Comparative Analysis on MNCs in India vs Domestic Companies

When mankind set up communication mediums (to coexist with each other), during the early days, trade & businesses were also developed. The first barter system and then currency invention has led trade expansion from being a local phenomenon to a cross country event.

Today, the world is one global village where firms from different countries have offices and production facilities in other countries. These are called as multinational corporations (MNCs) and as global companies.

MNCs have traditionally played very important roles in international trade relations and globalization. An example of an MNC is Nestle.

Economies which are in favour of globalization welcome MNCs with red carpets, offering them with tax incentives and other sops in return for the sales and employment opportunities these firms can inject into the new country.

Essentially, every MNC was once a domestic company in their own country. The sheer growth and size led to these firm’s expansion into different regions of the world.

Is there a difference in business approach followed by MNCs & Domestic Firms?

Market Entry

• MNCs typically follow two different types approaches here. They enter another country, launching the same products and segments which made them successful in their home country or they study the full market in which they are entering and customize their offerings with respect to the customer’s needs. The former is a quick way to disrupt the market but carries the risk of failure in case consumers don’t like the product, whereas the second approach is more thought after and the products are launched in a timely and phase wise manner. This carries a risk of not taking the advantage of first mover in case the product is something very new in the region

• In case of Domestic firms, since they know the customer needs in a much better way, are more equipped to launch consumer friendly products and services. However, they carry a risk of failure since they can’t be too competitive in pricing unless backed by good funding.

Marketing & Advertisements

• MNCs, with their deep-rooted pockets and good financial backups, generally spend generous amounts of money on Branding and advertisements of their products. They have huge marketing campaigns with big celebrities, and that help them create hype and garner interest.

• Domestic companies do keep separate budgets for advertisements, but smaller companies rely more on word of mouth and in modern times on social media marketing through WhatsApp, Telegram & Facebook, etc. Customer themselves act as their branding managers once the product is a bit successful in certain areas.

Funding/Capital Raising

• MNCs have deep pockets and are thus less dependent on external sources for capital raising. Most of the times, they can entirely fund a geographical expansion from their own reserves.

• Domestic companies are typically more dependent on external equity or debt to fund specially for expansional projects.

If we look at the Debt-to-Equity ratio of Pharmaceutical and FMCG sector companies,  the data as of 30^th June 2021 confirms the  almost zero leverage hypothesis for MNCs.

Success of MNCs over Domestic Companies in Indian context

• Considering the reception that these firms get from the government (tax sops, etc.) along with lower cost skilled workforce, MNCs typically come to India with a long-term view. With improvements in ease of doing business, MNCs have found great success in India over the last decade and that too in various sectors. They have made India a top priority (in spite of many challenges) due to its strategic location and a huge population base.

• MNCs have now changed their business models and enter into emerging economies with a greater study of consumer behaviour. When the south Korean car maker, Hyundai, entered the sub-continent, it targeted the middle class and launched Santro as a competitor to Maruti. Santro had to be modified as per Indian conditions like high ground clearance. Today Hyundai is the second largest PV company in India

• MNCs have repeatedly formed JVs with Indian domestic companies to understand the Indian context of doing business. These local partnerships proved vital in gaining market knowledge and studying consumer preferences. Cummins partnership with Tata Motors and CG ltd is a great case study in this regard. Cummins is now a leading diesel engine producer in India. Looking at the Mutual Fund sector, both the MNCs Merrill Lynch and Blackrock tried entering this sector in partnership with DSP at different point in time.

Evolution of MNCs in India – Business Perspective

Around 21^th century, MNCs started their journey towards India as India had successfully transitioned into a globalized economy. Siemens, Marks & Spencer among many other firms entered India with the sole purpose of increasing their end market and capturing the young middle class.

Later many MNCs shifted their focus on our large workforce which was available at lower costs in comparison with other economies. This triggered the culture of BPOs and KPOs along with back-office functions, thus creating an entirely different revenue stream.

Recently, MNCs have started to look India as a global exports hub thus shifting their manufacturing base in the country. Sectors such as Consumer Durables (White goods) and vehicle manufacturers are leading this initiative.

Evolution of Domestic firms and adoption of Start-up Culture – Indian Perspective

India has come a long way since globalization. Being an attractive and virgin market to big global MNCs, India has now itself built global brands that are ruling the world. And since the internet boom in India, start up and incubation companies have really flourished and some of them competing with big names of their respective sectors.

Lack of funding which was the major cause of concern for Indian domestic firms, is now replaced by big money that flows in from global PE and investment firms seeing the future capabilities of our young start-ups. Governments are also supporting these domestic young companies through PLI schemes and special provisions (FDI, etc.) in the annual budgets. Hopefully in the years to come, the disparity between the global MNCs and domestic firms will reduce to a larger extent and there would be good competition, ultimately befitting the Indian consumers.

Case Study: HUL vs Marico

For last 6 decades HUL has remained India’s top five companies, and the biggest FMCG brand. Almost nine out of ten people in India use an HUL product on a monthly basis. HUL is called the CEO factory of India with approximate 400 HUL alumni donning the CXO hat across the Indian corporate arena. 

Marico, on the other hand has been predominantly a hair and edible oil company. Marico adopted the strategy to build its two growth engines under the name Parachute and Saffola and then capture the market. Marico has relied on these two brands so much, that it launched products with the same brand name in an entirely different segment.

Strategies that made HUL a great success in India as an MNC

• M&A strategy: 1990s was the M&A decade for HUL. HUL tends to eat up its competition or buyout firms which they think can be better managed by HUL leadership. This strategy of HUL proved beneficial at the turn of the century, where it had good market share across segments
  • 1993 – Brooke Bond (HUL subsidiary), acquired the Kisan business (jams and ketchup) from the UB Group, and Dollops ice-cream from Cadbury’s
  • 1994 – Merger of HUL’s key competitor, Tata Oil Mills Company; JVs with US-based Kimberly-Clark (for baby and women hygiene products) and Tata’s Lakme (for cosmetics)
  • 1998 – Merger of Pond’s India with HUL, acquiring Tata’s 50% stake in the Lakme-Lever JV, and buying 74% in Modern Foods

• Demographic Diversification: What Samsung and Xiomi did with smartphones in India, HUL has been doing this for the past 2 decades. It creates products for every person in the demographic value chain. From Rs.10 to Rs.500, it has products with different names catering to different sections
  • Soaps: Lux, Lifebuoy, Dove, Pears, etc. (Pan India), Breeze, Liril, Moti, Hamam, Rexona (Region focussed)
  • Shampoo: Sunsilk, Tresemme, Clear, Dove

Additionally, some names are itself big brands producing different products. Essentially, at times HUL products are competing with themselves only:

• Dove is in body washes, hand and body lotions, facial cleansers, deodorants, shampoos, conditioners
• Lifebouy: Bar soaps, liquid handwash, hand sanitizer and talc

Strategies that made Marico a great success in India as a domestic franchise

• Core Business: Marico knew that it did not have the parental support what HUL had in the form for Unilever. Also, it didn’t have the deep pockets to just acquire anything under the sun. Thus, it focussed on brand leadership (Parachute and Saffola) and extension of these winning brands under different segments (Oats, Honey, Body Lotions).

• Safeguarding winning brands and maintaining leadership: Marico took on HUL’s Nihar brand in the late 90s and by 2006, it compelled the might HUL to sell off its Nihar hair oil to Marico. This was the aggressive nature of Marico to protect and extend its market leadership. Marico never allows competition to creep in, especially in the hair oil segment.

• Simple Innovations: In early ‘80s, coconut oil was sold in big tins. Marico decided to change that from tin to plastic to save cost. Also, it stated distributing smaller SKUs of oil for greater portability and ease of use. However, rats started attacking the plastic and the oil also oozed out of the bottle, as the bottles were square shaped. Thus, Marico applied a very unique approach to make the bottled round shaped such that rats would not grip it properly and also packed the bottle in such a way that there was no leakage.

Thus, both HUL and Marico used different approaches to capture market share and grow their respective franchise. There is no one formula fits all solution in the Indian context.

Comparative Study of MNCs and Domestic Companies in FMCG and Pharma sector

The above graphs clearly depict the disparity between MNCs and domestic companies. MNCs are able to generate higher ROCE as compared to their domestic counterparts because of better technology, proven management, and good funding.

The market also gives a higher premium to MNC firms as is evident from the above 2 charts. This premium is on the expectation that these firms will continue to give stellar results and gain market share. Let’s see the shifting focus by investors on Indian Unicorns and Soonicorns will change these expectations or not?