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Published: February 24, 2009

 
 

The China and India Strategy

The right question to consider now is how best to pursue the two countries together.

Far too many companies still spend considerable time and energy debating whether to focus on China or India as their next big market. These are both vast nations with huge population densities — China has 135 people per square kilometer (about 350 people per square mile) and India has two and a half times that, whereas the U.S. has only 31 people per square kilometer (about 80 per square mile). At first glance, China and India seem overwhelmingly large as well as distinct enough to merit separate strategies.

But that approach is short-sighted. As the two fastest-growing economies in the world, China and India together represent an immediate opening for unparalleled market penetration. The opportunity to tackle them simultaneously cannot be ignored without the real possibility that latecomers will be, well, too late. Other companies will have already staked their claims and raised the barriers to entry. Moreover, economic integration between China and India is proceeding apace. Few people outside these two nations are aware that China is India’s number one trading partner and India is among China’s top 10 trade relationships. Even if the growth rate in China–India trade slows down to 25 percent annually from its current rate of about 50 percent, bilateral trade will reach almost US$75 billion in 2010 and $225 billion in 2015 — equal to China–U.S. trade just three years ago. And investment between India and China is likely to grow even faster than trade. As these econ­omies become more intertwined, it will be more difficult for outsiders to find an easy path in.

In short, for most Fortune 1000 companies, the right question to consider now is how best to pursue China and India together. The strategic benefits of having a nearly equal presence in both countries, instead of a single focus on one or the other, can be broken down into four categories.

1. Scale. A combined market strategy for China and India is particularly important when a com­pany’s cost structure depends on significant economies of scale and when profit margins are razor thin. This is increasingly the case for makers of inexpensive products targeted at the middle- and low-income segments of emerging markets. Take the EC280, a new $335 compact desktop computer with a low-end Intel processor, introduced by Dell Inc. in March 2007 for first-time buyers in emerging markets. Because this machine would be sold in stores rather than online, Dell would have to share profits with retailers and accept extremely slim margins. In fact, the only way that Dell could make real money on the EC280 was by selling the computer not only throughout the vast Chinese market but also in India and other developing nations.

The rivalry between Cisco Systems Inc. and China’s Huawei Technologies Company offers yet another illustration of the potential downside a company faces if it fails to stretch its core skills across a cohesive China–India market strat­egy. Huawei is one of Cisco’s most aggressive global challengers; indeed, in 2003, Cisco sued Huawei for stealing its source code and using it in competitive routers and switches. The case was dropped nearly 20 months later, after Huawei agreed to discontinue the products. Between 2003 and 2007, Huawei’s annual revenue grew from about 20 percent of Cisco’s to nearly half. Huawei’s increasing competitive ad­vantage rests heavily on cost leadership, which derives primarily from the fact that the bulk of its R&D and manufacturing operations are based in China. With its lower-cost product portfolio, Huawei is attractive to customers in emerging markets. In fact, in 2007, the Chinese company generated 72 percent of its revenues from outside China, largely in de­veloping countries.

 
 
 
 
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