There is, of course, no de­fined for­mula for un­lock­ing the China mar­ket. Com­pa­nies who have been suc­cess­ful in meet­ing their goals are usu­ally those with an adap­tive strat­egy. They are nim­ble enough to re­spond to changes in the fluc­tu­at­ing en­vi­ron­ment and

The Smart Manager - - Front Page - it is an ab­so­lute pos­si­bil­ity that Chi­nese com­pa­nies may be­gin to shift man­u­fac­tur­ing to In­dia to ex­port back to China by 2020-2025.

on why com­pa­nies should follow ‘the world for China’ and ‘China for the world’ strat­egy.

It’s a re­cur­ring ob­ser­va­tion in your book that an In­dian company en­ter­ing China should have an ‘in China for the world’ strat­egy. Is not the need for such a global per­spec­tive rel­e­vant in all mar­kets?

It is a univer­sal point when­ever a company goes from its home mar­ket to another, but this be­comes par­tic­u­larly im­por­tant when you are go­ing into a big mar­ket, a bru­tally com­pet­i­tive one like that of China. If you follow an ‘in China for China’ strat­egy, then the chance of get­ting killed rapidly is quite high; that is why we say follow ‘the world for China’ and ‘China for the world’ strat­egy.

Let us take the case of Tata Con­sul­tancy Ser­vices (TCS). In­dia, of course, is a global power in IT ser­vices, but the do­mes­tic mar­ket in China for IT ser­vices is much big­ger than In­dia’s. TCS was big in In­dia, but they could

not just walk in. What they did was to cash in on their phe­nom­e­nal re­la­tion­ship with Gen­eral Elec­tric (GE), which had a sig­nif­i­cantly large China business. GE’s key IT ser­vice provider world­wide is TCS, and they would rather pre­fer to work with the same company in China too. TCS lever­aged GE to suc­ceed in China—that is ‘the world for China’ strat­egy.

TCS also in­cor­po­rated the ‘China for the world’ strat­egy. There is ob­vi­ously a size­able IT ser­vices mar­ket in Ja­pan and South Korea; but in IT ser­vices, lan­guage is an im­por­tant re­quire­ment. How many peo­ple in In­dia would be flu­ent in Ja­panese or Korean to pro­vide a ser­vice on the phone? If TCS wanted to suc­ceed in th­ese mar­kets, it was smarter to do that from north­east China than from Ben­galuru be­cause the re­gion has Ja­panese as well as Korean speak­ers.

Could you ex­plain the nu­ances of the ‘China for the world’ per­spec­tive?

As the ti­tle of the book sug­gests, In­dian and Chi­nese com­pa­nies are win­ning in each other’s mar­kets to suc­ceed and be­come stronger glob­ally. We are not say­ing that if you do not suc­ceed in China, you will not be able to com­pete glob­ally. Es­sen­tially, if you want to be a global gi­ant, you have to be in ev­ery ma­jor mar­ket. China is ob­vi­ously one of the big­gest mar­kets, but so are the US, Europe, and In­dia.

What an ex­ec­u­tive of a western multi­na­tional told us best ex­plains this premise; if you are not big in one of th­ese two mar­kets—China or In­dia—you could suc­ceed, but it will be like com­pet­ing glob­ally with one arm tied be­hind your back; if you are weak in both In­dia and China, you are not go­ing to be a big player ten years down the road.

Let us take the case of GE and China. GE’s business in China is huge, and TCS is their IT ser­vices provider, glob­ally. Let us as­sume that TCS was not present in China. Then GE would have al­lied with a Chi­nese firm, which would also have lan­guage ad­van­tages in Ja­panese and Korean. Even­tu­ally, this company would have made a cred­i­ble case to serve GE in South Korea and Ja­pan also, and later in South­east Asia. If a Chi­nese company has served GE in Ja­pan, South Korea, and South­east Asia, then there is a risk that they may one day be cho­sen for op­er­a­tions in Ger­many too. There­fore, if you are not present in China, you make your­self vul­ner­a­ble to Chi­nese com­peti­tors, es­pe­cially in B2B mar­kets.

What are your thoughts with re­gard to im­bal­ance in In­dia-China trade?

I think the In­dian per­spec­tive is mis­di­rected for sev­eral rea­sons. Firstly, 70% of our trade deficit is be­cause of our en­ergy needs; only 20% of it is on ac­count of the trade im­bal­ance with China. Se­condly, the trade deficit is not be­cause of im­port of toys, bat­ter­ies and so on, but that of ma­chin­ery. We all know that In­dia needs to be­come much stronger in in­fra­struc­ture and man­u­fac­tur­ing. For that, you need ma­chin­ery, par­tic­u­larly in­fra­struc­ture ma­chin­ery, which con­sti­tutes a big chunk of im­ports from China. It comes at a 30% lower price than from Euro­pean, Ja­panese or Amer­i­can sup­pli­ers and with much lower-cost fi­nanc­ing. Thus, what China is do­ing is to help In­dia ad­dress its in­fra­struc­ture weak­ness at a faster pace and lower cost. Es­sen­tially, China is help­ing to build its own com­peti­tor.

Thirdly, look at the trade deficit be­tween US and China, which is far big­ger than that be­tween In­dia and China. Yet, the US never talks about it in any strate­gic di­a­logue with China. What the US says is that whether trade is bal­anced or un­bal­anced de­pends on what the two have to ex­port and their rel­a­tive com­pet­i­tive ad­van­tages.

What they say is let it not be ar­ti­fi­cially de­ter­mined, but mar­ket de­ter­mined. Thus, what the US says to China is that your cur­rency is ar­ti­fi­cially un­der­val­ued vis-à-vis the US dol­lar and that you should let the mar­ket de­ter­mine its value. The US would still have a trade deficit, but they are

If you are weak in both In­dia and China, you are not go­ing to be a big player ten years down the road.

not say­ing it needs to be bal­anced. Cer­tainly, no coun­try can have bal­anced trade with ev­ery coun­try on a bi­lat­eral ba­sis.

For In­dia to get worked up about trade deficit is to get caught up in su­per­fi­cial­i­ties in­stead of think­ing about what is good for In­dia. It is bet­ter to not have a trade deficit, but no coun­try can have sym­met­ric trade with ev­ery part­ner.

You said in a Bloomberg ar­ti­cle, while re­fer­ring to the Cater­pil­lar, that com­pa­nies aim­ing to avoid mis­steps in China should start with an as­sump­tion that what is nor­mal in de­vel­oped coun­tries may very well not be nor­mal in China. Could you tell us more about this?

Cater­pil­lar, a US-based con­struc­tion ma­chin­ery and equip­ment company, had made an ac­qui­si­tion worth around 600 plus mil­lion dol­lars. They had sup­pos­edly done due dili­gence, but it turned out that the company’s real as­sets were only a frac­tion of what they claimed in the books. Un­til you come to know the other party and can trust them, you have to make sure that you do ex­tremely good due dili­gence. You’ve to ver­ify, and then ver­ify again and per­haps yet again.

China is a low-trust so­ci­ety. It is far from the case of the typ­i­cal de­vel­oped coun­try which tends to be a high-trust so­ci­ety with a high level of ed­u­ca­tion, mar­ket ori­en­ta­tion, so­phis­ti­cated in­sti­tu­tions, and court sys­tems. How­ever, although China is a low-trust so­ci­ety, that does not mean that you can­not do business there ef­fec­tively. You have to do your home­work. Also, just like in In­dia and else­where, once you come to know some­one well and de­velop a per­sonal re­la­tion­ship, you can start to trust them.

Which­ever way you en­ter China—whether it is through a joint ven­ture or through an in­di­rect route—you are land­ing in a highly price-con­scious mar­ket with low-cost com­peti­tors. How do you tackle this sce­nario?

China is a price-con­scious mar­ket for sure, but that is not the coun­try’s only re­al­ity. China’s per capita in­come is about three-and-a-half times that of In­dia. Peo­ple of­ten com­pare Shang­hai and Mumbai, but in some ways, Shang­hai is more de­vel­oped than even New York. Cer­tainly, Shang­hai’s in­fra­struc­ture is far su­pe­rior than New York’s.

China is no longer about just low price; that used to be true in 1990. To­day, there is de­mand for lux­ury goods where the cus­tomer is com­pletely price in­sen­si­tive. Also, China’s di­ver­sity is even greater than In­dia’s be­cause the top 10% of the Chi­nese pop­u­la­tion is much richer than the top 10% of In­dia’s pop­u­la­tion. Of course, China also does have very poor peo­ple.

It de­pends on which seg­ment a company is tar­get­ing. Many com­pa­nies like Proc­ter & Gam­ble and Volk­swa­gen have dif­fer­ent sets of prod­ucts and brands for the top of the mar­ket that is not price-sen­si­tive as well as for those at the low end.

How would you com­pare the ease of do­ing business in In­dia and China?

The chal­lenges of do­ing business in In­dia and China are very dif­fer­ent. Nei­ther of them rank high like Sin­ga­pore or the US on the World Bank’s ease of do­ing business in­dex, but China’s po­si­tion is much higher than In­dia’s.

Gen­er­ally, the bu­reau­cracy is un­likely to be a bar­rier in China; the bar­rier would be at the po­lit­i­cal level. Also, in China, there are no elected politi­cians, no sep­a­ra­tion be­tween bu­reau­cracy and min­is­ters. In In­dia, there is the bu­reau­cracy as well as the po­lit­i­cal sys­tem; politi­cians are elected and they may change, but the bu­reau­cracy con­tin­ues. You could get the green sig­nal from the min­istry, but then of­fi­cials could come in the way.

In China, de­ci­sions can be ar­bi­trary be­cause you can­not take the gov­ern­ment to court be­cause it is above the law. In In­dia, the laws are clear and there is greater trans­parency.

NIIT was per­sis­tent and went ahead de­spite them be­ing greeted with a big ‘no’ in Shang­hai, ini­tially. How dif­fi­cult is it to tackle a gov­ern­ment that is om­nipresent?

It is about deal­ing with the gov­ern­ment in a smart way. You can­not vi­o­late the laws. How­ever, if you en­gage in dis­cus­sions with the gov­ern­ment, you may be able to help bring about a change in the poli­cies. If you think that your

prod­ucts or ser­vices will help the gov­ern­ment ac­com­plish its agenda bet­ter, then even if the laws cur­rently do not per­mit your business, you should have a con­ver­sa­tion with the key peo­ple. Chances are that they may change the laws to per­mit you to come to China.

Which role would help In­dia gain the most trac­tion vis-a-vis China—sup­plier, cus­tomer, com­peti­tor or a part­ner?

It would vary a lot from one sec­tor to another, and the an­swer to­day would be dif­fer­ent from what it would be five to ten years from now. To­day, In­dia is likely to be much more China’s cus­tomer, es­pe­cially in the cap­i­tal goods sec­tor. The re­la­tion­ship is also likely to be one of China be­com­ing an in­vestor in In­dia.

Right now, In­dia is much weaker than China in man­u­fac­tur­ing. Thus, it is hard for In­dia to be a sup­plier to China in man­u­fac­tured goods. In man­u­fac­tured goods, the way to suc­ceed in China for In­dian com­pa­nies is ei­ther through an ac­qui­si­tion in China or through an ac­qui­si­tion in a third coun­try, which you can then lever­age to suc­ceed in China.

Mahin­dra Trac­tors went to China ini­tially with the idea that they will ex­port from In­dia to China. But they con­cluded that there was no way they could do this be­cause Chi­nese costs were much lower than those in In­dia. Hence they de­cided to man­u­fac­ture in China in or­der to sell in China. They first ac­quired a con­trol­ling stake in a smaller company, and then another con­trol­ling stake in a big­ger company. Through th­ese joint ven­tures, Mahin­dra be­came an in­vestor in China.

In­dia’s la­bor costs are lower than China’s. In­dia’s en­gi­neer­ing ca­pa­bil­i­ties are also very strong, and In­dia’s man­age­rial and lead­er­ship ca­pa­bil­i­ties are much stronger com­pared to those of Chi­nese cor­po­rates. There­fore, as In­dia be­gins re­dress­ing its in­fra­struc­ture weak­ness, it is an ab­so­lute pos­si­bil­ity that Chi­nese com­pa­nies may be­gin to shift man­u­fac­tur­ing to In­dia to ex­port back to China by 2020-2025.

What are the three must-do steps for an In­dian company to suc­ceed in China?

Firstly, you should keep in mind that you are not go­ing into vir­gin ter­ri­tory. China is an es­tab­lished mar­ket with bru­tal com­pe­ti­tion and the Chi­nese are fe­ro­cious com­peti­tors. Hence you must be clear about what com­pet­i­tive ad­van­tage you will carry with you into China.

Se­condly, you should go in with a global per­spec­tive— lever­age your global strengths to suc­ceed in China and lever­age what you do in China to be­come stronger glob­ally.

Thirdly, when you go into China, you will ob­vi­ously be bring­ing ideas, sys­tems, pro­cesses, and tech­nolo­gies from out­side. How­ever, since China is dif­fer­ent in many ways, you also have to be smart about re­main­ing open to do­ing things you have never done be­fore. Also, re­mem­ber that even global gi­ants such as Wal­mart, GE and IBM en­tered China by first iden­ti­fy­ing a beach­head seg­ment that had rel­a­tively low en­try bar­ri­ers. It was after they had so­lid­i­fied their po­si­tion in the beach­head seg­ment that they moved to other seg­ments.

You have ob­served in your book—busi­ness­men who cross the Hi­malayas with a learn­ing mind­set could end up not just wiser but be more suc­cess­ful. Could you elab­o­rate on this thought?

China is a bru­tally com­pet­i­tive mar­ket, more per­haps than In­dia in many in­dus­tries. You can never suc­ceed in China un­less you also go in with the idea that China is also a school. If you be­gin to suc­ceed in China through this type of a learn­ing ap­proach, you in­crease the odds of suc­ceed­ing ev­ery­where else in the world.

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