First published in July 2015
Foreign companies that want to sell their products in the Indian market need to choose their right India market-entry strategy. Their choice depends on their customers, products and how much time, energy and money they can invest for setting up sales in India.
Direct export to India
The easiest way to serve the Indian market is direct export of manufactured products from abroad (direct distribution). However, this assumes that one already knows (potential) customers in India, that one has the appropriate import registrations and is able and keen to settle commercial invoices in a foreign currency instead of in Indian Rupees.
The advantage of direct distribution is that you have control over pricing, as there is no intermediary. Moreover, distribution costs and expenses (as well as headaches) are minimized because the responsibility for the import usually lies with the customer. Furthermore, export-oriented Indian companies can deduct tax or customs charges from own imports.
In addition, in India it is very important to have direct contact with customers. Interpersonal relationships and trust play an important role in the buying experience, and Indians are reluctant to involve intermediaries – confidence in service, quality and accessibility are key selling points. Direct contact leads to unadulterated feedback and can help you assess your clients’ needs better. This means that maintaining your company’s and product’s reputations is in your own hand.
Disadvantages of direct distribution from abroad are the lack of observability and your limited range of action. Without your own local presence as an Indian subsidiary or branch office, you can only have a partial assessment of your market opportunities and it is unlikely you are fully reaching your sales potential.
Sales in India through dealers and distributors
The most common way in which foreign manufacturers enter the Indian market is through agents; this enables Indian retail customers to pay in local currency, which increases customer potential for foreign manufacturers. In addition, distributors allow you instant access to a local and nationwide sales force – often with an existing customer network – without long lead times or large initial investment.
Since it is difficult to assess the work of the partner from abroad, you need to involve your staff in the processing of your Indian business – and trips to India several times a year are a must. If your partner does not already have a complementary range of products and corresponding customer network, it should still have a solid Indian customer base for products of foreign exporters without costly marketing and market research activities.
However, there is the risk that your Indian distributor can utilize its information advantage to your detriment, and set prices in its favor by estimating customs duties, taxes, final prices for labeling and transport and storage costs too high – it becomes even more complex when multiple Indian states are crossed. Moreover, dealers are usually trading houses, working for various companies at the same time and keeping multiple products in their portfolio – with their focus on margins and volumes.
Explaining the benefits of imported – and often high-quality – products are not always the top priority for Indian distribution partners, so their sales people may not have the product know-how or be fully able to maximize your market potential. Especially in a price sensitive market like India, however, this is one of the key criteria that determine market success or market failure.
Sales in India – have your own organization as an Indian subsidiary
The advantage of your own Indian subsidiary is that you can attract customers with your long-term India commitment. Your own employees are your biggest asset; you can recruit and instruct them to conduct technical sales and maintain sustainable customer relationships – a key driver to succeed in India’s competitive market. The intensive contact you get with your (potential) customers and the long-term personal relationships allow you a better understanding of the needs and willingness of customers in India. Being close to the Indian market means that you will also be better informed about the latest market trends and new opportunities for sales in India, and you can adapt your India market-entry strategy – not least your price policy – quickly to market conditions.
The experiences that you have at the beginning of active market development can then be used to gradually develop your distribution system. You can often learn a lot from the well-functioning distribution systems of your competition. Finally, setting up an Indian subsidiary is also a commitment to customers and partners.
However, direct investment and setting up your own distribution network in India also carries risks. Many companies make the mistake of underestimating the time and energy needed to set up your Indian organization from scratch. The distribution requirements, the countless compliances and bureaucratic pitfalls and the initial inexperience of managing your own Indian team can leave you too preoccupied to focus on the actual sale of your products. It is not uncommon that companies need around two to three years for their own structures and business processes to begin operating satisfactorily.
When you add the relatively high initial investment in infrastructure, human resources, transport and logistics as well as the ongoing investment in the construction of a nationwide distribution network, it is quite possible that your sales office takes longer to reach profitability than originally planned. Therefore it is important to have a really good view on your expected revenue and do your research to anticipate the financial and organizational effort you will need before you commit. Building your own sales organization is the most effective way to successfully establish yourself and your products in the Indian market, but you need to “take a long breath” to be successful.
Maier+Vidorno can help you to choose the appropriate model for your business in India – and to overcome the bureaucratic hurdles. Contact our experienced India Consultants to help you work out which option is best for you!