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A New World Economy
The
balance of power will shift to the East as China and India evolve
By Peter Engardio ( Businesaweek
)
http://www.businessweek.com/magazine/content/05_34/b3948401.htm
It may not top
the must-see list of many tourists. But to appreciate Shanghai's
ambitious view of its future, there is no better place than the
Urban Planning Exhibition Hall, a glass-andmetal structure across
from People's Square. The highlight is a scale model bigger than a
basketball court of the entire metropolis -- every skyscraper,
house, lane, factory, dock, and patch of greens pace -- in the year
2020.
There are white plastic showpiece towers designed by architects such
as I.M. Pei and Sir Norman Foster. There are immense new industrial
parks for autos and petrochemicals, along with new subway lines,
airport runways, ribbons of expressway, and an elaborate riverfront
development, site of the 2010 World Expo. Nine futuristic planned
communities for 800,000 residents each, with generous parks, retail
districts, man-made lakes, and nearby college campuses, rise in the
suburbs. The message is clear. Shanghai already is looking well past
its industrial age to its expected emergence as a global mecca of
knowledge workers. "In an information economy, it is very important
to have urban space with a better natural and social environment,"
explains Architectural Society of Shanghai President Zheng Shiling,
a key city adviser.
It is easy to dismiss such dreams as bubble-economy hubris -- until
you take into account the audacious goals Shanghai already has
achieved. Since 1990, when the city still seemed caught in a
socialist time warp, Shanghai has erected enough high-rises to fill
Manhattan. The once-rundown Pudong district boasts a space-age
skyline, some of the world's biggest industrial zones, dozens of
research centers, and a bullet train. This is the story of China,
where an extraordinary ability to mobilize workers and capital has
tripled per capita income in a generation, and has eased 300 million
out of poverty. Leaders now are frenetically laying the groundwork
for decades of new growth.
INVALUABLE ROLE
Now hop a plane to India. It is hard to tell this is the world's
other emerging superpower. Jolting sights of extreme poverty abound
even in the business capitals. A lack of subways and a dearth of
expressways result in nightmarish traffic.
But visit the office towers and research and development centers
sprouting everywhere, and you see the miracle. Here, Indians are
playing invaluable roles in the global innovation chain. Motorola, (MOT
) Hewlett-Packard (HPQ
), Cisco Systems (CSCO
), and other tech giants now rely on their Indian teams to devise
software platforms and dazzling multimedia features for
next-generation devices. Google (GOOG
) principal scientist Krishna Bharat is setting up a Bangalore lab
complete with colorful furniture, exercise balls, and a Yamaha organ
-- like Google's Mountain View (Calif.) headquarters -- to work on
core search-engine technology. Indian engineering houses use 3-D
computer simulations to tweak designs of everything from car engines
and forklifts to aircraft wings for such clients as General Motors
Corp. (GM
) and Boeing Co (BA
). Financial and market-research experts at outfits like B2K,
OfficeTiger, and Iris crunch the latest disclosures of blue-chip
companies for Wall Street. By 2010 such outsourcing work is expected
to quadruple, to $56 billion a year.
Even more exhilarating is the pace of innovation, as tech hubs like
Bangalore spawn companies producing their own chip designs,
software, and pharmaceuticals. "I find Bangalore to be one of the
most exciting places in the world," says Dan Scheinman, Cisco
Systems Inc.'s senior vice-president for corporate development. "It
is Silicon Valley in 1999." Beyond Bangalore, Indian companies are
showing a flair for producing high-quality goods and services at
ridiculously low prices, from $50 air flights and crystal-clear 2
cents-a-minute cell-phone service to $2,200 cars and cardiac
operations by top surgeons at a fraction of U.S. costs. Some
analysts see the beginnings of hypercompetitive multinationals.
"Once they learn to sell at Indian prices with world quality, they
can compete anywhere," predicts University of Michigan management
guru C.K. Prahalad. Adds A. T. Kearney high-tech consultant John
Ciacchella: "I don't think U.S. companies realize India is building
next-generation service companies."
SIMULTANEOUS TAKEOFFS
China and India. Rarely has the economic ascent of two still
relatively poor nations been watched with such a mixture of awe,
opportunism, and trepidation. The postwar era witnessed economic
miracles in Japan and South Korea. But neither was populous enough
to power worldwide growth or change the game in a complete spectrum
of industries. China and India, by contrast, possess the weight and
dynamism to transform the 21st-century global economy. The closest
parallel to their emergence is the saga of 19th-century America, a
huge continental economy with a young, driven workforce that grabbed
the lead in agriculture, apparel, and the high technologies of the
era, such as steam engines, the telegraph, and electric lights.
But in a way, even America's rise falls short in comparison to
what's happening now. Never has the world seen the simultaneous,
sustained takeoffs of two nations that together account for
one-third of the planet's population. For the past two decades,
China has been growing at an astounding 9.5% a year, and India by
6%. Given their young populations, high savings, and the sheer
amount of catching up they still have to do, most economists figure
China and India possess the fundamentals to keep growing in the
7%-to-8% range for decades.
Barring cataclysm, within three decades India should have vaulted
over Germany as the world's third-biggest economy. By mid-century,
China should have overtaken the U.S. as No. 1. By then, China and
India could account for half of global output. Indeed, the troika of
China, India, and the U.S. -- the only industrialized nation with
significant population growth -- by most projections will dwarf
every other economy.
What makes the two giants especially powerful is that they
complement each other's strengths. An accelerating trend is that
technical and managerial skills in both China and India are becoming
more important than cheap assembly labor. China will stay dominant
in mass manufacturing, and is one of the few nations building
multibillion-dollar electronics and heavy industrial plants. India
is a rising power in software, design, services, and precision
industry. This raises a provocative question: What if the two
nations merge into one giant "Chindia?" Rival political and economic
ambitions make that unlikely. But if their industries truly
collaborate, "they would take over the world tech industry,"
predicts Forrester Research Inc (FORR
). analyst Navi Radjou.
In a practical sense, the yin and yang of these immense workforces
already are converging. True, annual trade between the two economies
is just $14 billion. But thanks to the Internet and plunging telecom
costs, multinationals are having their goods built in China with
software and circuitry designed in India. As interactive design
technology makes it easier to perfect virtual 3-D prototypes of
everything from telecom routers to turbine generators on PCs, the
distance between India's low-cost laboratories and China's low-cost
factories shrinks by the month. Managers in the vanguard of
globalization's new wave say the impact will be nothing less than
explosive. "In a few years you'll see most companies unleashing this
massive productivity surge," predicts Infosys Technologies (INFY
) CEO Nandan M. Nilekani.
To globalization's skeptics, however, what's good for Corporate
America translates into layoffs and lower pay for workers. Little
wonder the West is suffering from future shock. Each new Chinese
corporate takeover bid or revelation of a major Indian outsourcing
deal elicits howls of protest by U.S. politicians. Washington think
tanks are publishing thick white papers charting China's rapid
progress in microelectronics, nanotech, and aerospace -- and
painting dark scenarios about what it means for America's global
leadership.
Such alarmism is understandable. But the U.S. and other established
powers will have to learn to make room for China and India. For in
almost every dimension -- as consumer markets, investors, producers,
and users of energy and commodities -- they will be 21st-century
heavyweights. The growing economic might will carry into geopolitics
as well. China and India are more assertively pressing their
interests in the Middle East and Africa, and China's military will
likely challenge U.S. dominance in the Pacific.
One implication is that the balance of power in many technologies
will likely move from West to East. An obvious reason is that China
and India graduate a combined half a million engineers and
scientists a year, vs. 60,000 in the U.S. In life sciences, projects
the McKinsey Global Institute, the total number of young researchers
in both nations will rise by 35%, to 1.6 million by 2008. The U.S.
supply will drop by 11%, to 760,000. As most Western scientists will
tell you, China and India already are making important contributions
in medicine and materials that will help everyone. Because these
nations can throw more brains at technical problems at a fraction of
the cost, their contributions to innovation will grow.
CONSUMERS RISING
American business isn't just shifting research work because Indian
and Chinese brains are young, cheap, and plentiful. In many cases,
these engineers combine skills -- mastery of the latest software
tools, a knack for complex mathematical algorithms, and fluency in
new multimedia technologies -- that often surpass those of their
American counterparts. As Cisco's Scheinman puts it: "We came to
India for the costs, we stayed for the quality, and we're now
investing for the innovation."
A rising consumer class also will drive innovation. This year,
China's passenger car market is expected to reach 3 million, No. 3
in the world. China already has the world's biggest base of
cell-phone subscribers -- 350 million -- and that is expected to
near 600 million by 2009. In two years, China should overtake the
U.S. in homes connected to broadband. Less noticed is that India's
consumer market is on the same explosive trajectory as China five
years ago. Since 2000, the number of cellular subscribers has
rocketed from 5.6 million to 55 million.
What's more, Chinese and Indian consumers and companies now demand
the latest technologies and features. Studies show the attitudes and
aspirations of today's young Chinese and Indians resemble those of
Americans a few decades ago. Surveys of thousands of young adults in
both nations by marketing firm Grey Global Group found they are
overwhelmingly optimistic about the future, believe success is in
their hands, and view products as status symbols. In China, it's
fashionable for the upwardly mobile to switch high-end cell phones
every three months, says Josh Li, managing director of Grey's
Beijing office, because an old model suggests "you are not getting
ahead and updated." That means these nations will be huge proving
grounds for next-generation multimedia gizmos, networking equipment,
and wireless Web services, and will play a greater role in setting
global standards. In consumer electronics, "we will see China in a
few years going from being a follower to a leader in defining
consumer-electronics trends," predicts Philips Semiconductors (PHG
) Executive Vice-President Leon Husson.
For all the huge advantages they now enjoy, India and China cannot
assume their role as new superpowers is assured. Today, China and
India account for a mere 6% of global gross domestic product -- half
that of Japan. They must keep growing rapidly just to provide jobs
for tens of millions entering the workforce annually, and to keep
many millions more from crashing back into poverty. Both nations
must confront ecological degradation that's as obvious as the smog
shrouding Shanghai and Bombay, and face real risks of social strife,
war, and financial crisis.
Increasingly, such problems will be the world's problems. Also, with
wages rising fast, especially in many skilled areas, the cheap labor
edge won't last forever. Both nations will go through many boom and
harrowing bust cycles. And neither country is yet producing
companies like Samsung, Nokia (NOK
), or Toyota (TM
) that put it all together, developing, making, and marketing
world-beating products.
Both countries, however, have survived earlier crises and possess
immense untapped potential. In China, serious development only now
is reaching the 800 million people in rural areas, where per capita
annual income is just $354. In areas outside major cities, wages are
as little as 45 cents an hour. "This is why China can have another
20 years of high-speed growth," contends Beijing University
economist Hai Wen.
Very impressive. But India's long-term potential may be even higher.
Due to its one-child policy, China's working-age population will
peak at 1 billion in 2015 and then shrink steadily. China then will
have to provide for a graying population that has limited retirement
benefits. India has nearly 500 million people under age 19 and
higher fertility rates. By mid-century, India is expected to have
1.6 billion people -- and 220 million more workers than China. That
could be a source for instability, but a great advantage for growth
if the government can provide education and opportunity for India's
masses. New Delhi just now is pushing to open its power, telecom,
commercial real estate and retail sectors to foreigners. These
industries could lure big capital inflows. "The pace of
institutional changes and industries being liberalized is phenomenal,"
says Chief Economist William T. Wilson of consultancy Keystone
Business Intelligence India. "I believe India has a better model
than China, and over time will surpass it in growth."
For its part, China has yet to prove it can go beyond forced-march
industrialization. China directs massive investment into public
works and factories, a wildly successful formula for rapid growth
and job creation. But considering its massive manufacturing output,
China is surprisingly weak in innovation. A full 57% of exports are
from foreign-invested factories, and China underachieves in
software, even with 35 software colleges and plans to graduate
200,000 software engineers a year. It's not for lack of genius.
Microsoft Corp.'s (MSFT
) 180-engineer R&D lab in Beijing, for example, is one of the
world's most productive sources of innovation in computer graphics
and language simulation.
While China's big state-run R&D institutes are close to the cutting
edge at the theoretical level, they have yet to yield many
commercial breakthroughs. "China has a lot of capability," says
Microsoft Chief Technology Officer Craig Mundie. "But when you look
under the covers, there is not a lot of collaboration with industry."
The lack of intellectual property protection, and Beijing's heavy
role in building up its own tech companies, make many other
multinationals leery of doing serious R&D in China.
China also is hugely wasteful. Its 9.5% growth rate in 2004 is less
impressive when you consider that $850 billion -- half of GDP -- was
plowed into already-glutted sectors like crude steel, vehicles, and
office buildings. Its factories burn fuel five times less
efficiently than in the West, and more than 20% of bank loans are
bad. Two-thirds of China's 1,300 listed companies don't earn back
their true cost of capital, estimates Beijing National Accounting
Institute President Chen Xiaoyue. "We build the roads and industrial
parks, but we sacrifice a lot," Chen says.
India, by contrast, has had to develop with scarcity. It gets scant
foreign investment, and has no room to waste fuel and materials like
China. India also has Western legal institutions, a modern stock
market, and private banks and corporations. As a result, it is far
more capital-efficient. A BusinessWeek analysis of Standard &
Poor's (MHP
) Compustat data on 346 top listed companies in both nations shows
Indian corporations have achieved higher returns on equity and
invested capital in the past five years in industries from autos to
food products. The average Indian company posted a 16.7% return on
capital in 2004, vs. 12.8% in China.
SMALL-BATCH EXPERTISE
The burning question is whether India can replicate China's mass
manufacturing achievement. India's info-tech services industry,
successful as it is, employs fewer than 1 million people. But 200
million Indians subsist on $1 a day or less. Export manufacturing is
one of India's best hopes of generating millions of new jobs.
India has sophisticated manufacturing knowhow. Tata Steel is among
the world's most-efficient producers. The country boasts several top
precision auto parts companies, such as Bharat Forge Ltd. The
world's biggest supplier of chassis parts to major auto makers, it
employs 1,200 engineers at its heavily automated Pune plant. India's
forte is small-batch production of high-value goods requiring lots
of engineering, such as power generators for Cummins Inc. (CMI
) and core components for General Electric Co. (GE
) CAT scanners.
What holds India back are bureaucratic red tape, rigid labor laws,
and its inability to build infrastructure fast enough. There are
hopeful signs. Nokia Corp. is building a major campus to make cell
phones in Madras, and South Korea's Pohang Iron & Steel Co. plans a
$12 billion complex by 2016 in Orissa state. But it will take India
many years to build the highways, power plants, and airports needed
to rival China in mass manufacturing. With Beijing now pushing
software and pledging intellectual property rights protection, some
Indians fret design work will shift to China to be closer to
factories. "The question is whether China can move from
manufacturing to services faster than we can solve our
infrastructure bottlenecks," says President Aravind Melligeri of
Bangalore-based QuEST, whose 700 engineers design gas turbines,
aircraft engines, and medical gear for GE and other clients.
However the race plays out, Corporate America has little choice but
to be engaged -- heavily. Motorola illustrates the value of
leveraging both nations to lower costs and speed up development.
Most of its hardware is assembled and partly designed in China. Its
R&D center in Bangalore devises about 40% of the software in its new
phones. The Bangalore team developed the multimedia software and
user interfaces in the hot Razr cell phone. Now, they are working on
phones that display and send live video, stream movies from the Web,
or route incoming calls to voicemail when you are shifting gears in
a car. "This is a very, very critical, state-of-the-art resource for
Motorola," says Motorola South Asia President Amit Sharma.
Companies like Motorola realize they must succeed in China and India
at many levels simultaneously to stay competitive. That requires
strategies for winning consumers, recruiting and managing R&D and
professional talent, and skillfully sourcing from factories. "Over
the next few years, you will see a dramatic gap opening between
companies," predicts Jim Hemerling, who runs Boston Consulting
Group's Shanghai practice. "It will be between those who get it and
are fully mobilized in China and India, and those that are still
pondering."
In the coming decades, China and India will disrupt workforces,
industries, companies, and markets in ways that we can barely begin
to imagine. The upheaval will test America's commitment to the
global trade system, and shake its confidence. In the 19th century,
Europe went through a similar trauma when it realized a new giant --
the U.S. -- had arrived. "It is up to America to manage its own
expectation of China and India as either a threat or opportunity,"
says corporate strategist Kenichi Ohmae. "America should be as
open-minded as Europe was 100 years ago." How these Asian giants
integrate with the rest of the world will largely shape the
21st-century global economy.
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