Re-Thinking Global Strategy

It’s no secret that the phenomenal growth stories of China and India are changing the global economy playing field. By the end of this year China will have surpassed Germany as the world’s third largest economy, behind the U.S. and Japan. In fact, projections suggest that between 2035 and 2050 the three biggest economies will be the U.S., China and India.

At the same time, both countries face significant challenges and growth hurdles. The populations of both remain relatively poor, with per capita income less than one-twentieth that of the U.S. Both also face the hurdle of providing the infrastructure to support ongoing growth. What’s more, while GDP growth rates still outpace by far those of the U.S. and Western Europe, they have cooled somewhat since the financial crisis prompted consumers in the U.S. and developed countries to curtail spending.

What follows are excerpts from the remarks of Summit panel participants Anil Gupta, the Ralph J. Tyser professor of strategy and organization at the University of Maryland’s Smith School of Business and author of Getting China and India Right, and Robert Lawrence Kuhn, author of the forthcoming The Inside Story of 30 Years of Reform: How China’s Leaders Think and What It Means for the Future, who discussed how CEOs can leverage these economies for global growth.

On global position:

Robert Lawrence Kuhn: There is no question that India and China will become a force central to the world’s economy. This year, China’s growth rate will drop from the 11 or 12 percent we had in the last few years to potentially 8 or 9 percent. Next year, it might have dropped to 5, but the stimulus package just announced may keep it at 8. India may go down from 7 and 8 percent to 5 percent. But if other coun- tries, including ours, are slightly negative, you’ll basically have more than 100 percent of the world’s growth coming out of China and India. That says a lot about the future and indicates that all of us need to be very attentive.

Anil Gupta: I see China and India as the only two countries in the world that have four stories being played out simultaneously. One is the megamarket, rapid-growth story. A second is the cost-efficiency story, that wage rates remain a tiny fraction of those [in developed markets]. Third is innovation platforms, because of the sheer amount of skilled talent in engineering and science. Fourth is the emergence of new, potentially fearsome competitors who, unlike the Japanese and Korean companies that grew over the last 30 years, are actually much more acquisition-oriented and therefore likely to become bigger at a faster rate. Each is compelling on its own, but all four together have a compounded effect.

On challenges ahead:

Kuhn: The rural economy is extremely important in China and is a central concern of the Chinese leadership. There are roughly 900 million people in rural areas, 400 million in urban areas. Of that 900 million, roughly 200 million have already migrated to cities as migrant workers or floating populations. Estimates are that rural areas can only support about 400 million residents at a decent income level. What that means is that China has to effect the largest planned migration in human history—to migrate 400 or 500 million people on a permanent basis from rural areas to urban areas over a 20-year period, which means creating suburban areas, light industry and jobs.

Gupta: To put it even more starkly, if there is no salvation for the rural poor in China and in India, there is no salvation for China or India… I think the way it will happen is the tier two and three cities will become the equivalent of today’s tier one cities, so that we have a spread of industrial development. To make that happen the government needs to bring infrastructure. Mobile communications is in place quite nicely in both  countries, but highways, power and communications are needed. Once you have that, the private sector does its own thing, which is go where land is more easily available and people are less expensive. Both governments are working on this at breakneck speed—China obviously ahead of India—because if infrastructure doesn’t happen, none of this happens.

On potential protectionism:

Kuhn: A protectionist policy is virtually unenforceable. Or, if it is enforceable, it would have a dramatically negative effect on American industry, if not in a matter of months then in very few years. I tend to be not too worried that there will be a sea change once we get into the new administration because the President-elect is very smart and I hope somebody who’s very smart can see the right policies.

Gupta: There is talk in politics and there is reality. When you have bluecollar wages at $1 an hour versus $20- plus here, and a software engineer’s total cost is $15,000 a year versus $75,000 or $90,000, exactly how much subsidy can the U.S. government give to keep jobs here? What needs to be done is investment in R&D and education and things like that, which obviously don’t have a short-term payoff. But it’s hard to imagine how one can either incent or penalize companies by any meaningful amount to prevent the outsourcing story.

On navigating acquisitions:

Kuhn: Be aware that in many Chinese companies, if you ask for revenues, sometimes they give their factory production, not considering whether they ever sold any of the stuff or not. If it’s a state-owned enterprise in a municipality or province, the people will actually be on your side and try to negotiate against their own government because that’s in their own best interest. Every state-owned Chinese enterprise wants  to be a joint venture or majority-owned or minority-owned by a foreigner because that gets them out of their system. That’s a benefit, but you must be able to really understand the whole landscape of all the constituencies for any deal that you want to do. To just do it in the way you would do it in America, you know, significantly underplays your likelihood of success.