While India is the fastest growing major economy in the world today, some foreign companies are still struggling to enter the market there. However, recent developments have opened new doors for consumer product companies to expand their presence and sales in India, at much lower risks.

Giant companies such as Coca Cola , L’Oréal  and PepsiCo have made large, profitable investments in India, but many others are absent or have withdrawn, including Henkel, Mary Kay and Sara Lee.

In the meantime, both the number of middle class consumers and their spending per capita continues to rise, driving rapid growth of domestic Indian consumer companies from Amul (foods, dairy), to Dabur (personal care) to Godrej (home care and hair care) to Patanjali (foods, beverages, personal care) to Ghari (laundry detergent). To enter the Indian market with more profitability, multinational companies would benefit by creative use of the country’s supply chain and the explosive growth of its online channel. Two ways to achieve this are by sourcing locally and selling via e-commerce.

Leveraging India’s Supply Chain

New entrants tend to start by exporting finished goods from the nearest Asian factory with a desire to protect brand quality and/or intellectual property and/or to minimize capital investments. But import duties, taxes, transportation costs, and slow supply chains can cause the market size to be very limited in India with such an approach.

One way to mitigate these costs and appeal to a larger customer base is to manufacture in India.  Indian Prime Minister Narendra Modi’s government has launched a concerted effort to encourage companies from all over the world to “Make in India.” Indeed, Mars International committed to investing $160 million in building a confectionary factory in Pune in 2015.

This does not automatically mean companies should be investing large sums in an Indian factory, however. Fortunately, India now boasts a vibrant ecosystem of third party contract manufacturers (CMOs) who produce consumer goods in India for both Indian and global companies.

Foreign entrants can carefully choose among hundreds of viable CMOs or “co-packers” who can manufacture to global standards, using very low cost local labor and many locally sourced ingredients. Import duties and shipping costs are then payable only on a small subset of foreign raw materials or on proprietary intermediates where the foreign company wants to protect trade secrets or intellectual property.

This approach of using Indian CMOs enables foreign companies to ramp up Indian manufacturing rapidly with minimal capital deployment. Once sales reach levels that impress the C-Suite, justifying an investment in factories is no longer risky or difficult; for example Amway relied on third party manufacturing for its initial entry and once volumes reached sufficient scale, it invested in a 50-acre facility in India’s southern state of Tamil Nadu.

We suggest a three-step strategy in manufacturing:

• Use CMOs to establish beach heads to understand market dynamics.
• Set up low-cost manufacturing units in India that increase profitability. Drop product prices and boost volume growth.
• Leverage scale and cost efficiencies and export products to neighboring countries.

While sourcing locally can reduce costs, new entrants also need creative ways to build revenues from India.

E-Commerce as a Viable Entry Pathway

Most individual consumer product distributors in India have limited capital and geographical reach. For example, Hindustan Unilever has over 7,000 distributors in India. When a new foreign entrant signs up a single distributor, often it does not even move the needle for substantial sales.

India has over 10 million mom-and-pop retail outlets and they do an amazing job of servicing urban and rural neighborhoods with their most common daily needs. With rising aspirations across the country, consumers in large and small towns desire a wider range of products that are not easily stocked by the local shop.  This is a niche that American companies can fill. By leveraging online sales, new entrants gain instant access to a national market, particularly outside of India’s largest cities. Also, India today is changing socially. The number of Indians with smartphones has skyrocketed from a few million to over a quarter billion in less than three years.

Because middle class families are dispersed, e-commerce channels are an efficient way to send gifts to business acquaintances and such staying far away during major Indian festivals such as Diwali. In terms of e-commerce, 130 million Indians will make an online purchase in 2016. That exceeds the entire population of Japan and is up 76% percent from the previous year.  This impressive growth will continue in the next five years..

Two Indian e-commerce platform companies, Flipkart of Bangalore, founded by a pair of former Amazon employees, and Snapdeal near New Delhi, founded by a Wharton graduate, have each received over a billion dollars in venture funding and are in a war for these customers. Amazon CEO Jeff Bezos has made India a top priority for growth; he projects that the country will be its second largest market globally by 2025. Amazon has put the funds and the management bench strength to lend credence to this ambition. We fully expect that by 2020, in many categories, India’s online merchants will be as large as or larger than their brick-and-mortar counterparts.

Foreign companies can enter India via e-commerce with much lower risk and investment than by setting up a physical presence. E-commerce enables them to sell to a national footprint in India and to find the niche customers who value their unique offering. India has 23 official languages, with diverse climates, eating, grooming, and clothing habits. E-commerce sales data can reveal which segments of the market have the greatest affinity for products from a new company.  India also has a very high density of social media users. Multinationals must build trusted communities using social networks such as Facebook and Whats App. Digital assets, search engine strategies, big data analytics, and social media marketing techniques perfected in the West can readily be adapted to work in the Indian marketplace.

Neither the e-commerce opportunity nor the potential of the Indian supply chain is yet generally recognized as a lever for quick entry to the Indian consumer marketplace. Nimble global consumer companies looking for growth can accelerate their entry into India while mitigating their risks if they use one or both strategies.