ECONOMICS ASSIGNMENT

(Trimester 3)

CASE ANALYSIS:

Pepsis Entry Into India A Lesson in Globalization

Under the esteemed guidance of Prof. Prema Basargekar

Submitted By: Poorva Mishra Roll No. 26 PGDM - IB

Pepsis Entry Into India A Lesson In Globalization

EXECUTIVE SUMMARY: The case is a true lesson in globalization, which mainly deals with the tactics Pepsi Co used to enter the emerging market of India in the pre-liberalization period through various attractive commitments made to the Indian government. Sensitive issues such as the development of Punjab through promotion of agriculture and the export of the products were used to enter into the market. However, the company did not have keen interest in pursuing the promises made, creating controversies. Nevertheless, liberalization of India was a boon for the company. This meant that the company was no longer liable to fulfil many of the commitments it had made at the time of its entry and were free from controversies. Though the company was criticized a lot, there was also a positive side attached to its entry in India. The contract farming initiated by the company is well analyzed in the case.

ANSWER 1:
The basic reasons why companies like Pepsi globalize are: for the global recognition of the brand to increase sales Leveraging opportunities that companies discover in other countries, i.e., when the demand for the product a particular company offers is on places which are currently not within the scope of the company. Increasing profitability To get a good hold of emerging markets such as India During the late 1980s, the per capita consumption of soft drinks in India was only three bottles per annum, which was much lower than that of Egypt, Thailand, etc. hence, India was a lucrative destination.

There are a number of reasons why the multinational companies are coming down to India. India has got a huge market. It has also got one of the fastest growing economies in the world. The policy of the government towards FDI has also played a major role in attracting the multinational companies in India. For quite a long time, India had a restrictive policy in terms of foreign direct investment because of which there was lesser number of companies that showed interest in investing in Indian market. However, the scenario changed during the financial liberalization of the country, especially after 1991. Government, nowadays, makes continuous efforts to attract foreign investments by relaxing many of its policies. As a result, a number of multinational companies have shown interest in Indian market. Page 2

Poorva Mishra (26) PGDM - IB

Pepsis Entry Into India A Lesson In Globalization

The various ways in which foreign companies can enter a foreign market are: Licensing Franchising Management contracts Turnkey projects Joint ventures Equity alliances Wholly owned subsidiaries Exporting

PepsiCo faced a lot of problems while entering into India. Officials were involved in chaotic lobbying with the Indian government to obtain permission to begin operations in the country. There were a lot of supposition and analysis amongst the political leaders of the country regarding the entry of the company in India. Even as the government considered PepsiCos pitch to enter into the India, many Indian soft drinks companies and social and political groups strongly voiced their opposition to it. Protestors believed that the company would drain out money from the country in the form of profits, returns, promotional fees, and various other means, the same money which according to the protestors could be used for the development of the country. Dealing with such mindsets was a challenge. PepsiCo managed to enter the lucrative destination through some strategies. However, convincing farmers for contract farming of tomatoes initially was another hurdle PepsiCo, as a company had to face.

ANSWER 2:
Owing to the various hurdles that Pepsi had to face when it tried to enter the Indian market, the company adopted certain strategies. To make its proposal attractive to the Indian government, PepsiCo said that: The import of cola concentrate would essentially be in return for exporting juice concentrate from operations to be established in the north Indian state of Punjab. The company highlighted their objectives to enter into India revolved around 'promoting and developing the export of Indian agro-based products and introducing and developing PepsiCo's products in the country. The proposal, however, was rejected by the government primarily on two grounds: the government did not accept the clause regarding the import of the cola concentrate The use of a foreign brand name (Pepsi) was not allowed as per the regulatory framework.

Poorva Mishra (26) PGDM - IB

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Pepsis Entry Into India A Lesson In Globalization The company knew that the political and social problems that were prevalent in Punjab were a tremendously sensitive issue for India in the 1980s. PepsiCo's decision was a conscious one which aimed at winning the government over. The fact that Punjab boasted a healthy agricultural sector, with good crop yields in the past, also played a role in PepsiCo's decision. Reportedly, the new proposal gave a lot of emphasis to the effects of PepsiCo's entry on agriculture and employment in Punjab. The company claimed that it would play a central role in bringing about an agricultural revolution in the state and would create many employment opportunities. To make its proposal even more lucrative, PepsiCo claimed that these new employment opportunities would tempt many of the terrorists to return to society. This gave the government some incentive to grant the permission of entry to the company. The company also made a number of commitments to reinforce the proposal and make it unavoidable for the government of India. Some of the important points of the commitment were (in brief): The company would focus on food and agro processing and only 25% of the investment would be directed towards the soft drinks business Creation of jobs for 50000 people across the nation Foreign brand names would not be used An agricultural research centre would be established Half of the production would be exported and the export import ratio would be 5:1 for 10 years

The main strategy was that Pepsi consolidated a set of benefits that won the support of various interest groups in India. They used politics and public opinion in their favour. The commitments seemed to be beyond the willingness of the company to genuinely fulfil. They appeared to be mere tactics to enter the country. The projection of Pepsis operations as the solution to many of Punjabs problems was undoubtedly the biggest factor responsible for the acceptance of its proposal by the regulatory authorities. As mentioned earlier, the company was fully aware of the political and social problems that beleaguered Punjab were an extremely critical issue for India in the period of 1980s. When Pepsi could not enter through fair means due to the government regulations and speculations in the country, it tried entering through the political route by instilling a hope among the people that this move shall help in the improvement of the current situation of Punjab. This softened the government of India, who finally agreed to the proposal.

ANSWER 3:
The two most prominent features of the government's new economic policy were the removal of the numerous restrictions on foreign trade and the increased role of private equity in Indian markets. Pepsi benefited from the economic changes in a number of ways. The removal of various restrictions meant that it was no longer liable to fulfil many of the commitments it had made at the time of its entry. Restrictions that bound Pepsi's investments in the soft drinks business to 25% of the overall Poorva Mishra (26) PGDM - IB Page 4

Pepsis Entry Into India A Lesson In Globalization investments and required it to export 50% of its production were removed by the government. The company took complete advantage of the new economic policy. In 1994, it bought off its partners in the venture; Voltas and PAIC. Voltas sold off its stake completely, PAICs stake was reduced to less than 1%. The company, further, went on to establish a wholly owned subsidiary, PepsiCo Holdings India Pvt. Ltd., which was completely devoted to the soft drinks business. In 1995, Pepsi sold off the tomato paste plant to the Indian FMCG major, the Unilever subsidiary, Hindustan Lever Ltd. However, Pepsi continued with the contract farming of tomatoes. It is evident that Pepsi deliberately did not adhere to most of its commitments. The commitments were merely a sugar coat that the company required the proposal to be coated with to get the approval of the government of India: The commitments appeared to be beyond the companys intentions of fulfilling them at the very offset. The strategic projection of a positive linkage between the companys entry into the country and the improvement of government policies softened the government. As the whole purpose of making commitments was achieved, the company purposely did not pay much heed at the execution of the commitments. It cleverly handled a few commitments, such as the one which prohibited it from using the foreign brand name. Its cola was named Lehar Pepsi to differentiate it from Pepsi. However, in the packaging and promotion, where the product name was visible, the name Pepsi was given a prominent position, strategically sidelining lehar. Pepsi had promised around 50,000 jobs but had employed just 2400 people till 1996. Amongst those employed, majority was working in Concentrate and Bottling business instead of Food Processing Business as promised to the Indian Government. Pepsi had a huge stake in Futura Polymers Ltd. They focused on replacing workforce with machines. It was against their commitment to generate jobs. Instead of exporting fruits and vegetables and products based on them, Pepsi started exporting Tea, Rice and Shrimps which were already profitable

ANSWER 4:
The contract farming initiatives undertaken by Pepsi began by setting up a fruit and vegetable processing plant at Zahura village in Punjab's Hoshiarpur district. The plant mainly concentrated on processing tomatoes to make tomato paste. Since the domestic varieties of tomatoes were found to be of substandard quality, Pepsi imported the vital material for tomato cultivation. The company entered into agreements with a few well-off farmers with large land holdings, and began cultivating tomatoes through the contract farming way. Though Punjab was not exactly suitable for a crop like tomato agro climatically, Pepsi had chosen the state because of the following Poorva Mishra (26) PGDM - IB Page 5

Pepsis Entry Into India A Lesson In Globalization three main reasons: its farmers were progressive their landholdings were on the larger side water availability was sufficient.

Initially, it was difficult for the company to convince farmers to work for the company. Its experts from the US had to interact extensively with the farmers to explain how they could benefit from working with the company. Another problem was regarding financial transactions with the farmers. Paying the farmers by cheque was not a viable option since as many as 80% of the farmers did not even have a bank account.

Pepsi's tomato farming project was primarily responsible for increasing India's tomato production. Production augmented from 4.24 million tonnes in 1991-92 to 5.44 million tonnes in 1995-96. The company's use of high yielding seeds was one of the main reasons for the increase in productivity in tomato cultivation during the mentioned period. Abhiram Seth, the company's Executive Director (Exports and External Affairs)] commented on the mentioned issue by saying that when they had set up their tomato paste plant in 1989, Punjab's tomato crop was just 28,000 tonnes, whereas their own requirement alone was 40,000 tonnes. However, in a few years the production increased 10 times. Moreover, per hectare yields, which earlier used to be 16 tonnes, had crossed 50 tonnes. Pepsi was, however, not as successful in the chilli contract farming venture that was started soon after the tomato venture stabilized. The economic role of multinational corporations (MNCs) is simply to divert financial and physical capital to countries with capital shortages. As a result of which wealth is created, thereby, creating new jobs directly as well as through crowding-in effects. Moreover, new tax revenues arise from MNC generated income, allowing developing countries to develop their infrastructures and to reinforce their human capital. By improving the efficiency of capital flows, MNCs diminish world poverty levels and provide a positive externality that is consistent with the United Nations (UN) mission that countries are encouraged to cooperate and to seek peaceful solutions to external and internal conflicts.

Some of the various ways in which MNCs can improve the economy of the countries in which they operate are: Channelize financial and physical capital to countries with capital shortages Employment creation and generation Making available the resources which were previously unavailable Strengthen human capital Improved efficiency of capital flows Reduction of poverty levels and disparity of wealth Imparting education about the need and usage of the product Development of infrastructure and technology Investments

Poorva Mishra (26) PGDM - IB

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Pepsis Entry Into India A Lesson In Globalization

Poorva Mishra (26) PGDM - IB

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