DR ANIL GUPTA
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
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.