Ramakrishna Velamuri believes entrepreneurship is an expression of individual freedom and deserves as much protection as freedom of speech. According to him, any curb on entrepreneurship is a threat to a democratic society. He should know a thing or two about the subject, since he teaches Entrepreneurship and Negotiation to MBA students at the China Europe International Business School at Shanghai. Velamuri brings out the differences between the two most vibrant entrepreneurial ecosystems in the world — China and India. While access to cheap capital and a larger risk appetite has seen Chinese entrepreneurs make larger bets, the more risk-averse Indian entrepreneurs have been successful in creating brands and disruptive business models (in healthcare and education).
Tell us about the entrepreneurship ecosystem in China. How is it different from India in terms of quality of entrepreneurs and opportunity?
Entrepreneurship in both countries is thriving. You have role models in both countries — Narayana Murthy and Deep Kalra in India, for instance; Jack Ma of Alibaba and Robin Li of Baidu in China. None of them come from business families — they are first-generation entrepreneurs who didn’t have a lot of capital or family connections. But they’ve become remarkably successful. Their function as a role model has been very powerful. A huge number of people in China and India now say we, too, can do it.
Then, there are a number of industries today where you don’t need a lot of capital, at least to start off. You need capital to scale but not to start a business. So you have many educated people from middle-class families starting ventures. Thirdly, the ecosystem in both countries has improved tremendously in terms of funding. In both China and India, you have very active angel networks such as India Angels, Bangalore Angels, Chennai Angels, Shanghai Angels and Beijing Angels. Institutional capital, in the form of venture capital and private equity, is also available. So the ecosystem in both countries has evolved very rapidly.
The key differences are that even today, technology access in China is higher. In telecom, India has now almost caught up with China. But smartphone access in China is much higher. Nowadays, most internet applications are moving to the mobile platform. So, many of the ventures in China are focusing on mobile as a technology platform. Also, internet users in China are much higher — 400-500 million internet users against 90-100 million in India. That opens up a whole host of new possibilities.
China has been able to create national champions in the internet and technology businesses. They have made life difficult for Google, which has made it possible for Baidu to become the leader — its market share in China would be 80-90%. Alibaba, which is something like eBay but much bigger, has benefited because the government favours local players, and MNCs have made mistakes.
There is a kind of technology ecosystem within China that Chinese internet start-ups naturally connect to; partly because of language, partly because it is so specific to China. In fact, there is no foreign internet player who has been successful in China. There are a number of small nuances that Chinese companies are able to leverage better — knowledge about local habits, how and what they buy — to tailor to local taste and preferences. A typical Chinese website is very crowded… the text is jammed together. On the other hand, Western websites are much neater and simpler.
All along, China has favoured the public sector over the private sector. When it comes to technology, you need a greater emphasis on private sector, quite unlike what China is used to...
The technology, media and telecommunications industry is one area where the private sector is free to flourish in China. All the companies I mentioned, such as Alibaba and Tencent, are private companies. Let’s assume some foreign company wants to buy them out. That would be very difficult to do because foreign companies would find their value too high. But even if they could muster enough capital, the government will not allow [the sale] because it may consider that company a strategic asset. Behind the scenes, they may be watching these companies and how they behave. The leaders of these companies make sure they are on the right side of the government.
You said that MNCs made mistakes and there are cultural differences even in the internet space. Can you expand on that?
If you take the experience of eBay, in the first three of four years, they had several transitions in the top management. So there was a flux inside the organisation. It is an organisational issue. [MNCs] don’t identify and have the right people. If you take the case of Tatas, they have been very successful in China. Tata is not a technology company.
But James Zhan, who heads Tata Sons in China, has been with the company for several years now. You need that longevity in the top management position and then you need locals. The mistake MNCs made was that initially, they appointed Western expats. Then they said bringing in Western expats is not working as they don’t understand the local language and customs, so let’s bring in people from Taiwan or Hong Kong Chinese. There is an uneasy relationship between the local Chinese and the Taiwanese — sometimes it works well, at other times it doesn’t.
For some reason, MNCs hesitate to hire local Chinese to run their business in China. Many of my Chinese students joined MNCs while in undergrad and they have left in frustration. One student who comes to mind worked for an MNC in the Fortune 50; he was hired for the strategy role and he kept identifying opportunities for them. The Chinese environment is dynamic, so there are a lot of opportunities that come up.
But the decision making process where you have to keep referring to your expat seniors in China, put it as a report and wait for it to come back is very slow for the mindset of the Chinese people. This student left in frustration saying it is a good company, they have fantastic products and pay a decent salary but they put me in a position where they do not respond to what I do. And this is something that’s not peculiar to technology or internet companies alone.
Is there anything that is particularly striking to the Chinese entrepreneur as opposed to the Indian entrepreneur?
When China opened up its economy in the 1980s and 1990s, Chinese entrepreneurs were very daring. They took risks and initiative because it was all open space. They have big ambitions, they dream big — they all want to create the next billion-dollar company. They are obsessed with listing, preferably outside China. Indian entrepreneurs generally tend to be more measured. They measure the risk-return relationship very well. Capital in India is priced at the market rate. Interest rates are generally market driven and they pay significantly higher interest rates. So they need to be very careful about how they raise capital.
Take the case of the luxury hotel industry in China, where there is huge over-capacity. The occupancy rate in China is about 60%. At 60%, you are not making money; with 70-80%, you are making a lot of money. But why is there so much over-capacity? Because capital is very cheap for some companies and they sometimes invest without doing the proper diligence. Then they find themselves stuck with an asset that is not returning the capital it should. That tendency remains.
But now competition is heating up. There is a paper by a Chinese scholar that says between 1992 and 2004, the number of private companies multiplied by 37 times. We did an analysis of the decorative paints industry. There are 9,000 competitors in the decorative paints industry in China. In India, Asian Paints has the majority market share of 65%. In China, the largest company has just 1.5% marketshare. And mind you, we only looked at companies with a turnover of more than $0.5 million, which is not small by any stretch of imagination.
In the pharmaceutical industry, too, you have more than 10,000 companies and here again the largest player has a 1.5% marketshare. But the tendency to leap — to invest — before you look is changing now.
You wrote a book on how Indian companies are creating areas of excellence. It happened in healthcare but that is a one-off. What needs to happen for this to become mainstream?
I think the great thing about people like Dr Gullapalli Rao [of LV Prasad Eye Institute] and Dr G Venkataswamy [Aravind Eye Hospital] is that they took ideas from outside their industry. Dr Venkataswamy used to talk about the McDonald’s model — can we make cataract operations like a McDonald’s franchise, wherein it is so standardised that I can deliver it the same way anywhere across the world? In his lifetime, he did not achieve his goal, but took his organisation to a significantly different level. What I noticed with Aravind and LV Prasad is that they may not have scaled themselves across the whole country. But what they have done is, through their book practices and through training people, they have diffused these practices.
Organisations such as Aravind and LV Prasad show the world that these operations can be performed at this cost. These two organisations are socially intertwined. They don’t have a for-profit motto. But then you create the space for for-profit organisations such as Vasan Eye Care to come in and say I can produce at that cost and I need to make a margin. They probably charge a slightly higher price than Aravind. If somebody like Aravind had not existed, somebody like Vasan would not have had the path clear before him. So many of the procedures, techniques and even people have been trained and made possible by Aravind.
One feature of Aravind is its free pricing. If you are a full paying customer, the option is left to you what you want to pay; so you end up paying more, not less. Has this free pricing model worked in any other industry, where you let the customer decide what the pricing ought to be?
I am not sure. The cross-subsidisation model has worked for sure in many other industries. But I thought Aravind has a standard price: if the paying customer wants to pay more, he can do so. LV Prasad also gets support from some of its establishments and donor institutions. At LV Prasad, they recover 80% of their operating expenditure from operating revenue. I asked Dr Rao what would it take to recover the remaining 10-20%. He replied, “It is very easy for me to do. I just need to reduce the number of patients I treat.” He added, “I don’t want to do that. I have never had a problem in getting funding support. I will never consider reducing the number of patients.” LV Prasad treats 50% of its patients for free.
How popular has crowdfunding become in China?
As far as I have seen, it is not very popular in China. The Kickstarter model has not really taken off. If it does exist in projects, I have not encountered it. In both India and China, there is a lot of capital available. The entrepreneurs need to approach the right investor at the right time. In China and India, VCs have invested in very traditional businesses such as restaurant chains. Goli Vada Pav, for instance, is funded by Venture East.
In China, there are a number of restaurant chain models, retail and agricultural business products that have been funded. People ask why is it that these traditional businesses have been funded in India and China, whereas in the US you will find IT or life sciences in a VC portfolio. The reason simply is that the VC is looking for an upper value chain business. In a high-growth economy, like when India was at 8-9%, even a restaurant business is able to give you 30-40% IRRs [internal rate of return]. So why would you want to go and invest in a biotechnology business? It doesn’t make sense. If you can get that return in a pharma chain or a restaurant business, go with that, as it is less risky when compared to a business in life sciences.
One thing people say about China is that businesses there are not original; they are copycats. They only score because their speed to market is very high. Of course, the same thing could be said of Samsung a couple of years ago. In the way Chinese organisations are set up now, do you see them as being able to take a similar leap any time in the future?
Last year, we went to a city that is considered to be the hotbed of entrepreneurship in China, called Wenzhou. A number of companies there had started patenting their innovations. They were complaining to us that other Chinese companies were copying them with impunity. Protection of intellectual property rights will come to a country when local companies start demanding it. When local companies see the benefit, that is when innovation will happen. There are some instances of Chinese companies being very innovative. For example, Haier’s small refrigerators. In the US, they use these for wines and in student dorms they created a refrigerator like that because people were using them as desks by putting a plank of wood on top.
Then there is Hanting, a chain of budget hotels. In China, there are three or four chains each with close to 1,000 outlets. Hanting is priced at about 200 RMB or less, which is $30 a night. It is a very clean room with an attached bathroom but barely any amenities. Soon after they came in, when wi-fi was not so common, they found people were using internet from the bed. So they provided an internet connection right next to the bed.
They observed the behaviour of their customers and changed the design accordingly. The other thing that the entrepreneur did — bear in mind that he was from the information technology industry originally — was that he introduced modern IT technology to a budget hotel chain. So all their outlets are connected to a LAN [Local Area Network] and they have a very sophisticated online booking system. This chain is listed on NYSE or Nasdaq. There is another chain called 7 Days listed on Nasdaq.
Then there is an internet company that is going to revolutionise how people buy furniture. It has an online service where an application lets you to key in the dimensions of the room you want to furnish and visualises what that room will look like with different models of sofas.
Despite this, there are not many China MNCs that compete globally. Why is that?
Huawei and Lenovo are companies that have revenues of $30 billion each. Both are private companies. Coming to the state-owned ones, there are some big ones here. China Natural Oil Offshore Corporation (CNOOC) has made a huge acquisition in Canada. Coming to China Telecom, I don’t think it has been very active outside China in the recent past, but the number of Chinese state-owned enterprises that have made acquisitions in places such as Africa and Latin America is huge. One of the big differences between Chinese and Indian companies is the quality and availability of management bandwidth. Chinese companies have far greater and better management bandwidth.
How have Indian companies in China been faring?
Among Indian companies, Tata has been very successful.
That is only because Jaguar is doing better. NatSteel, of course, is a commodities business.
TCS has 2,500 people. I think it has been successful because it has had a very good product and been very professional in its approach to the market. It has hired good local managers and has had a very good management development policy. It hires some of the best graduates and rotates them through the organisation. The Tatas have a very long-term approach to the market. They are very good at branding. They invest in brands, people and processes.
Is there any Indian company that has come to China and got it wrong?
Some people have disinvested. Aurobindo Pharma was a failure. At Larsen & Toubro (L&T), AM Naik is not very pro-China. He is quite bearish on China. The China CEO doesn’t fully agree with Mr Naik. They do see possibilities in China. L&T has a significant business existing in China. We met him a couple of years back and said that even if whatever you are saying about China is true, it still makes sense to hang in there and keep trying our luck. He said we will have to agree to disagree in this case.
Infosys has grown to 3,000 people in China. It was earlier very bullish on China. But now, somehow, it is much more sober on its prospects in China. I don’t know if that has to do with Narayana Murthy taking over and shifting the focus to the US. Ranbaxy (now owned by Sunpharma) has a JV in China. It is doing reasonably well. The Birlas have a number of businesses, but none of these are doing as well as the Tatas.
But since 2006 or so, Indian companies have actively pursued acquisitions abroad, going to Africa and Europe. But China has not been on the radar. When it comes to acquisitions and setting up greenfield projects, is the environment in China hostile?
There is that perception. Many companies, as you know, buy from the Chinese. But, for some reason, they believe that it is difficult to sell to China.
How about using it as a sourcing base? For instance, tyres. India is not a great market for tyre companies. Why do many companies sell to Africa and other regions, but not to China?
At one point, L&T was in the tyre manufacturing machinery business. In the meantime, what happened is that the Renminbi has appreciated a lot. In 2007, $1 was 7.71 RMB. Today, $1 is 6.1 RMB. That is an almost 15-20% appreciation of the Chinese currency. At the same time, other emerging market currencies have gone down. If you look at the construction industry, they are buying from China due to the lack of choice, because nobody else has the capacity to supply at the level that the Chinese are supplying goods. Then there’s Apollo Tyres, which made an acquisition of Cooper Tires in the US. That company had a JV in China but the JV partner was not too happy with the acquisition. The union went on strike and finally that whole deal fell through. One of the things that puts Indian companies off China is that, the relationship with the government is also very important. That, to a large extent, determines your success in China.