THE WORLD IN 2025
ITT CONFERENCE
FORUM FOR GLOBAL KNOWLEDGE SHARING
GLOBALISATION OF CHINESE AND INDIAN ENTERPRISES
MUMBAI, NOVEMBER 2-3, 2007

Françoise Pardos, Pardos Marketing,

Asia, India, China and the others

Only three years ago, in the still so-called industrialized world, analysts used to refer with awe to the growth of China, and rarely, if ever, to India. In the last two years, or less, and all of the sudden, the two giants are currently mentioned in the same breath, as if they were so linked in any future analysis as to be mentioned, sometimes as an entity, named ChinIndia. ChinIndia, with over 2.5 billions is more than 36% of total world population.

Here is an attempt to list comparative plusses and minuses of each of these two giant countries. These lists are fully open to all controversies and critics, but they are a start, with many additions to fill in.

First, the main features that call for direct comparison:

Each of these two giants has a very large population, over 1 billion, with growth, now or soon, tapering.

The very large domestic markets, present and potential, make each of these two countries in the class of continents, like Europe or North America. This means that domestic demand is to be more important than foreign trade, in the medium and long term.

A large part of the population is still left behind economically, and to stay behind for another thirty years.

Huge land areas are still left untouched.

Logistics and transportation infrastructures are still less developed, with poor roads, congested ports. In spite of the work under way, there still are huge needs for modern infrastructures and transportation. The industrial centers are often far apart.

There still is corruption at all levels, more or less aggressive.

There is not much domestic oil, slightly more in China, 3.5 million barrels/day versus 1 million/day in India.

The economic annual growth is accelerating to unknown historical levels, 8 to 10% / year.

India and China are like USA and Europe in the 1950s, except ten times larger and their overall growth bound to take 10 years instead of 30.

Specific advances and problems in India and China now, from the good to the bad:

Advantages and disadvantages of China
Stronger image with foreign investors, still better known
Type of “Anything goes” early capitalism
Very fast development
Fewer global English-speaking marketing and sales people, a temporary problem though
Poor marketing skills, bound to improve
The quality image is still poor, in spite of CGMP, Current Good Manufacturing Practices laboratories.
Uncertainty about the financial system and stability
Poor technology and patent protection, legal infrastructures much less safe than in India
Stronger cultural differences with the West
Pollution, drought, development of deserts
Food availability problems in medium range
Non democratic government
Problems looming with minorities and conflicts

For investors, overprotection makes investing in China time-consuming and risky. Other obstacles include unresolved intellectual property issues and potential knowledge transfer problems. These cause new entrants to hesitate before installing the latest production technology capacities in China.

Advantages and disadvantages of India
Democracy
English speaking, leading to strong service economy in product design, engineering, accounting
International elites, eager and creative
With closer cultural understanding, Indians are “the Europeans of Asia”
Smart and highly educated expatriates returning
Increased presence in the world economic scene, with world entry of major companies
Strong advances in modern IT, Information Technology
Weight of bureaucracy, both an advantage and a hurdle
More quietly phased development
Supposedly smaller per capita average income
Poor society international image
Climate uncertainty with variable summer monsoons
Problems with minorities, border disputes

Despite all challenges, multinationals have had so far no other alternative but to invest in China, in order to benefit from its enormous growth.

Entry into India is less obvious and more subtle, probably more rewarding and safer in the longer run.

Will the factory and the office of the world be both to win?

One major risk of China, for its neighbors and for the rest of the world is a will to dominate, Asia and the rest of the world, at least economically. As it is often heard in China, the number one place is seen as a sort of birthright. China was 30% of the world economy until the 19th century. Then, it was only 1% in 1978, 4% in 2004. Now the Chinese objective is to regain its first rank, to 30%, or more, of the world economy.

One of the biggest challenges facing the global manufacturers installed there is that Chinese suppliers are getting very good. Their quality, low-priced parts have helped create new, homegrown and extremely aggressive competitors. China produces 80 % of the world supply of many consumer goods, from toys to telephones, portable radios and the like. Very large local companies, such as Ningbo Bird, Nanjing Panda Electronics, Haier, TCL Mobile, and Lenovo getting the IBM personal computers, are all getting among the top world suppliers of their markets.

Ninety percent of everything made in China is in oversupply. And instead of using cheap labor to push their profit margins higher, Chinese companies use cheap labor to drive down prices to be affordable to the mass of Chinese consumers.

The Chinese can, on average, buy about five times in goods and services per dollar what an American can with the same dollar in the U.S. If using measure of purchasing power parity, Chinese urban incomes approach the buying power of Americans making $12,500 a year. For working couples, this is $25,000. This is why Shanghai looks as prosperous as it does and why it seems everyone is out shopping all the time.

Chinese manufacturers have accelerated the market entry of consumer goods manufacturing. For instance, a new electronic innovation would be released at $1,000 in Japan, and it would take two years to drop below $1,000 and make it to the U.S. and Europe. It would take a total of five to seven years for it to make it into the mass market. Now China low-cost labor and the numbers of its consumer population bring bargain electronics into homes much faster, no more than one year. Competition shrinks the time it takes for new products to appear. New features are added while prices drop.

China now offers the world a labor supply with depth unlike anything before. It is said that if all the U.S. jobs were moved to China, there would still be surplus labor in China. This shows that the present Chinese economy can force down the value of work in any job that is at all transferable. The question is how long will this last? When will the growing domestic demand will put, at the same time, a pressure on costs and will reduce the exportable surplus? This is a sort of race against time, between the growth of Chinese domestic demand, and the decline of more industries all over the world. Hopefully, domestic consumption in China will overtake exports before the manufacturing industries in the rest of the rich world are dead.

Increasingly worrying to the rich countries whose industries have moved to China is the trend to science, engineering innovation, in China, now starting. Up to now, the rich countries would stay confident in their advances in higher performance, innovation, creativity. This smug sense of confidence is no longer valid. This also is a major question mark for the balance of economic power in years to come.

Europe and its East

Central and Eastern Europe, CEE, is Europe, already, fully, just truck delivery distances, with 27 members of the European Union now. Europe is home to all Europeans, this took less than ten years to happen.

For Western European producers, CEE is a new market and a good base for sale and distribution worldwide. For local CEE producers it is a chance to broaden markets and form strategic alliances with major western producers.

A key question is whether the CEE can compete against the competitively priced materials coming from Asia. CEE and Western Europe will both face the same threats, but producers in Western Europe have well established and modern production facilities, whereas those in CEE are in need of modernization. Of the new countries now part of the EU, most were from the Soviet bloc, and still require serious reorganization, but they are moving fast, with average growth rates at least double those of the older countries.

There are major problems in Europe however, offering ground for dire predictions. There are the fast aging population with little local replacement, the massive immigration with totally different cultures, high rates of unemployment, heavy debt, excessive assistance to all, deserving or not, and general economic stagnation, generally growing under 2 % /year.

Neighbor Russia and CIS remain a future enigma, but optimism prevails as time passes. Eurasia might be the obvious complement/outlet, rather than rival, to the Larger Europe, for a global standing. Tremendous natural resources and feedstock availability, at competitive prices, a huge domestic potential demand as well as good access to export markets, all contribute to a potential major development. A long term dream, Eurasia, its new frontier, its riches, bridging the Northern world, from Atlantic to Pacific, is a geopolitical vision not pleasing to some. Should Europe best expand to the North East, or to the South?

Trends in the Middle East

Middle East countries are not staying idle. The Middle East will continue to develop its petrochemical industry, producing 25 million tons/year of ethylene by 2010 and 40 million tons/year by 2020, in two more waves of cracker construction. This is an addition of 30 million tons/year between now and 2020.

This unique petrochemical development has been driven by a number of local factors:

Availability of ethane from the race to develop gas fields
Generation of cash from higher and higher prices for crude oil
High levels of profitability from steam cracking

The population of the Middle East is not a large market for industrial goods, comparatively, with less than 200 million people, with low and slow growing average income in the larger countries. Four countries, Iran, Arabia, Iraq and Afghanistan, account for 75 % of this area population. And it is an understatement to say that most of this population still has a long economic way to go.

Middle Eastern governments want to use their oil resources for much needed job creation.

The increase in logistics costs, especially freight charges, from East Asia to destinations such as Europe, could offer countries with a feedstock advantage, such as Iran, a competitive edge in finished goods exports in the not-too-distant future, if some sort of peace carries on…Iran and other Middle East countries see that future labor cost increases in China and India, parallel to GDP growth, and increasing domestic demand in these two giants, could be an opportunity to make converted industrial products with a strong international advantage.

The question is raised whether it might be more cost-effective to convert oil derived products, polyethylene and other plastics in China or in the Middle East? In fact it is all a question of timing and comparative development speed.

Although exports of finished goods may be a long-term solution to Iran and the Middle East development, in the short term, bulk petrochemicals are likely to remain the main export items.

A boost to the Middle East economies will come from the domestic demand, especially in Iran, with 70 million people, of whom 70 % are less than 30 years old. Demand in Iran is very fast growing, for all industrial goods, with the fast starting car industry. The automotive sector is one of the significant contributors to the country economic growth, from 150 000 cars in 1999, to over one million in 2006. And all consumer goods and infrastructure building call for this sort of growth, slowing down in 2007 however.

Africa

From time immemorial, Africa has been a primary producer of agricultural and mineral products. For centuries Egypt was the breadbasket for the ancient Romans and central African gold and ivory trickled overland or via dhows to Arabia, India and beyond. In more recent times it has been oil from North and West Africa, minerals from Southern Africa and everything from sugar to flowers from East Africa moving to markets around the globe.

However, by and large, Africa has never developed any strong manufacturing industries. True, Algeria used to be the world largest exporter of wine and South Africa is still a major exporter of motor vehicles to world markets and of a range of other products to destinations nearer home. But now changes are coming in the world economy which could give Africa the opportunity to move downstream.

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