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In India, There's a Reason Apple Inc. Can't Beat Google

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The former chairman of Microsoft India offers a few secrets for CEOs seeking success in emerging markets -- plus, the key to earning Bill Gates's respect.

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To get a sense of the challenges facing major multinational corporations in India, just look at the recent headlines about mighty Wal-Mart (NYSE:WMT). From Forbes: "Wal-Mart's troubles continue in India." From the Wall Street Journal: "Wal-Mart India Head Leaves Company." From Reuters: "Red tape, graft mean India not such a super market for Wal-Mart."

Ravi Venkatesan understands those challenges. Venkatesan, the former chairman of Microsoft (NASDAQ:MSFT) India and the author of Conquering the Chaos: Win in India, Win Everywhere, insists, however, that the opportunities in India are well worth the struggles. The Fiscal Times spoke to Venkatesan recently about that "chaos" in India and much more.

The Fiscal Times (TFT): You dedicate the book to "honest and upright government officials in all emerging markets for the courage they show every day." Why is it so hard for them?

Ravi Venkatesan (RV): The whole system is corrupt. And to be the lone person who resists it is a big challenge. When you are a junior bureaucrat, all they do is transfer you to a less inconvenient spot. As you grow senior, it becomes harder and harder. So when you find an exemplary official, my respect for them is enormous.

TFT: There was a period of great hope that India's political system and economy were both going to develop...

RV: It's still a great hope. But progress is a muddled one of two steps forward, one back. We're just in that slight regressive phase; I hope we again continue to shuffle forward.

TFT: Does that apply to the political system as well?

RV: There's a term called punctuated equilibrium in the evolution of species. It's pretty calm for a long time and then there's some huge event.... Political things happen in big steps, whereas the economy is much more vibrant and continuously buzzing along. But graft, corruption, bureaucracy, [and] chaos are not unique to India. It's absolutely a distinguishing feature of all emerging markets. And the advice I give to companies is learn to thrive on chaos rather than flee it or wish it away. For the foreseeable future these markets will have these characteristics. It's unlikely India or anyone else is going to be dramatically less corrupt in five years.

How Coke Went From Bad to Good

TFT: Does that tie into another theme of the book, thinking long term? We've seen cases of major multinational companies here that get caught up trying to get the win quickly and that means playing by those local rules, even if they're corrupt.

RV: Yes, so it requires great courage – the courage to do what is right rather than what is expedient and convenient. India and many of these markets have had colonial rule. Then they have had experiments with socialism. There's a fundamental distrust of business and of foreign companies in particular. You need to operate for the long term. You need to be seen as doing well by doing good. Give back to society and the development of the country.

Coke (NASDAQ:COKE), for instance, got into huge problems repeatedly in the '90s and early 2000s. It's because they forgot this. They were pumping out groundwater, which is scarce, bottling it, selling it for a nice markup, and repatriating profits. So it became the ugly multinational. Eventually they learned their lesson; they started doing huge amounts of work to conserve water, install drip irrigation systems, rainwater harvesting, invested quite a bit in sustainable practices. Today, for at least a decade, you wouldn't have heard of any agitation against Coke. McDonald's (NYSE:MCD), same thing. They've gone native; they're playing the long game. Monsanto (NYSE:MON) has yet to learn. The companies that are going to succeed are those that take that 50-year perspective and operate in that fashion.

TFT: The 50-year perspective? It sounds…

RV: It's crazy.

TFT: Yeah. For somebody who is in business day to day...

RV: The 50-year perspective – you've got to have your eye on that. But you need to have at least a 5- to 10-year horizon on your investments, which is the problem. Look at McDonald's. It took them nine years to figure out how to make a store profitable and get the supply chain for potatoes and other things in place. Nine years. In that period they've invested well over $100 million. Now they're cranking out stores and each one is profitable within three months. Because they've got the model…. The problem is that U.S. CEOs' tenure is down to six years on average. So it's pretty rare that you find a CEO that says, 'Oh, let me do the hard work and let my successor collect all the fruits.' It's an extraordinarily rare one: Sam Palmisano at IBM (NYSE:IBM), companies like Deere (NYSE:DE), Cummins (NYSE:CMI), Honeywell (NYSE:HON). As a CEO, you have to survive the quarter and have your eye on the short term. But you also get to make one or two long-term bets. I'm suggesting India is a worthy candidate of being that long-term roll of the die.

TFT: Is that also in large part because of India's role as a leader in emerging markets?

RV: I call it the archetype, in its opportunities, the structure of the market and the challenges. It's the perfect exemplar for all emerging markets. If you crack it here, you can take the model and take it elsewhere.

Don't Give Up on the Massive Middle

TFT: You say that a multinational can't just take its existing business model and stamp it on India and everywhere else and expect it to work. Yet if they're adapting to the Indian market, that may be a template for how to approach emerging markets?

RV: Exactly. And not just emerging markets – the middle of the pyramid in all markets. India became famous as the place where single-use sizes of shampoo and soap were developed. Because people were so poor, they couldn't afford $4 or something on a bottle that would last six months. So you had a single-use thing that might cost $.05. This was wildly popular in the emerging markets. Now, Unilever (NYSE:UN) says, "Holy cow, in Greece and Spain, people have the same income compression. They're loving the same thing." So it's not just emerging markets. It's for the lower middle class in all countries.... Companies need two models. One for the affluent segment, and one for these chaotic but aspiring middles.

TFT: With Apple (NASDAQ:AAPL) or perhaps Toyota (NYSE:TM), companies that you cite as examples that haven't done well in India – to some extent they would have to shift their business model, shift their brand. Apple has been the most prominent example that has been reluctant to do that.

RV: They're dead if they don't. If they don't do it, you've got plenty of guys like Samsung (OTCMKTS:SSNLF) who are happy to do it and are already doing it and are running away with the market. Last October Tim Cook, on the analysts' call, said, "I love India, but this is a difficult place, and its distribution is massively inefficient; it is not our belief that we should come up with low-priced versions." People in India are like people everywhere. They aspire to the same beautiful products. Samsung gains a massive leadership position in India, [Cook] retracts it. So they haven't come up with new models, but they've discounted their pricing by 36%. They've got cash-back offers, they give you three years interest-free payment mechanisms, they are investing massively in distribution. They've stopped short of coming up with models for these markets, a low-cost iPhone, but they're doing much better. So even proud Apple has gotten off its high horse.

This is exactly the risk. Microsoft – I took it to a billion dollars, which meant that we had captured that top end pretty well. But then [Steve] Ballmer was unwilling to go down to the middle, because to go down to the middle, Microsoft has to operate radically differently. The middle is a mobile phone first market. It's not a PC first market. Nobody is buying a PC out there.

Shopkeepers, consumers, everyone is bypassing PCs to a post-PC world, which Ballmer could not accept. We wanted to create a new model that was completely smartphone centric and using the mobile Internet, which is what Google (NASDAQ:GOOG) is doing. So that's the threat for Microsoft: that they're going to lose this beautiful 15-year lead to Google, which gets it.

Make Sure You Understand Globalization

TFT: In your book, are you speaking to the Steve Ballmers and other CEOs who are making these decisions?

RV: Absolutely, yes. There is a lot at stake. American companies have this unprecedented opportunity in emerging markets and they're busy squandering it. That's a problem. It's also a problem for these countries. India needs these companies to come and bring in investments, technology, capability, jobs. And we're busy scaring them away. I want to see if we can at least get people thinking a little bit differently…. What passes for globalization in emerging market strategy today is skimming the cream off 100 countries. That's a great strategy, but one day there's going to be no cream. And you're going to be really screwed.

TFT: What is Google is doing in India? Is it essentially the same products and service they're promoting here?

RV: They are tailoring it. Google has a couple of huge advantages. Their pricing model is free, at least to the consumer and the user. "Free" has enormous appeal in emerging markets. The second thing is phones. It's Android everywhere. The big issue in India for Google is that the broadband infrastructure is just pathetic. So they're doing everything possible to just get broadband going, working with telecom providers, the regulators and so forth. I think they're a couple of years away from the big breakthrough. When that happens, they're going to be an unstoppable force in their business. Unstoppable.

Go Up Against Bill Gates … If You Dare

TFT: One last thing: We heard you won a bet against Bill Gates?

RV: With Bill, at some point you have to go head to head, toe to toe with him, and then you get respect. Until then, you're just a flunky. And most people find that an intimidating experience. So it was about 2006, Melinda [Gates] had come as well, and we were flying on his plane from Delhi to Chennai. And it was late at night, he was tired and irritated, and we got into an argument. I refused to back down. After about 10 minutes he said, "Well, gee, I guess you're right." He was beginning to sulk about it a bit, and then Melinda sort of looks to him and says, "So Bill, what do you do?" He ignores her. "Bill, what do you do?" And then she passed him a dollar bill and he wrote on it, "I was wrong – Bill Gates," and I framed it. It was a dollar – but it's a valuable dollar.

Editor's Note: This article by Yuval Rosenberg originally appeared on The Fiscal Times.

For more from The Fiscal Times:

The Biggest Threat to Apple: Samsung or Google?

Is Google Losing Its Innovative Edge?

India's Economy: On the Cusp of Big Change


Follow The Fiscal Times on Twitter @TheFiscalTimes.
No positions in stocks mentioned.
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