China v. India: The Battle of the Titans
December 9, 2007
As China has been the dominant low cost solution for the manufacture of consumer products, so too has India for IT and Business Process Outsourcing (BPO), especially since the burst of the technology bubble in 2001. The duality of these economies is based on the practice of many US based companies to invest in China as the manufacturing powerhouse and India as the software powerhouse.
Companies making their initial entry into Asia, or looking to expand beyond the borders of China, may find India a very compelling place for high technology investments and lower costs. On the surface, India does not necessarily look like a major economy or an attractive place for a US company to setup a manufacturing operation. India’s infrastructure is poor, its traffic is chaotic, its policies and bureaucratic processes stifle development, and it is home to rampant corruption.
Relative to India, China has considerably more experience as a recipient of FDI (Foreign Direct Investment) from the West — about 35 years worth, ever since Nixon and Mao had their famous meeting in Peking in 1972.
Many Factors Distinguish These Countries
A comparative understanding of the two countries can help unravel some of the complexities and make it easier to appreciate what India has to offer. First, it’s important to dispel some of the hype that’s been surrounding both countries. Regardless of what’s said in the mainstream press, China and India suffer severe poverty, with a huge chasm between those who have and those who have-not.
Nearly 50% of China’s labor force comes from agriculture. In India, over 60% of the working population is engaged in agriculture. Despite the high visibility of India’s software engineers and technology industry, the country still has the largest number of illiterate people in the world — roughly 40% of its population — while China has the largest number of poorly educated people who contribute little to that country’s economic development. The total population of both countries exceeds 2.3 billion of which 1.5 billion earn less than $2 per day. The challenges equal the opportunities in both markets.
The performance of both economies can be seen in the following charts that show the 10-year trend in GDP, Imports, Exports, and Currency Vs. the Dollar. Clearly, China is the overall winner in terms of shear size and volume; however, India has gained substantially in GDP and Exports over the past four years.
The Chinese Yuan has shown a dramatic gain on the dollar. As of this article, the CYN is trading at 7.4936 and the INR is trading at 39.7943 on a three-month average. Over a one-year period, both the CYN and INR have gained strength of 10.5% and 14%, respectively. This has driven the cost of exports to the US at higher costs. But even if both currencies were to strengthen by another 50%, this still would not offset the lower costs of manufacturing in these two countries.
China Dominates in Manufacturing
In terms of manufacturing, China is a clear leader over India. The following chart shows the top 15 manufacturing nations, and where they will rank 20 years from now, according to the Financial Times. India has demonstrated sustainable success in the service sectors, however, this has yet to be seen in the manufacturing sector.
The following table gives general comparison of both countries as manufacturing or investment entities. India wins hands down in the area of taxation. Unlike China, India taxes both manufacturing and service entities at the same rates as long as they are in an Economic Zone. Most service industries in China are not taxed at the same rates as manufacturing companies. This is due to the low level of manpower in China’s service sector — a key resource for this country.
India Stronger in Finance and Management Skill
Another area where India has advantages over China is in the capital markets. Indian companies list domestically on the Bombay Stock Exchange (1 trillion US$). In China, companies are listed on one of two markets: the Shanghai (1.7 trillion US$) and Shenzhen (645 billion US$) exchanges.
Although the Chinese exchanges combined are much larger than India’s, the Indian exchange is managed to international standards and is extremely stable in terms of high quality companies. In China, the Securities Commission has no authority to punish offenders. In addition, the government is a major shareholder in the country’s State Owned Enterprises (SOEs), which are not subject to same financial and accounting rules as non-SOE companies. In general, India has a more transparent economy than China.
Management capabilities are another area where India has matured over China. Reforms in China started only 30 years ago. Management training and travel to Western countries to work or attend university did not begin until recently. Because Western companies came to China in search of lower costs and market access, Chinese companies were reluctant to take their own capabilities in terms of market access and acquisitions to Western companies.
By comparison, India has been developing under Western management and thinking for hundreds of years. The British ran the country from the 1700’s until it’s independence in 1947. Many Indian families sent their children to Europe and the US for education and a better quality of life. In the past 20 years, these first and second generations of Westernized Indians have been returning to India, helping to build the economy and educate and mentor others.
Western management skills have enabled India to become a leader in the M&A of Western businesses. During the first nine months of 2006, Indian companies announced 115 foreign acquisitions with a value totaling $7.4 billion, according to The Economist. That is roughly a seven-fold increase from 2000.
A report by Grant Thornton India shows that the largest proportion of outbound deals (Indian companies acquiring international companies) in 2005 occurred in Europe (50% of deal value), followed by North America (24% of deal value). The report says that the IT sector saw the lion’s share of outbound M&A deals in 2005, with 23% of the total number of international acquisitions, followed by pharmaceuticals / healthcare / biotech (14%). As for deal value, telecommunications led the way with a 33.6% share of deal value, followed by energy (14%), IT (8%) and steel (6.5%).
India and China Should Both Be Considered Strategic
In summary, China is still the dominant low cost manufacturing provider to the West. India has developed advantages in areas such as finance, IT, and management and cannot be ignored by any Western company considering an Asian investment. Here are some observations and recommendations based on our experience:
- The Indian economy will expand at growth rates that will surpass China’s within the next three years.
- India will challenge China in the manufacture of lower costs products as reforms continue over the next 10 years.
- Indian companies will continue to show their presence globally as they blaze the acquisition trail.
- China is a high volume / low mix manufacturing giant; as you look to reduce costs for commodity products, China is attractive for sourcing and/or outsourcing.
- India is a high mix, low volume market. There are a number of companies that can provide high quality engineering, design, drawing conversion, and/or prototypes of precision equipment.
- If you already have investments in China, you may be able to limit your risk by reviewing options in India, especially in the Economic Zones.
- All companies should develop strategies for both India and China based on their specific financial and market objectives.