Eastern Promise

India has always been a land of magical promise. But it’s also home to some of the world’s smartest and most innovative businesses, and they want to do business with us | Business Today Egypt

Business between India and Egypt is pretty good joint ventures are successful, and bilateral trade between the two countries is steadily growing. However, the full potential of mutual trade and investments hasn’t yet been fully tapped.

India must be doing something right. The words “India” and “Bangalore” kept coming up during the last American election campaign, which ended up with President G. W. Bush winning his second term in the White House. But India and Bangalore were, ironically, not mentioned in the context of the foreign affairs or the international political agenda of any of the challengers. They were at the center of a heated debate over a purely internal issue; jobs for Americans. Each party was proposing its own set of solutions to stem in the rising tendency, led by almost all the American corporate giants, including General Electric, Intel and Hewlett Packard, to outsource jobs to lower-wage, yet technically competent, markets. It is here that India’s Bangalore has become a visible example.

In fact, the success of the Indian companies is twofold. Not only have they been able to convince a host of the world’s best companies to relocate some of their jobs to call centers and IT consultancies in the Indian subcontinent, but they have simultaneously been able to expand outside India, particularly in the emerging markets, with no less success.


In Egypt, itself an emerging market, many of the 43 Indian-Egyptian joint ventures are operating with marked success. One good example is Alexandria Carbon Black (ACB), which is a joint venture between Aditya Birla Group in India, the International Finance Corporation (a member of the World Bank Group) and Egyptian companies and banks. 

Established in 1994, ACB was intended to fulfill the domestic tire and rubber industries needs for the sand-like carbon grains with a production capacity of 20,000 tons annually. This year, with the company producing 200,000 tons annually, it became the largest carbon black manufacturer at a single location. It effortlessly meets the local demand with only 5 percent of its production capacity, and the remaining 95 percent is exported to giant tire manufacturers around the world including Michelin, Bridgestone/Firestone, Goodyear and Pirelli, reeling in LE 700 million in revenues annually. 

When Minister of Foreign Trade and Industry Rachid M. Rachid was touring Amreya industrial zone in Alexandria late in October, he could not help voicing his admiration for the company’s success. “It is a success story of a ten-fold growth in 10 years,” said Rachid. “ACB is definitely a plus to the Egyptian economy; applying the best practices in manufacturing, using local raw materials, employing and training Egyptian staff and boosting the economy with a huge amount of exports value annually. I hope that every manufacturer becomes that efficient.”

The success of the Indian joint ventures operating in Egypt comes, indeed, simultaneously with steady and quick growth in the bilateral trade between the two countries during the last decade. Between 1996 and 2003, the total trade between the two countries grew steadily, except for a drop in 2000. It rose from $248 million to $830 million. 

The growth in bilateral trade in the last year alone was 17 percent, with Egyptian exports being mainly petroleum products, raw cotton, rock phosphate coking coal and marble; the Indian exports are mainly iron/steel castings, jute yarn and other textile fibers; plastic and rubber chemicals and pharmaceuticals, tobacco, papers, cereals and engineering goods including diesel engines; pumps and vehicles. Additionally, India is the 12th largest foreign investor in Egypt, according to General Authority for Foreign Investments (GAFI). By 2005, Indian investments in Egypt will be approximately $450 million. And with $500 million expected to be invested into a plant for producing methane, the sum will near $1 billion. 

Balance Of Trade

So what are the reasons behind this momentum in Indian investments in Egypt and the bilateral trade between the two countries? “The general trend in trade with Egypt, or exports of India to Egypt are basically in sync with the general trend of growth of exports from India in general,” says the Indian Ambassador to Egypt R. S. Rathore. “Because of the reform process we instituted in 1991, a lot of new technology has come in. This has resulted in making the industry very efficient, and thus our goods became very high in quality and more competitive.” 

The other part of the equation is that the flow of Indian investments to Egypt can be attributed to Egypt’s location and consumer market size. “Egypt is a large and growing market. It also has the potential to serve as the hub for this region. When you are based in Egypt you have easy access to Africa and the Middle East,” says S. A. Sundareson, the chief executive of SCIB, an Indian-Egyptian paints company. 

Second, it can traced back to what Rathore calls “commonalities and complementarities” between the two countries socially and economically. Which means that Indian managers can easily get on efficiently and cooperatively with their Egyptian counterparts and employees. 

This is probably most obvious in ACB’s case, where 305 employees turn over serious annual revenues. ACB has adopted an evidently very efficient incentive system in which each and every idea from an employee is rewarded by LE 5, and if the idea is approved by the management as a “breakthrough idea” one which is valuable in enhancing company procedures the employee who came up with it may get an award of as much as LE 3000. Between 1999 and 2003, the capacity of the ACB plant was raised from 110,000 tons to 137,000 tons solely through “breakthrough ideas.” “Our success absolutely derives from our commitment to our people,” says K. N. Agarwal, ACB’s managing director.
 
But is the potential of trade and cooperation between the two countries fully tapped? The answer is apparently not. The Indian ambassador traces this back to “the lack of information on both sides.” The result has been situations in which Egypt imports small consumer commodities from the West, whereas similar commodities, with almost equal quality, can be gotten from India at far lower prices.

This information gap can still be bridged by mutual visits of high-level officials and businessmen from both countries and by participating in exhibitions and fairs, says the Indian ambassador. It is in this stream that Egyptian Foreign Trade and Industry Minister Rachid M. Rachid and Investment Minister Mahmoud Mohieddin are going to visit India in December, together with a delegation of Egyptian businessmen, to participate in India Economic Forum. This will be a chance to discuss the opportunities of enhancing the cooperation between the two countries and pave the way for increased Indian investment in Egypt.

The opportunities for cooperation are not limited to industry. Ahmed El-Maghrabi, minister of tourism, is going to visit India in December to launch Egypt’s promotional week, seeking to attract more Indian tourists to Egypt. This is hardly surprising, since by 2003 estimates, the largest worldwide growth in tourist traffic was Indian. They numbered about 5 million tourists, of which only 35,000 came to Egypt. The 2004 estimate is approximately 43,000 a mere sliver of the pie.

There are basic issues on investment that need to be addressed, however. SCIB’s Sundareson is concerned about two main inefficiencies that, he thinks, are holding back foreign investments in Egypt Indian or otherwise. “As a foreign investor, one of my main concerns is how the [local] currency moves in respect to the international currencies,” he says. SCIB has suffered what Sundareson calls the “currency shock.” 

In August 2002, very shortly after Asian Paints, India’s largest paint company, acquired 60 percent of SCIB for about $5 million, the Egyptian pound was devalued, losing about 25% of its value. “The value to the foreign investor is always measured in terms of what the value of the local currency is when it is converted back into an international currency, be it the euro, the dollar or even the rupee, in SCIB’s case,” says Sundareson. With pound devaluation and the war on Iraq, 2003 was a “turbulent year” for SCIB and yielded a very average growth.

The other concern is that more transparent and clearer mechanisms are needed for running the economy. “Even though investment inevitably entails some level of risk, still there should be made available certain economic indicators, clearly and transparently, that help the investor get to some degree of predictability of the behavior of, say, the exchange rates,” Sundareson says. “Last year nobody in the banks knew what was going to happen. That is quite discomforting.”

The concerns over the performance of the Egyptian economy or how it is run do not, however, divert Indian investments from flowing steadily to Egypt, especially from those companies or groups that are already doing business in Egypt. This is likely due to a couple of reasons. First, Indian businessmen have experienced similar circumstances in the course of the development of their economy since the 1991 reforms they are more familiar than most with the hiccups associated with economic reform. 

For one, Aditya Birla Group, the mother company of ACB, is pumping $110 million into an acrylic fiber plant, slated for construction in 2005. It’s expected to churn out 18,000 tons annually in the first phase. Birla is also going to put to work the 5th production line in ACB, making ACB by far the largest, and fastest growing, producer of carbon black at a single location (the largest global manufacturer of carbon black from multiple locations is the American company Cabut). 

Other investments are completely new. General Authority of India Ltd (GAIL) is investing $6 million in two gas distribution ventures in Fayoum and Cairo.

Another factor likely to ensure continuity of trade between the two countries are the bilateral trade agreements, whether through talks or trade. For instance, the India-Egypt Bilateral Trade Agreement has been in operation since March 1978 and is based on “the most favored nation” clause. In 1999, a partnership agreement between the two countries was initialed in Cairo during the first meeting of the India-Egypt Joint Business Group (IEJBG). 

The IEJBG was set up in November 1997 at the initiative of the prime ministers of India and Egypt and constitutes nine prominent Indian companies and 15 Egyptian ones. A big delegation from the IEJBG is expected to accompany the foreign trade and industry and investment trade ministers in their visit to India in December. Additionally, two particularly important agreements are in the works between the two sides: the Preferential Trade Agreement (PTA) and a new Double Taxation Avoidance Agreement (DTAA). 

Three rounds of negotiations have been held between the two parties. The Indian side has already submitted their wish list, and the Egyptian side is expected to do the same soon, making it possible that the agreements will become active soon, according to the Indian ambassador. 

“Tax and tariff reform, of course, sends a positive message, but what you really need to do better is market Egypt as an attractive foreign investment destination,” says Agarwal, whose company’s request of becoming a “private free zone” has been approved in mid-2004.

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