August 17, 2005

India, China…Tortoise, Hare?

Asia Times, 18.08.2005

Consider, for a moment, a few haphazardly scattered jigsaw pieces of the India-China puzzle. First, a report on August 15 suggested that the Oil & Natural Gas Corporation (ONGC), India's flagship public sector company for overseas acquisition of energy assets, had submitted a US$3.2 billion bid for Petrokazakhstan. Second, the total number of overseas acquisitions made by Indian companies amounted to 42 in the first half of 2005, compared to 60 in the entire year of 2004. The value of the deals was recorded at $948 million.

On the Chinese side, a recent edition of The Economist contained a cover story on 'How China runs the world economy', examining the impact of soaring Chinese demand on global commodity prices and Beijing's recent revaluation of the yuan. But there was also a reality check – reports came of the failure of CNOOC's $18.5 billion takeover attempt of Unocal.

The idea that Chinese companies will buy the world has both aggravated xenophobia in the West, and been a pipedream for the cadres in Beijing. Several failed acquisition attempts in recent months come to mind: Haier's exit from the Maytag deal when Whirlpool entered the fray; China Mobile's loss to a UAE-based company in its takeover bid for Pakistan Telecom; or Minmetal's $7 billion attempt to buy Noranda fizzling out as a "damp squib". Among other debacles to hit China Inc, the lockout at the white goods maker Kelon, after the arrest of its top management for financial irregularities, instantaneously comes to mind.

The $1.75 billion purchase of IBM's PC division by Lenovo earlier this year generated much kerfuffle as well. However, this was more a sign of Lenovo's shrinking profit margins back home than the result of a distinct corporate vision. It could be argued that the move could spell trouble for the Chinese PC maker, as competitors such as Dell and HP were squeezing IBM, which is why it moved almost entirely into consulting by selling its underperforming PC arm. Moreover, Gartner predicts a 2–4% fall in global PC sales in the years to come, which means that Lenovo could be fighting for space within a declining market. Lenovo shares have fallen by 23% since the takeover.

Scholars such as Yasheng Huang (MIT) and Tarun Khanna (Harvard) have long argued about the better long-term prospects of India's economy, which is based on its strong domestic companies, vs China's primarily FDI-based growth. It could indeed be argued, using the aforementioned examples, that China's own companies are on weak legs. Although the country ranks above India on the global FDI confidence index, its stock markets fell by 15% in 2004, making it one of the poorest performers in the world. It fared the worst among all countries tracked by The Economist for two years running in 2004. On the other side of the spectrum, the Indian market grew by 20% over the same period. The Bombay Stock Exchange is at record highs of around 7,800 these days, despite $67 a barrel crude prices and the recent flood in Mumbai.

Shanghai Stock Exchange CEO Fang Xinghai put it aptly, "Why do you want to visit the trading floor? There is nothing to see." The fundamental cause of the fiasco in China's equity markets (the bear market on Chinese bourses is now four years old) has been the mismanagement, manipulation and constant intervention of political circles in the market's operations, which has effectively prevented firms from listing by merit and with freedom. As a result, confidence among investors has been terminally shaken. In February, authorities at Baosteel were forced to delay its initial public offering (IPO) worth $3.2 billion. Compare that with the recent announcement of listing by Sasken Communications, a Bangalore-based firm, whose IPO was oversubscribed by more than a dozen times.

It is common knowledge that business enterprises in China have a much better atmosphere to flourish than in India. But apart from the issues of good governance – better roads, an uninterrupted power supply, a low tax regime and flexible labor regulations – this business-friendly atmosphere also has certain dubious characteristics. These include an undervalued currency facilitating exports; cheap and unlimited credit for "blessed" firms; no default on non-payments for the same (as shown by the country's still huge nonperforming asset burden); low-priced land; subsidies; unpaid supplier bills waived and, ironically, (in light of the country's view of itself as "the worker's state") quite an oppressive labor regime.

India presents an interesting contrast – the physical infrastructure is creaky at best, the labor regime is inflexible, corporate taxes are still too high by ASEAN standards, and a demented preference policy for small firms still continues. But Indian companies are faring well in spite of these obstacles. Why? There are two primary reasons. First, democratic India retains an element of the rule of law, whereby conditions are the same for all firms, resulting in a reasonably competitive environment. Second, the government has wisely refrained from intervening in "new sectors" such as information technology, business process outsourcing and to a lesser degree, pharmaceuticals. Relaxation of overt regulations has been continuous, albeit slow.

To be sure, plentiful problems remain in both systems, and whereas "firms are often kept from bankruptcy by officialdom" in China, firms are deterred from taking risks in India, as the bankruptcy process takes nearly a decade. An even greater problem comes when we compare the two, since the successful firms in India and China almost never operate in the same sectors. But a few portrayals ought to deliver the point.

Take Huawei Technologies as an example. Here we have one of China's burgeoning telecom equipment companies, which recently announced a $100 million investment in a research and development center in Bangalore. Although its sales have zoomed to $3.8 billion in 2004 from $1.9 billion in 2000, its operating profit margins declined from 24% to 18% over the same period. Similarly, while sales of China National Petroleum Corporation for the first half of 2004 (the last time period for which information is available on the company website) increased by 4.7 billion yuan (US$580 million) compared to the first half of 2003, operating profits declined from 24.5% to 23.7% over a period when global crude prices have been soaring steadily. The corresponding figure for ONGC rose from 20% at the end of the financial year in March 2004 to 23% in March 2005. This was in spite of the damage to ONGC's numbers from numerous excise duties and taxes extracted by the Indian government, and the company's insistence on not passing on the increased cost of crude to consumers. As for the top IT companies in India like TCS, Infosys and Wipro, they operate at margins well in excess of 30–35%.

It is not for us to judge yet whether the tortoise has finally overtaken the hare. Both countries have different socioeconomic models, and just how different they are is becoming more conspicuous – the pieces of the puzzle are coming together. China continues to attract $60 billion of FDI each year, has soaring exports and an economy that grows in excess of 9% a year. But most of what is "Made in China" is in fact made by multinationals originating in foreign countries. Chinese companies are still finding their feet, despite the heavy backing they receive.

India receives about $7 billion in FDI, has a small but growing foreign trade ratio to GDP and grows at around 7% a year. Yet its companies, somewhat strangled by slow-moving politics back home, are prospering. Is it because their entrepreneurship has been nurtured by India's free credentials, instead of being "guided"? Hypothetically, if governance improves with time in India and the government in Beijing is not able to sustain its social and economic engineering indefinitely (both the most likely scenarios out of all the possibilities), where will the fate of India Inc and China Inc ultimately lie?

We return again to the story of the tortoise and the hare – and we all remember how that one ends, don't we?

- 13 comments by 1 or more people Not publicly viewable

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  1. Enjoy reading your posts.
    Do you know of any vehicle through which a UK national NRI can buy commercial property in India, mainly in Mumbai/Delhi/Bangalore?
    I have searched and searched but Google isn't giving me anything.

    17 Aug 2005, 16:37

  2. Kunal

    I am afraid you've got the wrong person here, as I am not entirely sure about the answer to your question. I know the restriction on foreign developers of real estate were dropped recently, but I am uncertain about the cap for foreign national purchase. Here is a site you might find useful about the precise guidelines though–


    I do know of these agencies but don't know their usefulness–


    Let me know how you get on.

    17 Aug 2005, 16:55

  3. Thanks for that..

    Apparently I can buy to let in India :)

    17 Aug 2005, 17:47

  4. Hu ZhenYu

    Mumbai reality .


    18 Aug 2005, 13:36

  5. And…?

    18 Aug 2005, 13:52

  6. donny


    Great post — only mention is on the lenovo part — they may have dropped share but they have introduced some really coolw thinkpads — the the tablet and the widesceen are both excellent — not to mention that they even have a uk portal

    21 Oct 2005, 22:59

  7. stone

    predictions about china made by westerners never correct. from 1949, when the republic was established, the westerner had been keep on predicting the country would collapse, but it did not. China lived in the encircling and hostility of nearly the whole world, including US and USSR, but the country achieved a rate of 7% GDP increase during 1949 to 1979. after the event of JUNE 4th 1989, the westerner started another hot wave of prediction, hehe, every year they said the country would collapse with 5 years, which never happened. on the contrast, the country develops faster after that.

    what made china and india different is that china choose a way by herself and goes her own way, which is unique,independent, and so different with the westerner's mode. and india is always within western framework. so you can understand why westerners feel sore about china's success.

    The problem for india is, if you play the game within the framework the westerners set for you, you would never overtake them. that's why the west politically love india and hate china.

    chinese never take westerner'ss opinion serious, I hope neither indian.

    19 Dec 2005, 19:38

  8. Stone, communism is very much a Western framework. One that didn't work very well.

    19 Dec 2005, 20:22

  9. I agree that there is a dearth of alternative ideologies to the one that the West formulated, but it is preposterous to say the least to suggest that China is somehow en route to that vis–a–vis India. As Kunal mentioned, Maoism heavily borrowed from Stalinism and the modern capitalist economy with authoritarian governments has also been done before by other South East and East Asian states. There is nothing unique about China's path.

    India on the other hand did borrow heavily from Westminster while settig up its polity. But as Amartya Sen has recently argued, the argumentative trait is very deep in India's culture and hence democracy is natural for us. A crucial point in my article though, is that India has managed to develop successful private companies that work in a non–arbitrary environment, something that China still hasn't managed to come up with.

    More generally though, yes, even India lacks a unique political philosophy of its own, just like China.

    19 Dec 2005, 21:03

  10. stone

    kunal and aruni,
    china's way is unique. because it is neither pure communism nor pure capitalism now. aruni said it " it has been done before by other South East and East Asian states". that not true. there is no South East and East Asian states shift from a pure comunism system to something like china's system, let alone in every dimension these countries are not comparable with china.

    china is tryng a new way to develop, which was never tried by other nations. the interpretations about china made by westerners are only laughable.china is a blackbox for them, totally beyond their understanding, that's why their predictions about china never come to true, as you already saw before.

    20 Dec 2005, 11:44

  11. What is so unique about transitioning from a socialist to a capitalist economy? A whole lot of countries in Eastern Europe have done it, and India has been doing it since the late 1980s as well. This has been the experience in the entire developed world. Arab Socialism comes to mind as well.

    Also, there is nothing new about juxtaposing an authoritarian form of government with a quasi capitalist economy. Singapore has done it, Taiwan has done it, so has Malaysia and others.

    In a small way, it is India that is unique for being the only country to have embraced democracy since 1947, which is unmatched in the developing world.

    There was some revival of neo–Confucianism in China, but it has since been abandoned by the cadres in Beijing as "un–Marxist". What is so unique about that?

    20 Dec 2005, 11:53

  12. stone

    I found maybe you are not a right person to discuss with. you always confuse different things with wrong logics.

    you said "from a socialist to a capitalist economy? A whole lot of countries in Eastern Europe have done it",
    well, but these east european countries did not maintain their communist goverment at the same time, while china does, is that different enough?

    you said "about juxtaposing an authoritarian form of government with a quasi capitalist economy. Singapore has done it, Taiwan has done it, so has Malaysia and others" . again you confuse many different things, there are no communist countries in the ones you mentioned. and these countries mostly developped in a friendly or at least neutral enviorment, not like china, developped as a enemy of both west group and east group led by USSR. by the way, their size, achiement and impact are not comparable with china's.

    20 Dec 2005, 12:29

  13. What exactlty is "communist" in the strict definition of the word about the CCP? Is there common ownership of means of production? No. Is there a classless society? No. Are there economic and political inequalities? Yes.

    So China was the only country who developed in "friendly atmosphere"? What about India, with American and Chinese hostility? What about Latin American countries?

    If you're talking about "impact", then Japan has had a far more impact on the global economy than China. And Japan was not a democracy by any means in its early years.

    After all's been said and done, is communism really Chinese?

    20 Dec 2005, 13:19

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