Japan’s last chance to invest: A once-in-a-century transformation in India

November 24, 2022

India is the greatest frontier when it comes to startup investing in the 21st century. The below interview with Managing Director Munehiko Eto from Dream Incubator India, parent company of DI India Digital Investment Fund, will offer a sneak peak at the current India market landscape attempting to decode the DNA of Japanese companies’ success.

“Now is the right time. A once-in-a-century transformation is happening in India.”

Q: What are the current market trends in India?

A: Since the early 2000s, India - with its most populous profile approaching 1.4 billion people and incredible demographic dividend coupled with an average age of under 30 - stands for a high expectation of strong economic growth.

There is a nationwide emphasis on STEM education in India. Since the 1990s, the country has sharpened focus on the IT industry to leverage its own national strength, and thus, elevating the number of IT engineers massively. Today, the Big 4 tech titans Google, Apple, Facebook, and Amazon (the so-called GAFA) are already building global products from their R&D centers in India, which as a result helps improve the quality of local talents.

Under the leadership of Prime Minister Narendra Modi when he took office in 2014, India’s digital transformation journey began with an aim of bringing about socio-economic transformation as a whole.

In line with this, digital payments continue to become more widespread, more budget and great-performing smartphone models come to the market (in just 6 years from 2016 to 2022, smartphone users skyrocketed from 300 million to over 800 million), and mobile data prices hit lowest levels in the world triggered by fiercer competition.

To adapt to these inexorable market changes, numerous start-ups have branched out with new services or solutions. That’s why we are seeing a great virtuous circle of foreign venture capital inflow that has been happening all at once in the past 2 or 3 years.

Q: What changes have occurred as a result?

A: There are an increasingly large number of unicorns (privately held startup companies valued at $1 billion or more that’s been in business for under 10 years) popped up over the years.

The country was a land of 10 unicorns when DI began its investment practices back in 2016, and now it has over 100. Especially, the 2020-2021 period experienced a huge surge with a total of 44 start-ups joining the unicorn club throughout the year.

The world-class potential that the country originally possessed has blossomed and and borne fruit, marking a major milestone thanks in large part to major economic policies and reforms initiated by the Modi administration. I think it is no exaggeration to say that this is a once-in-a-century change.

Q: Do you think India is becoming increasingly important investment destination for Japanese companies?

A: Yes, I do. In addition to China and Southeast Asia, where strong foothold is already in place, I believe India is becoming an increasingly important destination for Japanese companies.

China has long been the main driver of Asia economic growth; as low birthrate persists, China has been losing its demographic dividend. India, on the other hand, still enjoys handsome demographic dividend of young population.

Taking Alibaba Group as a recent example, there is explicitly different treatment between the public and the private in China. Recently I have noticed many foreign investors I am working with in India are shifting their funds towards India, rather than China.

Keys for Japanese companies to successfully expanding in India

Q: What are the keys to succeed for Japanese companies in a very different culture like India

A: India is a large and competitive market; the key is therefore how to utilize the local talent pool based on top managers’ unwavering commitment to breaking into the India market. Put it differently, it comes down to how Japanese companies manage global business.

First and foremost, making a long-term commitment is important. By dedicating time and resources in building and raising brand awareness and brand visibility, you can also increase your market share. In contrast, it would be safer not to enter a market considering there is a possibility of withdrawing from there within 1 or 2 years of entry. It would also be challenging for businesses that change strategic intent whenever new executives come on board.

On top of that, all successful companies manage to find a good local partner. Many also hire local talents for management position, offering remuneration in exchange for long-term retention.

Plus, cultural differences abound between Japan and India, but the biggest one has to be the culture of “Just give it a shot.” When Japanese people make a request or ask for something in business contexts, they do so after considerable consideration of its feasibility. Indians, however, give opinions and requests without much of that planning point of view as there is no harm in trying. I’d say that having the latter thinking pays off in the Indian business world.

Q: What segments do you think have the best chance of success for Japanese entrants?

A: Depends on the industry. Japanese companies, though, are undoubtedly superior performers in the manufacturing industry, and India generally has a deep-rooted respect for made-in-Japan brands. While the players still juggle many challenges, including licensing laws, land acquisition, immature supply chain, and noticeably competitive Chinese and Korean brands, growth prospects for this sector remain positive.
In addition, India’s consumer preference for affordability also adds to the pressure of keeping prices low. Continued economic growth, however, creates more demand for high-quality products which opens up further opportunities. For instance, there are indeed real and immense opportunities for ventures into the consumer goods/services and healthcare sectors. In doing so, the issue will be, for example, how to join forces with fast-growing online platforms as the digital transformation of India's economy and society unfolds.

I think there are ways for Japanese companies, not just limited to the tech market, to grow business in India by acquiring local businesses, incorporating them into global operations, hiring local talents, or building good human capital through M&A transactions. Some Japanese companies already adopted this perspective involving in M&A deals with DI’s portfolio companies. Moreover, ensuring a smooth post-merger integration (PMI) journey is just as important as M&A.

The heightened importance of partnering with start-ups

Q: How does DI’s investment portfolio in India look like?

A: We have invested mainly in early-stage start-ups across sectors, with 10 in health tech, 7 in fintech, and 4 in consumer tech. Of these, 2 have become unicorns; 4 are soonicorns (businesses that have the potential to become a unicorn).

The reason why there are many health tech companies in our portfolio is because India has an environment conducive to continued innovation in the medical sector, driving growth of a handful of interesting start-ups. Another reason is that I myself have a strong background in healthcare, which really helps when making investing decisions.

Q: What could DI help with India endeavors?

A: In addition to start-up investments through venture capital fund, DI also provides strategy consulting services to Japanese clients, enabling effective strategy to execution with market entry roadmap, post-entry growth strategies, or R&D of new services and products tailored to emerging economies.

It becomes more important than ever to partner with not only local conglomerates but also local start-ups amid the country’s digital transformation. With DI’s local network, expertise, and experience accumulated during VC fund investment, we can help companies develop winning strategies, find and negotiate with the best partners when they get down to business here in India.

Q: Could you leave a message for those considering doing business in India?

A: Generally speaking, Japan and Japanese brands still capture trust and admiration in India. The number of Japanese companies in the country has continued to rise in the past 2 decades (though COVID-19 slightly halted its growth track for the very first time in 2021), reaching 1,439 in 2021 (Source: JETRO).

In the not-so-distant past, a large share of these organizations comes from the manufacturing industry, such as auto or chemical manufacturers. Recently, we have witnessed a rising number of Japanese consumer goods and tech companies across the country. Seeking to expand their local presence, more Japanese players have been seen operating in increasingly diversified sectors of the economy.

In the start-up space, now may be the last chance for Japanese investors. As I write this article in November 2022, although Indian partners still show a sincere attitude toward proposals from Japanese investors amid a tougher venture funding environment, I think, however, in just another 5 to 10 years, the same thing would happen with India like it did out there in Silicon Valley and Shenzhen, where Japan is being ignored, losing its edge over rivals. As mentioned earlier, India is undergoing a major once-in-a-century transformation. Drastic changes in the business environment will unleash opportunities for new entrants and business expansion. And I am sure there is something DI can help with.

Source (Japanese only): https://www.dreamincubator.co.jp/news/column/2022/column_20933/

Author profile

DI India Managing Director Munehiko Eto

Eto holds a bachelor’s degree from the Faculty of Economics, the Keio University. Prior to DI, Eto worked for the Japan Bank for International Cooperation, PwC Advisory LLC, healthcare startup and more. He joined DI in 2011. Since 2014, Eto has led the company’s India operation with a focus on strategy consulting for Japanese companies looking to expand in the local market and tech start-up investment practices.

Of 30 portfolio companies in DI India’s track record, 2 have become unicorns: PharmEasy and Purplle. Eto is currently engaged in forming collaborative relationships and capital tie-ups with a joint business venture between the two. He moved to India in 2016 and currently lives in Bangalore.