Why PepsiCo and not Posco

Is PepsiCo’s decision to invest $5.5 billion to double manufacturing capacity proof that the India story still retains its fizz for foreign investors? Some commentators appear to think so, a few going as far as citing the food and beverage company’s example to criticise other multinationals such as Posco, Arcelor Mittal and BHP Billiton for shelving their India projects. But to compare Pepsico with, say, Posco is to mix apples and oranges. The playing field for global consumer firms in India is very different from that for their industrial peers involved in such activities as mining, metals and oil exploration. It is far easier for the former to do business in India. With no curbs on their manufacturing, sourcing or pricing activities, FMCG firms have very little interface with regulators. In contrast, a Posco has to grapple with the government machinery to acquire large tracts of land, secure environmental clearances and settle compensation claims before it earns even a rupee of revenue.

FMCG firms have a number of advantages in this respect. They are capable of getting their facilities up and running with relatively less capital and shorter gestation periods; they may also choose to rely on sub-contractors to produce the goods they brand and distribute. Also, they enjoy very strong pricing power and a steady offtake across business cycles, which results in high returns on capital. While SAIL and Tata Steel struggle with a 6 to 8 per cent return on capital employed (ROCE), the corresponding numbers usually lie between 50 and 70 per cent for FMCG firms; for a select few such as Hindustan Unilever, it is over a staggering 90 per cent. With such a stark difference in payoffs, it is hardly surprising that foreign investors are far more keen on pouring money into manufacturing facilities for snack foods and skin creams. And they are. Only recently, Unilever Plc invested $3.5 billion to raise its stake in its Indian arm; the company’s CEO Paul Polman has waxed about India’s untapped potential in rural markets.

It’s no surprise that Unilever and other consumer multinationals are looking seriously at India as a low-cost manufacturing base. This ties up with their plans to transition to a globally integrated business model, where products are centrally sourced from giant manufacturing centres in the developing world. This is just the opportunity India needs to woo FDI in manufacturing facilities. With global giants such as PepsiCo and Unilever going on about how bullish they are on India, the public relations exercise is already done. All we need to do is to further simplify procedures, cut the red tape and convince global consumer firms that India is an ideal destination for locating their manufacturing facilities.

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