Business-mar-apr2011

INFOCUS | INDIA-CHINA | BUSINESS

India and China doing business together

One size doesn’t fit all

They have to play with rules set by others yet there is hope that the two rising nations are likely to play to reinforce each other.

S Jaishankar

T

he growth stories of India and China, impressive in recent years in their own right, have acquired an added sheen. Their paths of development have in many respects been unique. This means that they not only differ from the western experience but from each other as well. Certainly, they do share some similarity in their broad socio-economic goals and the

scale of change being attempted.

As developing economies, they also possess competitive skills in their particular areas of competence.

Where they do diverge is in their approach and processes. One is more statist, supply driven, collectivist and goal oriented. The other is more entrepreneurial, demand influenced, pluralistic and process focused. If scale is the key characteristic of China’s growth, frugality is the hallmark of

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India’s development. When scale meets frugality, this becomes the basis for a significant economic interaction.

So, what is actually happening between India and China? While attention has been focused on the issues in the relationship, it is on the opportunity side that gains have been steadily recorded. Out of nowhere, within a decade, India has emerged among the top 10 trade partners of China. A turnover of less than USD

3 billion in 2000 looks set to cross the USD 60 billion level. What accounts for this rapid growth? As I noted, China’s large scale production capabilities are an increasingly effective fit for India’s ‘frugal’ economic growth.

The intersection of price, delivery and quality is today truly a value proposition in a number of fields. As a result, for example, the category ‘electrical machinery’ accounts for 30% of Chinese exports and ‘machinery’ for 26%. In plain English, Indian companies are sourcing from China for power generation and telecom sectors, steel and non ferrous metallurgy, railways, mining and construction. In addition, they are also using Chinese components and costs to enhance their competitiveness in the domestic market for consumer goods. The intensely competitive nature of the Indian economy, with its heavy emphasis on pricing, has created a natural market for China.

Two developments are of interest to the short term growth of Chinese exports to India. One, there is a stirring interest in the construction industry in India to take advantage of Chinese capabilities, just as their counterparts in power generation have done so successfully. Secondly, Chinese banks and financial institutions have started showing much greater attention to India’s economy. Some early steps taken in project financing also appear to augur well for the future. At present, there are no Chinese banks in India and limited experience in dealing with Indian companies. That could change rapidly, particularly once an inter-Governmental understanding on banking is concluded.

The India-China fit is not only in terms of the costing. It works equally well where capabilities are concerned.

The areas where China has excess capacity are often those where India faces a deficit. As a result, India has emerged as an increasingly significant market for Chinese ‘project exports’. In India’s current budget, 46% of the total plan allocations of the government is devoted to addressing infrastructure.

During the current Five Year Plan (2007-2012), India’s target is to add almost 80,000 MW, approximately half

of it in private sector projects. In the roads and highways sector, the target is to push the pace of construction to 20 km per day. The steel industry, metro projects, railway modernization and ports/airports construction will all raise their own demands as well, as indeed will telecom where Chinese companies already have a strong presence. Aggregating them, it would be no exaggeration to predict that India’s infrastructure demands could well take its economic cooperation with China to a completely new level.

Of course, given the nature of international relations, one cannot rule out that these calculations could go astray. There are four broad categories

now to a great extent and Chinese companies are back to doing business.

Indian companies have their share of inhibitions, often reflected in anxiety about their widening exposure to China. Hopefully, as more business gets done, levels of trust too will grow.

A second category arises from lack of understanding of the market.

Chinese companies are still in the process of developing an approach for the Indian market. Applying a global template, they expect to send out large numbers of personnel including in the semi-skilled category without giving adequate thought to how they would be received. They are also still mastering the transmission of information

of risks that need to be effectively addressed if we are to ensure that this does not happen. The first category pertains to sentiment and emanates from a complicated history between the two countries. This sometimes makes even legitimate policy implementation by one party appear as a political move in the eyes of the other. Last year, Chinese companies initially perceived India’s efforts at enforcing its visa policies as a method of disadvantaging them. Once an effective employment visa system was put in place, these worries slowly dissipated. This year, concerns in India about security certification in the telecom industry were similarly interpreted. Addressing the certification issue would have been smarter than questioning it. In any case, that too has been resolved

without physical demonstration.

When these approaches are challenged because of their unsuitability, they do not always appreciate the need to change their way of working. In the initial stages, commerce between the two nations developed almost on autopilot with Chinese companies simply responding to Indian demands. It is only now, after a decade, that a debate is taking place on the optimal strategy for India. The experience of the more successful Chinese companies points to their emphasis on localization. As sourcing from China increases, so too will market demands for greater localization. If they wish to continue growing in India, China’s industry will obviously have to contemplate greater commitments and demonstrate more creativity.

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INFOCUS | INDIA-CHINA | BUSINESS

A third category of risks arise from political issues. It is not easy to find a neat and ready description for India’s ties with China. The relationship undeniably has its share of issues. It has been our endeavour to manage them the best we can while searching for fair and equitable solutions. Perhaps, the success rate has been higher for the first rather than the second aspect of our approach. But nevertheless, there is today a considerable degree of stability and predictability in the relationship which then allows it to exploit the opportunities more effectively. At times, specific problems appear to create downward spikes. But the fact remains that neither side has an interest in eroding hard-won gains. Both would

familiar with, Indian companies were late in entering China. Discovering then that the domestic market here was largely closed, they saw limited merit in off-shoring their production in China when they could as well supply from a home base where they were more secure. High domestic demand was a further disincentive to look elsewhere.

But today, many Indian companies are thinking global and can no longer afford to ignore the world’s second largest economy. They are prepared to take risks in a new environment. As a result, a growing number of Indian companies are setting up shop, arriving at the best approach through trial and error. They are, no doubt, walking down a path that their counterparts in the developed

is concerned, we need to persuade large and internationally aspiring Chinese companies of the value of working with India. They must get to appreciate that global corporations elsewhere are leveraging Indian IT for low cost design and target contenting, value chain optimization, capital efficiency and product development efficiency.

Indian IT industry has evolved from mere project execution to an endto-end solution provider. Domain expertise attained by working with global corporations can be leveraged by Chinese corporations. The industry’s track record of delivering mission critical solutions based on international quality standards can enhance overall efficiency and competence of Chinese

– in China and internationally. The first will probably be necessary for the second to happen. Today, the lack of sales by pharmaceutical companies does not encourage more production in China, particularly when the approval process itself is seen as loaded against them. India, however, could well be a significant partner in the context of demands generated by China’s new health reforms. A greater import of Indian pharmaceuticals would be an important sign of China’s intent in this field.

The Indian engineering industry is also exploring opportunities in China more aggressively. Not surprisingly, they encounter a combination of regulations, policies and vendor practices that

final analysis, China has an interest in not being perceived by them as utterly mercantilist. It is possible that this case for convergence might appear to some of you as underplaying the competitive nature of the relationship. Protagonists of the relationship have often pointed out that 99% of the shared history between India and China has been positive. Yet, since the 1% is of relatively recent vintage, it tends to assume an importance beyond its quantitative aspect. The reality is complex and need not necessarily be negative. Some convergence has manifested itself in the recent past though it was obscured by larger developments. Those familiar with colonial history may recall that the Indian independence movement

characterized once again by the two countries pushing an agenda that is at least partially shared and raising the prospect of cooperating to advance their individual interests. We saw this at Copenhagen on climate change.

Similarly, it was in evidence at the Doha Round on trade rules and food security. At the G-20, India and China work together on the reform of financial institutions. The BRIC provides a forum for discussing broader questions. Indeed, as both China and India become more global in their interests, their points of intersection are steadily growing. They encounter each other in more ways and in more places than ever before. They share similarities not just in size, culture and history but

be globally weakened if there is a general perception that they cannot manage their differences. Business does require confidence. It is, therefore, incumbent on both countries to ensure that their relations retain a positive trajectory if their economic cooperation is to prosper.

The fourth category emanates the current structure of interaction.

Continued and rapid expansion of trade and investment needs a broad perception that benefits of cooperation are equitably shared. Large and recurring trade deficits obviously do not contribute to that view, particularly when they reflect the market access position. If the Indian economy’s frugality is the secret of China’s success there, the formula for Indians making it in China is still evolving. For a variety of reasons that many of you would be

Indian companies have their share of inhibitions, often reflected in anxiety about their widening exposure to China. Hopefully, as more business gets done, levels of trust too will grow.

companies and help position them as global companies.

A second area of challenge is in pharmaceuticals. Indian domestic industry was worth US $ 11 billion in 2009 and is expected to rise to US$ 30 billion by 2020. India produces more than 20% of the world’s generics and with US$ 70 billion worth of drugs expected to go off patent in the next three years in the US alone, this is clearly an area that will see considerable growth. To a joint venture partner, Indian industry brings branding, domain expertise, knowledge support and international networking. Contract manufacturing in India is growing rapidly and the US FDA has approved more sites in India than in any country outside the US. There are considerable opportunities today for Indian and Chinese companies to work together

make this a daunting challenge. Apart from their own marketing and brand building efforts, it is possible that the growing Chinese involvement with infrastructure building in India will create relationships that can assist in that process. A fourth area of focus is agriculture and food products, where our negotiations are hastening more slowly than we would like. This is clearly going to be a test in perseverance.

Doing business together involves addressing each other’s concerns. That is not yet happening adequately. As a result, many segments of the Indian business community find it hard to approach China with an open mind.

They cannot understand why Indian IT, pharmaceuticals or engineering which are competitive globally somehow don’t seem to succeed in the Chinese domestic market. But, in the

actually enjoyed considerable support amongst the Chinese intelligentsia.

Equally, China’s travails in the 1930s and 40s evoked great sympathy among Indian nationalists. Even today, an Indian medical mission that was sent out in 1938 remains a popular symbol of that bonding. In the 1950s, the two countries found themselves pushing parallel agendas on the global scene.

They both had an interest in advancing decolonization, and as emerging major polities, in resisting Cold War bloc politics. It is, of course, a matter of history that by the beginning of 1960s, their relationship deteriorated significantly and it took decades for it to get back on track. The short point is that there is history, even recent history, of working together.

This fact is important because today’s international system is

in aspirations and agendas as well.

The challenge before them today is to elevate this convergence from a matter of necessity to a matter of choice.

Progress in that regard would depend on the sharpness of their realization that for all their achievements, they still operate in a world where the rules are not made by them. A rising China seeks to revise this in its favour just as a rising India will. What remains to be seen is whether their efforts would reinforce each other. 

world have trodden before, except that the Chinese competition has got much tougher in the meanwhile. There is no ‘one size fits all’ solution. In some sectors, we need to project our value as global partners. In others, we need to provide reassurance as a local presence.

There are four thrust areas in India’s market development strategy for China. Where information technology

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Dr S Jaishankar is India’s Ambassador to China in Beijing

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