Modi Markets

German Firms Look to India Again, Warily

Hannover Messe 2015
Angela Merkel with Indian prime minister Narendra Modi at the Hannover Messe in April.
  • Why it matters

    Why it matters

    If German companies can boost business with India they may be be able to offset losses they incur through China’s slowdown.

  • Facts

    Facts

    • Angela Merkel will visit India for the third time as chancellor in October.
    • India now has the fastest growing economy in the world, with GDP growth of 7.5 percent.
    • India is currently Germany’s 25th most important trade partner, with €8 billion worth of exports heading east.
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Uttar Pradesh is an Indian state that is obsessed with guns. Farmers own pistols, politicians distribute arms to their followers, school teachers feel unsafe without their own weapons.

Guns are a status symbol, and security in a poor and largely unpoliced state. Many weapons are hand made, beaten into rough shape by blacksmiths. But locals speak longingly of the sort of gun they would most like to own: A pistol that is “Made in Germany.”

Meanwhile, 600 kilometers north in the capital New Delhi, politicians are looking at ways to clean up the Ganges river; a holy, myth-laden and deeply polluted waterway that flows through India from the Himalayas.

They are also looking to Germany. The Rhine river, also shrouded in myth and part of Germany’s national identity, was once fouled, but an initiative in the 1990s has made it one of the cleanest waterways in the world.

When India’s foreign minister, Sushma Swaraj, came to visit Germany in August she spoke enthusiastically about how her German counterpart Frank-Walter Steinmeier had offered to help India improve the Ganges.

“German firms enjoy a certain competitive advantage as they compete with a ‘Made in Germany’ brand, whereas Anglo-Saxon firms are more associated with outsourced production.”

Rajnish Tiwari, Researcher, Hamburg University of Technology,

Although seemingly unconnected, the two case studies – the yearning for Made in Germany goods among India’s poor and a shared love of rivers – send out a clear signal. After years of seeking growth, investment and international forays with China, Germany is looking once again at India, an old, and slightly neglected trading partner.

This October, Angela Merkel will visit India for the third time as chancellor. Her visit comes just six months after Indian prime minister Narendra Modi came to Germany, to attend the Hannover Messe, the world’s largest trade fair where India was one of the main sponsors

It is clear that for Germany, India is a country worth working on.

At the moment, India is only Germany’s 25th most important trade partner, with €8 billion ($8.9 billion) worth of exports from Germany to India. China by contrast ranks 4th, with €74 billion of exports.

India and Germany have long-standing connections. The University of Heidelberg is one of the world’s most important centers for the study of the ancient Indian language of Sanskrit, for example, and the first telephone line between India and its imperial rulers in Britain was laid by Siemens.

But the relationship has cooled in the last decade as Germany has focused on China, whose government has been far more pro-active in opening up markets for foreign investors. But China’s stock market crash, and the increasingly erratic behavior of the Chinese government, which is looking for foreign scapegoats for its economic crisis, is making the country a less attractive bet.

At the same time, a new, pro-business government in India, and a fast growing middle class with an appetite for German made goods, is making the sub-continent attractive again.

“Germany has a very strong industrial base; Britain does not have that industrial base anymore,” said Rajnish Tiwari, an Indian academic working at the Hamburg University of Technology, who studies trade between the two countries. “German firms enjoy a certain competitive advantage as they compete with a ‘Made in Germany’ brand, whereas Anglo-Saxon firms are more associated with outsourced production.”

India’s GDP growth between January and March this year was 7.5 percent compared to China’s 7 percent, making it the fastest-growing economy in the world.

The Economist Intelligence Unit, the business research arm of “The Economist” newspaper, meanwhile forecasts that by 2050, India will outrank Germany, Japan, Brazil and Russia in terms of GDP. A lot of this growth will come from a fast-growing middle class, which is more willing to spend on goods it perceives to be good quality.

These can range from Bosch washing machines to Volkswagen cars – all are in demand. The city of Pune, a car-making hub near the west Indian city of Mumbai, is already a base for around 300 German companies. Mercedes Benz said in June that it will manufacture its new model of SUV in India. And Germany’s Metro Cash and Carry will open 50 wholesale stores in India by 2020

Mr. Modi came to power in May 2014 promising an overhaul of the country’s large but lumbering economy. He is planning smart cities with eco-friendly lighting and recycling, less red tape and 100 million new jobs by 2022.

More significantly for German companies, he has changed laws so foreign companies can own up to 49 percent of defense and insurance industries, up from the current limits of 26 percent.

These changes provide opportunities for Germany companies, particularly for insurers such as Allianz. People and companies are relatively lightly insured in India. A report by insurer Swiss Re shows that the average insurance premium income in India is €38 per head, compared to €148 in China and €326 in Brazil.

The market for private insurance products is significant. Ergo in particular has said it expects demand for car and health insurance in India to grow sharply.

Germany is also one of the primary destinations for Indian companies looking to invest abroad. German automotive and IT companies are particularly attractive to companies that want to trade with Europe, and take advantage of the “Made in Germany” label, and to boost their technological knowledge.

A report for the Indo-German Investment and Cooperation authority, which seeks to promote trade between the two countries, points out that Germany is the third-largest acquisition target for Indian companies in the developed world, after the United States and Britain.

But many Indian investments in Germany do not show up in official statistics, as many are done through subsidiaries and holding companies. India’s Hero Cycles, for example, bought a significant stake in the German bike maker Mitteldeutsche Fahrradwerke, but did it through its Dutch subsidiary.

However, the case should not be overstated. Many of Mr. Modi’s vaunted reforms have not materialized. State-owned banks are still weighed down with bad loans, and economic reforms have not appeared. After Mr. Modi’s high profile visit to Germany, many wondered what happened to the much-trumpeted deals: Indian officials promise they will be signed when Ms. Merkel visits.

Mr. Tiwari also warns that the reform of the railways, while promising huge investment opportunities for companies like Siemens, also has dangers.

“In India the railway sector is basically in the government hands and prone to political pressure from stakeholders such as labor unions,” he said. “We do not see yet a lot of growth on the ground in India because of pressure from labor unions and passengers who are worried they may be required to pay more when the railways are modernized.”

And of course India itself is not immune from problems in China. China is now India’s biggest trading partner, sending over raw materials and engine parts. Financial ties between the two countries are weak, and there is little attempt at building social or cultural bridges between the two. But there is little doubt that a Chinese economic slowdown will hit India.

But overall, out of all the so-called BRIC countries (Brazil, Russia, India and China), India has the most surmountable problems. Russia is hit by political sanctions and an overdependence on oil; China by an opaque political class; and Brazil by deep-seated corruption and a credit-dependent boom.

By contrast, India, with its established, if chaotic, democracy and capable workforce, needs to get rid of a clunking bureaucracy, build up its infrastructure and focus on green technology; tasks that German companies are perfectly positioned to help with.

 

Meera Selva is an editor for Handelsblatt Global Edition. To contact the author: selva@handelsblatt.com

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