About the Author
Prof. Nitin Pangarkar of the NUS Business
School and authority on China and India,
looks at the implications of the emergence
of "Chindia", dispels common misconceptions
about these fast growing economies,
explores opportunities, and outlines 5 rules
of thumb for effectively integrating "Chindia"
into a global strategy.
Over the last 15 years, observers, analysts, and managers
have been fascinated by the rapid growth of emerging
markets, especially China and India. Large populations are
a clear advantage enjoyed by these countries - together
China and India account for more than a third of the world's
population, and when this population has a growing income
level, the market potential will be substantial. Many believe
that the growth potential of these markets offers a
unique opportunity for all firms, multinational or local. It
is not surprising then that managers of multinational
companies are enthusiastic and interested. Andy Grove,
the co-founder of Intel, said that "China is the most vigorous
market for US (and) its most vigorous competitor." Likewise,
a senior manager of Nissan said that "not being in India
would be a huge strategic mistake. It's an investment for
the future."
Historical Growth and Future Predictions
To get a better sense of the sustained growth enjoyed by
these two countries, one should look at past growth rates:
between 1979 and 2004, China grew at an annualized
growth rate of 9%, and India at 6%. Still, estimating the
current market size for specific sector industries is
challenging, especially since the data may not always be
available or reliable and factors such as Purchasing Power
Parity need to be accounted for. Aggregate level indicators,
however, are generally more easily available and reliable.
These estimates support the argument about the
importance of China and India, which account for 49%
of world iron ore consumption, 55% of world cement
consumption, and 59% of world vegetable production.
While forecasting future market size can be more hazardous
than estimating current market size since such exercises
may require making forward-looking assumptions, we can
identify some of the estimates. According to one estimate, by 2020, China's GDP will be $12 trillion and India's about
$3.4 trillion; together they could constitute 60% of the US
GDP. If current growth trends continue, by 2050, China's
GDP would exceed the US GDP significantly while India's
would match the US. Low current penetration levels - in
terms of ownership of durable goods - is another factor
working in favor of these markets. In 2003, only 0.9% and
1.6% of the population in China and India had cars, versus
55% for Japan, 25.7% for Taiwan, 22.7% for Malaysia,
and 9.1% for Thailand. There is strong prior evidence about
the increase in percentage of car ownership with increasing
incomes, suggesting that both China and India's markets
have plenty of room to grow.
Operating in Chindia: A Plethora of Misconceptions
Despite the attention received by these markets in the popular press, many misconceptions remain. For instance, many analysts and managers tend to view China as a cheap source for low value added manufacturing and India as a cheap location for low value added high tech services (e.g. software and business process outsourcing) while believing that the market size for these markets is rather limited for high tech goods and services. Another misconception is that China and India offer large markets for counterfeit goods and limited opportunities for genuine goods, which often come at high prices. Finally, some question whether these markets are profitable to serve and wonder about the risks rewards equation for serving these markets is appropriate - in other words whether these markets are characterized by higher levels of risk than what expected returns would suggest. On the other hand, there are also optimists who believe that capturing even a 1% share of these markets is not unreasonable and would significantly impact their overall performance.
We submit that China and India's low average income
levels belie the fact that they have plenty of consumers
that can buy a wide variety of goods and services, whether low or high tech. By 2006, China had more than 350 million
mobile phones subscribers, a number India is expected to
reach by late 2008. As producers, these countries will play
an even bigger role in high tech industries. India's exports
of software and technology-enabled services are expected
to increase from US$22 billion in 2006 to US$140 billionin 2012. In 2005, high technology exports constituted 28%
of China's total exports and amounted to US$220 billion.
In life sciences, which are the epitome of high tech sectors,
China and India are expected to widen their lead over the
US in terms of the sheer number of young researchers.
Even after allowing for the possibility of quality differences,
the difference is large enough to shift the center of gravity
of these research-based industries towards Chindia.
It is also important to dispel the misconception about
the difficulty of operation in these countries and the
risks/rewards equation. According to one estimate, 68%
of the US companies in China are profitable, and for 70%
of the companies, the margins in China are greater than
their global margins. In India, the proportion of profitable
companies is as high as 90%, and the Indian operations
exhibit better than average profitability for 60% of
the MNCs.
Finally, while it is true that counterfeits pose a challenge,
Chindia offers plenty of opportunities for selling genuine,
high-quality (and premium-priced) goods. China, for
instance, is the second largest market for Louis Vuitton,
the purveyor of high quality fashion accessories. In terms
of risks/rewards equation, the challenging nature of these markets implies that once strong competitive footholds
are established, they are likely to be sustainable simply
because later entrants would often face similar difficulties
and barriers as the pioneers. In fact, there are several
examples of firms that struggle in their home markets to
compete with the leaders in their industries but have
managed to capture the pole positions in Chindia - these
include Buick and KFC in China and Suzuki in India.
Integrating Chindia into Your Strategy
While the Chindia market represents a tremendous
opportunity, it clearly is not without challenges. In fact,
firms that rush in and expect to easily capture a 1% market
share often receive a rude shock. Upon its initial entry into
India, even Kellogg's, a company with a wealth of experience
of operating in global markets, struggled badly. Corn Flakes,
its main product, were considered too expensive and bland
for the local tastes and preference.
So how can multinational firms integrate Chindia in their global strategy? Below, we suggest a few rules of
thumb which improve the chances of success in the
Chindian markets:
1. Be early: In emerging markets, early movers may
be able to build brands cheaply, create impregnable
positions in the distribution channel, and shape consumer expectations, all of which makes it difficult
for later entrants to match their success. As Jorgen
Clausen, CEO of Danfoss, which has enjoyed significant
success in China, said, "We want to have the same
high market share as in Europe. We need to do it now
when the competition is small and young".
Singapore-based Asia Pacific Breweries, which makes
Tiger beer, is an excellent example of moving early. In
the Hainan province of China, where it was the first
multinational brewer, it commands 80% of the market
and its international brands, such as Anchor, enjoy
leadership positions. Conversely, the company has not
been as successful in the Shanghai market, where it
was not the early mover and jockeying for market share
is intense. KFC in China is another example of early
market entry. KFC not only leads McDonald's in the
China market but has been growing at a faster
rate (200 stores per year versus 100 stores per year
for McDonald's).
2. Have a long and broad view: Given the evolving nature
of these markets, MNCs looking for quick returns are
likely to be disappointed. Those who patiently build their
operations towards ultimate success, however, are likely
to be handsomely rewarded. It is also important that
companies look beyond a pure local market orientation
and look at these markets for diverse purposes such
as sourcing products, services, and talent.
Motorola in China serves as an excellent example of
the importance of broad view. It entered the country
in 1987 by opening a representative office and followed
up with the establishment of Motorola (China) Electronics
Ltd. in Tianjin five years later. Its product range included
mobile phones, two-way radios, wireless communications
equipment, semiconductor products, and automobile
electronics for the Chinese and other global markets.
In June 2002, it announced a "2+3+3" strategy:
"2"centers to make China into a global production
base and a global R&D base for Motorola; "3" growth
areas (e.g. digital trunking communication systems, semiconductors and broadband); and "3" 2006
US$10-billion targets (e.g. an annual output of US$10
billion in China, an accumulative investment of US$10
billion in China, and accumulative local sourcing
in China to reach US$10 billion by 2006.
3. Be adaptable: Adaptability is a key success factor in
emerging markets. In Sir Isaiah Berlin's terminology,
being a fox is likely to be more rewarding than being
a hedgehog. Lack of adaptability has led to many
failures, with Nestle's bottled water business and
Ericsson's handsets business being prime examples.
Nestle's bottled water business in China failed because
it adopted a centralized facilities model that resulted in
high costs and long delivery times. While Ericsson
enjoyed a peak market share of 37% in China, it refused
to deal with cases involving defective products. The
resulting bad publicity led to rapid erosion of its market
share. McDonald's, whose beef-based core product
offends religious sensitivities in India, is an excellent
example in this regard. Over more than 10 years, it has
assiduously built up a local supply chain, adapted its
menu significantly (75% of its Indian menu is unique to
India), worked hard at satisfying the vegetarian segment
(some of its advertisement promise a "Veg surprise"),
and reduced its prices to improve affordability with
meals selling at the equivalent of US 50 cents. While
the profitability of its Indian operations is not known,
it has laid a solid foundation for future growth.
4. Don't underestimate local companies: Multinational
firms often enjoy strong competitive advantages over
local companies in the form of scale economies,
technology, and brand advantages. Some firms,
however, run the risk of underestimating local
competition. Recently, many Chindian firms such as
Haier, Huawei, Ranbaxy, and Tata Steel have emerged
as important competitors on the global stage. A recent
survey found that a smaller proportion of Chinese firms
operate very old manufacturing plants (i.e. greater than 10 years), and a greater proportion consider innovation
as being very important than US firms (54% versus
26%). These statistics suggest that Chindian firms are
likely to be vigorous competitors.
5. Be an insider: Multinational firms can significantly
enhance their chances of success by becoming an
insider, a term coined by the noted management consultant and writer Kenichi Ohmae. Becoming an
insider might include a broad range of strategies
including developing a local supply chain, getting
involved in the local communities, making extra efforts
to hire local managers, and presenting a local face in
promotional and other strategies. Danfoss has worked
extremely hard at becoming an insider in China by
establishing a R&D facility (2005), sending Chinese
employees to Denmark for training and thus preparing
them for taking over expatriates' roles. Hyundai has
also become an insider in India. It was early in developing
the local supply chain, which has reduced its costs
and helped it charge lower prices. As a result, India
has become a global centre for the export of the tall
hatchback called Santro, with exports to 68 countries
(including faraway countries such as Mexico). Hyundai
also employs local movie celebrities as its
spokespersons, which has further enhanced its
popularity. Motorola has served as an excellent
corporate citizen by supporting education, environmental
protection, and China's bid for the 2008 Olympics.
6. Partnerships: Partnerships offer interested multinational
firms several advantages over going it alone. They can
ease the task of obtaining regulatory permissions, fill
competence gaps (especially in terms of local
knowledge), and give a local face to the multinational
entity. In the highly regulated telecoms sector, IBM has
found a way to operate in the booming Indian market
without going through the trouble of obtaining a
license. The company provides technical expertise
and services to Bharati Airtel, India's leading mobile
operator, in exchange for a fee tied to Bharati's revenues.
Is Chindia Homogeneous?
Despite their similarities, there are differences between the Chinese and Indian markets. China is further ahead in terms of infrastructure, which helped it become a "factory to the world." India's weak infrastructure, on the other hand, has meant that it is more competitive in high tech services. Furthermore, China has a mixed model in terms of its political economy, while India is a vibrant and contentious democracy where a new round of elections might entail a completely different set of policies. Despite these differences, the markets are sufficiently similar for the above arguments to be applicable to multinationals seeking to build positions in both countries. Additionally, in time, these differences will become less salient.
Concluding Remarks
While multinationals face significant challenges in competing
in Chindia, successful establishment of positions in these
markets is likely to enhance performance significantly. With
its large population and market potential, Chindia offers
significant opportunities and reward for the patient and open-minded investors. Indeed, as Peter Engardio asserts,
"Few companies any longer can afford not to engage in
China or India. As consumers, suppliers, competitors,
innovators, investors and sources of skilled labor, they are
reshaping the world." To succeed in Chindia, however,
firms must identify misconceptions about the markets.
They must enter the market early, operate for the long
term, adapt, respect local companies, be an insider, and
form partnerships.
Bibliography
Dayal-Gulati, Anuradha and Angela Y. Lee (eds.). 2004. Kellogg on China: Strategies for Success. Evanston, IL: Northwestern
University Press.
Engardio, Peter. 2006. Chindia: How China and India are Revolutionizing Global Business. New York: McGraw Hill.
Gu, Zhibin. 2006. China's Global Reach: Markets, Multinationals, and Globalization. Palo Alto, CA: Fultus Corporation.
Ramesh, Jairam. 2005. Making Sense of Chindia: Reflections on China and India. India Research Press.
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