Can INDIA lure the global companies? Will they shift their base out of CHINA?

Over the last 2 decades, China has served as a worldwide manufacturing hub for companies in a number of sectors, including electronic equipment, textile, healthcare instruments, and automotive. This is due to high availability of raw materials, technological inventions, business-friendly legislation and accessibility to proficient labour. The Situation changed in 2019, when increased cost of labour in addition to anxieties made by US-China trade war impacted and tarnished China as a favorable production centre hence, more than fifty multi-nationals made a decision to shift those  destinations that were low-cost, for example India, Vietnam, Thailand and other neighboring Asian nations, to avoid the hike in tariffs in 2019.

Whether India is prepared to grab this chance? Which countries will give stiff competition to INDIA? Do this possibility can be a Cup of Tea for INDIAN government headed by PM Narendra Modi?

With Covid-19 infecting millions across the world, China has been Facing an unparalleled global backlash that could destabilise and predominate it as the world's mill of choice. Its neighbour India has felt an opportunity and is keen to make inroads to a space and hopes China will vacate sooner rather than later. China's weakened Worldwide standing is really a “Blessing in Disguise" for India to draw more investment, transport minister Nitin Gadkari mentioned in a recent interview. The northern province of Uttar Pradesh, that features a population the size of Brazil, has already been forming a financial action force to pull businesses excited to ditch China. India is also be readying a pool of property double the size of Luxembourg to supply businesses that want to go manufacturing from China, and has now reached out to 1000 American multinationals,'' Bloomberg reported.

Post Covid-19, companies will boost inventories or Re-locate a few supplies to locations closer to dwelling markets as opposed to move production in a big way. The Indian authorities plans to attract organizations seeking to relocate manufacturing from China, by developing a land pool of 460,000 hectares.

The domestic market of China was a major factor for global companies to invest there but the problem of over-dependence has resulted the companies to increase their inventories which will be a cushion for disruptions, companies are also thinking about relocating into areas nearer to home markets-Slovakia,  for the European Union rather than moving production at very far place.

It is to be noted that China has world class infrastructure for example six-lane highways and ports that offer quick customs clearance. Vietnam's exports in 2019 rose 8% to $264 Billion, of which its exports of spare and smartphones elements and is a major production base for Samsung which amounts to $51 billion with the current rate of development, its merchandise exports will surpass India’s in the near future.

Even the current INDIAN government made a decision to opt out of Regional Comprehensive Economic Partnership (RCEP) last year after signalling it was excited on joining. Japan's attempts to add India in a current RCEP assembly were rebuffed by New Delhi. India has for several years balked in a free trade agreement with the EU which would benefit apparel manufacturers due to the fact domestic lobbies create stopping heavy tariffs on luxury cars and wine.

At 2019, China's exports in apparel and clothes accessories was $94 billion. Bangladesh and Vietnam were distant seconds at about $29 billion annually, India's declining share has place it in fifth position with export business of $11.4 billion just ahead of Cambodia. Chinese Communist Party ensures more rigorous labour protection and improved social safety than India does.

China dominates the manufacturing of lower-value elements for smart phones and their assembly. Chinese smartphone giants like Lenovo and Xiaomi are now the greatest manufacturers in the world. The largest contract manufacturer for the Apple i.e. Foxconn, predicts that smartphone is unlikely to manoeuvre out from China. Foxconn has greater than a thousand workers from China. Should you Ask producers around transferring to Vietnam or elsewhere from South-East Asia, they say they can't build factories of more than 20,000 staff there which is not about the population strength but the model will not work there.

In an environment in which international balance sheets have been fractured, Re-locating entire distribution chains is not that simpler. Relocating manufacturing is a complex matter. Overcoming high initial setup cost, infrastructure, communications and connectivity economical and good warehousing, transport and other logistical support. There is a challenge of choosing the suitable skilled manpower and then putting the newest workers by giving special training for their own production practice.

In China there is a Single point of contact i.e. a person takes the whole responsibility for all the documentation from the government side and makes the process hassle free and less complex, whereas it is not the same in India hence ease of doing business is one of the important aspects considered by global companies for FDI. The culture of manufacturing, that’s prevalent in countries Such as Germany, Japan, China and South Korea has been missing from India. Vocational training programmes should be easily available in order to better equip people with necessary skills.

The companies in China are facing severe cash and capital constraints because of the pandemic, and will therefore be very cautious before thinking to shift their base. Manufacturing, Assembly lines and supply chains are far more complex. It’s tough to pull them aside immediately. China provides integrated infrastructure for example large Interfaces and highways, top quality labour and sophisticated logistics, all which are critical facets to meet stringent deadlines that international businesses operate on whereas India is not integrated with major global supply chains this is also a reason that global companies are not considering India for their base.

Last year, Delhi pulled out from multilateral trade Agreement with 12 other Asian countries, jointly known as the Regional Comprehensive Economic Partnership (RCEP), despite seven years of discussions. Decisions like these make it difficult for Indian exporters to profit from tariff-free access to desired markets or offer reciprocity to its trading partners. Recently while addressing the nation, Prime Minister Narendra Modi focussed on being vocal for local. New stimulus proposals have increased thresholds for foreign businesses bid for Indian contracts. If India can improve regulatory stability then there is great opportunity for international businesses to launch hubs in India.

Thus, the question arises “Then who, If not India?”

As things stand, Vietnam, Bangladesh, South Korea and Taiwan seem like favourites to benefit from US China trade war. The latter two at the high-tech end of this spectrum, Vietnam and Bangladesh in the lower end. Multinationals began moving production out of China into these countries nearly a decade ago due to rising labour and environmental costs. The slow exodus has only gathered pace as US-China trade tensions have increased in recent years.

As per the study done by Japan-based Nomura, brokerage firm in Japan, in the 16-month period from April 2018 to August 2019, of those 56 companies that relocated their production facilities from China, just three are now planning to come to India where 26 companies are going to Vietnam, followed by Taiwan - 11, Thailand - 8 and Mexico – 6, the 3 firms which have moved/planning to move to India include Foxconn, Wistron and also Toy Maker Hasbro.

As per the Ease of Doing Business ranking 2019 provided by the World Bank, out of 190 states, Vietnam are in the 69th position, while India, which has improved its own standing vastly from the past couple of decades, is now in the 77th position. It was at the 142nd position in 2015, 130th in 2016, 130th at 2017 and in the 100th position in 2018.

In Accordance with the World Bank, out of the 10 broad parameters that are used to determine the “Ease of Doing Business”, India is yet to make substantial progress when it comes to the problem of enrolling of property, protection of their interest of minority investors, implementing of contracts and resolving bankruptcy.

One of the key issue Global companies encounters in INDIA is procedural delay. Government is focusing on single-window process, but in ground reality big investors and MNCs’ representatives have to go through multiple offices, meet several officials, host them for lunch, dinner so that their work is done quickly. This kind of work culture puts off investors who want the work to begin within days and a few months due to this Vietnam as starting business is more economical here.

Source: - Japan External Trade Organization

A joint survey ran by April 2 to April 10 by Japan's Consulate at Guangzhou and Japanese Chamber of Commerce of Southern China found that only 2.9 percent of surveyed firms are planning to shift their company from China due to the Corona virus.

Source: - American Chamber of Commerce in China

A recent poll jointly carried out with the American Chamber of Commerce in China and PricewaterhouseCoopers showed that many American businesses now have no plans to move their distribution chains or procurement activities out of China and are now focused on risk administration. Over 84 percent of respondents said they would not shift their manufacturing or procurement activities out the city, though about 4 percent said that they are planning to leave China and 12 percent said that they plan to relocate manufacturing companies within or out of China.

In INDIA states like Uttar Pradesh and Madhya Pradesh states have suspended significant labour protections exempting factories out of maintaining basic conditions like ventilation, cleanliness, toilets and lighting with the goal to improve the investment climate and attract international funding. However, these conclusions could turn into counterproductive and hurt rather than helping Global companies are very careful regarding the labour laws they have strict codes of conduct on labour, environment and safety standards for suppliers.

Let’s go back in the past to know the reason why India is lacking in such foreign investment. The lack in manufacturing from the independence of India as well as those individuals who had money did not invested due to the governmental policies & Licence Raj. Businessman used to face Trade-union & Worker Union problems subsequently to the 1991 economic reforms, it changed the government outlook toward the world market due to this various MNC’s started investing in India.

But still, industries are confronting many burning issues which are as follows

·         Absence of technical advancement

·         Absence of research work in the discipline of manufacturing

·         Lack of systematic approach in large manufacturing facilities

·         Government support and policy

·         Labour Union problems

·         High-priced and less skilled labour

·         Absence of political will power to be pro-business

·         High Logistics cost

 Currently INDIA is struggling with three factors of “C”.

1. One of the “C” is Corona Virus.
2. The next is “C” is Corruption Virus which has penetrated the deepest roots of Indian society and    threatens to kill the possibility of foreign exchange.
3. The last “C” is Cussedness where absurd demand is raised on telecommunication companies for a share in non-telecom revenue by Department of Telecommunications, hence the probability of Vodafone, one of the biggest overseas direct investment company is even thinking to leave the country.

As INDIA has great opportunity to be the biggest manufacturing hub. The figure from the World Bank report concludes that, India is not even in the top 3 destinations for the companies moving outside the china.

Source: -Macrobond, World Bank, 2018 JETRO survey, Rabobank calculations

India is in the Second category of selection for companies moving out of China. Restrictive regulations that influence its land, labour, logistics and policies is affecting its goods and services, that is why the production which has relocated from China has not moved towards India. Companies has time and again selected East Asian Nations due to the regulations, labour laws and low logistic cost. India's logistic cost is three-time higher-than china and two times to the neighbouring country Bangladesh.

Apart, from Asian Countries like Thailand, Malaysia, Vietnam and Bangladesh, several of the African countries are doing well in terms of developing as a manufacturing hub. Ethiopia by itself has started several industrial parks inside the past few years only

Global companies will not invest in INDIA just for the sake that, it has a large population. India have to focus on some specific sectors, sub-sectors and should boost as well as develop conditions for those sectors.

OYO – IS IT THE END OR NEW BEGINNING?

OYO ambitious plan to become global hotel superpower has taken a hit, a never seen crisis is faced by them which threatens to wipe out a large part of its business for the foreseeable future and impact its $10-billion valuation Corona Virus Outbreak has hit the travel and hospitality industry globally and it will take a long time for the industry to recover.

Earlier Masayoshi Son announced Ritesh Agarwal one of the star entrepreneurs backed by his SoftBank Group Corp and said the OYO group is going to overtake the biggest hotel chains in the world in the coming years.

As the SoftBank is still incurring huge loss on its investment due to the failed IPO (Initial Public Offering) of shared-office company WeWork. SoftBank booked for profits on OYO's rising valuation abut as of now they are forced to take losses on their investment. OYO valuation last year was at $10 billion. The situation is highly messy where Ritesh Agarwal  borrowed $2 billion to buy shares in his own company as the valuation rose, and Son personally guaranteed the loans from financial institutions, including Mizuho Financial Group Inc whereas if the valuation of OYO drops then the two of them will incur personal losses and banks may ask for more collateral. It has more than $1 billion of cash reserves which will keep the business running for next 36 months.

On 8 ^th of April, OYO’s founder Ritesh Agarwal said due to corona virus there is a drop of 50-60 percent in revenues and occupancy levels which has resulted in severe stress on the company’s balance sheet. OYO plan is to terminate the agreement with hotels that cannot generate a minimum revenue of $100,000 in a year, reducing the number of hotels within its umbrella and decreasing the size of employees which will bring down its monthly expenses down to around $25 million from the current levels of around $40 million. OYO followed aggressive expansion strategy last year to increase its footprint into Europe, Southeast Asia and the US apart from India and China which led to huge losses up to $335 million last year and they are now focusing on markets like India, Southeast Asia, Europe, China and the United State.

 OYO runs over 43,000 hotels with more than a million rooms apart from this they have 130,000 homes around the world under the umbrella of OYO Home, Belvilla, Danland, DanCenter, and Germany based Traum-Ferienwohnungen brands. It will keep sustaining its presence to Japan, Brazil, Mexico and the Middle East but at opportunity cost of leaving some parts of India where, it has shrunk from 550 cities to 400 cities currently.  OYO is now availing the services of renowned specialists like Alvarez & Marsal and Accenture Plc to suggest turnaround strategies the restructuring of its human resources is taken care by Aon Hewitt last year.

As stated earlier that the company was increasing its presence across geographies, many roles within the organisation were rapidly replaced by technology one of the side effects of scaling up too quickly, hence as a part of its restructuring exercise, the company has  cut about 15%-20% of its overall consolidated workforce in India (about 12,000 people); in China 30% of the 10,000 employees were downsized also reduced the non-discretionary staff of 6,000 by 50% in China and the current strength is of around 25,000 worldwide. India announced its lockdown from March 24 where interstate borders were closed and travel via flights, trains, and buses came to standstill, hence hotels across the country as well as globe is suffering.  

Earlier OYO founder announced that he is foregoing his own salary for a year, whereas the leadership team is taking pay cuts in the range of 25% - 50% while few employees were granted voluntary leave with limited benefits. In the financial year 2019 the company reported losses at the expense of expansion globally particularly China increased to 35 per cent of revenue in financial year 2019  to $335 million which is explained by the fact that in any new country, the revenue starts rising in from the second year onwards, making up for the costs incurred in the first year of operations. The global financial year 2018 loss was $52 million while India loss was $50 million in financial year 2018 and $83 million in financial year 2019. Its revenue for financial year 2019 increased to $951 million from $211 million in financial year 2018.

OYO was in trouble even before the covid-19 hit the China due to the fraudulent behaviour by few of its China employees and hotel partners apart from it many of hotel suppliers left the platform as the company was not fulfilling its promises. Budget travellers are increasingly opting for better chains such as Quanji  and Atour Hotel Group in China as they are offering more value-added services, but  in the short to medium term, China will be OYO’s best-looking market. Major recovery is seen from covid-19 in China and domestic tourism will see a revival with the upcoming summer months.

In the beginning OYO purchased rooms from hotels at fixed prices a profitable proposition for the hoteliers as they did not have to worry about occupancy but later OYO changed the model to a dynamic one wherein the control of the room rates and inventory rested with hotel owners and later on shifted to minimum guarantee price scheme wherein it took the entire inventory and the responsibility to fill the rooms due to this hotel were not allowed to feature their rooms on other booking platforms  said by Amitabh Mohapatra, He is the current president of  Guest House Welfare Association in Gurugram. Once oversupply of rooms was there, they were not able to achieve the target and did not gave the assured minimum amount and delayed payments they also started penalising hotel owners with hidden costs, excuses were given of poor service, convenience fees and data subscription fees, guest complaints.

Some of the other complaints faced by OYO are

1. OYO has been manipulating prices and artificially controlling demand with fake bookings.

2. They have been indulging in discounting of hotel room rates without the permission of owners

3. OYO has been charging below cost price and agreed rates where hotel owner is feeling cheated cases of illegal charging of hotel service fee from customer which were not passed on to the hotels

4.  Manipulation of the micro-market rates which aid in bringing more traffic on their platform forces hoteliers to reduce room rates

5. The rating system is erratic and one-sided

6. They are not prompt enough to move the money from their end to the partner end

OYO size has increased tremendously from the past and to grow and sustain int the market they require huge funds which will be met by SoftBank but they themselves are going through their own troubles.  The key investors of OYO are SoftBank, Lightspeed Venture Partners, Sequoia Capital, and Airbnb, while its smaller shareholders are Didi Chuxing, Grab, and Sunil Kant Munjal, chairman, Hero Enterprise. OYO’s asset-light model where it doesn’t own its properties and lean operations expenses where unlike hotels it doesn’t invest in front office, housekeeping, and F&B staff will help it survive this crisis.

List of OYO brands in India

1. OYO Rooms

2. Townhouse

3. Capital O

4. Collection O

5. Corporate and Executive hotel brand Silver Key

6. Palette Resorts

 Innov8 Gurugram-based co-working space provider was acquired for an estimated ₹180 crore to ₹200 crore last year. It also operates OYO Life, a long-term, co-living, fully managed, rental housing which target millennials and freshers joining new company. When compared with established hotel chains like Marriott International, Indian Hotels and others which have bigger balance sheets and generate profits OYO is more vulnerable. It has build itself as an internet start-up that leverages market power through network effect more the independent hotels are brought into platform it attracts more customers which means more business and in this way competition becomes irrelevant for rivals, then it raises larger capital which increases valuations and then the profits starts to generate by increasing prices and commissions.

 OYO has establishing itself as one of the biggest hotel chain in India it became the second-largest hotel chain in that country within 18 months after launching in late 2017, it has expanded to 79 other countries while buying hotel brands in  US and Netherlands,  entered China by breaking the  taboo about foreign companies entering there, OYO has raised $3 billion over the span of past four years and is spending on attracting and retaining hotels and customers, making technology investments and building a large workforce. It faces a prolonged battle to save its business from collapse. The company from the past months has moved fast to cut expenses and conserve cash. OYO is invoking force majeure clause with its hoteliers in India and refused to make fixed monthly payments now the payments to hotel supplier is made on the basis of customer bookings.

OYO is offering some of its properties as quarantine centres or for hosting medical workers and aircrew by reaching out to governments in India and other countries to. All the travel and hospitality firms along with OYO are hoping to get relief from the government. The future of OYO and similar companies in that space are waiting for announcement of favourable policies by the government.

OPPORTUNITY AVAILABLE

1. As businesses are heavily cutting costs a big opportunity for OYO post-Covid-19 world will be the availability of budget option

2. After months of lockdown millions of people will be out of their homes to enjoy themselves also the wedding industry, youngster parties and corporate function will look for venue bookings

OYO CHALLENGES

1. Formulating plans to survive the unprecedented situation

2. Ensure to retain its credibility with key stakeholders

3. Focus to increase the revenue and sustain its valuation

4. Maintaining the service standards consistently and focus on sustainable growth

5. To increase the demand which is falling due to travel restrictions across the globe and to prevent the further spread of Covid-19

6. Transparency with the hotel partners and fulfilling the promises made

GOOD MEASURES

1. They have launched CO - OYO app which will help hotel owners in such a way that they will be able to keep a tab on the bookings and entries made at the hotel reception

2. Initiative such as OYO Connect/OYO Direct/OYO Sambandh/OYO Globally, which will improve the relationship with existing customers as well as asset owners

3. The company had made cancellations easy for its customers alternatively, OYO was giving travellers credits that could be used to rebook later

4. Working on technologies and automation which will give them the edge over competitors

5. They are improving their brand image and cementing the relationships with US authorities and the healthcare community by offering its rooms for free to American medical and healthcare professionals fighting coronavirus

6. Training is being given to its business development officers in accounting and financial matters, apart from usual sales training.

7. Behavioural training is being offered for staff across departments Improving the code of conduct and soft-skills

 

Thus at the end of the article I will conclude that, Currently OYO has to contend with fallout of rapid expansion, conflict with partners, restructuring and a pandemic which is giving the company most difficult time, but as we know there is Silver lining to Dark clouds so we hope that OYO will come back bigger and stronger.