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What are we doing about "Chindia"?

Jamie Popkin and Partha Iyengar, Information Age

12/05/2007 13:51:27

There is no hotter topic in the high tech industry than the impact of China and India on the industry and the world at large. If you are a strategist or a decision maker in almost any enterprise, anywhere in the world, you see the impact of India and China in new waves of technology products and services in events, decisions and strategies featured on corporate Web sites and in international news coverage.

As industry analysts we have been fortunate to travel extensively in China, India and virtually everywhere else in the world where the impact of these two rising economic giants is felt. Wherever we have gone over the past three years, we have been consumed with answering our clients' questions about China and India.

These experiences inspired our thinking about what lies ahead for each country, as well as to seriously examine the idea of "Chindia" - China and India combining strengths in several industries to compete globally - as a subject for research and analysis.

Chindia The bilateral economy of China and India is in its infancy. Yet new momentum suggests a powerful relationship is building. "Chindian" enterprises will have access to complementary skills and resources and, in turn, will have the potential to lead many global markets.

New joint ventures between Indian ICT service firms and their Chinese counterparts are early illustrations of how a formidable Chindia economy could develop. Indian firms bring to the table world-class software expertise and leadership in global markets. Chinese partners have legions of capable, low-cost employees and greater know-how with clients in Japan, Korea and other Asian countries where English is less prevalent.

Modest steps recently under way provide only a hint of what India and China collectively could bring to the global economy and global balance of power in coming decades. Patterns of a widening bilateral commercial partnership are visible in increasing high-level official visits and pronouncements, conference participation, cultural exchanges and, most of all, forecasts of accelerating goods, services and investment flows across the Himalayas.

Much of the West's attention on China and India thus far has focused on the West's outsourcing of manufacturing and low-end service jobs. Optimistic observers believe the current flow of jobs across the Pacific is immaterial in the long run because innovation remains strong in Western countries, and innovation produces new jobs and economic growth.

This view is absolutely correct on the surface, but it hides the underlying truth of what is happening in India and China today: both countries are getting better at driving technological innovation. Today China and India are producing some of the world's best-trained computer science and electrical engineering graduates.

Far from being simply a source of cheap labour, both countries soon will be able to compete favourably for global business - as India's ICT services firms have done - not on price, but on competence and capability.

Creating a "Chindia" strategy If you are in a business, you need a China strategy and you need an India strategy. You need to monitor how China and India create alliances in specific markets, alliances under what is coming to be known as the "Chindia bloc". The first signs are already clear in ICT services, in automotive components and in a few other sectors.

China and India increasingly will be the dominant economic stories on the world stage, a trend that may well extend through most of the 21st century. Despite mounting stakes, however, the quality of information, research, and advice on how to make key decisions related to China and India is uneven. Executives and managers need a comprehensive view not only for understanding China and India, separately as well as together, but also for gauging future threats to and opportunities for enterprise.

For effective decision making, business leaders need: • Accurate information on the current state of global ICT competitiveness in India and China for their internal markets. • A set of realistic scenarios that explores not only the possibility of continued rapid economic growth in India and China but also potential social, political, or other disruptions to these economies. • A series of milestones that define pivotal issues in each scenario and of signposts that over time point to milestone outcomes to help determine when and where to invest, cooperate, compete, analyse, or ignore these countries.

China's ICT landscape The power China can wield will affect every major corporation in the world. Every business, whether directly engaged with China's economy or not, must have a China strategy. Simultaneously, China will be transforming the information technology industry in ways that executives and managers in the West simply must address. This is especially true for companies that embrace advancing ICT for strategic and operational advantages.

China's spending on its ICT needs in 2005 was about $US119 billion, about four times that of India's. That the majority of this spending went toward telecommunications equipment and services (79 per cent) reflects the priorities of an infrastructure that is still growing.

China's ICT spending has been forecast to grow 6.5 per cent annually through 2009, well below the 7.9 per cent rate forecast for Asia Pacific and well below the 25 per cent forecast for India. China's spending will be led by the purchase of software (17.5 per cent) and ICT services (14.5 per cent). As the software market expands, ICT leaders of Western corporations operating in China need to ask, When will locally provisioned software and services be available, and will they be competitive with foreign software and services?

Continuing government control over the most basic levers of the economy is the most significant inhibitor of China's vast potential for innovation. China's ability to set a practical course to ease government influence in its economy and to promote innovation is the pivotal issue in forecasting the country's future.

Your first reaction to this might be that "government policies and government relations are not my specialty and not my problem - lawyers and government relations pros, not CIOs and ICT executives, worry about what the politicians and regulators are up to". You place calculated bets on big issues and market trends in cost-effective innovative ICT.

With respect to China (and India), such views are flawed and dangerous for business and ICT leaders. The Chinese government often is the biggest factor in ICT issues and trends, and business leaders can't afford to delegate these relationships or distance themselves from the core analysis.

The blunt challenge for China is whether it has the ability to move up the global value chain to the commanding heights of innovation and global marketing prowess, from being a low-cost, high-volume manufacturer. In ICT, the particular challenge is whether China can transfer its demonstrated expertise in low-margin, high-volume hardware manufacturing into high-margin software and ICT services.

By 2008, it is highly likely that China will generate intellectual property at a rate comparable to developed countries and, in the same year, actually surpass the US as the population with the largest English language capacity (in terms of English language comprehension and proficiency, however, China will remain a challenger, not the global leader).

By 2010, we anticipate at least eight Chinese ICT brands will be recognised internationally. The world will witness the birth of a real ICT superpower if government restrictions are loosened and the Chinese instinctive talent for entrepreneurialism continues to be encouraged.

Whether China emerges as a global leader in science and technology innovation relevant to the information and communications technology (ICT) industry is a pivotal issue for you as a business strategist or ICT decision maker in Western organisations. The outcome will influence which global suppliers can establish a strong presence in China for the long haul and which of China's strongest domestic companies can compete in international markets.

The answers may not be clear for years. Yet with potential rewards from engagement in China so high, and the risks of staying on the sidelines potentially great, companies need to address these questions now.

India's ICT landscape With its challenging logistics, stifling bureaucracy, official corruption and leftist political influences, can India still be worth the effort? We hear this question often from CIOs, business strategists, and decision makers who doubt whether the benefits of an Indian connection can truly outweigh obvious risks and discomforts. The vast majority of the global Fortune 1000 companies have agreed India is worth the effort.

We also think India is worth the effort when the problems you are attacking and opportunities you are chasing match what India can provide. We estimate that the largest ICT services providers will add between fifteen thousand and thirty thousand employees annually, on average, for the next several years in anticipation of continued rapid growth in global demand.

Until recently, the Indian ICT industry has been the story of the widely differing fortunes of two cousins - the export cousin and the domestic cousin. The former has been fabulously successful and richly applauded throughout the nation. The latter has been regarded as backward and hardly worth bothering about.

Much of this perception is due to the relative successes enjoyed by the export and domestic sectors of the industry. India's total exports of ICT services - dominated by domestic companies, not foreign-controlled subsidiaries - were worth $21 billion in 2005. In comparison, India's domestic market for ICT services was worth an estimated $2.7 billion in 2005. This figure is minuscule compared to 2005 ICT services spending in other countries in the region, such as Japan ($83 billion), Australia ($12.1 billion), and even China ($4.5 billion).

The intensive activity supporting an export-focused industry has distorting effects across India's economy: it changes the focus of local ICT firms; it influences government policy settings, such as incentives and the establishment of software technology parks; and it hampers the ability of non-exporting local employers to find and retain quality staff.

The export side of the Indian ICT industry got its big break in the early 1990s, when US companies began hiring huge numbers of skilled systems analysts and computer programmers. Demand for Indian companies' staff in the US was driven to frenzied levels by three factors: concern about the millennium bug, the dotcom boom and a corporate craze for enterprise resource planning software.

It is only within the past five or six years that India's ICT industry was transformed from a source of labour for hire to the formidable leader in ICT services it is today.

Many Indian companies are not letting the grass grow under their feet. Three works-in-progress serve to demonstrate the opportunities for foreign companies, for the domestic industry, and for the export industry.

US-based Intel - which already employs three thousand Indians at its Bangalore R&D centre - has invested $250 million in partnership with local manufacturer Xenitis Infotech to manufacture low-cost computers priced at $250 - the cheapest machine for sale with an Intel chip. The target market is regional and rural areas within India.

On the domestic side, Bharti Tele-Ventures is growing in innovative, unexpected ways. Bharti and IBM are establishing an ICT services business that seeks business from domestic customers.

On the export side, all major Indian ICT outsourcers have established beachhead offices in China, with a view to leveraging their ICT services skills, not just in China but also in the more insular Korean and Japanese markets.

These examples show Indian companies can be innovative, build capacity in areas not generally seen as a strength, and be aggressive in expanding beyond a predominant US focus into Asian markets generally. These kinds of talents have put Indian companies on the threshold of what we believe could develop into one of the great economic success stories of the pan-Asian region: the great global potential of India and China together, combing the world's ICT services powerhouse with the world's factory.

Anyone doubting India's capacity to play its part need only consider the source of its ICT industry. In 1995-1996 India's exports of ICT services were worth about $1 million. In 2004 they were worth $13 billion. In 2000 India's share of business process outsourcing (BPO) was worth $148 million. In 2004 it was worth $3.5 billion. Any student of business knows what those kinds of growth rates mean: disruptive, challenging forces that can unseat rivals and destroy business plans.

Questions left unanswered There are many unanswered questions about the economic futures of China and India, of China and India together, and indeed of China's and India's future impact on the global economy. Can innovation be outsourced? Is it possible to compete in Asian markets without piracy of intellectual property draining away the opportunities? Will China's and India's mounting successes in world markets create a protectionist backlash among developed economies?

The answers you seek may well be among the most important for setting the long-term course and success of your enterprise. The methods by which you pursue them certainly will shape the quality and insight of what you find. As China and India increasingly redefine the future of technology and innovation, knowing how to map a course into that future will be a core competency of the most accomplished travellers.

Jamie Popkin, group vice president and research fellow at Gartner, and Partha Iyengar, vice president and distinguished analyst at Gartner, are the authors of "IT and the East" to be published in May 2007 by Harvard Business School Press and distributed in Australia by McGraw-Hill.

[sidebar]

Eight priorities to focus on now Whether you are a collaborator or a competitor in delivering ICT products and services in global markets, solely a buyer of ICT services, or your organisation combines several of these roles, as many do, the national economies of China and India, and of a nascent China and India together, are stirring unprecedented threats and opportunities.

Given these possible threats and rewards, we have identified eight priorities - with related action steps and competencies - in planning and operations to help prepare your enterprise for whatever realities in China and India develop between 2007 and 2012.

1. Government policy formulation by industry Action: Engage appropriate government agencies and trade organisations. Competencies: Relationship management; long-term investment and employment perspective to ensure industry specific presence.

2. Rural development investment programs Action: Develop knowledge base on government investment; identify and leverage commercial opportunities in rural areas. Competencies: Government spending process and contracting knowledge and government relations management. Creativity in rural channel development.

3. Research, design and development Action: Build local RD&D capabilities. Prepare proactive approaches to technology transfer requirements. Competencies: HR's capabilities including profiling, hiring, training and university relations. Investor knowledge and insight. Develop localised IP protection mechanisms.

4. Market development Action: Recognise that markets are likely to have very different characteristics, behaviours and expectations than the traditional "developed" markets. Competencies: Market research, local market analysis and culturally sensitive product and service deployment.

5. Chindia opportunity Action: Leverage the combined strengths of China and India for increased synergy and value. Competencies: Knowledge of the similarities and differences between the two countries; understand natural competition and cooperation. Ability to track and leverage the individual government's policies that are driving cooperation.

6. Resource development Action: Develop the ability to recruit, train and integrate Chinese and Indian talent and labour at all appropriate levels of your organisation. Competencies: Knowledge of the vastly different employment ecosystem; Ability to create customised HR policies; cultural orientation and assimilation.

7. Local expertise Action: Identify and collaborate with savvy, trusted local advisers. Establish a clear understanding with them of global practices and laws that the organisation needs to conform to. Competencies: Identifying the right resources; balancing local cultural practices and nuances with global best practices and legalities; develop strong political relationships at local, regional and national levels.

8. Cultural understanding Action: Understand and act on significant cultural differences between the West and Asia Pacific. Competencies: Multicultural exposure in work-force; critical mass of "bridge" executives from these countries in key roles; ability to take a long term - really long term - view.