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Greenfield projects are flourishing

Apart from increasing cross-border M&As, India Inc is also venturing into countries less visited to set up greenfield projects.

india Updated: Sep 18, 2006 02:53 IST

Apart from increasing cross-border M&As, India Inc is also venturing into countries less visited to set up greenfield projects. The reasons are many: cheap availability of natural resources, greater access to new markets and consumers and product diversification.

Tata Steel, for instance, has decided to set a $120 million greenfield ferro-chrome plant in South Africa to take advantage of cheap power, which accounts for around 50 per cent of the cost of production. Similarly, in 2004 Infosys invested $5 million to start up a 200-people software development center in China to take advantage of the untapped workforce and booming domestic market.

The list of Indian greenfield projects abroad is growing by the day. This June, Jindal Steel and Power announced its intentions to invest $2.3 billion over ten years in Bolivia for mining and setting up a steel plant after securing rights to develop the country’s largest iron-ore mine. Bajaj Auto has set up a joint venture in Indonesia to assemble three-wheelers and motorcycles to tap the growing South East Asian market. The company further plans to set up manufacturing facilities in Brazil and Nigeria, countries that were never on India Inc.’s radar.

The automobile sector is also seeing a lot of activity with Mahindra and Mahindra manufacturing 10,000 tractors annually at its two US-based greenfields projects in Atlanta and Texas. The company is also planning similar forays in Indonesia, China, Russia and South Africa. Auto component manufacturer Sundaram Fasteners set up $5 million greenfield plant in China in 2004. Similarly, Minda group, which manufactures vehicle ignition switches, has also announced its intentions to invest $5 million to set up a greenfield project in Indonesia.

Other than country specific perils overseas greenfield projects involve many other risks. It takes a longer time to fructify especially in a capital-intensive industry like steel. It also involves setting up from scratch the local distribution and marketing networks. Indian companies also have to develop a sound supplier base and obtain local permits and licences to set up the project. Though policy changes in the last few years have made it easier for Indian companies to invest in greenfield projects abroad, they leave a lot to be desired.

On the other hand the Chinese government is becoming increasingly supportive of companies expanding overseas. This year in March Chinese Premier Wen Jiabao reaffirmed the government’s commitment to support globalisation by offering various types of support, including new policies and services to coordinate overseas investments and manage risks. Furthermore, financial institutions such as the Bank of China, China Development Bank and Sinosure are planning to offer foreign exchange, financing and insurance services to Chinese companies expanding abroad.

India Inc too would like to see fewer regulatory obstacles and simpler approval procedures for outward foreign direct investment. Easy access to information on overseas investment opportunities, potential host country government regulations and requirements and market conditions would also help further their global ambitions Like China, India also needs to ensure access to finance at preferential treatment and insurance against political risks through credit guarantees schemes.