Setting up operations in India (Part 1) – good investment or incalculable risk?

The fact that companies like IBM, Daimler and Bosch are operating facilities in India since several years, reveal that their investments (and calculated risk) have proven to be good. But is it  also advisable for small and medium-sized enterprises to immediately set up an operational base in India? The inevitable answer: It depends! The success of investing in an Indian location mainly depends on the individual or business requirements as well as the selected approach.

In general, foreign companies have two options to take action in the Indian market: in the form of an enterprise in India or a company without legal entity, such as a Representative Office. However, companies w. l. e.  are not allowed to do business and therefore are only useful for fulfilling representative tasks. So the only possibility for companies who intend to produce or do business  is to set up an enterprise based in India.

A question of time and money

To give an example: The investment cost for setting up an IT company in India, with 50 employees and the necessary equipment, can be quantified with 700,000 €. Furthermore, the expenditure of time is around 8-9 months. That’s how long it takes until the company is founded, suitable employees hired, their working places set up as well as getting all necessary licenses. . Finally, even the administrative efforts related to founding and operating a company under Indian law should not be underestimated. This applies to issues of corporate and taxation law as well as operational management.

Because it is hard to predict whether this investment of time and money as well as the administrative efforts are worthwhile, most small and medium-sized companies are afraid of investing in an enterprise in India. But there are two possible alternatives for companies which find setting up their own operation in India too difficult or risky: A joint venture (JV) or a Build-Operate-Transfer (BOT).

Nothing ventured, nothing gained!

In a Joint Venture, a legally independent enterprise in India is founded jointly with another company. This means that not only the necessary investments, but also the risk is divided amount two shoulders.  A Build-Operate-Transfer means that a company is assigned to set up a location and operate it for a contracted period of time. Thus, the German company can focus on its core business while knowing the project “Operation in India” in capable hands.

For both alternatives, partnering with an Indian company  holds a distinct advantage: Existing know-how and experience in the setting up and operating a company in India. However, to avoid unpleasant surprises, the Indian partner should be selected carefully. Ideally, he must have proven his reliability and trustworthiness before (e.g. by accomplishing IT projects as outsourcing partner).

With a strong partner at their side, the long and rocky road to a new location in India becomes a calculable risk and a worthwhile investment, especially for  small and medium-sized companies.

We’re listening.

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Author : Jenny Date : 21 Jun 2011