South Korean Firms Pivot to India: Navigating Opportunities and Challenges

As geopolitical tensions reshape global supply chains, South Korean companies are increasingly turning their attention to India—a market that has become impossible to overlook. With a population of 1.4 billion and a GDP growth rate that outpaces many major economies, India offers not just a vast consumption opportunity but also a potential manufacturing alternative to China. However, despite the strategic allure, South Korean investment in India remains modest, highlighting the complexities involved in this burgeoning relationship.

The Strategic Shift

In 2024, South Korean mergers and acquisitions (M&A) in India totaled approximately $228 million across just four deals, representing a mere 2.85% of Korea’s total outbound investment. This figure underscores the cautious approach many firms are taking despite the evident potential. "The Indian market provides significant opportunities for Korean companies, both in terms of the vast local market and abundant resources that can be utilized as manufacturing or service hubs," notes industry experts.

Recent signs of deepening engagement are evident. LG Electronics is set to list its Indian unit, following Hyundai Motor India’s successful $3.3 billion IPO. Additionally, gaming giant Krafton invested $53 million in Indian fintech firm Cashfree Payments, while POSCO has increased its stake in a Pune-based steel processing center.

Strategic Alignment: Policies and Economic Cooperation

The complementary nature of India’s "Act East" policy and South Korea’s "Act Southern" policy has created fertile ground for enhanced economic cooperation. This alignment has become increasingly relevant as global companies reconfigure their supply chains. Experts emphasize that Korean companies are actively seeking alternatives to traditional investment destinations like China and Vietnam, focusing instead on India.

India’s relative resilience to global economic headwinds further enhances its appeal. While U.S. tariff policies have introduced uncertainties, South Korean firms are finding that India’s economic growth—largely driven by its local market—makes it a less risky investment compared to other countries.

Preferred Entry Strategies: Joint Ventures

When entering the Indian market, South Korean companies have shown a distinct preference for joint venture structures. This approach allows them to navigate unfamiliar regulatory landscapes while leveraging local expertise. "Incorporating a joint venture in India has proved to be a compelling route for many Korean companies due to the significant advantages of leveraging local expertise, sharing risks, and facilitating faster market access," explains legal experts.

The joint venture model has gained traction in sectors where local partnerships can unlock government incentives, particularly in manufacturing, electric vehicles, and semiconductors. Companies like Samsung and SK Hynix are expanding their operations in India, while collaborations in renewable energy and defense are also on the rise.

Selecting the right partner is critical for success. Transparency and trustworthiness are essential qualities to look for in an Indian partner to prevent potential disputes and ensure business continuity.

Navigating Regulatory Complexities

Despite improvements in India’s business environment, regulatory complexities remain a significant concern for South Korean investors. The decentralized federal structure of India creates a patchwork of regulations that vary across states, necessitating sophisticated navigation strategies. "Each Indian state maintains its own regulatory and tax frameworks, leading to significant variations across jurisdictions," experts note.

The Indian government has made strides in streamlining processes, such as the introduction of the National Single Window System (NSWS), which offers a more efficient process for obtaining operational approvals. Recent regulatory changes have also improved the investment climate, liberalizing FDI caps in key sectors like defense and retail.

Structuring for Conflict Management

Another bureaucratic challenge is the lengthy dispute resolution process in India. Litigation can be a document-heavy and prolonged affair, prompting South Korean companies to prefer arbitration as a dispute resolution mechanism. "Arbitration has emerged as a particularly effective mechanism in Korean-Indian business relationships," experts suggest, citing its potential for greater speed and efficiency compared to domestic court systems.

The choice of arbitration seat is crucial, with Singapore emerging as a favored venue due to its well-regarded legal framework. A notable ongoing case involves Korea Western Power Co (Kowepo), which has initiated international arbitration against India over alleged failures in fuel supply commitments.

Sectoral Opportunities

Several sectors stand out as particularly promising for South Korean investment in India. The semiconductor sector is highly attractive, driven by India’s push to develop domestic manufacturing capabilities. Recent collaborations, such as Vedanta Group’s MoU with 20 South Korean firms, aim to establish an electronics manufacturing hub in India.

The electric vehicle sector is also drawing significant interest, with South Korean entities investing heavily in India’s burgeoning market. Collaborations between JSW Group and South Korea’s POSCO in steel and battery materials exemplify this trend.

Future Outlook

Despite the strategic importance of India, challenges remain, particularly around valuation expectations and global economic uncertainties. Addressing these issues will be crucial for accelerating deal flow between the two countries. South Korean investors tend to approach India’s high valuation expectations with caution, focusing on long-term viability rather than short-term growth metrics.

The capital markets present another avenue for engagement, with Hyundai Motor’s IPO in India sparking interest among other Korean companies. Regulatory evolution will continue to shape the investment landscape, particularly in sectors aligned with sustainability goals.

In conclusion, to successfully penetrate the Indian market, it is critical for South Korean firms to adopt a long-term perspective and cultivate stable relationships with regulatory authorities, local communities, business partners, and customers. As the landscape evolves, the potential for fruitful collaboration between South Korea and India remains vast, offering opportunities that both nations cannot afford to overlook.