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Getting China And India Right

China, Chinese Flag
CNBC.com
China, Chinese Flag

Appearing before the National People’s Congress, China’s Prime Minister offered a new economic plan for his country that faces in his words, “unprecedented difficulties and challenges.”

Wen Jiabao called for spending a whopping $132 billion on schools, hospitals and clinics, low-income housing and environmental projects.

His economic plan also calls for a change in the very psychology of his countrymen. He wants his citizens to be - if you will - more like us: Spend more - Save less.

Balancing optimism with caution Wen set a target of 8 percent growth in China’s gross domestic product in 2009 - that’s about the same as in similar years but he added, China's prospects were as bright as ever, “Neither the fundamentals of China's economic and social development nor its positive long-term trend has changed."

In the face of a world-wide economic crisis - Wen wants his countrymen and the world to know that China's prospects remain bright.

And that’s what authors Anil K. Gupta and Haiyan Wang suggest in their new book "Getting China And India Right."

While many are in that bunker-like mentality – these authors say many business leaders may be leaving too much on the table when they do business in China and India. They say there's a surprising range of challenges and hidden opportunities that remain untapped.

Here is my guest blog today from the authors, Anil Gupta and Haiyan Wang:

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Companies looking for growth opportunities in the middle of the current financial crisis should note that 2008-2010 will actually see an acceleration in the pace of the ongoing shift in the world’s economic center of gravity from other major economies to China and India.

During 2009, these are the only two economies – among the world’s twelve largest – that will not only grow but do so in the 5-8 percent range, far above the growth achievable by developed economies even in the best of times.

This growth rate is a sharp slowdown from the 9-11 percent range of the last five years. In an increasingly integrated world, no country can remain unaffected by turmoil in a major economy such as the United States. However, if you are looking for top-line growth, you have little choice but to start deepening your market push into China and India – with greater urgency than ever.

Taking a 10-15 year perspective, we would go so far as to say that a suboptimal strategy for China and India will rapidly become a survival question for many companies.

Take the 2007 GDP numbers for U.S. and China and make three fairly conservative assumptions. Assume that the U.S. grows at a 2.5 percent annual rate, that China grows at 6 percent (not 13 or 11 or even 9 but a much slower 6 percent) and that the Chinese yuan appreciates vis-à-vis the U.S. dollar at a 4 percent annual rate, slower than what many economists are calling for.

Based on these numbers, it is clear that China will catch up with the U.S. by 2025 if not earlier.

Look ahead another 25 years. Assume that, from 2025 onwards, U.S. GDP continues to grow at 2.5 percent, China’s growth slows down to 5 percent, and there is no further adjustment in exchange rates. By 2050, China’s GDP will become twice as large as that of the U.S. India is following a similar trend but trailing China by about 12-14 years, the time lag between 1978 when China started its liberalization and 1991 when India jumped onto a similar train. In short, by 2050, the combined GDP of China and India could well exceed that of the U.S., Europe, and Japan put together.

These two economies have long been recognized as platforms for cost arbitrage for both blue and white collar work. What is new however is that with each passing day they are also becoming sizeable and rapidly growing market opportunities for almost every product or service.

China and India currently account for 10 percent of the world’s GDP, over 25 percent of the growth in world GDP, and 40 percent of the world’s population. Thus, for almost every product or service (be it candy, cars, or computers), these two markets presently account for between 10-40 percent of world demand and over 25 percent of the growth in world demand.

To see if these numbers hold up for specific industries, take autos. In 2007, the total demand for cars and commercial vehicles in China and India accounted for 15 percent of the world demand and an astounding 50 percent of the growth in world demand over the previous year.

Similarly, consider pharmaceuticals. In both China and India, the market size for pharmaceuticals is growing at over 20 percent a year. Industry estimates are that, by 2017, pharma sales in just the big emerging markets are likely to be larger than those in the United States plus the top five European markets combined.

Finally, take another industry - mobile telephony. China and India currently account for about 30 percent of the mobile subscribers in the world as well as 30 percent of the annual growth in the number of subscribers.

It is crucial to remember, however, that both China and India are vast and diverse markets with very high income, geographic, and cultural differences within the society. They are also “mega-markets with micro-customers.”

While the overall market size is large, per capita incomes are very low - about one-fifteenth of the U.S. in the case of China and one-fortieth in the case of India. Thus, unless a company operates in niche products and services, it should go wide and deep i.e., pursue a multi-segment strategy.

At the top end of the income spectrum, customers have high buying power and are likely to prefer global products and services. The middle income segment constitutes the mass market. For most products and services, this is also the fastest growing market in each country and can be ignored only at great peril to the company’s future. This segment is often characterized by brutal competition, low pricing power, and low margins. In order to win here, a company will generally need to develop local products and services that are designed to be low cost. At the bottom of the pyramid, a company is unlikely to generate much revenue. However, given high growth rates, this is the segment with the greatest possibilities for innovation. Every smart company should engage with this segment seriously, aim to break-even, and view it as a learning laboratory for the discovery of new business models.

As we note in our just-released book "Getting China and India Right", the ongoing rise of China and India is a game-changing phenomenon. They are the only two countries in the world that simultaneously constitute “four stories rolled into one,” each strategically crucial in its own right.

The four stories are: (a) China and India as mega-markets for almost every product and service, (b) China and India as platforms to dramatically reduce a company’s global cost structure, (c) China and India as platforms to significantly boost a company’s global technology and innovation base, and (d) China and India as the springboards for the emergence of a new breed of ambitious global competitors.

Many countries feature one or two of these stories but, other than China and India, there is none that features all four.

For most Fortune 1000 companies, survival and success over the next 5 to 10 years will demand that they address each of these four stories head-on and with urgency.

Questions, comments? bullishonbooks@cnbc.com