China and India each are starting to exert powerful influence in virtually every dimension of global business. In the coming decades, they
will likely be the biggest forces reshaping the world economy. The following
articles lay out the many implications of the rise of these two
emerging economic superpowers.
A New World Economy, the opening article in BusinessWeek’s special issue, argues that China and India could have as much impact as
America’s ascent in the 19th century. In part, that is because the
economic takeoffs of both of these immensely populated nations are
occurring simultaneously. What’s more, they complement each other’s
strengths. The lead article summarises the impact China and India are exerting
as consumer markets, manufacturers, investors, sources of skilled labour,
drivers of global technology trends, and partners in corporate innovation.
It also analyses the fundamental differences between the two
nations’ economic models. China’s model is characterised by massive
mobilisation of capital and labour, foreign investment, strength in large-scale
manufacturing, and heavy state intervention. India’s model is
characterised by strength in engineering and services, private capital
markets, business models that focus on high-quality goods and services
at low costs, and small-batch precision manufacturing. The article also
touches on the debate over which economy is in a better position to
achieve high growth over the long term. Until now, China has attained
dramatically higher growth. But some experts believe India’s superior
capital efficiency, higher population growth, and younger workforce
mean growth is more sustainable and will enable India to surpass China
in economic growth in the coming decades.
To attain their enormous potential, however, China and India must overcome tremendous challenges. As their economic and political roles
grow bigger, these domestic problems also pose risks for the entire
world. “Crouching Tigers, Hidden Dragons” cites the key obstacles
as domestic political strife, environmental degradation, health crises,
regional wars, and the need to continuously create enough jobs
to employ tens of millions of new workers annually. Two leading
economists—Hai Wen of Beijing’s China Center for Economic
Research and William T. Wilson of Keystone Business Intelligence
India—offer their views on why both nations are headed for decades
more of high growth.
The balance of power will shift to the East as China and India evolve
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
advisor.
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-run-down
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, Hewlett-
Packard, Cisco Systems, and other tech giants now rely on their Indian
teams to devise software platforms and dazzling multimedia features for
next-generation devices. Google 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. and Boeing Co. 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. 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 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, versus
70,000 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 no
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 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, or Toyota 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 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
mainly 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 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,
versus 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 know-how. 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 automakers, 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. and core
components for General Electric Co. 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.
The economic momentum isn’t unstoppable. Plenty of forces can
still throw the Chinese and Indian economies far off course. The
economic fundamentals of both nations, with their enormous populations
of young workers and consumers, point to strong growth for
decades under almost every forecast. But it is instructive to remember
that financial crashes, coups, political strife, and plain bad management
have derailed many other miracle economies from Southeast Asia to
Latin America. And the same huge populations that can translate into
economic power for China and India also could prove to be a
double-edged sword if social, political, and environmental challenges
are not deftly managed. Indeed, growth doesn’t have to slow all that
much to pose serious social problems. Both China and India need
annual growth of at least 8% just to provide jobs for the tens of millions
joining the workforce each year. Fear of worker unrest is a big reason
Beijing has kept stoking its boom with massive lending and growth in
the money supply, despite economists’ warnings that it is setting the
stage for a nasty bust. If India grows only 6.5% a year, which seems a
respectable rate, its jobless rate would still jump, resulting in another
70 million unemployed by 2012, forecasts India’s Planning Commission.
Slower growth also could keep China and India from fulfilling the
widespread predictions that they will become superpowers. For example,
in forecasting that India will rank just behind the U.S. as the world’s
No. 3 economy by mid-century, with a gross domestic product of $30
trillion, Goldman, Sachs & Co. assumes 8.5% average annual growth.
But what if India grows at less than 6%, its average for the past 20 years?
By 2050, it would have only a $7.3 trillion economy—smaller than
Taiwan’s even then and just 2.6% of global GDP, notes Stephen Howes,
the World Bank’s former chief India economist. Worse, India’s masses
would remain extremely poor. “If you don’t grow fast enough, will you
have social forces that bring everything to a stalemate?” asks Infosys
Technologies Ltd. CEO Nandan M. Nilekani. “That’s the worry.”
To achieve the high growth predictions, China and India will have
to overcome formidable challenges. Some of the biggest:
Environment
Both countries have paid a steep ecological price for rapid industrial and
population growth, with millions of deaths attributed to air and water
pollution each year. Air quality in big cities like New Delhi,
Chongqing, and Bombay is among the world’s worst. And forests are
vanishing at alarming rates.
Enforcement of environmental laws in both nations is poor. Many
power plants and factories depend on coal and don’t invest in clean
technologies. China is one of the world’s most wasteful users of oil. If
it does not act quickly, the long-term costs of health problems linked to
the environment and the required cleanup will skyrocket. A growing
scarcity of water in both nations could slow industry within two
decades.
Political Backlash
China’s Communist Party harshly represses dissent. But virtually each
week brings new reports of big protests in cities and villages over corruption,
pollution, or worker abuse. They underscore China’s lack of
democratic institutions and the widening gap between rich and poor.
Serious challenges to Communist rule can still erupt, especially if the
economy stalls. Judging from history, the process could be tumultuous.
India has a democracy, but it also has extremely unbalanced growth
and rampant corruption. The surprise electoral defeat of the ruling
Bharatiya Janata Party by a more populist coalition led by Sonia
Gandhi’s Congress Party in 2004 served as a warning of mass discontent.
The new government also is reform-minded, but the pace of
economic liberalization has slowed. Further electoral setbacks for
reformers are possible if the poor don’t see the benefits of growth.
Tensions between Hindus and Muslims have eased after bloody riots in
2003 and 2004. But communal violence remains a threat.
Financial Crisis
Debt and currency crises have derailed many high-flying emerging
markets. India needed an International Monetary Fund bailout in 1991.
China withstood the 1997 Asian financial crisis mainly because it lacks
a convertible currency. Also, Beijing controls the banks. Bailouts and
the banks’ near-monopoly over China’s vast domestic savings have kept
them solvent despite mountains of bad loans to state firms.
Soon, however, Beijing will start letting foreign banks compete for
deposits and domestic loans. That could put more financial pressure on
state banks. China also is starting to loosen its currency controls a bit.
China has plenty of foreign reserves now. But if Beijing can’t whip its
banks into shape, there’s a danger that financial market liberalization
will go wrong, leading to a crash. India’s financial system is in stronger
shape, but its public finances remain a mess, with budget deficits at the
federal and state level reaching 10% of GDP.
Health
Perhaps China’s biggest worry over the long term is inadequate medical
care for its rapidly aging population. In 20 years, China will have
an estimated 300 million people age 60 or older. Yet only one in six
Chinese workers now has a pension plan, and just 5% have guaranteed
medical benefits. What’s more, many retirees will not be able to rely on
children for support. Beijing promises to build a broader safety net, but
adequate health care and pensions could consume a huge portion of
GDP and deplete China’s economic strength in the future.
Both nations also could face full-blown crises with AIDS, tuberculosis,
avian flu, and other infectious diseases, and their health systems have
been slow to mobilize. At least 5 million Indian adults are infected with
HIV, one of the world’s highest rates outside sub-Saharan Africa. India’s
National Intelligence Council predicts the number could pass 20 million
in 2010. The U.N. estimates the number of Chinese with HIV could hit
10 million in five years. Some 200,000 Chinese also die annually of TB.
And a serious flu epidemic could kill millions. “Many investors don’t
appreciate the economic damage a serious outbreak would cause in
our crowded cities,” says Subroto Bagchi, chief operating officer of
Bangalore info-tech services firm MindTree Consulting Ltd.
War
India and neighboring Pakistan have fought three times since their
independence in 1947—and have had many border skirmishes over
Kashmir. Now, both nations possess nuclear weapons, so a war could be
catastrophic. New Delhi and Islamabad have recently eased tensions and
begun peace talks. But the rise to power of a radical Islamic regime in Pakistan,
or election of a stridently Hindu nationalist government in India,
could easily reignite tensions. China’s biggest flash point remains Taiwan.
Beijing has cooled its fiery rhetoric lately, but it still vows to invade should
the island declare independence. Any war in the Taiwan Strait would likely
involve the U.S. and possibly Japan—China’s two biggest trade partners—
and paralyze shipping in and out of China’s southern ports. It also would
likely result in long-term Sino–U.S. tensions that would spill into trade.
It’s too much to expect for any developing nation to avoid military,
financial, environmental, and health crises for decades. But the test for
a great power is how well it manages a great crisis.
Reprinted by permission of McGraw-Hill Education India Pvt Ltd. Excerpted from Chindia: How China and India are Revolutionizing Global Business ed. Pete Engardio Rs. 395.00: Copyright © 2008; All Rights Reserved.
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