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 / Spring 2009 / Issue 54(originally published by Booz & Company)


The China and India Strategy

Huawei is on the record as saying that its goal is to become India’s number one supplier of telecom infrastructure equipment. The im­plications for Cisco are clear. It must develop a counterstrategy that rests on at least three legs: innovating faster than Huawei, drastically re­ducing its cost structure to match or beat Huawei’s low prices, and then riding these gains to attack Huawei in both of its key markets — China and India.

2. Complementary strengths. China is much stronger than India in terms of physical infrastructure and manufacturing efficiency — its manufacturing sector is five times as large as that of India — whereas India bests China in software devel­opment, IT-enabled services, and many types of analytical and knowledge-intensive tasks such as legal research, finance and accounting, and advertising.

IBM Corporation provides a near-perfect example of how to leverage the complementary capabilities of manufacturing in China and IT services in India. IBM has built its largest procurement center outside the United States in Shenzhen, China, and two years ago IBM’s chief procurement officer relocated there. Sourcing from Asian (primarily China-based) suppliers accounts for about 30 percent of the com­pany’s $40 billion annual purchasing budget; IBM hopes that these moves will make this very busy supply chain more efficient, especially for products destined for Asian markets. But whereas it relies on China for hardware procurement, the company has made India its global center for the delivery of IT services. At the end of 2007, IBM employed more than 70,000 IT professionals in India, about 20 percent of its global workforce and a group four times the size of its staff in China.

The complementary strengths of China and India extend beyond manufacturing and information technology services. China’s chem­ical industry (particularly specialty chemicals) is significantly more ad­vanced than India’s. In addition, certain types of pharmaceutical raw ma­terials are available more abundantly and at lower cost in China than in India. Thus, many India-based pharmaceutical companies turn to China as a primary supplier of pharmaceutical ingredients. In turn, India is emerging as an important source of specialized talent in fi­nance, accounting, and global marketing for many Chinese companies as well as the Chinese units of major multinational corporations. In mid-2007, Chinese computer maker Lenovo Group Ltd. centralized its worldwide advertising activities in Bangalore, to a hub that is re­sponsible for all ads placed outside China.

3. Knowledge transfer. The fact that China’s economy is 12 to 15 years ahead of India’s provides many companies with an oppor­tunity to leverage lessons from China. This helps them fine-tune their strategies for the Indian market at a relatively fast pace. Take the case of the PC industry. Dealing with the Chinese and Indian PC markets involves many common factors, such as extremely rapid growth, large proportions of first-time buyers, the need to reach customers not just in the most populous markets but also in smaller ones, the im­portance of selling through the retail channel, low buying power, few credit cards, and the need for local-language software.

Lenovo has attempted to take advantage of these similarities in the two markets by first putting on paper the essence of the Chinese business model and then “distilling it down to five salient points that we could implement in any country,” according to William J. Amelio, Lenovo’s president and chief executive. India was picked first for this knowledge transfer, and the company’s success with this market entry strategy there has driven Lenovo’s wider global sales strategy.

4. Risk reduction. Establishing a presence in both India and China can reduce companies’ exposure to political risk. Given the rapid transformations in their economies, the Chinese and Indian governments are still trying to determine whether and how to differentiate between domestic and foreign enterprises and what types of policies to adopt for each category of firm. For example, China’s new enterprise income tax law eliminates the tax advantages that foreign enterprises historically enjoyed over domestic ones, and a new antimonopoly law may put fresh restrictions on acquisitions within China by foreign firms. Meanwhile in India, the government is often ruled by a coalition of widely disparate partners, populated by incumbents who almost always lose in the next election. With so much uncertainty surrounding future policymaking in both countries, a multinational enterprise with dual operations in China and India stands to do the best job of hedging against political vulnerability.

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