Business Accent

Do You Have a “Chindia” Strategy?

To stay competitive, business and IT leaders need a strategy for China and India. By Partha Iyengar and Jamie Popkin of Gartner, Inc.

Partha Iyengar

Jamie Popkin

As industry analysts, we are constantly in search of great, far-reaching trends that will impact our clients and the IT industry. We look for the inexorable patterns, seminal events and startling decisions whose global reach defines eras.

There is no hotter topic in the high tech industry than the impact of China and India on the industry and the world at large. If you are a strategist or a decision-maker in almost any enterprise, anywhere in the world, you see the impact of India and China in new waves of technology products and services in events, decisions and strategies featured on corporate Web sites and in international news coverage.

As analysts we have been fortunate to travel extensively in China, India and virtually everywhere else in the world where the impact of these two rising economic giants is felt. Wherever we have gone over the past three years, we have been consumed with answering our clients’ questions about China and India.

These experiences inspired our thinking about what lies ahead for each country, as well as to seriously examine the idea of “Chindia”—China and India combining strengths in several industries to compete globally—as a subject for research and analysis. The Chindia framework is offered as a means to examine how these two great countries might soon reassert their collective influence on the international stage.

Chindia

The bilateral economy of China and India is in its infancy. Yet new momentum suggests a powerful relationship is building. China-India or “Chindia” enterprises will have access to complementary skills and resources and, in turn, will have the potential to lead many global markets.

New joint ventures between Indian IT service firms and their Chinese counterparts are early illustrations of how a formidable Chindia economy could develop. Indian firms bring to the table world-class software expertise and leadership in global markets. Chinese partners have legions of capable, low-cost employees and greater know-how with clients in Japan, Korea and other Asian countries where English is less prevalent.

We see Chindia today as an early work in progress, an entity still being formed. Outcomes are far from determined, but early signs indicate continued movement in a positive direction. Leaders in China and India remember a time, before the 1962 border war, when the two countries traded cries of Hindi Chini bhai bhai—“Indians and Chinese as brothers”. China’s Premier Wen Jiabao reiterated this sentiment in 2006 while visiting the Indian Institute of Technology in New Delhi. As the economic strength of China and India increases worldwide, business strategists and IT decision makers need a toolkit to monitor their bilateral commercial activities.

These activities are sure to affect end users and sellers of IT products and services worldwide, but how much and how soon has yet to be played out.

World-class technology, global standards, managerial know-how, innovation, expanding populations, low-cost labor pools, fast-growing regional markets – these are the makings of a historic partnership.

IT innovation moves westward

The center of the technology world has been moving steadily west for two hundred years. The innovation that drove the industrial revolution was based in England. For decades the British crown maintained strict export controls on technology and people to prevent the movement of physical and intellectual capital out of the United Kingdom. As always, restrictions failed, and eventually the knowledge and experts escaped, moving the center of innovation to the United States, with its large local market and the freedom to pursue new opportunities.

Another westward shift has been underway since the mid-1990s. However, the new center will not be in the Western world at all. Today China and India are producing some of the world’s best-trained computer science and electrical engineering graduates. Far from being simply a source of cheap labor, both countries soon will be able to compete favorably for global business—as India’s IT services firms have done—not on price, but on competence and capability.

Even more crucial to their increasing global predominance is the rapid growth of domestic markets for technology and consumers in China and India. Soon both countries will have spending power equal to the United States and Western Europe.

Much of the West’s mainstream attention on China and India so far has focused on the West’s outsourcing of manufacturing and low-end service jobs. Optimistic observers believe the current flow of jobs across the Pacific is immaterial in the long run because innovation remains strong in Western countries, and innovation produces new jobs and economic growth. This view is absolutely correct on the surface, but it hides the underlying truth of what is happening in India and China today: both countries are getting better at driving technological innovation. More and more, traditional Western high-tech firms are sourcing not just the assembly of their products from India and China but also the innovation that drives these products.

Creating a “Chindia” strategy

If you are in a business, you need a China strategy and you need an India strategy. You need to monitor how China and India create alliances in specific markets, alliances under what is coming to be known as the “Chindia bloc”. The first signs are already clear in IT services, in automotive components, and in a few other sectors.

China and India increasingly will be the dominant economic stories on the world stage, a trend that may well extend through most of the twenty-first century. Despite mounting stakes, however, the quality of information, research, and advice on how to make key decisions related to China and India is uneven. Executives and managers need a comprehensive view not only for understanding China and India, separately as well as together, but also for gauging future threats to and opportunities for enterprises.

For effective decision making, business leaders need:

• Accurate information on the current state of global IT competitiveness in India and China for their internal markets.
• A set of realistic scenarios that explores not only the possibility of continued rapid economic growth in India and China but also potential social, political, or other disruptions to these economies.
• A series of milestones that define pivotal issues in each scenario and of signposts that overtime point to milestone outcomes to help determine when and where to invest, cooperate, compete, analyze, or ignore these countries.

China’s IT Landscape

The power China can wield will affect every major corporation in the world. Every business, whether directly engaged with China’s economy or not, must have a China strategy. Simultaneously, China will be transforming the information technology industry in ways that executives and managers in the West simply must address. This is especially true for companies that embrace advancing IT for strategic and operational advantages.

China’s spending on its IT needs in 2005 was about $119 billion, about four times that of India’s. That the majority of this spending went toward telecommunications equipment and services (79 percent) reflects the priorities of an infrastructure that is still growing.

China’s IT spending has been forecast to grow 6.5 percent annually through 2009, well below the 7.9 percent rate forecast for Asia-Pacific and well below the 25 percent forecast for India. China’s spending will be led by the purchase of software (17.5 percent) and IT services (14.5 percent). As the software market expands, IT leaders of Western corporations operating in China need to ask, when will locally provisioned software and services be available, and will they be competitive with foreign software and services?

Continuing government control over the most basic levers of the economy is the most significant inhibitor of China’s vast potential for innovation. China’s ability to set a practical course to ease government influence in its economy and to promote innovation is the pivotal issue in forecasting the country’s future.

Your first reaction to this might be that government policies and government relations are not my specialty and not my problem—lawyers and government relations professionals, not CIOs and IT executives, worry about what the politicians and regulators are up to. You place calculated bets on big issues and market trends in cost-effective innovative IT.

With respect to China (and India), such views are flawed and dangerous for business and IT leaders. The Chinese government often is the biggest factor in IT issues and trends, and business leaders can’t afford to delegate these relationships or distance themselves from the core analysis.

The blunt challenge for China is whether it has the ability to move up the global value chain to the commanding heights of innovation and global marketing prowess, from being a low-cost, high-volume manufacturer. In IT, the particular challenge is whether China can transfer its demonstrated expertise in low-margin, high volume hardware manufacturing into high-margin software and IT services.

By 2008, it is highly likely that China will generate intellectual property at a rate comparable to developed countries and, in the same year, actually surpass the United States as the population with the largest English language capacity (in terms of English language comprehension and proficiency, however, China will remain a challenger, not the global leader).

By 2010, we anticipate at least eight Chinese IT brands will be recognized internationally. The world will witness the birth of a real IT superpower if government restrictions are loosened and the Chinese instinctive talent for entrepreneurialism continues to be encouraged.

Whether China emerges as a global leader in science and technology innovation relevant to the information and communications technology (ICT) industry is a pivotal issue for you as a business strategist or IT decision maker in Western corporations. The outcome will influence which global suppliers can establish a strong presence in China for the long haul and which of China’s strongest domestic companies can compete in international markets.

The answers may not be clear for years. Yet with potential rewards from engagement in China so high, and the risks of staying on the sidelines potentially great, companies need to address these questions now.

India’s IT Landscape

With its challenging logistics, stifling bureaucracy, official corruption, and leftist political influences, can India still be worth the effort? We hear this question often from CIOs, business strategists, and decision makers who doubt whether the benefits of an Indian connection can truly outweigh obvious risks and discomforts. The vast majority of the global Fortune 1,000 companies have agreed India is worth the effort.

We also think India is worth the effort when the problems you are attacking and opportunities you are chasing match what India can provide. We estimate that the largest IT services providers will add between fifteen thousand and thirty thousand employees annually, on average, for the next several years in anticipation of continued rapid growth in global demand.

Until recently, the Indian IT industry has been the story of the widely differing fortunes of two cousins –the export cousin and the domestic cousin. The former has been fabulously successful and richly applauded throughout the nation. The latter has been regarded as backward and hardly worth bothering about.

Much of this perception is due to the relative successes enjoyed by the export and domestic sectors of the industry. India’s total exports of IT services—dominated by domestic companies, not foreign-controlled subsidiaries—were worth $21 billion in 2005. In comparison, India’s domestic market for IT services was worth an estimated $2.7 billion in 2005. This figure is minuscule compared to 2005 IT services spending in other countries in the region, such as Japan ($83 billion), Australia ($12.1 billion), and even China ($4.5 billion).

The intensive activity supporting an export-focused industry has distorting effects across India’s economy: it changes the focus of local IT firms; it influences government policy settings, such as incentives and the establishment of software technology parks; and it hampers the ability of non-exporting local employers to find and retain quality staff.

The export side of the Indian IT industry got its big break in the early 1990s, when US companies began hiring huge numbers of skilled systems analysts and computer programmers. Demand for Indian companies’ staff in the United States was driven to frenzied levels by three factors: concern about the millennium bug, the dot-com boom, and a corporate craze for enterprise resource planning software.

It is only within the past five or six years that India’s IT industry was transformed from a source of labor for hire to the formidable leader in IT services it is today.

Many Indian companies are not letting the grass grow under their feet. Three works-in-progress serve to demonstrate the opportunities for foreign companies, for the domestic industry, and for the export industry.

U.S.-based Intel–which already employs three thousand Indians at its Bangalore R&D center—has invested $250 million in partnership with local manufacturer Xenitis Infotech to manufacture low-cost computers priced at $250 the cheapest machine for sale with an Intel chip. The target market is regional and rural areas within India.

On the domestic side, Bharti Tele-Ventures is growing in innovative, unexpected ways. Bharti and IBM are establishing an IT services business that seeks business from domestic customers.

On the export side, all major Indian IT outsourcers have established beachhead offices in China, with a view to leveraging their IT services skills, not just in China but also in the more insular Korean and Japanese markets.

These examples show Indian companies can be innovative, build capacity in areas not generally seen as strengths, and be aggressive in expanding beyond a predominant US focus into Asian markets generally. These kinds of talents have put Indian companies on the threshold of what we believe could develop into one of the great economic success stories of the pan-Asian region: the great global potential of India and China together, combing the world’s IT services powerhouse with the world’s factory.

Anyone doubting India’s capacity to play its part need only consider the source of its IT industry. In 1995-1996 India’s exports of IT services were worth about $1 million. In 2004 they were worth $13 billion. In 2000 India’s share of business process outsourcing (BPO) was worth $148 million. In 2004 it was worth $3.5 billion. Any student of business knows what those kinds of growth rates mean: disruptive, challenging forces that can unseat rivals and destroy business plans.

Chindia’s emerging economy

What is the significance of the current level of China-to-India and India-to-China commercial interactions? Where do the two countries stand along a potential path towards a unified economy of Chindia? Modest steps recently under way provide only a hint of what India and China collectively could bring to the global economy and global balance of power in coming decades.

China and India hardly qualify today as trading partners by conventional standards for industrialized economies. Total bilateral trade amounted to $18.7 billion in 2005—more than twice the 2003 level. This is only a small fraction of each country’s foreign trade. China’s foreign trade in 2005 was $1.4 trillion, rising 23 percent from 2004. India’s foreign trade in the 2005-2006 fiscal year amounted to $241 billion, up 28 percent. Yet the annual growth rate of internal Chindia trade is outpacing those high-stepping totals, at an estimated 30 to 40 percent.

Patterns of a widening bilateral commercial partnership are visible in increasing high-level official visits and pronouncements, conference participation, cultural exchanges and, most of all, forecasts of accelerating goods, services and investment flows across the Himalayas.

Questions left unanswered

There are many unanswered questions about the economic futures of China and India, of China and India together, and indeed of China’s and India’s future impact on the global economy. Can innovation be outsourced? Is it possible to compete in Asian markets without piracy of intellectual property draining away the opportunities? Will China’s and India’s mounting successes in world markets create a protectionist backlash among developed economies?

The answers you seek might well be among the most important for setting the long-term course and success of your enterprise. The methods by which you pursue them certainly will shape the quality and insight of what you find. As China and India increasingly redefine the future of technology and innovation, knowing how to map a course into that future will be a core competency of the most accomplished travelers.

Jamie Popkin, group vice president at Gartner, and Partha Iyengar, vice president and distinguished analyst at Gartner, have published “IT and the East” by Harvard Business School Press. This book examines how China and India are altering the future of technology and innovation.