MUMBAI -- As Indian Prime Minister Narendra Modi looks to increase engagement with the Association of Southeast Asian Nations, Indian companies, too, are realigning their strategies to tap the region's potential. And with the 10-member bloc moving toward further integration by the end of December in the form of the ASEAN Economic Community, the business opportunities there are only likely to expand.
The latest big Indian name to step up its focus on the grouping -- which has a combined gross domestic product of over $2.5 trillion -- Larsen and Toubro. The engineering powerhouse has won a contract to construct power lines for Malaysian electricity utility Tenaga Nasional.
Until recently, L&T's main overseas focus was the Middle East. But according to S.N. Subrahmanyan, the company's senior executive vice president for infrastructure and construction, L&T foresees "huge opportunities in ASEAN with [its] transmission and distribution network poised for rapid expansion."
The company's presence in ASEAN has thus far been limited to production bases in Malaysia and Indonesia to cater to orders from the Middle East. The Tenaga deal is the company's first major construction project for a client in Southeast Asia.
"With this timely market entry we are well-placed to take advantage of those opportunities," said Subrahmanyan, referring to the kickoff of the AEC.
In venturing into the ASEAN market, L&T joins such other prominent Indian players as Reliance Industries, Tata group and Mahindra & Mahindra, all of which regard the region as not only a strategic consumer market but also a gateway to Asia-Pacific markets.
Last year, oil major Reliance Industries and Myanma Oil & Gas Enterprise signed a production-sharing contract for two blocks in the Tanintharyi Basin off Myanmar.
The Tata group has over 16 group companies operating across Southeast Asia, and has designated Singapore as its regional hub. Tata Power has made significant investments in coal resources in Indonesia and is also developing power generation projects in the region. Tata Motors has a manufacturing facility in Thailand.
"Indian companies can gain a lot from the low input costs in some ASEAN countries. They can mimic China in the way that country has participated in the production supply chain network in the region," said Nilanjan Banik, an associate professor at Mahindra Ecole Centrale, an engineering school in Hyderabad.
Lessons from China
Banik said Chinese companies were able to increase their global presence even during the economic slowdown in 2009-2010 because they started to shift their manufacturing bases to lower-cost countries in ASEAN to offset the negative effect of nontariff barriers imposed by some Western countries on imports.
The lower input costs also helped Chinese companies offset surging expenses at home. Banik said Chinese companies have been particularly active in making inroads in less-developed countries, such as Vietnam and Cambodia, where labor costs are relatively lower. He said they have gradually been turning those bases into manufacturing centers for white goods and electronics, and expanding into office equipment, electrical machinery, motorcycles and even fertilizer.
Banik sees similar opportunities for Indian companies in the region. Indonesia's plan to build six economic corridors, for example, presents chances for such companies as Oil and Natural Gas Corp., Reliance Industries and Bharat Heavy Electricals. And with Myanmar opening up, Indian players such as L&T, energy conglomerate NTPC and Adani Ports & Special Economic Zone could provide money and technical expertise for building container docks, ships, power stations, cement factories and other infrastructure.
But Indian companies have a long way to go if they are to catch up with their Chinese counterparts in Southeast Asia. According to data from ASEAN, Chinese foreign direct investment in the region totaled $21.37 billion between 2012 and 2014, compared with India's $6.45 billion.
Some observers have attributed this gap to a lack of political will in India and China's strong influence in the region. But Indian companies are hoping to get a boost under Modi's Act East policy to strengthen economic and strategic ties with ASEAN.
India has set a target of doubling trade with the region to $200 billion by 2022. As part of this drive, the government is setting up a $100 million fund to help companies expand in Cambodia, Laos, Myanmar and Vietnam.
Meanwhile, the proposed Regional Comprehensive Economic Partnership could also open doors for Indian investment in 15 countries in the Asia-Pacific region, said Rajrishi Singhal, senior fellow at Gateway House, an Indian think tank.