Anil K. Gupta Haiyan Wang

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Four Stories Rolled Into One

Think China and India, Not China or India

Megamarkets and Microcustomers

Leveraging China and India for Global Advantage

Competing with Dragons and Tigers on the Global Stage

The War for Talent: Dealing with Scarcity in the Midst of Plenty

Global Enterprise 2020




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Table of Contents


Book: Q&A
What is the most common mistake that multinationals are making with their China and India strategies?

The most common mistake is to view China and India from the narrow lens of just off-shoring and cost reduction. Instead, we argue that both China and India represent four game-changing realities: mega-markets for almost every product or service, platforms for global cost reduction, platforms to boost a company’s intellectual capital, and springboards for the emergence of a new breed of extremely capable and highly ambitious competitors. For a multinational, developing robust China and India strategies requires addressing all four of these realities head-on rather than just one or two of them.

What kinds of incorrect assumptions are keeping most companies from succeeding in these countries?

There are three that are the most common. The first fallacy is to look at the rise of China and India as “additive” rather than as “transformational” for the world economy. Compare China and India with Japan. With a 120 million population i.e., 40 percent of the U.S., Japan’s economy had to peak at about 40 percent of U.S. GDP. The rise of Japan was an important development but it did not alter the underlying structure of the world economy. In contrast, over the next 20-30 years, both China and India are almost certain to catch up with and start becoming larger than the U.S. economy. Even then, they are likely to have a few more decades of relatively high growth ahead of them. These developments will transform the structure of the global economy. The second fallacy is to assume that, if you’ve seen the major cities (Shanghai, Beijing, Mumbai, or Bangalore), you understand either China or India. In both China and India, about 90 percent of the population lives outside of the 25 largest cities. In short, these two are more like vast and diverse continents than typical countries. There is no such thing as an average Chinese consumer or an average Indian consumer. The third fallacy is to view China and India from a legacy mindset. The past experience of most multinationals has taught them how to operate successfully in markets that are either “rich-and-rich” (i.e., rich in terms of overall GDP as well as rich in terms of per capita income) or “poor-and-poor” (i.e., poor in terms of both overall GDP as well as per capita income). In contrast, China and India present a novel reality. They are both “rich-and-poor” at the same time. The overall market size is very large. Yet, per capita income in China is only about one-twentieth and in India about one-fortieth of that in the United States. Thus, multinationals’ existing business models do little more scratch the surface of the market opportunities in China and India. In most cases, these markets require inventing new business models from the ground up.

What are some examples of companies that have suffered from getting their China and/or India strategy wrong?

Look at eBay and AT&T Wireless. eBay entered China via the acquisition route in 2002-2003. It started with a bang – a dominating 85 percent share of China’s C2C auction market. However, over-centralization of decision-making, poor market responsiveness, and fierce competition from smart domestic players such as Taobao, a unit of the Alibaba Group, have wiped out eBay China almost completely. In December 2006, eBay shut down its local website and became a minority owner in a new operation run by TOM Online, a China-based portal and wireless services provider. In 1995, AT&T partnered with India’s Tata and Birla groups to set up Idea Cellular, a mobile operator, each party acquiring a one-third stake. In Oct 2004, AT&T Wireless merged with Cingular. In July 2005, Cingular sold its stake in Idea to the other two partners for about $250 million. Barely three years later, India had emerged as the second largest mobile market in the world and, if Cingular had not sold its stake, it would be worth about $3 billion in 2008. Cingular, now renamed AT&T Wireless, is once again looking for a (much more expensive) way to get back into India.

What's an example of a company that got it right?

IBM is an excellent example of a company that knows how to leverage the multi-faceted market and resource opportunities offered by both China and India and in the process take on the dragons and tigers at their own game. It is at the leading edge in leveraging the unique strengths of each country for global advantage. IBM uses China as the primary source for the manufacture and procurement of hardware and its chief procurement officer now sits in Shenzhen, China. IBM also uses its operations in northeastern China to provide Japanese-language services to customers in Japan. In turn, IBM has transformed its Indian operations into the largest base for the delivery of IT services to customers worldwide. About 25 percent of IBM’s worldwide staff is now based at the company’s global delivery centers in India. IBM has also established major research laboratories in both China and India. In the IT services business, IBM has built a base in India that is nearly as large as any of the top three Indian giants – Tata Consulting, Infosys, and Wipro – and thus has taken the battle to its competitors’ home turf. In addition, by also leveraging its global presence and global capabilities, it has now garnered a bigger market share of the domestic Indian market than any of the Indian players. IBM has also become the partner of choice in business model innovation for India’s leading mobile operators such as Airtel and Idea Cellular. In more ways than one, IBM today is just as much an Indian and a Chinese company as it is an American company.

What sets your book apart from other books on China and India?

On the subject of China and/or India, the market already has two types of books. One set consists of “country” books – some excellent examples being Ted Fishman and James McGregor on China, Edward Luce and Gurcharan Das on India, and more recently Tarun Khanna on both China and India. The primary focus of these books is on the history, the culture, the politics, and the evolution of public policy in these two countries. Except in passing, these books do not focus on how the rise of China and India must reshape corporate strategies. The other set consists of a large number of nitty-gritty how-to books that focus on the tactics of “Doing Business in China” or “Doing Business in India.” While potentially helpful to the first time business traveler to China or India, these books are not written for the seasoned senior executive. Getting China and India Right is the first “strategy” book to focus on both China and India and to bring an integrated perspective towards these two economies. Its intellectual roots lie in the authors’ (especially Anil’s) two-decades-long thought leadership on the subject of global strategy. Equally importantly, between the two of us, we bring in-depth insider perspectives to the subject matter. One of us (Anil) was born and brought up in India, earned his first two degrees there and worked in India for a major multinational before moving to the U.S. The other (Haiyan) was born and brought up in China, earned her first two degrees there and worked in China for a major Chinese company before moving to the U.S. Each of us has also studied and done consulting projects for some of the world’s largest multinationals for over ten years. In short, Getting China and India Right is the only book which integrates its authors’ insider perspectives on China and India with cutting edge ideas on global strategy. Aimed squarely at the CEO and his or her senior colleagues, our book argues that just because a company is present in China and/or India does not necessarily mean that its leaders understand these countries well or that they have robust strategies for them.

What's changing about China and India that most multinationals aren't preparing for?

Most multinationals seriously underestimate the growing capabilities and the rising ambitions of the emerging global champions from China and India. They also have not accounted for the fact that the Chinese dragons and Indian tigers are globalizing through acquisitions rather than organically. Inorganic expansion can transform the structures of industries a lot faster than organic growth. Look at Arcelor Mittal which has taken only about fifteen years to become the steel industry’s dominant player by far. In contrast, Toyota which followed the organic path took over thirty five years to become the world’s number one car company. Fortune magazine’s 2008 list of the 500 largest global companies includes 36 companies from China and India, up from a tiny handful in 2000. It’s entirely possible that this number could grow to over 150 by 2020. Many of today’s multinationals are quite unprepared for such a scenario.

Who are China and India's emerging global champions and are they confined to just a few industries?

It is impossible for any large economy (look at the U.S., the EU, and Japan) to be a niche economy. This is true also of China and India. Thus, as these two economies continue to become bigger, we can expect to see new giants emerge in almost every industry. The evidence for this is already in. Across industries, examples of rapidly growing global companies from China include Lenovo (PCs), Alibaba (electronic markets), Chery (automobiles), Haier (home appliances), Huawei (telecom equipment), and TTI (power tools). Examples from India include Tata Steel (metals), Tata Motors (automobiles), Tata Consulting, Infosys, and Wipro (IT services), Suzlon Energy (wind turbines), Moser Baer (consumer electronics), Bharat Forge (auto components), Dr. Reddy’s (pharma), and Mahindra & Mahindra (agricultural equipment).

Where does a company’s China/India strategy fit into its global strategy?

Notwithstanding their growing heft, one should not forget that China and India are not the only major economies in the world. This statement will be true even fifty years from now. Thus, a company’s China/India strategy should be looked at as one part, albeit an increasingly important part, of its global strategy. The core elements of any company’s global strategy are: (i) globalization of market presence, (ii) globalization of resources and capabilities, and (iii) how the company leverages its resources and capabilities to broaden and deepen its market presence and to win competitive battles effectively and profitably. The growing importance of China and India as markets, as platforms for cost efficiency and innovation, and as the source of new competitors means that, with each passing day, a company’s China/India strategy is becoming more central to its global strategy. We are willing to bet that any Fortune 1000 company that does not develop and pursue a robust China/India strategy over the next five years will run a serious risk of being annihilated or acquired by 2020.

How should companies be structuring themselves differently to succeed?

Over the next ten years, historical notions of corporate headquarters will have to undergo a radical transformation. Today, the U.S. accounts for only 25 percent of the world’s GDP, only 10 percent of growth in world GDP, and only 5 percent of the world’s population. With each passing year, all three numbers are going down. Thus, for any company that wants to emerge or stay as one of its industry’s global leaders ten years from now, it is imperative that the center of gravity of its marketing and sales efforts, its manufacturing operations, and even its R&D activities must shift sharply from the U.S. to other countries.

Will the current economic problems in the U.S. market be good or bad news for China and India? How will they be impacted?

In an increasingly integrated global economy, ups and downs in the U.S. economy affect every other economy, including China and India. More specifically, the impact of the current problems on China and India will be partly negative and partly positive. First, the negatives. The current turmoil in the U.S. economy is hurting exports of manufactured goods from China and IT services from India. As a result, during the next two years, China’s GDP is expected to grow at about 8.5-9 percent annually, down from about 11-11.5 percent over the last four years. Similarly, India’s GDP is expected to grow at about 7.5 percent annually, down from about 9-9.5 percent over the last four years. While these will still be very robust growth rates, they will be lower than in the recent past. On the positive side, any weakness in the U.S. economy implies a slowdown in the demand for oil and other commodities. Since both China and India are net importers of oil and most other raw materials, a weaker U.S. economy means lower inflation, a welcome relief for the common man on the street. Also, as the weakness in the U.S. economy depresses the stock prices of U.S. companies, it is likely to accelerate the pace of U.S.-based acquisitions by companies from India and China. Aggregating all of these trends, we predict that the current economic turmoil will very likely accelerate the ongoing shift in the world’s economic center of gravity from the U.S. and Europe to Asia.

How will the economic ties between China and India evolve over the coming decade and what does that mean for the rest of us?

The best way to look at the rapidly growing economic ties between China and India is from the lens of co-opetition. The two countries compete with each other fiercely in two particular arenas: energy and other commodities and prestige. In recent years, both China and India have been bidding against each other for access to energy and other raw materials in Africa and Latin America. On the prestige front, the feather in China’s cap is that it has built a much better infrastructure and a much stronger economy. In contrast, the feather in India’s cap is that it is emerging as the global leader at the top end i.e., information and knowledge intensive services. Also, India’s large companies (mostly from the private sector) are stronger than China’s (mostly state-owned) and thus ahead in the global M&A game. Notwithstanding this competition, the more important reality is one of rapidly growing economic ties between the two countries. Over the last five years, India-China trade has grown at an annual rate of over 50 percent, more than twice as fast relative to the growth in either China or India’s trade with the rest of the world. China today is India’s #1 trading partner, ahead of the U.S. In reverse, India already is one of China’s top 10 trading partners. Even if we assume that, over the next 8-10 years, China-India trade will grow at a much more modest 25-30 percent annual rate, bilateral trade between the two countries in 2015 will be almost as large as that between China and the U.S. until recently. Aside from trade, both China and India are also becoming mission critical for companies headquartered there. Having acquired Jaguar Land Rover, Tata Motors now finds that China has become one of its major sources of revenues and future growth. Infosys is building a major software and services hub in China. In reverse, Chinese companies such as Lenovo and Huawei have publicly declared that achieving market leader status in India is fundamental to their global strategies. Importantly too, Lenovo has established its global marketing hub in Bangalore. Similarly, Huawei has set up its largest R&D center outside China in Bangalore. A direct implication of the growing economic integration between China and India is that, for most Fortune 1000 companies, the time for debating whether China or India is over and that the right question to ask is how best to pursue both China and India rather than which one.

How might a multinational benefit from pursuing a China+India strategy?

There are four important ways in which a multinational company can profit from pursuing a China+India strategy. It can capture the scale benefits from going after two (rather than just one) of the largest and fastest growing markets in the world. It can leverage the complementary strengths of both countries; China is far ahead of India in manufacturing, whereas India is far ahead of China in information and knowledge based services. It can transfer learnings from one market to the other thereby accelerating the pace of success in both. And, it can use presence in both countries to reduce the level of overall risk associated with operating in just one of them

Why do you think China and India will be two of the greatest sources of innovation in the coming years?

History tells us that necessity has always been the mother of innovation. Look at the origins of just-in-time manufacturing. Given Japan’s extremely high population density, auto companies there simply could not afford to set up American-style plants where 75 percent of the factory space would be devoted to storing parts and having vehicles shuttle these parts from one place to another. Companies such as Toyota figured out that the only way you could have a competitive auto industry in Japan is to eliminate the need for all this wasted space without hurting production efficiency. The net result was innovations such as just-in-time manufacturing and total quality management. Look now at some of the major challenges that China and India face: shortage of oil and many other commodities, rapid degradation of the environment and, despite the fact of large economies, very low per capita buying power. These challenges are also opportunities for companies to create products, services, processes, and business models that are frugal on three counts: frugal use of raw materials, frugal impact on the environment, and extremely low cost. It is not by accident that one of the world’s largest manufacturers of photovoltaic equipment (Suntech) is based in China. Or that a ten–year old Indian startup (Suzlon) has become the fifth largest wind turbine manufacturer in the world. Or that an Indian company (Tata Motors) is about to launch the world’s lowest priced car that would still meet European safety and emission standards. Some of the other innovations currently being fine-tuned in India and China pertain to mobile data services. The number of mobile subscribers in China is nearly 600 million and in India nearly 300 million (growing at about 8 million per month). Given a higher penetration of mobile telephony than PCs in both countries, a powerful ecosystem of big companies, start-up ventures, and VCs is working together to create solutions for mobile banking, mobile education, and mobile commerce that are likely to be among the most cost-efficient in the world.

What is behind the war for talent that you say is going on in China and India and how can it be won?

Notwithstanding their billion-plus populations and the world’s two largest pools of college graduates every year, both China and India suffer from an acute shortage of professional staff such as seasoned managers and people with specialized skills (e.g., accountants in China and software developers in India). As such, most companies (foreign and domestic) find themselves engaged in a perpetual war for talent. There are several reasons behind these pockets of scarcity in the midst of plenty. First, as domestic companies become larger, go public, and start to expand abroad, the need for professional managers is growing at a faster pace than the overall economy. Second, multinational companies operating in China and India are eager to localize a much larger chunk of their senior management teams; thus, there is growing competition for talent between the multinationals and the domestic companies. Third, unlike blue collar work where migration of people from farms to the cities can boost the supply of manpower rapidly, growing the supply of experienced managers takes time and is a stickier challenge. In a situation such as this, no company can isolate itself from the imperative to keep compensation levels in line with market reality. However, business leaders do have the ability to increase the odds that the turnover of professional staff in their company would be around 5 percent rather than 50 percent. This depends directly on the firm’s ability to build proprietary competitive advantages in the local labor market. As we discuss in Chapter 6, winning the war for talent requires action in four domains: treating HR as a strategic function, smart recruitment (labor market branding, looking beyond Tier 1 cities), smart training and development (seeding and feeding the labor market ecosystem, investment in in-house training), and smart retention (deferred compensation, and cultivation of intellectual and emotional bonds).

What's the first step a company should take to start getting China and India right?

The most important first step for getting China and India right is to look ahead at 2020 and ask: What will be the nature of the market and competitive reality in China and India then? What position do we want our company to occupy in these markets in 2020? What happens if we don’t? In answering these questions, do your best to try and interpret the world not just from American (or Japanese or German) eyes but also from Chinese and Indian eyes.



Anil K. Gupta

     The Institute




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