The Asian Century

From the third issue of Outlook Business, now on the stands.

For every success story in the manufacturing sector of China, there’s a parallel in the Indian knowledge industry. If Haier turned itself from a near bankrupt refrigerator unit two decades back into China’s largest—and the world’s fifth largest—household appliances maker with globalrevenue of $12.8 billion (in 2005) and presence in more than 20 countries, Infosys did equally well, growing from virtually nothing in 1981 when it was set up to a $2-billion company in 2006 with a global presence. If China accounts for two-thirds of all the shoes produced in the world, two-fifth of personal computers and 85% of the world’s toys, then India boasts of a 60% share in the global offshore industry and 40% of the BPO market. If Shanghai—with its space-age skyline, sprawling industrial zones and bullet train—is the second home of the world’s manufacturing giants like General Motors, ABB and Agilent Technologies, Banga-lore—with its innumerable R&D centres and excellent IT infrastructure—is the new innovation hub of the likes of Google, Hewlett-Packard and Motorola.

Both China and India are still relatively poor. But the blistering growth of the two—home to two-fifth of the humanity—is being closely watched with awe and trepi-dation. While economic commentators from across the world are busy prophesising the ascendance of the next "super powers", the world media is chasing every move of the "Asian giants". For good reasons too. Over the last five years, China has grown at an annual rate of 9.7% to become the world’s fourth largest economy today with a gross domestic product (GDP) of $2.3 trillion in 2005, overtaking the United Kingdom, France and Italy. India, which joined the race much later than China, has picked up pace of late, growing at an average of 8% a year for the last three years to log a GDP of $700 billion in 2005-06. "For global players, the question is no longer, ‘India or China?’ You have to be in both," says Meera Shankar, Indian Ambassador to Germany.

Drivers of Growth

But the big question the whole world asks is, Will China and India expand their influence and become the real drivers of growth in the 21st Century? Paul Rawkins, Senior Director at Fitch Ratings, believes that China has already proved that it can be the driver of global growth. "China’s robust growth helped the world escape recession after America’s stock market bubble burst in 2000-01," says he.

Aneesh Tripathi, Knowledge Head, KPMG, a global consultancy major, points out that while India and China constitute around 6% of the global GDP, their contribution is nearly 13% if the incremental growth in GDP for 2004 is seen. "And this incremental growth is likely to increase in the coming years," he says, pointing to the demographic profile of the two countries. "Remember, by 2020, India will be the youngest country in the world with around 547 million people below the age of 25, although China will have a much higher ageing population due to its strict one-child norm," says he. What this means is that India will have a much larger, more flexible and innovative labour force than the rest of the world.

China’s integration with the global economy will be the biggest driver of global growth, according to Nagesh Kumar, Director-General, Research and Information System for Developing Countries (RIS), a New Delhi-based think tank. "The reason is simple: Economies become truly richer through increased productivity growth either from technological advances or from more efficient production thanks to international trade. The same cannot be said of all the wealth produced by stock market or asset bubbles, which is happening more in the western world," adds he.

One obvious advantage China and India enjoy is their vast pool of cheap labour. With unemployment still a major problem in the two countries, there’s no sign just yet of any pressure on this supply chain. Stephan Green, China-based Senior Economist at Standard Chartered Bank, believes that the large surplus of underemployed people in the Chinese countryside will continue to provide an incessant source of cheap labour for its various factories and industries. This will help China’s urbanisation, already at 46%, continue to rise by 1-2% every year.

Another key factor in the China-India story is their rapidly bulging middle class—currently there are around 150 million Chinese and some 50 million Indian households fall in this category. This will lead to a consumption-led growth in the two countries, which, in turn, will also be the newdriver of global growth. "India and China share the advantages of scale," says Farida Khambata, Vice-President, International Finance Corporation. "Both countries have large, productive workforces and are benefiting from the virtuous cycle of rapid growth, creating a large domestic market which fosters further growth," adds she. "For a growing number of products and services from aircraft to mobile phones to compact cars and two wheelers to cement and steel, India and China are already the largest markets in the world," says Nagesh Kumar of RIS.

Chindia, Anyone?

And what if the two countries join hands? "Cooperation is just like two pagodas, one hardware and one software," Chinese Prime Minister Wen Jiabao had said during his visit to India last year. "Combined, we can take the leadership position in the world. When the particular day comes, it will signify the coming of the Asian century of the IT industry," he told a packed crowd of IT professionals in Bangalore. Although the two countries have not yet made any serious effort on that front—what with China harbouring the dream to build up a world-class software industry on its own and India looking to make serious inroads into hi-tech hardware manufacturing—the fact remains that China and India complement each other’s strengths. China will remain dominant in mass manufacturing, India is a champion in software, design and services. "Chinese manufacturing plus Indian services will create an ideal win-win situation," says Wang Jinzhen, Assistant Chairman, China Council for Promotion of International Trade

There are other areas of mutual interest where China and India can come together. In fact, after running into each other a number of times in the race for oil equity abroad, India’s Oil and Natural Gas Corporation (ONGC) and China National Overseas Oil Corporation (CNOOC) have come together to jointly bid for third-country oil assets. "We soon realised that the competition between us only worked to the advantage of the sellers, with asset prices going up dramatically," explains ONGC Chairman and Managing Director Subir Raha who believes India and China should also explore the possibility of swaps tominimise freight and insurance costs in transporting crude. Another area identified for mutual cooperation is multilateral trade negotiations. "If the two Asian giants take a joint stand in global forums like World Trade Organisation, International Monetary Fund and the United Nations then their voice will be heard," says Manoj Pant, Professor, School of International Studies,Jawaharlal Nehru University. But despite the obvious advantages, the clashing political and economical interests have so far prevented the two countries from moving towards what is known in academic circles as ‘Chindia’. The two governments are, however, playing a proactive role in their economic development.

Eye On The Future

Back in 2002, Girija Pande, Asia Pacific Head, Tata Consultancy Services (TCS), used to fly down to Hangzhou province in China from his Singapore office every weekend. He had to find a site for the company’s third development centre in the mainland after Shanghai and Beijing. Every time he visited the province, he was welcomed by the mayor. During one of their casual exchanges, Pande remarked that the lack of a good vegetarian restaurant would disappoint the mostly South Indian project managers of TCS. When he visited the province for the fourth time, the mayor took him a spanking new vegetarian restaurant promoted by the state government. There you are! There’s no limit to Chinese hospitality towards foreign investors. The country is very aggressive in laying dollops for investors. Tax sops, flexible labour laws and no red tape—it can’t get better. "Starting a business in China is as easy as walking into a rented house. No licences, no clearances, no permissions, just rent a shed and begin work,’’ says Venugopal Dhoot, Managing Director, Videocon.

Not to be left behind, India too is hard-selling itself to global investors. Despite strong political opposition, the country is opening up more and more industries. And there’s competition among states in offering tax holidays and other incentives to attract FDI. For instance, when Ford wanted to set up its manufacturing plant in India in 1995, Tamil Nadu, Gujarat, Haryana and Maharashtra were all vying to woo the US car major. What helped Tamil Nadu clinch the deal was the "customised package of incentives" it offered to the company.

And both India and China have their eyes set on the future. India is leaving no stones unturned in ensuring that it keeps its lead in IT offshore and BPO segments. In fact, the country’s knowledge industry is pushing hard to go up the value chain. India has already established a strong 65% market share in the booming knowledge process outsourcing (KPO) which is expected to become a $17-billion industry by 2010. India is also going all out on the physical infrastructure front, the country’s weak point. Major highway projects like the Golden Quadrilateral and the North-East, South-West corridors are expected to be completed in December 2006 and December 2009, respectively. Also, a number of special economic zones (SEZs)—the same animal that takes most of the credit for China’s runaway success in the last three decades—and industrial townships are slated to come up in different parts of the country. The government has already given nod to 160 SEZs that are expected to attract investments of Rs 1 lakh crore in the next three years and create nearly five lakh jobs.

Chinese government, meanwhile, is aggressively pushing its low-cost, mass-producing industry to move into higher value-added goods by encouraging R&D in domestic companies and luring foreign firms to move up the value chain by giving them tax incentives. "Thus, in the next 10 years, while the low-cost, mass produced goods will move to the hinterlands, the coastal areas will move into high-value added industries like telecommunications, information technology and pharmaceutical research,’’ says Green of Standard Chartered. Already, according to the Organization for Economic Cooperation & Development (OECD), China has overtaken the United States to become the world’s largest exporter of information and communication technology goods. What next? A Chinese Sony? Well, the country clearly doesn’t want to remain just an assembler of someone else’s knowhow. A slew of Chinese companies, such as Haier, sees themselves as serious players with global ambitions. " We don’t talk about our country of origin because Haier is a global player, having 16 R&D centres and 13 manufacturing units across the world,’’ says T K Banerjee, President and Chief Executive of Haier Appliances (India)

No Cake Walk

It is not to say the two countries have an easy ride ahead. Their first challenge is to broad-base growth. Of the total 2.3 billion people in the two countries, nearly 1.5 billion earn less than $2 a day, according to World Bank data. Add to that the problems of illiteracy (35.2% in India in 2004 and 24% in China in 2003) and unemployment (9.9% in 2005 and 4.2% in 2004). And you knowtomorrow’s superpowers are still a long way away from prosperity.

Then there are economic factors. Some commentators like Surjit Bhalla, Managing Director, Oxus Research and Investments, believe that China’s inefficient use of investment will drag down its growth rate in the future. Its incremental capital output ratio—increase in annual investment divided by the increase in GDP—has risen in recent years. This suggests that the country is having to spend more money togenerate the same amount of growth. Again, they say, there has been over-investment in some sectors such as cars, steel and property and that some of the projects will prove unprofitable. Add to that China’s fragile bankingsystem burdened with non-performing loans (some says it’s close to 50% of China’s GDP). Also, many global
economists believe that China will become old before it becomes rich. "By 2027, 14% of its population will be more than 65 years of age, but the per capita income will be around $12,000 a year," says Green of StanChart.

India’s ills include poor infrastructure, rigid labour laws, corruption, red-tapism, high fiscal deficit, rural poverty and poor governance. Both China and India are still to take the benefits of reforms to the rural areaseven though most of their labour force remains in agriculture.

Ironically, the two countries that together attract 12.5% of the world’s FDI, are among the worst when it comes to business environment. According to the World Bank, to start a business requires 71 days in India and 48 days in China (compared to 6 days in Singapore); enforcing debt contracts requires 425 days in India and 241 days in China (69 days in Singapore).
But then, clearly the pluses outweigh the minuses. According to an IMF report, China just has to continue its reforms (especially those of banking and its loss-making public sector units) to enjoy faster growth than America ever achieved and within a decade become the biggest exporter and importer of items in the world. India is rated a better environment for investment than China, thanks to its higher returns on capital—achieving a GDP growth of 7-8% on an investment rate of 29% against a 9.5% growth on an investment rate of 45% by China. Other attractions include India’s legal and regulatory environment and democratic institutions. "India will be a power to reckon with because of its demographics and high rate of growth,"’ says Kamal Nath, Minister of Commerce and Industry. He believes the world will woo India because it is a counterbalance to China and the US.

Most global banks and investment firms have optimistic outlook for both India and China. The now-famous Goldman Sachs report, Dreaming With BRIC (Brazil, Russia, India, China), of 2003, has predicted that in dollar terms China could overtake Germany in the next four years and the US by 2039. India’s economy could be the third largest after China and the US in the next 30 years. It said India will continue to grow at more than 5% in the next 30 years if the reforms continue. A recent report by PricewaterhouseCooper, The World in 2050’, states that India has the potential to become the fastest growing large economy in the world by the year 2050. A Deutsche Bank Research report, ‘The largest economies 2020 according to Formel-G’, says India will be the third largest economy by 2020.

So, make no mistake, we’re at the beginning of the Asian Century. And it proves an old Chinese proverb right: "If you want one year of prosperity, grow grain. If you want 10 years of prosperity, grow trees. If you want 100 years of prosperity, grow people."