5

COMPETING WITH DRAGONS AND TIGERS ON THE GLOBAL STAGE

India and China are a tsunami about to overwhelm us.¹

—Curtis R. Carlson, president and CEO, Stanford Research Institute

During the past fifty years, Boeing Corporation has been the single largest exporter from the United States. The aircraft industry is important not only for its size but also for being one of the most technologically intensive, capital-intensive, and scale-intensive industries. The barriers to entry into this industry are extremely high—in fact, higher than into other high-tech sectors such as computing, telecommunications, and pharmaceuticals. It took the combined might of all of the rich European countries, over several decades, to create Airbus, the first viable competitor to Boeing.

Think now about which companies are likely to keep Boeing executives awake at night in another ten years. Clearly Airbus will remain one of the major competitors. But Airbus is a devil they know and understand. What may really keep them awake is Commercial Aircraft Corporation of China (CACC), a state-owned enterprise from China created in May 2008 by merging the commercial aircraft operations of two other existing state-owned enterprises, AVIC 1 and AVIC 2. The Chinese government has publicly stated its goal to make China a competitor in the global jumbo jet market by 2020. CACC's predecessor, AVIC 1, has already announced that it will be launching the maiden flight of ARJ21, a passenger aircraft with seventy to one hundred seats during the next twelve months.

Consider now another industry that has been and continues to be crucial to the fortunes of virtually every major industrial economy: automobiles. At the January 2008 Detroit Auto Show, one of the most important auto shows in the world, the talk of the town was not General Motors, Ford, Toyota, Renault-Nissan, or Daimler but a “new” company from a “new” country: Tata Motors from India. Tata had just introduced the least expensive car in the world, the Nano, with a starting price of twenty-five hundred dollars. At the other end of the spectrum, within the same month, Tata Motors had also emerged as the front-runner to close a deal with Ford Motor Company to acquire Jaguar and Land Rover, two iconic, upscale, and highly global British brands.

CACC and Tata Motors represent just the tip of the iceberg in the global restructuring underway in several of the most important industries in the world. In this chapter on the rise of Chinese dragons and Indian tigers, we examine the strategy implications of these developments for established multinationals, as well as the dragons and the tigers themselves. More specifically, we address these questions:

• How similar or different is the rise of global champions from China and India today compared with that from Japan and South Korea between 1970 and 2000?
• How globally fungible are the home country advantages of today's emerging market champions?
• What are the relative advantages and disadvantages of emerging global champions from China versus those from India?
• How serious a threat do the emerging global champions pose to incumbent multinational corporations (MNCs) from developed countries?
• What is the best strategy for established incumbents to neutralize the threat from emerging global champions?
• What weaknesses will the global champions from emerging markets need to overcome if they wish to survive as successful players on the global stage?
• How might they best overcome these weaknesses?

Strategic Logic and the Emergence of Global Champions

We begin with a conceptual discussion of the factors that enable new players to emerge on the global stage and challenge the established positions of incumbents. Our core premise is that the rise of the dragons and tigers is neither a universal nor a random phenomenon. It is not universal in the sense that not every company (not even every large company) from China and India will be able to grow into a significant global competitor. At the same time, it is not random in that one can systematically lay out the factors that will distinguish a firm that becomes a global leader from one that remains just a wannabe.

As depicted in Figure 5.1, three dominant factors determine the likelihood that a company from any country, developed or emerging, will end up as a global force within its industry: the country effect, the industry effect, and the company effect.

Country Effect

In the early stages of globalization, the only place where a company has any significant operations is its home country. Thus, it is critical that the company be able to leverage country-specific comparative advantages as it spreads its wings abroad. Without these advantages, the aspiring globalizer runs the risk of being little more than all hat and no horse.

Figure 5.1 Factors That Drive the Emergence of Global Champions

Country-specific advantages can be of many different types. We highlight some of the most prominent ones:²

• Labor costs. Much lower labor costs for both blue- and white-collar work in their home countries have proven to be a major source of global advantage for companies such as China's Chery Auto, a car company, and India's Suzlon Energy, a wind turbine manufacturer.
• Cost of raw materials and other inputs. For Tata Steel, which acquired the much larger Anglo-Dutch Corus in 2006, access to India's low-cost iron ore has been a major source of competitive advantage as it becomes a global player. Similarly, access to abundant and lower-cost feedstock was the major advantage that Saudi Arabia's Sabic (Saudi Basic Industries Corp.) leveraged when it purchased GE's plastics business for $11 billion in 2007.
• Cost of capital. Abundance of capital in China and the oil-rich nations has made it much easier for state-owned or state-supported companies in these countries to access capital at a much lower cost than would be feasible for companies based in the United States, United Kingdom, or India.
• Talent pool. Access to a large, well-educated, and relatively lower-cost talent pool has been a major source of global advantage for technology-intensive companies such as China's Huawei (in telecommunications equipment) and India's Infosys (in IT services).
• Domestic scale. A megasized domestic market is one of the primary reasons that a sizable number of companies based in the United States, Japan, and Germany have historically dominated their industries worldwide. A large domestic market gives the globalizing company home-grown scale economies that it can leverage against competitors in other markets. The large and rapidly growing size of the domestic markets within China and India is now playing a similar role for the dragons and the tigers.
• Innovation. A country's unique characteristics can serve as a driver of leading-edge innovation by companies embedded there. Think about why Japanese companies became world leaders in manufacturing innovations such as just-in-time and total quality management. Given Japan's high population density and thus expensive real estate, the cost of operating a U.S.-style plant would have been prohibitive. In order to survive and succeed even in the domestic market, companies such as Toyota had to invent new approaches to manufacturing that dramatically reduced the need to devote factory space to any task other than direct production. Once created, these innovations served as global rather than merely local advantages. Companies such as Tata Motors and Bharti Airtel are playing an analogous game. Since the per capita buying power of the Indian customer is extremely low, these companies and many others like them are pushing the envelope to create and deliver products and services that are ultra-low-cost. The resulting innovations in technology, product and service design, operations, and even the entire business model are likely to be highly fungible across borders.
• Public policy. Country effects can take the form of public policy that encourages and facilitates exports and foreign direct investment by domestic firms. The role of public policy is particularly evident in China, where the national government has pursued an explicit “go global” policy in recent years. As vice minister of commerce Ma Xiuhong noted in her remarks at a conference in 2006, “The Chinese government supports those domestic companies with the strength to invest in the rest of the world to jointly develop business with their international counterparts.”³ President Hu Jintao even included a reference to the importance of “go global” strategies in his report to the Seventeenth Party Congress in October 2007. Some of the planks in this policy include direct exhortation to state-owned enterprises, a helping hand by the Export-Import Bank of China in financing project outlays by foreign customers, coinvestment by China Investment Corporation (a sovereign wealth fund), and encouragement to state-owned enterprises to set up overseas economic and trade cooperation zones in countries and regions with a favorable investment climate.

Despite the major role that country effects can play in giving local players a foundation for global advantage, it is important to remember two other facts. One is that these advantages are equally available to almost all domestic companies within a China, an India, or a Brazil. Yet not every domestic company becomes a global champion. Thus, other factors, such as industry and company effects, also play a critical role. Second, in this era of open borders and a globally integrated world economy, most of the country-specific advantages are available not just to domestic companies but also to those from abroad. IBM has built almost as large a staff in India as the Indian IT giants. Thus, whether country effects become a source of competitive advantage depends also on the company's ability to internalize them.

Industry Effect

Industries differ in the extent to which the strengths from one country can be leveraged across other countries:

• Economies of global scale. In some industries (such as semiconductors and mobile phones), global scale in R&D, sourcing, or operations is very important. In others (such as nursing homes), what matters is local, not global, scale.
• Economies of global scope. In some industries (such as supply chain management software), most customers are multinational companies that prefer suppliers with the capability to provide the needed products and services on a worldwide basis. In others (such as food retailing), virtually all customers are local, and they place no value on whether the supplier is global.
• Economies of global delivery. In some industries (such as athletic shoes and call centers), goods and services can be produced in the most cost-efficient locations and distributed or delivered worldwide at a relatively low cost. In others (such as restaurants or home repair services), the product or service must be produced locally, near the customer.

These three factors—economies of global scale, economies of global scope, and economies of global delivery—drive some industries to become very globally integrated (examples are semiconductors, mobile phones, and remotely deliverable IT services), for some others to remain multidomestic (housing construction, food retailing, and consumer banking, for example), and for the rest to fall somewhere in between (such as Internet retailing and legal services).

Whether an industry is of the globally integrated or the multidomestic type has a major bearing on the likelihood that an emerging global player will be successful in realizing its aspirations. In a multidomestic industry, it is extremely hard (although not impossible) for an aspiring global champion to leverage its home-based advantage into other markets. Thus, established players in other countries have little to fear from such new entrants. Even a giant such as Wal-Mart faced miserable failures in Germany and South Korea precisely because of industry structure. Given the inherently multidomestic structure of the discount retailing industry, the local market leaders in Germany and South Korea could easily defeat Wal-Mart.

But if the industry in which you play is globally integrated, then you must treat aspiring global players with much greater seriousness. If they are not kept subdued when they are young, the risk is high that they will be able to globalize at a rapid rate and become even tougher to battle later. Interestingly, however, for the established multinational, globally integrated industries also offer an important advantage. It is precisely in such industries that the established multinational can leverage its global capabilities to apply tough competitive pressure on the aspiring globalizer in the latter's home market.

Consider the case of Nokia versus domestic competitors in China's mobile phone market. By every measure, the mobile phone industry is global. Thus, the bulk of the worldwide market has long been shared by a small number of global players—primarily Nokia, Samsung, Sony Ericsson, and Motorola. In 2003–2004, within the Chinese market, which had already become the world's largest, the global players came under serious attack from domestic challengers such as TCL and Ningbo Bird. Within short order, the domestic champions had captured over 51 percent of China's mobile phone market. To its enormous credit, Nokia decoded the developing scenario accurately and responded with all its might against the Chinese challengers. Among other moves, Nokia's actions included the introduction of much cheaper cell phone models and a rapid expansion in its distribution system. By 2007, the combined market share of the Chinese players had been reduced to 25 percent and was declining.

In short, the Chinese dragons, the Indian tigers, and the established multinationals must never forget that industry structure matters and must be factored into the design of strategic moves.

Company Effect

Today Infosys in IT services and Haier in home appliances are well-known and highly respected names within their industries worldwide. As of May 1, 2008, Infosys's market capitalization stood at $26 billion, second only to that of IBM in the worldwide IT services industry. Haier was the fourth largest home appliance manufacturer in the world, with not just the leading position in China but also rapidly rising market shares in other large markets, such as the United States, Europe, and India.

In understanding how Infosys and Haier became what they are, it is important to note that the explanation goes well beyond country and industry effects. In the mid-1980s, Infosys was just one of several hundred tiny IT services companies based in India. In 1991, ten years after its founding, the company's revenues were less than $2 million, and its market value was estimated to be only about $1.5 million. Similarly, in 1984, Haier, known at that time as the Qingdao Refrigerator Factory, was one of several hundred appliance manufacturers in China. Moreover, it was teetering on the verge of bankruptcy, and Zhang Ruimin, the newly appointed director, was the fourth boss in one year.

Why did Infosys leave most other Indian IT companies in the dust and emerge as the global giant that it is today? Why did Haier emerge from the ruins not merely to survive but to become one of China's most respected global companies? The answer lies in what we call the “company effect”: the company-specific core capabilities, mindset, and organizational culture that distinguish the emerging champion from its peers within the home country. Leaders such as N. R. Narayana Murthy at Infosys and Zhang Ruimin at Haier were relentless in their passion to transform their companies into world-class organizations. Consider first the rise of Infosys.

In 1991, the Indian government initiated economic liberalization, and multinationals such as IBM began planning to reenter India. Many observers predicted that Infosys was basically “as good as dead.” They doubted that it could withstand the expected war for talent, the company's key asset. Infosys's response was brilliant and highly atypical. Although the company did not need the cash, its leaders decided to do an initial public offering (IPO) and used the capital to build a world-class campus (one that would rival that of Microsoft or IBM in the United States) in what was still Third World Bangalore. They also decided that Infosys salaries would be in the top 85 to 90 percent of the companies in its peer group. Also critical, Infosys became one of the first companies in India to issue stock options to all employees. A top engineer from one of the Indian Institutes of Technology could now see that he or she had a better chance of becoming a millionaire at Infosys than at IBM.

As the U.S. government started to reduce the number of visas that could be granted to foreign workers doing projects in the United States, Infosys became one of the first companies in India to develop global delivery capabilities whereby the work could be done in Bangalore and exported from there instead of having to be done at the customer site in the United States. In order to assure customers that quality standards would continue to be met, Infosys became one of the first companies in India to receive ISO 9000 certification.

In the mid-1990s, rather than bow to intense pricing pressure from GE, which accounted for 40 percent of its revenues, Infosys's leaders decided instead to let GE go. They also vowed to significantly improve the company's marketing capabilities so that it would never again be so dependent on any one customer.

In 1998, Infosys became the first Indian company to achieve CMM-Level 4 certification from Carnegie-Mellon's Software Engineering Institute (SEI). In 2000, it again became the first Indian company to achieve CMM-Level 5 certification, the highest awarded by SEI. Until then, only forty companies in the world had achieved CMM-Level 5 certification.

In 1999, Infosys became the first Indian company to undertake an IPO on a U.S.-based stock exchange. Like the IPO in India in the early 1990s, this IPO also was done not just for financial but also strategic reasons. The company's leaders believed that an IPO on NASDAQ would help build name recognition and credibility with the chief information officers and CEOs of major U.S. corporations, all potential clients. By now, the company had arrived.

Consider now the rise of Haier. Just a few months after becoming the CEO in 1984, Zhang Ruimin pulled seventy-six newly built refrigerators from the production line, gathered all workers outside the factory, and asked them to join him in destroying these defective products. Such an act was unheard of in China and was highly symbolic. Many of the defects were minor, and each refrigerator would have sold for four times the average annual salary of a worker. The message hit home: the company would no longer produce substandard products. The CEO was convinced that better-quality products would command a higher price, even in the then very poor China. By 1988, Haier was widely regarded as the producer of the best-quality refrigerators in China. Although the company charged a premium price, its market share was growing. Haier's track record on all fronts—product quality, brand image, profitability, and cash flow—made it the obvious leader in consolidating the fragmented white goods industry in China.

Haier also entered into strategic alliances with several leading multinationals to build technological capabilities in product design and manufacturing. The alliances included a technology licensing agreement with Germany's Liebherr, imports of production technology from Denmark's Derby and Japan's Sanyo, and joint ventures with Japan's Mitsubishi and Italy's Merloni. As Zhang Ruimin explained the logic behind these moves, “First we observe and digest. Then we imitate. In the end, we understand it well enough to design it independently.”

Haier became a pioneer in market segmentation and product innovation to meet the unique needs of different segments. The discovery that rural customers were using Haier washing machines to clean vegetables and sweet potatoes led the company to redesign its machines for rural customers so that they would no longer get clogged with mud. At the other end of the market, Haier introduced a tiny machine for customers in Shanghai. This machine could clean just a single change of clothes and was a hit with customers who lived in a hot and humid city and in tiny apartments.

Haier cultivated a culture of delighting customers with the quality of its after-sales service. Tales of its dedication to customer service were legendary, and many observers regarded Haier as the leader in after-sales service across China.

As is clear, these capabilities (a mania for product quality, a disciplined approach to building technological capabilities, an obsession with market responsiveness and product innovation, and a commitment to after-sales service) became the defining features of Haier. They had little to do with the fact that Haier was a Chinese company or that it was an appliance manufacturer. Zhang Ruimin and his team built these capabilities because they wanted Haier to become a world-class company, whether in China or outside China. This obsession with building world-class capabilities paid off handsomely as Haier ventured into markets outside China, especially in highly competitive markets such as the United States and Europe, where established incumbents ruled supreme and entry barriers were relatively high.

To sum up, the country-specific advantages of China and India provide significant potential opportunity for many of their home-grown companies to become global champions. However, this potential is likely to become a reality only for companies that figure out how to build leading-edge core capabilities in a systematic manner. Even then, we are much more likely to see global champions from China and India in industries whose underlying economics make them globally integrated than in those that are destined to remain largely multidomestic.

The Rise of Dragons and Tigers

We now delve deeper into the factors that are fueling the rise of the Chinese dragons and the Indian tigers. In particular, we expand on three observations:

• The emergence of global champions from China and India is taking place at a much faster pace than was the case with their predecessors from Japan and South Korea.
• To date, Indian companies have been more aggressive than their Chinese counterparts in globalizing through acquisition.
• Notwithstanding their strengths, aspiring globalizers from China and India face considerable challenges in realizing their ambitions.

Rapid Pace of Global Expansion

The emergence of global champions from China and India is taking place at a much faster pace than was the case with Toyota, Sony, Samsung, and LG from Japan and South Korea one generation ago. The faster pace is due almost entirely to the fact that the new global players are much more acquisition driven than was the case with their Japanese and South Korean predecessors. In 2007, the value of outbound deals from China was about $30 billion, 60 percent higher than in 2006 and larger than the $25 billion value of inbound deals. For India, the value of 2007 outbound deals totaled over $35 billion, five times that of 2006, and larger than the $32 billion value of inbound deals.⁴

A primary driver of the trend toward globalization through acquisition is that capital markets, both public and private, are much more global now than in the 1970s and 1980s. Despite the subprime crisis engulfing much of the world economy in 2008, if the business logic makes sense, it is not very difficult for an aspiring globalizer to secure debt or equity financing to fund a cross-border acquisition. By way of example, look at Tata Motors's deal with Ford to buy the Jaguar and Land Rover brands, plants, and intellectual property rights. Tata signed the deal for $2.3 billion in March 2008, to be financed largely through loans from a consortium of Indian and overseas banks. The acquisition became final on June 2, 2008.

The aggressive pace of today's globalizers is also being fueled by other complementary trends. The market for companies is much more liquid today than was the case two decades ago. Importantly too, so is the market for senior executive talent. Thus, as the Chinese and Indian companies globalize, they are able to recruit seasoned veterans (including returnee Chinese and Indians) from the established multinationals in the United States and Europe to guide their global expansion moves:

• At Tata Group, the Group Corporate Centre, the apex body comprising nine senior executives, includes Alan Rosling as an executive director. Rosling is a British citizen whose background includes a Harvard M.B.A., serving as special advisor to the British prime minister, and senior executive positions with the Jardine Matheson Group. Other foreign nationals within the senior ranks of the Tata Group are Raymond Bickson, an American who is CEO of the Indian Hotels Company, and Trevor Bull, managing director of Tata AIG Life Insurance.
• The CEO of Jet Airways, India's largest airline and a rapidly expanding global player, is Wolfgang Prock-Schauer, an Austrian national. Prock-Schauer had previously served as an executive vice president with Austrian Airlines and chairman of the Star Alliance Management Board.
• At Chery Automobile, the executive in charge of international business is Zhang Lin, a Chinese national who obtained a Ph.D. in engineering from the University of Michigan and served as a senior executive with Chrysler from 1995 to 2003 before returning to China to join Chery.
• In June 2006, Shanghai Automotive Industry Corporation (SAIC), China's largest automaker, hired Phil Murtaugh as an executive vice president in charge of overseas operations. Prior to this role, Murtaugh had served as the chairman of General Motors China and negotiated the joint venture relationship between GM and SAIC. Although Murtaugh left SAIC in September 2007 to become the head of Chrysler's Asian operations, it appears by all accounts that his tenure at SAIC was viewed as mutually productive.

It is true that Japanese companies such as Nissan and Sony currently have non-Japanese CEOs. Nissan's CEO is Carlos Ghosn, a Frenchman who was born in Brazil to Lebanese parents. And Sony's CEO is Howard Stringer, a U.S. citizen who was born in Wales. It is important to note, however, that Japanese companies are bringing in seasoned Western executives in order to help revive troubled companies. In contrast, a growing number of Chinese and Indian companies are recruiting seasoned veterans from the outside at a much earlier stage in the expectation that these veterans can help steer them wisely on the path to globalization.

Chinese Dragons Versus Indian Tigers

Notwithstanding major similarities in the emergence of tigers and dragons from India and China, there also are important differences. The first major difference pertains to the fact that on average, Chinese companies are far ahead of India in globalization through exports of manufactured goods. In turn, Indian companies are far ahead of China in globalization through exports of remotely deliverable services. These differences derive directly from the historically differing strengths of the two economies.

The second difference pertains to the fact that a much larger number of Chinese (as compared with Indian) companies are emerging as global giants in the supply of equipment and project management services for infrastructure projects such as the construction of highways, electric power plants, and ports. Having built more infrastructure over the past fifteen years than has ever happened in any other country in the world, Chinese companies bring well-developed and much lower-cost capabilities to these tasks. Take, for example, the construction of hydroelectric dams. China is home to almost half of the world's forty-five thousand biggest dams. Chinese companies such as Gezhouba Co., an engineering firm, and Sinohydro Corp., a dam builder, have recently won multibillion-dollar orders for dam projects in other developing countries. Often these projects are financed by the Export-Import Bank of China, a state-owned enterprise.⁵

Another example is State Grid Corp., a state-owned enterprise that owns provincial and regional transmission companies within China. It is the largest power company in the world, with 1.5 million employees and 2006 revenues of $116 billion. In December 2007, State Grid and two host country partners signed a twenty-five-year deal to manage Philippines' power grid for $3.95 billion. According to Sun Jinping, head of the company's international division, “We have experienced power shortages, but we have proven technology which can be used for upgrading the network. This is very valuable in a market like the Philippines. They are now experiencing very fast demand. They need this kind of experience.”⁶

The third major difference pertains to the much stronger capabilities of Indian companies (relative to their Chinese counterparts) at playing the cross-border acquisition game, especially when it comes to making large acquisitions in developed countries. Obviously there are exceptions, such as Lenovo's purchase of IBM's PC business in 2005. However, as a general statement, it is valid to claim that Indian companies are far ahead of their Chinese peers at making large cross-border acquisitions and integrating them successfully. Let us look at the reasons.

The two key requirements for success in globalizing through the mergers-and-acquisitions (M&A) mode are strong financial skills (to do the deal on the right terms) and strong postmerger integration skills (to make the deal work). In general, emerging global champions from India have an edge over their Chinese counterparts on both dimensions. Given an abundance of capital in China and a well-recognized propensity on the part of China's state-owned enterprises to put national policy goals ahead of shareholder value maximization, Chinese corporate leaders are still at a relatively early stage in developing world-class finance skills. In contrast, Indian business leaders are probably at the leading edge on this dimension. Indian business leaders also have an edge in postmerger integration skills. China's is a command-and-control economy embedded in a culture that respects hierarchy. In addition, China is a relatively homogeneous society in terms of race, religion (or lack of it), and language. In contrast, India is a ferociously democratic country with one of the largest intracountry diversities in the world on almost any dimension that matters. Thus, the cultural DNA of Indian business leaders makes them more adept at horizontal integration and managing horizontal organizations than is currently the case with most Chinese business leaders. Finally, Indian corporate leaders have the well-known advantage of fluency in English so crucial to cross-border integration.

In globalizing through acquisition of companies in the developed economies (especially the United States), another advantage that Indian companies appear to enjoy pertains to the significantly lower political sensitivity of acquisitions by companies from India relative to those from China. The reasons are multifaceted and perhaps rooted in the similarities or differences in the cultures, political systems, and dominant languages among various countries. Any sizable bid (say, above $1 billion in deal size) by a Chinese company to acquire a controlling stake in a U.S. company would almost certainly be a front-page story in the Wall Street Journal and is likely to invite negative comments from U.S. politicians. In contrast, even large acquisitions by companies from India are treated by the media and the politicians as relatively routine commercial events. A recent case is an agreement announced by India's Essar Steel to buy the U.S.-based Esmark, a steel producer and distributor, for $1.1 billion in cash. It was a relatively small news item on page B5 of the Wall Street Journal.⁷

Chinese companies are responding to their relative disadvantage at playing the cross-border M&A game by adopting a learning mode. In concrete terms, this is reflected in the willingness of Chinese companies to take a minority stake rather than outright control. Recent examples include a $5.6 billion investment by the Industrial and Commercial Bank of China to acquire a 20 percent stake in South Africa's Standard Bank; a $2.7 billion investment by Ping An Insurance to acquire a 4.18 percent stake in Fortis, a Belgium-based banking and insurance company; and a $14.05 billion investment by a partnership between China Aluminum and Aluminum Corporation of America to acquire a 12 percent stake in Rio Tinto, an Anglo-Australian mining company.

We anticipate that as China and India continue to grow and develop more diversified strength, there will be convergence in the strengths and weaknesses of the dragons and the tigers. In the meantime, globalizers from both economies have a lot of learning to do. Considerable opportunities also exist for entrepreneurs who can figure out how to combine an abundance of capital in the Middle East with an abundance of manufacturing capabilities in China and an abundance of organizational and managerial capabilities in India.

Challenges for the Dragons and Tigers

For the emerging global champions from China and India, the most salient common challenge pertains to the accumulation and upgrading of capabilities in all key elements of the value chain: (1) product and process technologies; (2) sourcing, production, and supply chain processes that can deliver high-quality products and services on a consistent basis; (3) accessing distribution channels in foreign markets; and (4) establishing credibility and trust with potential customers in far-away lands. What the dragons and the tigers bring to the table is access to vast pools of scientific and engineering talent, the ability to produce goods and services at a low cost, burning ambition, and the ability to move with speed. However, most of them lack the stock of scientific and technical knowledge, organizational discipline, market credibility, and brand image that established companies such as IBM, Procter & Gamble, and Caterpillar have built over decades. These weaknesses can be overcome partly through acquisitions and partly through a process of learning from the ground up—as is being demonstrated by companies such as Tata Motors, Lenovo, Huawei, Suzlon Energy, and Chery Auto. However, accumulating new capabilities is never an automatic and easy process. It takes time and requires humility coupled with determination. Box 5.1 details the systematic and disciplined manner in which India's Suzlon and China's Chery have attempted to build as well as acquire the needed capabilities. As these cases also illustrate, this task is far from over.

A second common challenge pertains to the risk of hubris getting the better of cold analysis and sound judgment. As it is, hubris is a common malady in M&A deals (witness the complete failure of the DaimlerChrysler merger). In the case of emerging champions from China and India, the risk of hubris is greater. The roots of hubris lie in an abundance of external adulation. That is not too far from the reality for China and India today.

The possibility of hubris clouding sound judgment is illustrated well by the case of China's TCL Multimedia, a consumer electronics firm. In 2002, TCL was rated as one of China's largest industrial enterprises, and Li DongSheng was being feted as a hero by the media not just within but also outside China. The troubles started in 2003 when TCL acquired Thomson SA's television business and Alcatel's mobile handset business. Both acquisitions were weak businesses with products and technologies that were becoming rapidly obsolete. In essence, they were misguided acquisitions. Lack of capabilities at postmerger integration made a bad situation worse. As China International Business observed in an analysis of TCL's woes in December 2006:

By 2006, TCL was struggling for survival. The TCL saga has served as an expensive but highly valuable lesson not just for its own leaders but for other aspiring dragons and tigers.

A third common challenge pertains to the brand image that China and India still have in much of the developed economies. By and large, in most people's minds, the image continues to be one of “low cost” rather than “high quality,” “luxury,” or “world class.” Notwithstanding its first-rate leadership and organizational capabilities, the Tata Group faced this challenge in its moves to acquire Jaguar and Land Rover from Ford, as well as a stake in Orient-Express, a New York Stock Exchange-listed luxury hotel and cruise firm. In December 2007, Ken Gorin, chairman of the Jaguar Business Operations Council, a U.S.-based dealer group, told the Wall Street Journal, “I don't believe the US public is ready for ownership out of India for a luxury-car brand such as Jaguar. … I believe it would severely throw a tremendous cast of doubt over the viability of the brand.” Along similar lines, a few days later, the media reported that Paul White, CEO of Orient-Express, had written a letter to R. K. Krishna Kumar, the vice chairman of Indian Hotels, a Tata subsidiary, noting that “any association of our luxury brands and properties with your brands and properties would result in a reduction of our brands and of our business and would likely lead to erosion.”⁹

In our judgment, it is only a matter of time (perhaps less than five years) before Indian and Chinese companies learn how to overcome these challenges. Look back to Toyota in the 1980s. In 1980, the Western world appeared far from ready to embrace a luxury car from Japan. By the early 1990s, media reports indicated that Bill Gates had been spotted driving in a Lexus.

Strategic Implications for Established Multinationals

The structure of most industries has changed dramatically over the past twenty years. Given the accelerating pace of change, it is inevitable that in most industries, structural change over the next ten years will be at least as large as that over the previous twenty. The ongoing technological upheaval will be one of the drivers of this change. The rise of new global players from the emerging economies will be another.

In 2000, the top five global players in virtually every industry were companies that had their roots in the developed economies of the United States, Europe, Japan, and, in some cases, South Korea. By 2025, it is not unlikely that two out of the five biggest companies in every industry may be from China, India, or one of the other big emerging markets, such as Brazil, Russia, or Mexico. Not every aspiring globalizer from the emerging economies will succeed in realizing its ambitions. But it is certain that many of them will. Similarly, not every company that is an established leader today will stumble and get swallowed. But it also is certain that many of them will.

What should you and your team do to increase the odds that your company is one of the leaders in its industry by the time 2025 rolls in? We discuss four complementary strategic moves: (1) neutralize the dragons' and tigers' home court advantage, (2) join forces with the dragons and tigers, (3) leverage the power of China+India, and (4) protect your competitive position in markets outside China and India.

Neutralize the Dragons' and Tigers' Home Court Advantage

The starting point for battling the dragons and tigers on the world stage is to figure out how best to neutralize the country-specific advantages that they enjoy. In essence, this requires competing with the Indian or Chinese global players by becoming an insider in these economies. If executed well, such a strategy can help established multinationals close the gap between their cost structure and ability to innovate in relation to that of the Indian or Chinese globalizers. And offering stiffer competition to the emerging dragons and tigers on their home turf can help contain the latter's profit margins, cash flow, and thus aggressiveness on the global stage. Dell is pursuing this strategy against Lenovo in the PC business. Similarly, IBM and Accenture have pursued this strategy exceptionally well in taking on the challenge from Indian players such as Tata Consulting, Infosys, and Wipro in the global IT services industry.

Lenovo's purchase of IBM's PC business in May 2005 immediately made it the number three PC company in the world and potentially a major threat to Dell's (and similarly Hewlett-Packard's) positions globally. Lenovo enjoyed several advantages. It had a low-cost manufacturing base in China that could be particularly important in laptops, where shipping costs as a proportion of total costs are much lower than in the case of desktops. Lenovo also enjoyed a dominant position in China, the world's largest and fastest-growing PC market; this gave the company significant economies of scale. Shortly after the acquisition, Lenovo hired William Amelio, Dell's Asia chief, to be its new CEO. Dell has responded by becoming fiercely aggressive against Lenovo in the Chinese market. It has beefed up its R&D and manufacturing capabilities in China, introduced ultra-low-cost models designed and manufactured in China, and signed agreements with major Chinese retailers such as Gome and Suning to sell Dell PCs through over a thousand retail outlets in urban and rapidly growing rural markets.

In 2001, IBM's India-based operations were tiny, with a staff of only about four thousand people. In contrast, Indian IT services companies were on a roll, with growth rates exceeding 50 percent a year. Indian companies had proven their technical skills with inoculating multinational firms' computer networks against the Y2K bug. Also, their capabilities were moving up in sophistication at a rapid rate. Furthermore, given weak economic conditions in the United States and Europe, it was clear that an increasing number of IBM's current and future clients would be looking to Indian companies to help reduce their cost structures. IBM started ramping up its India-based operations in full seriousness around 2004. During that year, it signed a $750 million outsourcing contract with Bharti Tele-Ventures (now called Bharti Airtel), India's leading mobile operator. It also acquired Daksh eServices, an Indian company providing business process outsourcing services. This became the start of seeing India not just as a market but also as the emerging center of gravity for IBM's services business globally.

In 2004, IBM started expanding its India-based global delivery capabilities aggressively. The head count in India grew to 38,500 (by the end of 2005), 53,000 (by the end of 2006), and 70,000 (by the end of 2007). In mid-2006, Amitabh Ray, head of IBM's global delivery operations in India, felt confident enough to predict, “Three years from now, we'll definitely be the largest IT services company from India.”¹⁰ It appeared likely that by 2009, IBM's head count in India would exceed 100,000, accounting for nearly 30 percent of the company's global workforce. By almost every measure, IBM had transformed its services business into an integrated global enterprise with India as the center of gravity within a short span of five years.

Accenture serves as another good example of an established multinational that concluded that the best way to compete with the rising IT giants from India was to neutralize their India-specific advantages (while still being able to leverage its own global capabilities and customer relationships). At the end of 2000, Accenture's head count in India was a mere two hundred. The transformation started during 2001–2003 when the corporate leadership team committed itself to the idea of building Accenture India into the company's leading hub for the delivery of global services. The head count grew rapidly from five hundred (in 2002) to thirty-three hundred (in 2003) to ten thousand (in 2004) to sixteen thousand (in 2005) to twenty-three thousand (in 2006) and to thirty-five thousand (in 2007). As Karl-Heinz Floether, group chief executive for systems integration, technology, and delivery and the leading champion behind this transformation, observed in an interview in October 2007:

Join Forces with the Dragons and Tigers

Other than small toehold acquisitions, the strategies of Dell, IBM, and Accenture to fight fire with fire featured an aggressive but organic buildup of their capabilities and operations within China and India. An alternative approach to accomplish the same goal is to join forces with the dragons and tigers by acquiring or aligning with one or more of these home-grown guerrillas. The main advantage of a “join forces” strategy is speed, as it can potentially make the established multinational an immediate insider. As such, this strategy is much more appropriate for multinationals that are late and need to play a catch-up game. This strategy can also be appropriate in cases where the mindset required to build the China- or India-based capabilities is radically different from the prevailing mindset of the established multinational. Electronic Data Systems (EDS) and Renault-Nissan provide interesting examples.

In early 2006, EDS found itself severely lagging behind IBM and Accenture in building India-based global delivery capabilities. At that time, EDS's head count in India was only about three thousand as compared with nearly forty thousand for IBM and nearly twenty thousand for Accenture. Given the speed with which IBM and Accenture, as well as the major Indian competitors, were ramping up their capabilities in India, EDS concluded that acquisition was the smarter route for it to try to close the gap. In June 2006, the company paid $380 million in cash to acquire a majority stake in MphasiS BFL Limited, a rapidly growing middle-sized applications and business process outsourcing services company based in Bangalore. This acquisition immediately gave EDS access to eleven thousand India-based employees skilled in advanced applications development, emerging technologies, and services for business process outsourcing and customer relations management. Equally important, it gave the company a much stronger India-based platform for more rapid expansion over the next five years.

There is every reason to conclude that EDS has done an effective job in integrating MphasiS. Jerry Rao, the cofounder of MphasiS and its CEO at the time of the EDS acquisition, is still affiliated with the company. As of early 2008, Rao was chairman of EDS's Asia-Pacific Advisory Board as well as vice president and general manager for EDS India Operations. In an interesting development, EDS's success in ramping up its Indian operations appears to have made it a particularly attractive acquisition target for Hewlett-Packard, a deal that was completed in August 2008. The acquisition of EDS is a major plank in Hewlett-Packard's renewed efforts to compete more forcefully with IBM in IT services.

Renault and Nissan, the French and Japanese auto companies with equity holdings in each other and a common CEO, also illustrate the strategy of joining forces with local players to take on the emerging dragons and tigers. Tata Motors's debut of a twenty-five-hundred-dollar car (the Nano) in January 2008 indicated that the low- and middle-price segments of the auto markets around the world (including in Europe and the United States) would very likely be under attack from India-based companies within five years. As recently as mid-2007, even Japanese auto executives had proclaimed that it was impossible to deliver a car that would meet safety and emission standards for that price. Yet Tata Motors did it. The Nano was a vivid illustration of Indian companies' growing capabilities in frugal engineering: designing products and services that would be functional and yet ultra low cost to produce and deliver. As Wolf-Hennig Scheider, a senior executive at the German company Robert Bosch (which supplied engine technology for the Tata Nano), noted, “Low-price vehicles are not vehicles of inferior quality equipped with the most basic components. They are inexpensive technical solutions produced using state-of-the-art components.”¹²

There appears no reason to discount the possibility that within less than five years, a souped-up Nano meeting European safety, emission, and reliability standards could be in dealer showrooms in London, Paris, Milan, or Berlin at a price 25 to 30 percent below the least expensive European car. Carlos Ghosn, the combative and highly revered CEO of Renault and Nissan, appears to have concluded that fire must be met with fire. As he noted, “The challenge is to build a low-cost car that makes money. … And if Tata can do it, we can do it.”¹³ He has also concluded that it would be extremely difficult for Renault to overcome this challenge on its own: “They understand frugal engineering, which is something we aren't as good at in Europe or Japan.”¹⁴ By early 2008, Renault and Nissan were in serious discussions with India's Bajaj Auto to set up a three-way joint venture to produce an ultra-low-cost car first for the Indian market and later for export worldwide.

Despite the advantages of speed and access to already established local capabilities, the “joining forces” strategy comes with challenges. An acquisition can be costly and, if not integrated effectively, can prove to be a disastrous distraction. Similarly, a strategic alliance poses the challenge of aligning the vision, the goals, and the disparate capabilities of different companies. Given his track record at managing the alliance between Renault and Nissan, Carlos Ghosn has demonstrated that it can be done. However, considerable research indicates that strategic alliances between companies within the same industry (particularly when the “allies” have the potential to become global competitors) are risky and highly prone to conflicts and eventual dissolution.¹⁵

Leverage the Combined Power of China and India

The idea here is to pursue an integrated China+India strategy. Notwithstanding the rapidly growing economic integration between China and India, given the history of a brief war in 1962 and unsettled border disputes, there remains a certain degree of political tension between the two countries. Political leaders in both countries have expressed optimism that these disputes will eventually be resolved harmoniously. Yet any such resolution is still a few years away. Also, until they start working together and discover how much they have in common, most Chinese managers understand little about India, just as most Indian managers understand little about China. Thus, for at least the next five years, companies headquartered in countries outside China or India are likely to have an easier time pursuing an integrated China+India strategy than would generally be the case with emerging players from within China or India. In short, established MNCs may have considerable opportunity to leverage China+India to do battle with Chinese companies within China and globally, as well as the opportunity to leverage China+India to do battle with Indian companies within India and globally.

Cisco Systems provides a good example of a concerted attempt to pursue a China+India strategy to take on Chinese challengers such as Huawei Technologies in China, India, and globally. Founded in 1984 at Stanford University, Cisco is the undisputed global leader in networking solutions. As we noted in Chapter Two, it reported revenues of $35 billion in 2007, up 22 percent from 2006. Depending on market segment, Cisco's competitors included Juniper Networks, Nortel, Alcatel-Lucent, Nokia, Microsoft, and most significant, Huawei, a privately owned company with strong backing from the Chinese government.

Among its traditional competitors, Huawei was perhaps Cisco's toughest challenger. It was already a large company, with 2007 revenues of $16 billion, up 45 percent from 2006. At current rates of growth, Huawei's revenues could catch up with Cisco's within less than five years. Huawei was also a very global company, deriving 72 percent of revenues from outside China, and it had set up R&D centers in several locations, including Bangalore, Silicon Valley, Texas, Stockholm, and Moscow. Huawei enjoyed several sources of competitive advantage, notably:

• The ability to deploy almost half of its seventy thousand employees on R&D since, on a per person basis, Huawei's engineers cost only about 20 to 25 percent of their peers in the United States or western Europe.
• An early-mover advantage in leveraging the software engineering capabilities of India to complement its own hardware engineering capabilities in China; Huawei's largest software R&D center outside China was located in Bangalore with a staff of over fifteen hundred.
• A sourcing and production base in China, and thus much lower costs for the manufacture and assembly of its equipment.
• A passion for customer support. Our interviews with several of Huawei's customers and competitors uniformly yielded the observation that Huawei was almost maniacal in responding urgently to customers' queries and problems with a high degree of on-site engineering support.
• A gung-ho action-oriented and army-like culture that reflected the founder's background as an officer for the People's Liberation Army.
• An alignment between its lower-cost offerings and the rapidly growing needs of customers in emerging markets.
• Access to low cost and preferred financing from China's state-owned banks.

Huawei's strategic goals and trajectory seemed perfectly aligned with the government's explicitly stated policy to help Chinese companies emerge as global champions, especially in technology-intensive sectors.

Cisco's response to the challenge from Huawei has been to pursue a China+India strategy with a vengeance. In November 2007, Cisco announced a five-year $16 billion initiative for China that included ramped-up procurement from China, venture capital investment in China, the establishment of Cisco Networking Academies with a particular focus on central and western provinces being targeted by the government for accelerated development, an equity stake in and strategic alliance with the business-to-business player Alibaba.com, and plans to help China develop green technologies and its IT services sector. At the same time, Cisco has assigned a complementary role to its base in India. In December 2006, John Chambers announced it was setting up a second global headquarters in Bangalore. Wim Elfrink, executive vice president for global services, took on a second title, chief globalization officer, and relocated to India. The India initiatives also included a rapid ramp-up in Cisco's R&D staff there to about ten thousand people within three years. Importantly too, Chambers announced that within three years, 20 percent of Cisco's top leadership talent would be relocated to Bangalore and would carry out their global responsibilities from there. The Bangalore campus also makes it much easier for Cisco to work closely with all of the world's major IT services companies (including IBM and Accenture) because Bangalore is the global hub for them too. Most importantly perhaps, relocating a sizable proportion of global leaders to Bangalore makes it much more likely that Cisco will be able to understand the needs of customers in emerging markets more accurately, more comprehensively, and more proactively.

Protect Competitive Position in Markets Outside China and India

Finally, competing with the dragons and the tigers on the world stage also requires that the established multinational defend its position outside China and India—not just in other emerging markets but also in the developed markets of North America, Europe, and Asia. Notwithstanding their large size, China and India are not (and even fifty years from now, will not be) the only megamarkets in the world. China's population is about one-fifth that of the entire world and is likely to remain at roughly that level for the foreseeable future. Thus, even when China becomes richer and its per capita income catches up with that of the other countries, its GDP will still be only about 20 percent of world GDP. Also, as China becomes richer, its economy will become a mature, slower-growing economy. In short, even fifty years from now, it is a reasonable bet that 75 to 80 percent of the global demand for most products and services will be outside China. True, there will be some products and services where China may account for a disproportionately high percentage of global demand. If so, then these high figures will be balanced by lower percentages in some other products and services. The same calculations apply to India.

Thus, if you are the leader of a company such as Boeing, Dell, or Cisco, you can take some comfort in the fact that over both the short and long terms, a dragon or a tiger would find it difficult to have privileged home country access to anything more than 20 percent of global demand. The remaining 80 percent will be outside the home market and will be up for grabs by whichever company is smarter at building and managing a globally integrated enterprise that is able to internalize the differentiated comparative advantages of various locations. There is no reason that the established multinational should cede any of this market to an aspiring global champion from China or India.

Of course, the strategies discussed earlier (neutralizing the home country advantages of the dragons and the tigers and leveraging the complementary strengths of China+India) are likely to play a critical role in helping the established multinational defend its competitive position in markets outside China and India. However, in its historical markets, the established multinational should also have other advantages that it could leverage, such as established relationships with distribution channels and customers, superior understanding of customer needs, and products, services, and solutions that are more tailored to local market requirements.

Conclusion

Over the next ten years, the global structure of most industries will undergo greater change than in the previous twenty. Reflecting this change, we predict that the list of the world's largest five hundred companies in 2020 will include a much more even mix of players from the United States, Europe, Japan, India, and China, as well as other large, emerging economies.

Not every established multinational of 2008 will make it from here to there. Some will get swallowed up by the rising dragons and tigers. At the same time, not every aspiring globalizer from China or India will succeed in realizing its ambitions. Some will stumble and wither away or get acquired by their compatriots or foreign multinationals. On either side (established multinational, or aspiring dragon or tiger), the odds will favor companies whose leaders combine an entrepreneurial orientation, a bias toward acting as if the future is already here, and sound analysis along the lines discussed in this chapter.