Private equity dealmakers in China and India have very different approaches. The question for investors is whether these countries will be able to capitalize on mutual advantages. Varun Sood, managing partner of independent private equity investment group Capvent AG in India, talks strategy.
Q: Why is the China market attractive to Indian companies?
A: It is the ability to manufacture something better and cheaper in China, and the scale that is served. There are 400,000 Indian traders that travel every year in the direction of China. There are only 100,000 Chinese coming to India – so you get an idea about what is happening.
Q: Do you think there is potential for more Chinese capital to be invested in India?
A: I think it’s huge. Chinese capital could surely go into India if they start to see how it fits into their business model. I think they are not able to do that right now. Indians are more adventurous in this direction. They are out there a lot more than the Chinese are.
Q: Why do you think the Chinese are holding back from India?
A: The big companies are here but the smaller ones don’t know how to do it, or what is there. There is also a different approach to business in China and India. Over the last few years the Chinese have put a lot of capital into the ground – a very capital-intensive approach. India is capital-efficient – you work with very little money.
Q: How do the Chinese and Indian business models differ?
A: The model in India is the software companies where you start in a garage and you build a very large company. The model in China is the big industrial areas … big investments and then you produce large quantities of the same product.
Q: How does this affect operations in the two countries?
A: Their approaches are different. There is a company we know that is buying a company in China that has 2,000 employees. The same company in India with the same turnover has 131 employees. That’s probably because these guys outsource a lot in India and they run things more efficiently. It is a very different approach, so both sides can learn a lot. Private equity can play a role in this. However, private equity for capital-intensive projects is not a good match because it means a low level of value added, a longer gestation period and a longer return on capital.
Q: Do you see it changing in the future?
A: It has to change because at the end of the day an entrepreneur always thinks in a capital-efficient manner, but so far it has not been like that. So far I would say that 95% of investments into China have not taken that approach.