“Challenges Presented by China and India”

Kenneth LieberthalUniversity of Michigan

Globalization• Seriously impacted US

corporations in recent decades – Largely unfolded under leadership by the

West– Now the rise of China (especially) and of

India are forcing major new ways of thinking

– China’s growth has significantly changed the global political economy, and India is now on a rapid growth path, too.

China’s Record Has Been Spectacularly Successful GDP up about10%/yr FDI over $70 billion/year Foreign trade up over 18% per year Largest foreign exchange reserves in the world Has become a global manufacturing center Chinese Communist Party has become the

Chinese Bureaucratic Capitalist Party, a real entrepreneurial (but not free market) dynamo

China-India Comparison• China and India favor economic growth but

– China accepts both growth and related social transformation– India welcomes growth but tries to minimize social transformation

• Reflects different notions of the state– In China, traditionally the state shapes civilization– In India, traditionally the state reflects the social structure– Thus, the Chinese state is far more autonomous of society and

Chinese enterprises are far less autonomous of the state

• China has done far better to date– Same per capita GDP in 1978, now China’s is more than 100% higher

than India’s– India has far higher levels of poverty and illiteracy and far lower

levels of investment in infrastructure

India: Change is Occurring and Accelerating

• In theory, have long had favorable conditions to benefit from globalization

• Media and other forces pressuring government toward reform and more rapid growth

• Different from China– The industries (computer services, design work, specialized analytical

services, insurance services, telecoms, call centers, pharmaceuticals) that are rapidly growing generally have been sectors that do not require much physical infrastructure

– A lot of the dynamism is at the private company level, seeking to leverage technology for disruptive business models

• Similar to China, have competition between localities to encourage FDI

China/India National Growth Strategy Comparison

• China seeks to leverage – High savings– Massive infrastructure investment– Universal basic education– Rapid industrial development– Increasingly deregulated labor market– Relatively open economy– Rapidly growing state investment in technology innovation

• India seeks to leverage service sector development and primarily private sector technology innovation, but it retains– Restricted labor market– Low infrastructure investment– 45% illiteracy– Relatively high tariffs

• National goals: China as global manufacturing center; India as global high tech center.

• Each wants to move somewhat in the direction of the other

For MNCs• China and India both very important, but in

different ways– India

• Provides outsourcing opportunities and increasingly keen global competition

• Domestic market opening is growing, and political factors are important

– China• Major domestic market and sourcing opportunities• Factors of production make it a serious element in global

competition among MNCs almost across the manufacturing spectrum

• Nature of domestic political economy is creating important strategic issues for MNC strategy and operations

– In sum• Both India and China are important for MNCs going forward• But China, given its political economy and far larger overall

economy, is creating the more pressing issues for MNC strategy and operations in the near term

MNCs and China• Most MNCs initially fit China into standard

globalization strategies– Sell products developed elsewhere into the

Chinese market– GBUs source in China for local and global markets

• Now, though, moving beyond that initial strategy is becoming imperative

• Six major emerging issues

#1: Managing Reputational Risk

• Have developed multi-level supply chains in China

• Problems: inadequate regulatory institutions, poor business ethics, constant cost pressures, pervasive corruption

• Worrisome results: labor and environmental abuses, product safety problems

Resulting Issues for MNCs• What resources to devote to supervise adequately the

entire supply chain ?• How to set up corporate communications adequately to

manage reputational risk ?• How to protect yourself when law enforcement in China

is poor? • How far is it reasonable to push cost saving

requirements onto supply chains in China?• Also have “China brand” reputational risks

– Olympics– U.S. presidential election– Symbol of globalization

#2: Relations Between China Team and Global Business Units (GBUs)

• China team needs to have authority and resources to handle– Government relations– Corporate branding– Product development– Demand for rapid project and account decisions

• Poses difficult issues regarding such issues as decision making authority, staffing and reporting lines, and financial support of the country team.

#3: Meeting Competitive Challenges: Product Development

• Problems with the typical MNC model – Limits the customer base to the top of the pyramid– Chinese dragons are capturing the mass market and

using that to attack MNC competitive strengths – In reality, MNC strengths are not in its existing

products Real MNC strengths are in technology, conceptualization and

design, and managerial talent (systems integration)

To Compete for the Mass Market• Ideal approach

– Deeply research the contours of a problem in China– Specify a low price point for the solution– Then turn it over to the local office designers and engineers to create the

product

• Note the implications– Technology innovation to lower price points– View China and India as vital sources of new solutions and products – Empower management in China and India to do not only market research but

related R&D, product development, and venture capital type investment– Take learning developed in China and India and leverage it elsewhere for

competitive advantage– Potentially, headquarter one or more GBUs in China or India

#4: HR Challenges

• Questions:– How to instill corporate norms regarding corruption,

teamwork, quality assurance, lines of responsibility, and IP protection into environment that does not value these norms?

– How to recruit and retain, where especially management talent is in very short supply?

– How to identify and leverage pertinent cultural differences?

• Need training programs built from the ground up • New mix of demands for successful management

#5: The Business Model Challenge

• MNCs are accustomed to operating in the framework of the “Washington Consensus”

• But China has succeeded without this – a newly emerging “Beijing Consensus”?

• “The West knows best” seen as less true than previously

• How should this affect corporate communications and explanations of corporate philosophy and strategies?

#6: Challenge of Shifting Centers of Initiative• Globalization began with Western dominance in technology,

capital, and management, along with Western development of the rules of the game

• All of this is shifting– China and India using technology innovation for disruptive business

models– Can no longer assume the West will remain the only source of

technology development– China is now the world’s largest holder of FOREX– China is one of world’s largest markets, and Indian market is now

growing rapidly• Shifting balance is likely to be reflected in changes in

attitudes toward many existing international rules, such as IP protection

Conclusions: Implications of the Rise of China and India

• Both increasingly reclaiming previous global shares, with major impacts on – International supply chains– Returns to capital and labor and to differences in human capital– Intensity, shape, and nature of competition – Distribution of opportunities and risks– Environment– Nature and speed of innovation

• Add in the implications of the technology revolution– Greater power to NGOs – New world of work place rights and enforcement– Fundamentally changing flows of capital and knowledge

• Globalization previously was led by the West but China and India are increasingly changing the shape and directions of global competition

• Key questions– How to shape corporate communications to stay ahead of and benefit from these

major, multi-directional changes?– And with China and India, how is each likely to fare over the long term?

THANK YOU!