A business opportunity where India can outdo China

By: Sourajit Aiyer

Indian businesses are going international, but Chinese companies are beating them in cracking new opportunities. Nowhere is this more etched than in sectors which require significant long-term funding – like infrastructure and engineering.

Chinese infrastructure companies have made tremendous inroads in Asian and African countries, solely thanks to their country’s ability to fund the projects for those countries.

China’s treasury is overflowing due to its high export earnings, and hence Chinese institutions are in a position to offer the financing. This is something that many countries, including India, cannot offer.

While such Asian and African countries, including many SAARC countries, believe China is their saving angel for its development assistance, many do not realize its indirect cost. Often, Chinese companies may end up getting preference for trade contracts, in return for its long-term financing.

This compulsion to open their markets to cheap Chinese imports comes at the cost of their own domestic industries and employment. It is not surprising that many such countries have a trade deficit with China today.

In such a competitive scenario, where India already starts at a disadvantage, the search is on for areas of international business where India has a realistic chance of outdoing China. Concentrating on infrastructure and engineering, given its need for long-term funding, one narrows down on EPC and consulting projects.

EPC (engineering, procurement, construction) means the company undertakes the design and construction of the project for the commissioning agency typically on a turnkey basis. The company receives its payment and exits the project. The commissioning agency has deep pockets, enabling them to make the payment at one go and dependence on long-term funding is minimal.

The opposite occurs in BOT (build, operate, transfer) projects, which are heavily dependent on long-term funding. Under BOT, the earnings are based on the project’s future cash flows, and payment for funding comes from there. The commissioning agency mostly cannot fund the projects outright.

Today’s reality is that very few agencies have the ability to fund, hence BOT models have increased in recent years, much to the advantage of Chinese engineering firms.

Focus on the Middle East

So while one has narrowed down on EPC and consulting projects for Indian engineering firms to expand overseas, the second question is: which markets to target? It has to be countries with cash-rich government agencies. The Middle East comes to the mind for the following five reasons:

  1. Earnings from oil and gas exports mean their treasuries can fund projects of their Public Works agencies.
  2. Five-year plans of these countries have listed out ample heavy construction projects, across infrastructure, factory plants, desalination units, etc. That bodes well for the pipeline of tenders for work-orders.
  3. EPC projects mean the raw materials and input products would often have to be brought in from the company’s home countries or other sourcing countries. Geographically, India is located in close proximity to Middle East countries, and so inputs can be imported at minimal freight costs as compared to other regions.
  4. India has historical linkages with these countries, especially the GCC (Gulf Co-operation Council) region. The GCC business community is itself bullish for India-GCC opportunities. India was a focus-country at the 2013 Jeddah International Trade Fair in Saudi Arabia. Over 80 Indian companies participated in this flagship GCC event, even higher than the number of companies from Muslim friends like Turkey and Pakistan.
  5. Given their high purchasing power, the GCC countries are a market for premium-quality products. Chinese products may not find favour on their USP of being cheaper. Either the Chinese products reinvent themselves in terms of quality, or they might overlook this market for its exported products. This means that the nature of competition might differ here, as compared to what Indian firms typically face in other regions from Chinese players.

But while it is one thing to say that there is a significant business opportunity for Indian engineering firms, the proof of the pudding is in the eating. Leading Indian engineering firms are already tapping this opportunity. L&T (Larsen and Toubro) is India’s leading EPC player, and it has obtained roads and bridges contracts in Saudi Arabia, Oman, UAE, etc. The Middle East currently forms its largest international market. Jindal Steel & Power has also made serious inroads into the region, for instance in Oman.

Therefore, targeting EPC and consulting engineering projects in the Middle East is a realistic business opportunity where Indian firms can compete effectively with Chinese players. Some Indian companies are already registering gains, and the field is open for more.

— The author is a finance professional currently living in India. Views expressed are entirely personal.

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