"Good chance that India will create a Silicon Valley faster than China"

Professor and author Anil K Gupta on the successes and failures of Chinese companies

Whether it is on the economic front or the warfront — the India-China rivalry is one of the oldest in the history books, characterised by mutual suspicion, distrust and healthy competition. This competition is perhaps what makes this one of the most dynamic duos in the world; both economies present different economic development stories and are entering their most challenging phases of growth. Anil K Gupta, the Michael Dingman Chair in global strategy and entrepreneurship at the Smith School of Business, The University of Maryland at College Park, and the co-author of The Silk Road Rediscovered, speaks about what makes companies from both countries win or lose in each other’s markets. Gupta looks at instances across industries to conclude that companies can win only by becoming stronger globally.

Your book outlines in detail the success stories of Indian companies such as Tata Motors, Mahindra & Mahindra, TCS and NIIT in China. What did these companies do to get it right in China?

For any Indian company without a competitive advantage, failure is inevitable in China. China is not a clone of India or the US and one way of getting it right is learning on the ground. Take the example of M&M, which is currently the fifth largest tractor company by volume in China. It very sensibly took the joint venture route, which meant working with a local partner and taking a big bang approach later. None of the companies you have mentioned made a mega entry into China.

If you are already a big company buying an existing successful operation in China, then that is a different story. Maybe that approach could work for one of the Indian pharmaceutical companies someday. NIIT used the franchisee approach instead, which is what it does in India and elsewhere. That bombed initially in China for systemic reasons, after which it, too, decided to partner with someone who knew the market well. In this case, it was working with universities, which would license NIIT’s curriculum and instructional methodologies and use these in place of their own curriculum. This proved to be a very successful strategy for NIIT.

How brand-conscious is China as a market?

While companies such as Apple have run into issues relating to imitations and counterfeits here, as a country, China remains extremely brand-conscious. It is a society that has rapidly changed with increased wealth. Seven years ago, most people in China were buying a car for the first time; there was no knowledge about brands and people looked for cars at a very superficial level. Today, Shanghai and Beijing see people buying their third cars. Consumers have become sophisticated and brand-conscious and that has percolated into smaller towns, where people are now buying their first cars.

While there are Indian companies that have got it right in China, failures exist as well. What are the most common mistakes that companies make in this market?

Marriages succeed because of a single reason but fail thanks to multiple reasons. For instance, a leading auto parts company in India, that is spoken of in the book but not named, set up a 50:50 joint venture with a state-owned enterprise in China. Success in India, it assumed, would translate to success in China. But it made some crucial mistakes — it did not have its own CEO or management control. There was little due diligence with respect to governance and ownership. Things never worked out for that company in China.

In that context, what are the mistakes Chinese companies have made in India?

An example I can think of right away is that of Haier, at a time when a Chinese company like Huawei is doing well, while Lenovo is a story that is unfolding. It is strange that Haier, which dominates China’s appliance business the way Mahindra dominates the Indian tractor scene, is struggling in India. Haier is a very well-run organisation in China and entered India in 2004. LG, a big player here, entered India in 1997 and already has key advantages such as manufacturing facilities, a presence in rural India, a strong management and a product that has localised itself very well.

The big mistake Haier made in India was to position itself as a premium brand, since LG had occupied the mind of the middle-class Indian. They thought the affluent consumer was the one to target. The problem is that Haier’s name is not familiar to this audience, which is well-read, well-travelled and very aware. The Haier management has now decided to take the mass route, leaving the consumer confused. It has no local manufacturing and is up against serious competition from companies like LG and Godrej, to only name a few. If it decides to import from China, the cost structure becomes tricky. And if it decides to set up a manufacturing base in India, capacity may not be fully utilised.

Does that mean setting up a manufacturing base in India is not always a good idea?

Not at all. Look at what Hyundai did in the late 1990s. It was smart in setting up a plant here, at a time when it had a very small market share. It then became an export hub. Capacity was utilised well and it is in a position where it can wait for the local market to open up. India is a mission critical market for Hyundai and it has a clear, long-term approach. Haier has some serious financial muscle and it can crack the Indian market.

Most Chinese success stories appear to be in capital goods and there are very few instances in the consumer goods segment, barring Haier and Lenovo. Why?

China’s exports to the US stand at $400 billion, while it gets only $50 billion from India. Despite that, the only Chinese brand in the US is Lenovo. Of course, China also exports products sold by companies such as Apple, Samsung and Dell. Eventually, it will get there. One has to go back in time to understand this. In 1978, when China was a basket case, it was an agricultural economy. With economic reforms, the plan was to build a manufacturing base. The country is still to learn concepts such as marketing and R&D. Companies in the West shifted their manufacturing to China but the R&D remains elsewhere.

This is a systemic weakness in China and one it has to address. Even at home, Chinese brands sit in the mid to lower end of the market, while the higher end is dominated by brands from the West. If you look at the market for sports shoes, Nike and Adidas are right on top, while Li-Ning, a Chinese brand, caters to the segments below that. It has tried to take market share from Nike and Adidas but has had no success. It is the same story in the passenger car industry as well. It is a game that China still has to master.

How do you see this scenario playing out in the time to come?

In the US, the world’s largest market, there are no big Indian brands; even companies such as Tetley Tea and Jaguar are merely owned by Indian companies. Likewise, Volvo Cars is owned by Geely Holding, a Chinese company. In that sense, the answer will be in buying brands. Some Chinese companies such as Lenovo, Huawei, Haier and Xiaomi have mastered the art of creating brands.

China is still a regulated market for many industries. How much of a concern is that for companies looking to make investments there?

The Chinese equivalent of India’s Planning Commission has outlined four industries (including telecommunications) where there is a restriction on foreign investment. It’s quite similar to how India’s defence sector used to be. China has a 100% foreign direct investment (FDI) policy in sectors such as FMCG and retail, which is not the case in India.

To that extent, FDI in China is really a question of which sector you are in. Things are different today, however, with respect to the approach towards FDI. China is now telling companies that it doesn’t need their money. It is instead seeking help in areas such as branding capability and technology. If you look at the market for cars in China, the biggest names — such as GM and Volkswagen — are now being pursued for expanding capacities, as opposed to getting in new companies that want to start projects afresh. We do not have the luxury to act that way in India, given that we are still growing. India in 2014 is quite similar to what China was like in 1995.

The first highway in China was built in 1995-96, which is really when things took off in a big way. The lesson for India is that we need to reduce our cost of capital the way China has. That said, we cannot say ‘to hell with the environment’ like China, which is battling horrible levels of pollution. In 1990, the gap between the two countries was not that large. It is only after that that China has really surged. 

Do you see more Indian companies succeeding in China in the future?   

There are very few sectors where Indian industries are stronger than China, and among these are IT and generic pharmaceuticals. It is not easy to compete with China in other industries. However, the strength of Indian companies lies in organisational capability and leadership. Over the next five to six years, we can expect to see many Indian companies investing locally as well as overseas. We will also see money going into sectors such as IT, pharmaceuticals, auto components, petrochemicals and consumer goods.

Much has been said about India’s advantages when it comes to English language skills. How do you see that playing out over the next few years?

It is not easy for China to overcome that challenge. In India, when TCS wants to hire 20,000 people, it will have to look beyond the IITs and it does have that option. In China, barring those at the top universities, others are extremely weak when it comes to the English language and kids will not work with BPOs. These students do not live in an English-speaking environment and watch just a single English television channel. The media reports largely in Mandarin. English is compulsory in schools; only, no one in town speaks English. As a result, you will learn how to read in English but will never be able to speak it.

Do you see a time when many Chinese companies will do well in India?  

Yes, the probability of that taking place is quite high. Chinese companies will become India-savvy and there will be many like Lenovo in the market. Take the case of Fosun, which is a big Chinese corporation with assets under management of $50 billion. They have created an India investment division headed by a managing director who is Chinese but very India-savvy. His job is to look for investment opportunities in India.

The fact is that Chinese companies are extremely hungry for success in India. When it comes to brand capabilities, they will learn from the US, but for market growth, Chinese companies will have to learn from India, Latin America and Africa. Of this, India is clearly the hottest story. Let me cite the example of Lenovo. Historically a PC company, it has today diversified into tablets and smartphones, which have overtaken the PC business. It is the second-largest smartphone company in China.

The first market it picked after China was India; its global board meeting took place in India. Look at Xiaomi, which has been the biggest tech story of our time. It is giving Samsung and even Lenovo a run for their money. They are in India and its CEO, in an interview to the Financial Times, has said that India is the most important market for the company after China. 

How do you contrast the economic reforms story in India and China?

China was really a basket case economically. By the time Mao died in 1976, it was clear that he had been a disaster for China. Later, when Deng Xiaoping took over, he ushered in economic reforms. He was a pragmatic person and his approach was simple when it came to development — it does not matter if a cat is black or white as long as it catches mice. What he meant by that was that it did not matter whether you were a communist or capitalist as long as the focus was on economic development. He launched reforms in 1978. India, too, was a basket case in 1991 and economic reforms were the need of the hour then.

What can China learn from India?

I would say it would be concepts related to innovation and R&D. China spends seven times more than India on R&D, with very different results. India accomplishes half of what China does with respect to Indian-origin patents in the US and Europe. India is probably three to four times smarter than China. This is really a result of our culture and the system that we are brought up in.

That being said, India, too, needs to spend a lot more on R&D. Its R&D-to-GDP ratio is 0.9%, while the corresponding number for China is 1.6%; it is 2.5-3% for the US. In India, we spend little but get a lot more. There is a very good chance that India will create a Silicon Valley faster than China. In 1991, India was characterised by a serious deficit and high interest rates. There were some serious bottlenecks on the supply side and there was a need to boost demand. Contrast that with China in 1978, where the focus was on the supply chain rather than demand. Banks were state-owned and they controlled interest rates. What banks did was to lend to companies in the cement industry, for instance, leading to a rapid build-up in infrastructure.

This boost on the supply side with low rates of interest has resulted in inflation being under check. As a result, the real buying power was never affected in China. India, unlike China, has had high inflation rates. If China needs to move to the demand side, India will need to focus its attention on the supply side. I think that is a pretty big lesson for both the countries.