“Challenges Presented by China and India” Kenneth Lieberthal University of Michigan

1. “Challenges Presented by China and India”Kenneth LieberthalUniversity of Michigan

2. 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.

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. #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

10. 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

11. #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.

12. #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)

13. 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

14. #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

15. #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?

16. #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

17. 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?

18. THANK YOU!