Friday, September 30, 2005

Chindia: Chinese and Indian economies futures

Chindia, where the world's workshop meets its office

By 2050, China and India will make up half of the global economy

Randeep Ramesh in Gangtok, Sikkim

The Guardian September 30, 2005

Tracing a route through the folds of the eastern Himalayas, Motilall Lakhotia is explaining how Indian trade caravans used to ply the scenic Chumbi valley into Tibet.
"It was a big trade even then. The Tibetans sold us Indians silver, raw wool and Chinese silk. We had manufactured goods and cotton. Especially blue cotton, because that is what everyone wore those days. You remember ... they called them Mao suits," says the dapper Mr Lakhotia.
The 80-year-old businessman is one of a dying breed of Indians who traded across the mountains. Many in Gangtok, the capital of India's Sikkim state, which nestles in the foothills of the Himalayas, remember a flourishing cross-border trade in wool, machine parts and tea carried by mules supervised by resident trade commissioners on either side.
The mountain kingdom of Sikkim was a pit stop on one of Asia's main arterial routes linking Tibet to the nearest ports on the Bay of Bengal. Goods were unloaded in Calcutta, driven 370 miles (600km) and then carried over mountain passes into Tibet before being taken as far again to Lhasa. A small Chinese community sprang up in Calcutta. Indian businessmen began buying homes and warehouses in Yadong in China.
In 1962 all this came to an end. The frontier was sealed after a short, bloody border conflict between Nehru's India and Mao's China. The Silk Road - or to give it its Chinese name, the Tea Horse route - which carried three-quarters of Sino-Indo border trade, worth hundreds of millions of silver dollars, was closed overnight. "When the war happened, it all disappeared. It was a good business and everything I had built up in seven years was gone," said Mr Lakhotia.
The hostility continued until early this decade when business ties began to ease the wariness between the world's two most populous nations. The value of the two-way trade has risen from a few hundred million dollars in the mid-1990s to $13bn (£7.4bn) last year.
Gangtok is likely to be one of the first beneficiaries of this rapprochement. By March the first direct trade link between India and China will be re-opened. Perched at 15,000 ft (4,500m), Nathu La pass will resume business as the world's highest customs post.
Huge markets
Karma Gyatso, industrial secretary in Sikkim, points out that a recent report by the Confederation of Indian Industry said the potential for cross-border trade could reach $10bn within a decade. "It will be a big boost to us. We have to tackle high levels of unemployment in the state and trade will provide opportunities for a lot of people here."
What's happening in Sikkim is only part of what is now being called the "Chindia effect", a phrase that has gained currency as it dawned on analysts that if the current growth rate persists in China and India, by 2050 the two nations will account for roughly half of global output. The "Chindia" region's potential of huge domestic markets - encompassing a third of humanity - cheap highly skilled labour and governments pursuing capital-friendly policies have led many to conclude that the world is at a tipping point in history.
In Mapping the Global Future, a report by the National Intelligence Council, a division of the CIA, analysts concluded: "In the same way that commentators refer to the 1900s as the 'American Century,' the 21st century may be seen as the time when Asia, led by China and India, comes into its own."
Such prophecies will only be made real if both nations can co-operate and compete peacefully. The extent to which historic differences are now being edged aside by growing economic links can be judged by the rising trade figures. Trade is projected to rise to $20bn by 2008 and shoot up to $30bn two years later. Sun Yuxi, China's ambassador to India, told a conference recently that in the first four months this year trade exceeded $6bn. "If it continues, we will hit our targets ahead of schedule," he said.
At the same conference earlier this month, a trade delegation from Jiangsu province made it clear that what interested them most was India's software industries. "We have come to learn from the Indian masters," Li Yuanchao, chairman of the Jiangsu People's Congress and in effect the local party boss, told a startled audience of Indian businessmen. Information technology has been India's most remarkable success story. The sector now contributes 4% of the nation's GDP and the industry's revenues are growing by 38% a year. Analysts predict it will have sales of $70bn by 2008.
Despite its reputation as a software superpower, India's exports have been driven by the export of one item: iron ore. Last year the country shipped 60m tonnes of iron ore to China, whose voracious construction industry is gobbling up the world's raw materials. Chinese officials have long insisted that if their country is the workshop of the world then India is the globe's office. The logic is that both can work together to corner markets. Many Indian IT firms already employ hundreds of programmers in China.
Tata Consultancy Services, one of India's biggest IT firms, signed up with Microsoft and the Chinese government in June to develop a global software company based in China. "We decided to come here because of the talent," said Girija Pande, TCS's Asia-Pacific head. "China now produces more computer science graduates than India and we want to tap into the domestic market, which is growing at 20% a year."
'Reform or perish'
To many experts, China offers India a role model. Indian information technology companies made a mark because the government avoided stifling them with regulation. Software and outsourcing companies are exempt from restrictive labour laws and they have been allowed to receive foreign direct investment, which is banned in, for example, retailing.
The lesson has not been lost on India's leaders. Hardly a day passes that its government does not invoke the "Chinese model" to justify rolling back the state. Whether trying to usher in flexible labour laws or setting up special economic zones to attract foreign direct investment, officials usually back up their policies with Chinese examples. Even leading communists in West Bengal, who have been in power in the state for 28 years, have taken to telling comrades that everyone must "reform or perish".
India and China are non-identical conjoined twins, joined at the Himalayas. China's success is built on high literacy rates and low poverty rates, ensuring that there are workers to fill positions in the country's labour-intensive manufacturing industry. In India, almost every second child under five is malnourished and half of its female population cannot read. The result is that India's economy depends on a thin sliver of its population.
In terms of its economy, China drew on its deep reservoirs of domestic savings to create world-class infrastructure and sucked in enormous amounts of foreign capital to build factories and to acquire the expertise that it required.
India, which began economic reforms a decade later, has taken a more conventional route. There are institutions to support private enterprise. There are established stock markets, which operate with a greater transparency than China's. It also has a decent legal system, albeit one that works better in theory than practice.
"The result is that with just a 25% savings rate, we have grown at 7%," says Jairam Ramesh, the economist and Indian MP who coined the term "Chindia". "The Chinese have a savings rate of 40% and managed 9% growth. It is that efficiency and our market economy that will help us in the future to catch up with China."

Making Sense of Chindia is a book by well-known economist and Member of Parliament – Jairam Ramesh.

Peter Ghooi: book review

Chillibreeze, Summer 2005

Book details: Making Sense of Chindia : Reflections on China and India by Jairam Ramesh. New Delhi, India Research Press, 2005, xii, 130 p., (pbk). ISBN 81-87943-95-5.

What is with “Chindia”? Is it possible to visualize India and China as comparable entities? Is it possible for the two countries to begin to respect each other and help themselves to rise to commanding heights in the comity of nations? Is it possible to think in terms of “Chindia”?
In this book, Jairam seeks to validate all these statements through a series of essays by examining different issues from past history to present reality and thoughts of what the future may hold.
The launch of the book
I had the opportunity to be present during the launch of this book in Bangalore on the 23 rd of April 2005 at the “Landmark” book store at the Forum Mall. I am not at skilled at reviewing books but having had this opportunity of hearing Jairam elucidate his current thoughts and answer the questions put to him; it is worth sharing these thoughts with a wider audience many of whom think of our two countries as only being in a state of confrontation and unease with each other.
It was but a few months ago, (in fact just a few days before I attended the launch of this book), that the Chinese President Wen Jiabao visited Bangalore first, before going on to Delhi . This came as a surprise to many, for those of us who live in Bangalore , this is a city defined by traffic jams and practically no infrastructure for growth.
Yet, even China with its amazing progress in creating infrastructure and economic growth thinks that there is something to be learned from us. There was the fiasco, of Tibetan students breaking through security cordon (outsmarting the police intelligence) and demonstrating against the Chinese premier. But, times have changed and we did not hear anything from the Chinese about this lapse.
However, I digress, coming back to the book, this is a rather slim book but written well in Jairam’s style. I realize that Jairam is not only great to watch and hear on debates like the “The Big Fight” on NDTV, but it’s also interesting to read his take on the global situation. And he is certainly eminently qualified to speak in matters of foreign policy and government decision making.
The historical relationship of “Chindia”
Jairam starts with the historical relationship between the two countries, which, in ancient times had links. This was when Buddhism was taken to China from India and we discovered our past history through the writing of the Chinese travelers. There was considerable trade in ancient times as well between our countries. However, in post-colonial times there was a lot of antagonism between both countries due to the politics of the day.
Most Indians who are in their thirties and upwards would have grown up in the atmosphere of the post 1962 war debacle with China . Our distrust and fear of the Chinese has only grown from this point and there are mutual misgivings on the border disputes, our nuclear policy and support to the Tibetan cause.
But perhaps it was the Indo-China war in 1962 that ingrained in us that China was the aggressor nation. Taking on from here we have seen how China’s spectacular success in abating poverty, the amazing growth in its manufacturing and infrastructure have made India feel vulnerable and threatened a few years back.
Globalization and the growing market of Chinese products
We thought that with the opening up of trade and globalization Indian industry would be unable to stand the might of Chinese manufacturing and would be swamped with Chinese products.
However, while there has been a huge increase in trade, it has not been one sided. Yes, Chinese products practically dominate certain sectors such as electronic gadgets and toys but we have seen that most Indian companie making quality products have continued to thrive. In fact we now see that many companies in the training and IT services sector are aggressively setting up shop in China and investing in China .
Software and IT services
India ’s spectacular success in software and IT services has made Chinese leaders sit up and take note. They now see India as a leading power and a country they should collaborate and do business with. Thus we see the pragmatism of Wen Jaibao’s approach of visiting the “software capital” of India and then going on to the national capital. They surely want to emulate the success that India has in the knowledge arena.
India’s Mind Block
However, Jairam’s contention is that Indian leaders on the other hand are still wary of giving too much to the Chinese. There are very few Chinese companies coming directly into India. Jairam cites the examples of Haier and Huawei Technologies who seem to be facing some obstacles and are not being allowed to expand freely. There is a mind block that does not want to accept that with changing times even sworn enemies can become friends. Perhaps the same can be said of our Pakistan relationship as well
An Opportunity for India
Jairam Ramesh says that both countries should come together and make use of this opportunity in time to strengthen their ties not only in terms of business but culturally and with people to people contact as well. This would be a great occasion for India to use the collaboration with China and make itself a more important player on the world stage.
Criticism
The criticism against this book would primarily be that this anthology of essays has been written at different times and therefore there is a lack of continuity between the chapters. Also, one feels that when facts and figures are being quoted from say 2002 or earlier years for a book being published in 2005, they do seem a little outdated for a book of this type.
All in all, a very informative book, which tries to dispel many set notions regarding the country that has become a force to reckon with.
From: http://www.chillibreeze.com/bookreviews/MakingSenseofChindia.asp

Business Week special issue on Chindia: many articles exploring various aspects
http://www.businessweek.com/magazine/toc/05_34/B3948chinaindia.htm

BusinessWeek on "Chindia"

Vinnie Mirchandani : blog: 16 August 2005

BusinessWeek's latest issue is almost completely devoted to China and India - over 70 printed pages and more on-line. Their huge potential, their appetite, their challenges. I have met two of the prime authors - Pete Engardio, based in NYC (but spent years in Hong Kong and other parts of Asia) and Manjeet Kripalani, based in Mumbai - and they know their stuff and have covered the 2 countries for years now.
As I leafed through the issue and some of the data they quote (from various research firms) I found my mind brimming with burning questions:
1) Is the West prepared to absorb $ 2 trillion in exports from the 2 countries expected in 2010, almost triple what it is today?
2) Are China and India prepared to import at least $ 1.8 trillion a year in return so we do not end up with massive trade wars or dramatically reduce 1 above? (By the way a $ 1 trillion in Middle Eastern oil imports would not be a good answer to this question).
3) How many US and European companies are aggressively innovating and moving up the "stack" in their product value chain?
4) How many US and European companies are gearing up to aggressively export to these countries as GE is?
5) What are government and corporations doing to retrain western labor force to support 3. and 4?
6) Can western labor for "utility" (as against innovation) work be made more competitive with technology (like Jetblue with VoIP) or as wage inflation grows in India and China?
7) What impact will India's projected 1.3 billion people in 2015 (up almost 40% from today) on its already poor infrastructure?
8) Will Indian and Chinese companies learn to quickly build strong management teams in US and Europe? (It took the Japanese a while to find the right "mix". Even now vendors like SAP are learning about multi-national management. I find many of the Indian firms micro-managing from India when over 75% of their revenues come from the US and Europe)
9) If China is so far ahead in exports and GDP compared to India, could it not just afford to buy a few Indian services firms and acquire market share, rather than build that capability itself?
10) If China and India were emerging technologies, not markets, where would Gartner put them on its "hype cycle"?
Lots of questions - hopefully lots of people smarter than me around the world are asking similar questions and coming up with answers. We have to thank Pete, Manjeet and the rest of the BW crew for stimulating this discussion. And introducing the term "Chindia" to Google.
Author's Note: Manjeet Kripalani at BusinessWeek corrects me and says they did not come up with the term "Chindia" - see her comment below. Nice and modest of her.
August 16, 2005 in Globalization and Technology Permalink
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Comments
Nice of you to blog us, Vinnie! But one correction. BusinessWeek did not introduce the word Chindia to the world. Jairam Ramesh did - he wrote a book on it released this April. Then CLSA followed it up with a bigIndia-China report called Chindia, released in June. BusinessWeek is just a follower here! So maybe we will popularize the term internationally (people in India use it commonly already), but Jairaminnovated it!
Posted by: Manjeet Kripalani August 17, 2005 11:46 PM

From: http://dealarchitect.typepad.com/deal_architect/2005/08/businessweek_on.html

Sample article from the Business Week special issue:

A New World Economy The balance of power will shift to the East as China and India evolve

Business Week 18 August 2005

It may not top the must-see list of many tourists. But to appreciate Shanghai's ambitious view of its future, there is no better place than the Urban Planning Exhibition Hall, a glass-and-metal structure across from People's Square. The highlight is a scale model bigger than a basketball court of the entire metropolis -- every skyscraper, house, lane, factory, dock, and patch of green space -- in the year 2020.
There are white plastic showpiece towers designed by architects such as I.M. Pei and Sir Norman Foster. There are immense new industrial parks for autos and petrochemicals, along with new subway lines, airport runways, ribbons of expressway, and an elaborate riverfront development, site of the 2010 World Expo. Nine futuristic planned communities for 800,000 residents each, with generous parks, retail districts, man-made lakes, and nearby college campuses, rise in the suburbs. The message is clear. Shanghai already is looking well past its industrial age to its expected emergence as a global mecca of knowledge workers. "In an information economy, it is very important to have urban space with a better natural and social environment," explains Architectural Society of Shanghai President Zheng Shiling, a key city adviser.It is easy to dismiss such dreams as bubble-economy hubris -- until you take into account the audacious goals Shanghai already has achieved. Since 1990, when the city still seemed caught in a socialist time warp, Shanghai has erected enough high-rises to fill Manhattan. The once-rundown Pudong district boasts a space-age skyline, some of the world's biggest industrial zones, dozens of research centers, and a bullet train. This is the story of China, where an extraordinary ability to mobilize workers and capital has tripled per capita income in a generation, and has eased 300 million out of poverty. Leaders now are frenetically laying the groundwork for decades of new growth.INVALUABLE ROLE Now hop a plane to India. It is hard to tell this is the world's other emerging superpower. Jolting sights of extreme poverty abound even in the business capitals. A lack of subways and a dearth of expressways result in nightmarish traffic.But visit the office towers and research and development centers sprouting everywhere, and you see the miracle. Here, Indians are playing invaluable roles in the global innovation chain. Motorola, (MOT ) Hewlett-Packard (HPQ ), Cisco Systems (CSCO ), and other tech giants now rely on their Indian teams to devise software platforms and dazzling multimedia features for next-generation devices. Google (GOOG ) principal scientist Krishna Bharat is setting up a Bangalore lab complete with colorful furniture, exercise balls, and a Yamaha organ -- like Google's Mountain View (Calif.) headquarters -- to work on core search-engine technology. Indian engineering houses use 3-D computer simulations to tweak designs of everything from car engines and forklifts to aircraft wings for such clients as General Motors Corp. (GM ) and Boeing Co (BA ). Financial and market-research experts at outfits like B2K, OfficeTiger, and Iris crunch the latest disclosures of blue-chip companies for Wall Street. By 2010 such outsourcing work is expected to quadruple, to $56 billion a year.Even more exhilarating is the pace of innovation, as tech hubs like Bangalore spawn companies producing their own chip designs, software, and pharmaceuticals. "I find Bangalore to be one of the most exciting places in the world," says Dan Scheinman, Cisco Systems Inc.'s senior vice-president for corporate development. "It is Silicon Valley in 1999." Beyond Bangalore, Indian companies are showing a flair for producing high-quality goods and services at ridiculously low prices, from $50 air flights and crystal-clear 2 cents-a-minute cell-phone service to $2,200 cars and cardiac operations by top surgeons at a fraction of U.S. costs. Some analysts see the beginnings of hypercompetitive multinationals. "Once they learn to sell at Indian prices with world quality, they can compete anywhere," predicts University of Michigan management guru C.K. Prahalad. Adds A. T. Kearney high-tech consultant John Ciacchella: "I don't think U.S. companies realize India is building next-generation service companies."SIMULTANEOUS TAKEOFFS China and India. Rarely has the economic ascent of two still relatively poor nations been watched with such a mixture of awe, opportunism, and trepidation. The postwar era witnessed economic miracles in Japan and South Korea. But neither was populous enough to power worldwide growth or change the game in a complete spectrum of industries. China and India, by contrast, possess the weight and dynamism to transform the 21st-century global economy. The closest parallel to their emergence is the saga of 19th-century America, a huge continental economy with a young, driven workforce that grabbed the lead in agriculture, apparel, and the high technologies of the era, such as steam engines, the telegraph, and electric lights.But in a way, even America's rise falls short in comparison to what's happening now. Never has the world seen the simultaneous, sustained takeoffs of two nations that together account for one-third of the planet's population. For the past two decades, China has been growing at an astounding 9.5% a year, and India by 6%. Given their young populations, high savings, and the sheer amount of catching up they still have to do, most economists figure China and India possess the fundamentals to keep growing in the 7%-to-8% range for decades.Barring cataclysm, within three decades India should have vaulted over Germany as the world's third-biggest economy. By mid-century, China should have overtaken the U.S. as No. 1. By then, China and India could account for half of global output. Indeed, the troika of China, India, and the U.S. -- the only industrialized nation with significant population growth -- by most projections will dwarf every other economy.What makes the two giants especially powerful is that they complement each other's strengths. An accelerating trend is that technical and managerial skills in both China and India are becoming more important than cheap assembly labor. China will stay dominant in mass manufacturing, and is one of the few nations building multibillion-dollar electronics and heavy industrial plants. India is a rising power in software, design, services, and precision industry. This raises a provocative question: What if the two nations merge into one giant "Chindia?" Rival political and economic ambitions make that unlikely. But if their industries truly collaborate, "they would take over the world tech industry," predicts Forrester Research Inc (FORR ). analyst Navi Radjou.In a practical sense, the yin and yang of these immense workforces already are converging. True, annual trade between the two economies is just $14 billion. But thanks to the Internet and plunging telecom costs, multinationals are having their goods built in China with software and circuitry designed in India. As interactive design technology makes it easier to perfect virtual 3-D prototypes of everything from telecom routers to turbine generators on PCs, the distance between India's low-cost laboratories and China's low-cost factories shrinks by the month. Managers in the vanguard of globalization's new wave say the impact will be nothing less than explosive. "In a few years you'll see most companies unleashing this massive productivity surge," predicts Infosys Technologies (INFY ) CEO Nandan M. Nilekani.To globalization's skeptics, however, what's good for Corporate America translates into layoffs and lower pay for workers. Little wonder the West is suffering from future shock. Each new Chinese corporate takeover bid or revelation of a major Indian outsourcing deal elicits howls of protest by U.S. politicians. Washington think tanks are publishing thick white papers charting China's rapid progress in microelectronics, nanotech, and aerospace -- and painting dark scenarios about what it means for America's global leadership.Such alarmism is understandable. But the U.S. and other established powers will have to learn to make room for China and India. For in almost every dimension -- as consumer markets, investors, producers, and users of energy and commodities -- they will be 21st-century heavyweights. The growing economic might will carry into geopolitics as well. China and India are more assertively pressing their interests in the Middle East and Africa, and China's military will likely challenge U.S. dominance in the Pacific.One implication is that the balance of power in many technologies will likely move from West to East. An obvious reason is that China and India graduate a combined half a million engineers and scientists a year, vs. 60,000 in the U.S. In life sciences, projects the McKinsey Global Institute, the total number of young researchers in both nations will rise by 35%, to 1.6 million by 2008. The U.S. supply will drop by 11%, to 760,000. As most Western scientists will tell you, China and India already are making important contributions in medicine and materials that will help everyone. Because these nations can throw more brains at technical problems at a fraction of the cost, their contributions to innovation will grow.CONSUMERS RISING American business isn't just shifting research work because Indian and Chinese brains are young, cheap, and plentiful. In many cases, these engineers combine skills -- mastery of the latest software tools, a knack for complex mathematical algorithms, and fluency in new multimedia technologies -- that often surpass those of their American counterparts. As Cisco's Scheinman puts it: "We came to India for the costs, we stayed for the quality, and we're now investing for the innovation."A rising consumer class also will drive innovation. This year, China's passenger car market is expected to reach 3 million, No. 3 in the world. China already has the world's biggest base of cell-phone subscribers -- 350 million -- and that is expected to near 600 million by 2009. In two years, China should overtake the U.S. in homes connected to broadband. Less noticed is that India's consumer market is on the same explosive trajectory as China five years ago. Since 2000, the number of cellular subscribers has rocketed from 5.6 million to 55 million.What's more, Chinese and Indian consumers and companies now demand the latest technologies and features. Studies show the attitudes and aspirations of today's young Chinese and Indians resemble those of Americans a few decades ago. Surveys of thousands of young adults in both nations by marketing firm Grey Global Group found they are overwhelmingly optimistic about the future, believe success is in their hands, and view products as status symbols. In China, it's fashionable for the upwardly mobile to switch high-end cell phones every three months, says Josh Li, managing director of Grey's Beijing office, because an old model suggests "you are not getting ahead and updated." That means these nations will be huge proving grounds for next-generation multimedia gizmos, networking equipment, and wireless Web services, and will play a greater role in setting global standards. In consumer electronics, "we will see China in a few years going from being a follower to a leader in defining consumer-electronics trends," predicts Philips Semiconductors (PHG ) Executive Vice-President Leon Husson.For all the huge advantages they now enjoy, India and China cannot assume their role as new superpowers is assured. Today, China and India account for a mere 6% of global gross domestic product -- half that of Japan. They must keep growing rapidly just to provide jobs for tens of millions entering the workforce annually, and to keep many millions more from crashing back into poverty. Both nations must confront ecological degradation that's as obvious as the smog shrouding Shanghai and Bombay, and face real risks of social strife, war, and financial crisis.Increasingly, such problems will be the world's problems. Also, with wages rising fast, especially in many skilled areas, the cheap labor edge won't last forever. Both nations will go through many boom and harrowing bust cycles. And neither country is yet producing companies like Samsung, Nokia (NOK ), or Toyota (TM ) that put it all together, developing, making, and marketing world-beating products.Both countries, however, have survived earlier crises and possess immense untapped potential. In China, serious development only now is reaching the 800 million people in rural areas, where per capita annual income is just $354. In areas outside major cities, wages are as little as 45 cents an hour. "This is why China can have another 20 years of high-speed growth," contends Beijing University economist Hai Wen.Very impressive. But India's long-term potential may be even higher. Due to its one-child policy, China's working-age population will peak at 1 billion in 2015 and then shrink steadily. China then will have to provide for a graying population that has limited retirement benefits. India has nearly 500 million people under age 19 and higher fertility rates. By mid-century, India is expected to have 1.6 billion people -- and 220 million more workers than China. That could be a source for instability, but a great advantage for growth if the government can provide education and opportunity for India's masses. New Delhi just now is pushing to open its power, telecom, commercial real estate and retail sectors to foreigners. These industries could lure big capital inflows. "The pace of institutional changes and industries being liberalized is phenomenal," says Chief Economist William T. Wilson of consultancy Keystone Business Intelligence India. "I believe India has a better model than China, and over time will surpass it in growth."For its part, China has yet to prove it can go beyond forced-march industrialization. China directs massive investment into public works and factories, a wildly successful formula for rapid growth and job creation. But considering its massive manufacturing output, China is surprisingly weak in innovation. A full 57% of exports are from foreign-invested factories, and China underachieves in software, even with 35 software colleges and plans to graduate 200,000 software engineers a year. It's not for lack of genius. Microsoft Corp.'s (MSFT ) 180-engineer R&D lab in Beijing, for example, is one of the world's most productive sources of innovation in computer graphics and language simulation.While China's big state-run R&D institutes are close to the cutting edge at the theoretical level, they have yet to yield many commercial breakthroughs. "China has a lot of capability," says Microsoft Chief Technology Officer Craig Mundie. "But when you look under the covers, there is not a lot of collaboration with industry." The lack of intellectual property protection, and Beijing's heavy role in building up its own tech companies, make many other multinationals leery of doing serious R&D in China.China also is hugely wasteful. Its 9.5% growth rate in 2004 is less impressive when you consider that $850 billion -- half of GDP -- was plowed into already-glutted sectors like crude steel, vehicles, and office buildings. Its factories burn fuel five times less efficiently than in the West, and more than 20% of bank loans are bad. Two-thirds of China's 1,300 listed companies don't earn back their true cost of capital, estimates Beijing National Accounting Institute President Chen Xiaoyue. "We build the roads and industrial parks, but we sacrifice a lot," Chen says.India, by contrast, has had to develop with scarcity. It gets scant foreign investment, and has no room to waste fuel and materials like China. India also has Western legal institutions, a modern stock market, and private banks and corporations. As a result, it is far more capital-efficient. A BusinessWeek analysis of Standard & Poor's (MHP ) Compustat data on 346 top listed companies in both nations shows Indian corporations have achieved higher returns on equity and invested capital in the past five years in industries from autos to food products. The average Indian company posted a 16.7% return on capital in 2004, vs. 12.8% in China.SMALL-BATCH EXPERTISE The burning question is whether India can replicate China's mass manufacturing achievement. India's info-tech services industry, successful as it is, employs fewer than 1 million people. But 200 million Indians subsist on $1 a day or less. Export manufacturing is one of India's best hopes of generating millions of new jobs.India has sophisticated manufacturing knowhow. Tata Steel is among the world's most-efficient producers. The country boasts several top precision auto parts companies, such as Bharat Forge Ltd. The world's biggest supplier of chassis parts to major auto makers, it employs 1,200 engineers at its heavily automated Pune plant. India's forte is small-batch production of high-value goods requiring lots of engineering, such as power generators for Cummins Inc. (CMI ) and core components for General Electric Co. (GE ) CAT scanners.What holds India back are bureaucratic red tape, rigid labor laws, and its inability to build infrastructure fast enough. There are hopeful signs. Nokia Corp. is building a major campus to make cell phones in Madras, and South Korea's Pohang Iron & Steel Co. plans a $12 billion complex by 2016 in Orissa state. But it will take India many years to build the highways, power plants, and airports needed to rival China in mass manufacturing. With Beijing now pushing software and pledging intellectual property rights protection, some Indians fret design work will shift to China to be closer to factories. "The question is whether China can move from manufacturing to services faster than we can solve our infrastructure bottlenecks," says President Aravind Melligeri of Bangalore-based QuEST, whose 700 engineers design gas turbines, aircraft engines, and medical gear for GE and other clients.However the race plays out, Corporate America has little choice but to be engaged -- heavily. Motorola illustrates the value of leveraging both nations to lower costs and speed up development. Most of its hardware is assembled and partly designed in China. Its R&D center in Bangalore devises about 40% of the software in its new phones. The Bangalore team developed the multimedia software and user interfaces in the hot Razr cell phone. Now, they are working on phones that display and send live video, stream movies from the Web, or route incoming calls to voicemail when you are shifting gears in a car. "This is a very, very critical, state-of-the-art resource for Motorola," says Motorola South Asia President Amit Sharma.Companies like Motorola realize they must succeed in China and India at many levels simultaneously to stay competitive. That requires strategies for winning consumers, recruiting and managing R&D and professional talent, and skillfully sourcing from factories. "Over the next few years, you will see a dramatic gap opening between companies," predicts Jim Hemerling, who runs Boston Consulting Group's Shanghai practice. "It will be between those who get it and are fully mobilized in China and India, and those that are still pondering."In the coming decades, China and India will disrupt workforces, industries, companies, and markets in ways that we can barely begin to imagine. The upheaval will test America's commitment to the global trade system, and shake its confidence. In the 19th century, Europe went through a similar trauma when it realized a new giant -- the U.S. -- had arrived. "It is up to America to manage its own expectation of China and India as either a threat or opportunity," says corporate strategist Kenichi Ohmae. "America should be as open-minded as Europe was 100 years ago." How these Asian giants integrate with the rest of the world will largely shape the 21st-century global economy.
[Note also the reader comments at the end of this article]
From: http://www.businessweek.com/magazine/content/05_34/b3948401.htm

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