Time will come, if you don't win in India, you won't win globally: Sanjiv Mehta

India’s evolving business landscape presents a unique mix of opportunities and challenges for multinational corporations and domestic giants alike. Sanjiv Mehta, Executive Chairman of L Catterton India and former MD & CEO of Hindustan Unilever, in an exclusive interaction with Fortune India share a wealth of experience in navigating the complexities of India’s business ecosystem. Having led HUL through a period of remarkable growth and transformation, Mehta offers insights on the evolving role of multinationals in India, the challenges of market consolidation, and the future of innovation and manufacturing in the country. Edited excerpts:

Edited excerpts:

Fortune is compiling its first-ever listing of multinationals operating out of India. HUL, one of the oldest MNCs in the country, is among the top 10. In this context, how does market share consolidation in India's auto sector compare to FMCG, given that the auto industry is significantly more consolidated while FMCG has seen MNCs like HUL and others leverage M&A to expand their portfolios?

What is the maximum market share of any company in the auto industry?

Maruti has the highest market share of over 40%. What about HUL?

HUL has 39% value market share of all categories put together. So, it’s not dramatically different. The only problem is, when you look at the auto industry, there aren’t as many players, it’s not as fragmented as FMCG because the barriers to entry in FMCG are relatively much lower.

It means in FMCG space companies have to be continuously on guard, even as you consolidate your position.

Absolutely.

HUL has long balanced organic and inorganic growth strategies, but today's industry disruptions are far more intense. How are MNCs adapting their market consolidation strategies in response to these new challenges, particularly in FMCG?

I'll give you an example to bring clarity. In my last year was FY23, HUL added ₹8,000 crore to its turnover, which was more than the total turnover of all the new age players that you’re talking about. So, many times, the optics are very different from reality. Because, in newspapers, a lot of space is given to companies doing ₹300 crore, ₹400 crore, ₹500 crore of revenue. But all that turnover, put together, is not going to be make a dramatic difference to HUL’s destiny.

Globally, if you look at industries, the top five players—what we call the "circle of five"—appropriate most of the value. And if you were to look at the consolidation of profits in the industry, the bottom of the pile that we’re talking about—the so-called disruptors— make insignificant money. Most of them hardly make any money.

When MNCs like HUL make acquisitions, what factors determine the decision, especially when some categories generate only a minuscule share of revenue? How does this align with long-term growth and market consolidation strategies?

When we did our biggest acquisition for GSK’s Horlicks & Boost brands, we invested over $4 billion. Horlicks had great equity in the Indian market, especially in South and East of India. Building that same kind of ₹5,000 crore brands would have taken huge amount of effort and time as opposed to acquiring them.

When we used to acquire, we always looked at how much time and money it would take us to create a similar kind of brand. We also look at the distinctiveness of the brand when we acquire it. If it’s a “me-too” brand, we would never buy—or at least, I wouldn’t.

The distinctiveness could come from the proposition or technology or capabilities or a combination. For example, when we acquired Indulekha, it was a fabulous Ayurvedic brand at a premium. We bought it when the turnover was ₹50 crore and turned it into a ₹400 crore brand within a few years. If it’s something you can do on your own, why would you buy it? Why waste money? Why would you pay a premium?

But when it comes to food brands...

There is a subtle difference between Home & personal Care brands as compared to Foods brands. Many of the Home & Personal Care categories have been created in the last 70-100 years. But food is as old as human-kind and it is very specific to a local palate. That’s why even global food companies grow through acquisitions. They enter different markets and acquire brands that are developed based on local tastes. Food is much more difficult to build as a global brand compared to something such as Dove or Tresemme, which can scale globally Coca-Cola is an exception because they created the category.

In foods because it’s contextual and related to local tastes, does that make it a much more challenging segment?

Absolutely yes for an MNC. It’s challenging because the nuances of local tastes mean you need to tailor products accordingly and what has worked in one market may not work in another.

What about Home Care & personal Care brands?

Frist is you should not look at a me-too brand. If you have an existing brand in your portfolio, then why would you buy that? The second aspect you look at, is this a trend or a fad? Many times, it's a fad, it comes and vanishes. And when you do look at acquiring, then first you ask yourself, that what is the brand built on? What is the brand's distinctiveness? And is it built on a premise which will sustain or will disappear? And what will it take you to build a similar brand? And if you conclude that buying is better than building, then you would look at buying. Of course, the consideration also is extremely important. It has to be at the right price. In home and personal care, technology also plays a very important part. What is the new molecule you have? Do you have anything which is patented? And would this give you an edge, or can it be easily replicated? If you buy something that can be replicated by anyone, then why would you spend a huge amount of money on it? Right.

Whereas in foods, leaving aside products such as Horlicks, they are low in technology and also it takes much lower spends to build a brand in foods. You don't spend 25% of your turnover on brand and marketing investment as you do in personal care. So, the category nuances of foods, and home & personal care are very different.

The reason Surf Excel a billion-dollar brand because it involves technology. It's a blown powder. Blown technology is relatively much expensive and capital intensive. There are very few players who have adopted the blown technology in our country. You have to build a tower. Similarly, in Horlicks, the technology is not as simple as just having a mixer and a roasting machine which you can easily create. These are products which require technology.

But nutritional brand supplements may not necessarily be core to HUL?

In fact, Unilever globally has built up a very wonderful portfolio of VMS ( Vitamins, minerals, and supplements). And that is the reason we had invested in Oziva and Wellbeing Nutrition in India during my time. VMS is a very important category. If you look globally, Liquid IV has become extremely successful. It's nearly becoming a billion-dollar brand. Similarly, OLLY too is successful. So, VMS increasingly is becoming a very important part of Unilever’s portfolio.

Aside from what force that HUL stands for in India, will this be the new play or you know, the new categories that you will see more?

I will not be able to comment on HUL’s strategy now or going forward but if I look back from the lens, when I used to head at the company, yes, VMS is important and that's the reason we had invested in it.

HUL has become so deeply Indianised that it is sometimes not even seen as an MNC. It has also consistently contributed talent from India to global leadership roles rather than the reverse. How does this dynamic shape its positioning and strategy compared to other multinationals operating in India?

HUL is a very different MNC. We come from a philosophy, what is good for India is good for HUL. The first private sector R&D centre in India was set up by HUL. We are talking about 1950. Since then, itnow has got 900 scientists and technologists working in their labs in India, in R&D centre alone. No one in FMCG has this kind of R&D capabilities in India. And if you look at the portfolio, again, I'll refer to my days, one-third of the portfolio was made in India for India, not global brands. So, HUL is a unique company and that is the reason why it has done so well in India.

You mentioned that selling in India requires deep localisation since it’s a strong, homegrown market. How do MNCs like HUL navigate this balance—adapting global strategies while creating products uniquely suited for Indian consumers?

99.5% of the products sold in India by HUL are manufactured in India. So, localisation for HUL has never been an issue. But creating a brand and proposition just for India, that is unique. Not many MNCs do that.

So, early-mover advantage is not as easy as it is made out to be?

Nestle has been in India before HUL. They would be a ₹17,000 crore company, HUL is nearly ₹60,000 crores. So, age does not define your size. During my ten years, we added ₹35,000 crores to HUL's top line.

Is that the best-ever that has happened in HUL’s history?

Of course, it was ₹25,000 crore before I came in. And, yes, we took the margin from 14% to 24%. And we took market cap from ₹1.2 lakhs crore to ₹6.2 lakhs crore. Now adding ₹35,000 crores to the turnover is significantly more than the total turnover of the next biggest competitor of in HPC & Foods business.

From a broader perspective, even global giants like Coke and Pepsi have struggled to hit the billion-dollar mark in India’s food and FMCG space. What unique market dynamics make scaling in this sector so challenging for multinationals?

Because one thing you have to remember, Indians are very value-conscious consumers. And when you say you build in India for India, It is not just about the brand and proposition, but also the price points at which you operate.

Also, a lot of newspaper headlines have spoken of ecommerce and quick commerce. Put together they are just about 10% of the total market of FMCG. So, a large part of India lies in the heartland and India, even after ten years, the general trade will still be the largest & dominant channel, though its share will come down. So, one must understand India and then create the business model. You know, Maruti came at a time when we were just living off Fiats and Ambassadors. And they brought in a modern car. In those days, Maruti 800 had become an aspiration car. People had to wait long to get it.

Today, the barrier to entry in consumer goods is very low. Thanks amongst other things to D2C building a brand of ₹500 to 1000 crore is relatively easy, but becoming a category leader is a different game altogether. But after you reach a certain scale, you'll have to go offline. Offline is a very different game and you require very different capabilities and that is where many stumble.

Looking at the broader landscape for MNCs entering India, Apple reached a billion-dollar milestone much faster than Coca-Cola or Pepsi, despite being a premium brand. What factors contribute to this contrast in market success across different sectors?

For most MNC’s India would become a strategic priority. Time will come, if you don't win in India, you won't win globally. India will be to consumption this decade and beyond what China was for the previous two decades. So, every MNC worth its salt would look at India. If you're present, you would be looking at how do you double down and increase. If you're not present, you would ask yourself, how do you enter?

How does the ability to think and act local, including capital allocation from a local headquarters, impact an MNC’s success in India? How does this differ across industries?

You have raised a very important point. Most multinationals think global and act local. That is limiting. For a country like India, you must think local. And if it works brilliantly, like HUL does, a lot of capabilities that HUL has developed now in the digital side, are taken abroad. You know, gone are the days when the capabilities would get just transferred from West to East. Now, as far as digital technology is concerned, those capabilities will move from East to West.

So, is this sector agnostic?

Every category has its own nuances, and we'll have to appreciate that. But remember something. A few years back, there was very little technology which used to come from East to West. If you look at say 20 years back, the perception of people of China's products was poor quality. Now, there are more patents being filed in China than in the US. So, it has changed.

But the perception of China, at least in India, poor quality, is because the Indians chose to get the lowest quality from China.

No. There was a time, say 20 years back, it was a very different China. But now if you look at BYD, look at the cars, look at Lotus Cars which are manufactured out of China, their EVs and all. They are of very high quality. So, India will have to do a similar thing and compete on cost, quality, service, and innovation to become a big manufacturing player. And it's not either/or, it's and.

But the edge on the three things that you mentioned, unfortunately, has been the domain of MNCs. For instance, in capital goods or anything that involves cutting-edge tech, MNCs have an edge over Indian manufacturers.

That is what we must change. Increasingly, if you look at Tata Motors or Mahindra, as far as automobiles are concerned, they are investing in building the next generation engine or drivetrain, etc. Because that's what will enable them to compete globally. Similarly, we are trying to raise a game when it comes to defence sector. Mr. Modi has just inaugurated the stealth frigates. It’s not easy to build stealth frigates. You need a manufacturing ecosystem if you have to move up the value chain. Also, we must understand that, till 1990, we were a closed economy. Even if you made crap products, they would still sell because there were no options. Now, suddenly, consumers are becoming more discerning, and they would look for better products. So, things have changed. But if we have to say significantly improve our exports, then we have to compete on those four axes that I mentioned. We have to become a product nation. We have to have an innovation ecosystem. We have to invest in basic R&D.

India Inc.'s R&D spending remains low, except for a few conglomerates, particularly in the auto sector. How does this limited investment impact India's competitiveness against MNCs in innovation and technology?

When you look at a multinational, you have to look at it in a bit different way. For instance, when HUL has this large number of scientists and technical people working on R&D, their costs, aren’t absorbed by HUL directly. Those costs go to the centre and come back to HUL in the form of technology fees. So, many times when you say that HUL's R&D is low in P&L, it is factually wrong because that's not how multinationals operate.

Yes, as far as Indian companies are concerned, they will have to up the game. No questions. And in many cases, if you look around, a lot of heavy lifting when it comes to R&D, in the initial phase, has been done by the government.

So, I was very happy when in the last Budget, the government had earmarked one lakh crore for R&D. But I think they're still not framed the laws on how that will get implemented. But you need to create that ecosystem where your private sector, public sector R&D, academia, venture capital, have to come together, because R&D spend to a large extent is a risk capital.

R&D investment in India is often a capital allocation dilemma—while it may sound strategic, many domestic CEOs hesitate to commit top dollar, seeing it as a potential black hole.

But you know, the way I look at it. Say, tomorrow, if in any industry, a manufacturer comes up with a better product at a lower price, because they've built a certain technology, everyone will start investing in R&D in that industry. You know, let me take you back to the ’70s, when Detroit ruled the roost, people believed that improving quality and reducing costs can't go together.

The Japanese changed it through TPM, TQM, and just-in-time ethos -- they improved the quality and lowered the cost. This is the kind of disruption we need in our country. Then you will find that whole industry overnight changing. Detroit had to follow Japan. Read Lee Iacocca's books – Detroit never after that regained the status it had before the Japanese came.

But that game shifted from Japan to China. As global dynamics evolve, what’s next for India?

There is one more axis which has come up which India could play with -- a better product at a lower cost and more sustainable. Today, no one occupies those three axes. There's no country. In a very small way, I'll give you an example. We had developed a Rin washing bar, which was a superior product at a lower cost and required less water for rinsing. That is the thinking you need for all innovation.

But that calls for a change in mindset, which doesn't happen overnight.

Mindset is the most important axis of growth. There are three very important axis of high performing companies. One is the mindset. It is the growth mindset and the owner's mindset, if you're a professional company. The second is distinctive capabilities, which are hard to replicate. The third is high-performance anatomy, which includes your culture, your talent management, your performance management - all that comes under high performance. That's what makes a high-performing business.

Hands to your heart, who according to you, holds the edge today—India Inc. or MNCs?

If you look at, say, the big bets of Chandra, whether it is Tejas, semiconductors, or Air India. In many ways, these are big bets.

But Tatas are an exception

If you were to look at from a generic perspective, India is nowhere close to becoming today a product nation. We have to go on that journey. We have to become a product nation.

Isn't it too late?

It's never too late. You know, every next-generation technology comes in. We will have to, in many cases, leapfrog. I'll give you one small example. The cost of production of HUL is the lowest in the Unilever world, including that of Unilever China. If we can do it in India, others can also do it.

But it's a chicken and egg situation. HUL could do it because it had the scale and heft.

It's not about scale. You know, I made an increase in margin from 14% to 24%. We didn't do it by increasing our prices. If you try hiking prices in India, you'll get slaughtered. We significantly reduced the cost. My factory conversion cost used to be 14-15%, we brought it down to 10%. So, it's the mindset. Most importantly, you start with the premise that I want to become globally the most competitive.