A.T. Kearney 87

Appendix

Increasing income levels and changing consumption patterns have led to rapid growth of organized retail sector Key trends

India Total Retail Market Size1 (€ Bn)

CAGR: 7%

CAGR: 18%

393

278

300

2004

2005

343

181

2002

2007E

2009E

Organized Retail Penetration (Organized retail as % of total retail, 2006l) 85 75

32

22

Key Players

20 6

USA Notes: Source:

Brazil

South Africa

Vietnam

• Market value of 300 Bn € in 2005 growing by 7% in the next four years • Market largely fragmented and dominated by small unorganized players • organized retail only 6% of total retail, but expected to grow by 10% per year up 2010 • Continuous growth of population of urban areas, as percentage of total population (currently 29%) • Textile, food & grocery account for around 60% of organized retail market • Global players who have developed or customized products for Indian market have been successful in India. Coca Cola & Unilever (HLL) launched smaller SKUs to drive penetration in the mass market, Mcdonalds’ customized menu to Indian tastes

China

India

(1) Estimated sales to the end consumer across all categories Economist Intelligence Unit (EIU), Euromonitor, A.T. Kearney analysis

• Food and Grocery: Food Bazaar, Food World, Subhiksha, Big Bazaar, Spencer’s • Food and Beverage: Barista, Café Coffee Day, Mc Donald's, Pizza Hut, Haldirams • Department Stores: Shoppers Stop, Lifestyle, Westside, Pharmacy: Health and Glow, CRS, 98.4 • Books, Music & Gifts: Landmark, Crossword,Music World, Planet M A.T. Kearney 88

Appendix

Participation of international players is currently restricted by FDI policies

Main Trade/Investment Policies & Regulations • FDI: foreign investments not allowed in multi-brand retailing • FDI upto 51% is allowed for single band retailing • Retail does not belong to the “granted industry status” which hinders creation of retail specific laws • Many retail products are purchased from small scale industries (SSIs) as 506 items are reserved for manufacturing by SSIs • Urban Land Ceiling Act and Rent Control Acts have resulted in very high property prices • VAT policy has been implemented in all states, except Tamil Nadu

Source:

A.T. Kearney analysis A.T. Kearney 89

Appendix

Opportunities and challenges for Retail sector

Challenges

Opportunities • Enter into a joint venture or agree on a fee based mechanism with Indian retailers and provide in-store management expertise to Indian retailers

• Lack of basic infrastructure creates difficulty in sustaining retail operations across the large geographical spread of country

• Manage supply chain for Indian retailers bringing in international experience and technology to increase efficiency and reduce costs

• FDI limitation

• Invest in setting up a operations through formats that are currently allowed under Indian law

• Current regulations lead to some hindrances in the growth of real estate development • The tax structure in India is still complex and evolving, creating challenges for retailers • The supply base for the retail sector is fragmented due to government policies and legacy issues • Lack of trained manpower is a bottleneck for growth in the retail sector • Limited knowledge about the consumer behavior of huge population in towns and rural areas

Source:

A.T. Kearney analysis A.T. Kearney 90

Appendix

Overview of key industry sectors n Agro-industry and food processing n Textile n Leather n Oil and Gas n Automotive n Tyres n Banking n Insurance n ICT n Pharmaceuticals and Healthcare n Machinery and Equipment n Infrastructure n Aerospace and defense n Tourism n Retail n Petrochemical n Cement A.T. Kearney 91

Appendix

The petrochemical industry is forecasted to grow at a CAGR of 10% over the coming years India Domestic Basic Petrochemicals(1) market production (Mtpa)

C AGR: ~9

%

7.6

5.4

6.3

2005

2007

2009

Basic Petrochemical Market in 2005 100%=5.4 mtpa 100% = 5.4 mtpa Benzene, 9%

Key Players Ethylene Propy50% lene 36%

Source:

• The current basic petrochemical demand is driven by ethylene and propylene (~86% of total demand) • Propylene and butadiene are expected to witness CAGR of ~ 16% and 17.5% respectively over next 5 years • The market for propylene will grow on account of downstream capacity expansion by Reliance industries (RIL) at Jamnagar and new capacity set up by Indian Oil (IOCL) at Panipat • Butadiene demand is expected to grow rapidly owing to a 100 mtpa SBR plant being set up by RIL and another 40 mtpa plant by Bhansali Engineering • The end plastic user industries like automotive, home appliances and packaging are also expected to witness rapid growth, in turn driving demand for petrochemical industry

Toluene, 3%

Butadiene, 2%

Notes:

Key trends

• Indian Players: Reliance India Ltd, Indian Petrochemicals Ltd, Gas Authority of India Ltd, Indian Oil Corporation Ltd, Haldia Petrochemicals Ltd, Kochi Refineries, Mangalore Refinery

(1) Includes Ethylene, Propylene, Butadiene, Benzene and Toluene (2) Annual growth in volume till 2011 CrisInfac, Interviews, A.T. Kearney analysis A.T. Kearney 92

Appendix

Petrochemical plants are located in proximity to raw material sources

• Large petrochemical plants in Hazira, Jamnagar, Patalganga etc. make the western India as the key region for petrochemical industry

Panipat

Mathura Bongaigaon Barauni

Koyali

Vadodara Jamnagar Dahej Hazira Nagothane

Haldia

Mumbai Rabale

Kuthethoor

• Petrochemical units in Assam situated close to oil sources

Vishakhapatnam

Patalganga

Petrochemical Industry

Digboi Numaligarh Guwahati

Chennai Narimanam

A.T. Kearney 93

Appendix

Opportunities and challenges for Petrochemicals sector

Opportunities • Tight demand - supply situation in the Indian petrochemical market • Large and growing domestic market for petrochemicals

Challenges • Cyclicality of Industry’s profitability • Significant capacity is being built in the Middle East which has a cost advantage due to the cheaper cost of natural gas

• Cost advantages for exports

Source:

A.T. Kearney analysis A.T. Kearney 94

Appendix

Overview of key industry sectors n Agro-industry and food processing n Textile n Leather n Oil and Gas n Automotive n Tyres n Banking n Insurance n ICT n Pharmaceuticals and Healthcare n Machinery and Equipment n Infrastructure n Aerospace and defense n Tourism n Retail n Petrochemical n Cement A.T. Kearney 95

Appendix

The industry is witnessing strong growth driven by a boom in construction and real estate Cement industry turnover in India (€ Million) % R: 7 G CA

Key Trends • Market value of 6 Mn euros in 2005 • Second largest producer of cement in the world after China • Per capita consumption of 102 kg still low if compared to the world average of 260 kg • Cement demand expected to grow steadily the next five years driven by growth in the construction market (commercial as well as real estate) • Exports grew by 20% in 2005 due to higher demand from markets such as the Middle East, Sri Lanka and Nepal • The industry is in a stage of consolidation and international players are entering the market

6.34

5.93

2004

2005

Cement Production in India (Million Tonnes) : 7% C AGR 117.4 3.4

Higher demand from Middle East 125.1 4.1

+6%

2004

Source:

+21%

121.0

114.0

Domestic Market

Key Players • Indian players: Grasim, ACC, Gujarat Ambuja, India Cements, Ultratech Cement, Century Textiles, Jaiprakash Industries, Birla Corporation • Italian players: Italcementi • Other global players: Holcim, Lafarge, Heidelberg, Cemex

2005 Exports

IBEF, Crisinfac A.T. Kearney 96

Appendix

Cement plants are primarily located near limestone reserves in the country

Gagal

• Plants in Darlaghat and Bhatinda are key sources for the northern market

Darlaghat Ropar

• Capacities in Jawad and other places due to availability of limestone

Bhatinda

Tikaria kymore

Lakheri

Hirmi Bhatapara

Pali

Purulia Durgapur

Shambhupura Jawad Road Magdatta Sikka

Sankrail

Jafrabad

Sindri Chaibasa Jharsugdha Bargarh

Kodinar

• The western market is served by plants in Jafrabad and Magdatta

• Sindri, Chaibasa and other plants in West Bengal and Jharkhand major plants eastern India

Jamul

Raipur Chanda Chandrapur Hotgi

Malkhed

Macherla Wadi

Ratnagiri

• Chandrapur is the key cement production hub in the area

Tadipatri

ACC Ultratech Cement Grasim Cement Gujarat Ambuja Cement

Arakonam Madukkarai

Reddipalayam

A.T. Kearney 97

Appendix

Opportunities and challenges for Cement sector

Opportunities • Huge and growing demand for cement due to infrastructure spending (particularly on roads, ports and airports), a spurt in housing construction and expansion in corporate production facilities • Efficiency of Indian cement companies due to low cost technology and extensive restructuring • Sector fragmentation favor purchasing of equity stakes by international firms: e.g. Italcementi has acquired a stake in the K.K. Birla promoted Zuari Industries' cement plant in Andhra Pradesh

Source:

Challenges • Highly fragmented market and regional in nature consisting of over 54 players and more than 129 manufacturing plants • Risk of excess of supply due to large capacity additions expected to become operational in the coming years • Transportation costs which account for 20% of overall costs are expected to increase • High energy cost, one of the most important component of cement productive cycle

A.T. Kearney analysis A.T. Kearney 98