Are companies taking the right steps to tap into the huge potential of China and India?

China’s potential to become one of the world’s biggest economies could happen sooner rather than later. In fact, in a Jan 24 report, Reuters quoted Goldman Sachs economist Jim O’Neill as saying that China could overtake Japan as the world’s second largest economy this year.

But in a post-crisis global economy, the attention should not be just on China. Companies should focus on China’s neighbour India as well, said Dr Anil K Gupta, co-author of Getting India and China Right. 

To tap into two of the world’s fastest-growing markets, Anil said companies should view the two countries as two hubs in the global network.

“You have to almost think from scratch, in many ways. But what it means for multinational companies is that they have to think of China and India as not just two additional nodes in the network, but as two hubs in the global network,” he said in an interview during a visit to Kuala Lumpur in October.

It’s basically about making China and India part of the company’s corporate strategy, he added.

“The global economic crisis is actually speeding up the shift from the West to the East. This year, China will grow at about 8.5% to 9% while India will grow at 6.5% to 7%,” said Anil, the chair of strategy and entrepreneurship at the Robert H Smith School of Business at the University of Maryland in the US. He co-wrote the book with his wife Haiyan Wang, managing partner of research organisation, China India Institute.

China announced a double-digit economic growth of 10.7% in the final quarter of 2009.

“Over the next 15 to 20 years, one billion people will go from poor to middle-income, just in China and India (alone). That’s the market that somebody is going to serve,” he said.

“Now the question is, could it be the Western multinational companies that serve that market or could it be the domestic companies? Whoever serves that market will be a very big company, and will be globally, very powerful.” 

Anil said that before venturing into the two economies, companies need to be aware of China and India’s four “realities” — mega markets, low-cost structure, advanced science and technology, and launch pad for the rise of new competitors.

Compared with other countries, China and India have some of the lowest cost structures in the world, said Anil.

“Big economies like Japan, Germany, the US, do not have the cost structure of China and India. Other countries like Vietnam and the Philippines, which have very low cost structures, do not have the market the size of China and India,” he explained.

According to him, what’s unique about the situation in China and India is that while other countries may have experienced one or more of the “realities”, the two economies are experiencing the four “realities” simultaneously. 

The global financial crisis has driven many MNCs to set up their operations in the two countries but Anil said they were merely skimming the surface by targeting premium, high-end niche markets.

Targeting the mass market which is the middle-income segment is a totally different ball game. “Even though China is the third-largest economy in the world, per capita income is only 1/15th of the US. China’s per capita income is US$2,000 (RM6,880) while US per capita income is US$45,000,” he said.

“So when you’re talking about US$45,000 with US$2,000, you cannot just bring your Western products and make some minor adaptation. It does not work.”

Most of the time, companies develop new technology and new products in their home country and then bring it to the emerging markets, but that should not be the case for China and India.

“What they have to think about (is) what are the products and technologies they should develop here (in China and India), for the global market,” said Anil who joined the faculty of INSEAD Singapore last month. 

In terms of the market, companies should follow a multi-segment strategy for the two countries.

“Target the top, for sure, but also target the middle. But to target the middle, it would require different brands, different products and different pricing to follow a multi-segment strategy,” he said.

Another thing companies would need to think about is leadership.

“Many companies are struggling with (the issue of) to what extent should the company run China and India operations (via) ‘remote control’ from US or Europe, versus giving power to the people over there,” Anil explained.

Companies need to be on the ground as superficial knowledge of the two economies isn’t going to guarantee success. He named IBM, Cisco, Nokia and Proctor & Gamble as examples of companies which have deep knowledge of China and India.

“IBM has total employees of 360,000 people worldwide. Out of the 360,000 people, 100,000 are in India. One-third of their worldwide hardware is manufactured in China,” he said.

“So IBM is an American company, an European company, a Chinese company and an Indian company at the same time. I think by 2020, the leading companies, the surviving companies, will be like that.”



This article appeared on the Management page, The Edge Financial Daily, Feb 8, 2010.