Preface

The central premise underlying this book is that being present in China and India is not the same thing as getting China and India right.

Most CEOs and their senior colleagues are well aware that the world's economic center of gravity is shifting from the developed to the emerging economies, in particular China and India. Notwithstanding this general awareness, very few truly grasp the magnitude and pace of change and the multifaceted nature of the new reality. Fewer still have figured out what these developments mean for the future architecture of their company. Some of the most common mistakes are viewing China and India solely from the lens of offshoring and cost reduction, building marketing strategies that are centered around just the rich cities and the top 5 to 10 percent of the population, underestimating the ambitions and capabilities of emerging competitors, and treating these two countries as peripheral rather than core to their company's global strategy.

The rise of China and India is a game-changing phenomenon. Given the size and rapid growth of these two economies, a suboptimal strategy for China and India is no longer a matter of merely leaving some money on the table. Many of today's Western giants that do not have solid strategies for China and India will face severe threats to their very existence in as little as ten years, as competitors that are making the most of China and India mark these companies with a bull's eye for annihilation or acquisition. Putting in place the right strategies, which we outline in this book, is crucial to leveraging these economies for global advantage.

A 2006 report by the American Chamber of Commerce in Shanghai reported that 65 percent of its member companies were profitable and that nearly one-third of these had profit levels equal to or higher than in other countries. At first blush, these data may suggest that multinational companies are finally beginning to get their China (and similarly India) strategy right. But based on our analysis of and interviews with managers in over a hundred companies, we question the validity of any such conclusion. As a recent report by the IBM Institute for Business Value on MNC strategies in China noted, “Although a small, but growing, number of companies are tapping the mass market, the majority of MNCs still rely on premium-end products in the top cities for the bulk of their revenues and profits.”¹

Pursuing a premium-end niche strategy may be an easy way to show attractive profit margins from the China and India operations and keep headquarters executives happy. We contend, however, that focusing exclusively on profit margins as the measure of success runs a serious risk of leading to misplaced priorities. Pursuing market opportunities in China and India is like entering a large and rapidly growing new line of business. If you just skim the surface, it will appear as if you are doing well. However, what you may not know is that you have a rather small and declining market share and that you are setting yourself up for being pushed aside. Established multinationals face a particularly acute competitive threat from new global players from within China and India that have radically different capabilities, radically different mindsets, and radically different notions of speed—combined with easy access to global capital and global talent. As the China president for one of the world's largest multinationals noted to us, “Ten years from now, there will be fewer successful multinational corporations in China than you see today. Headquarters executives in many companies are simply unaware that they are being squeezed into a narrow corner.”

In Chapter One, we develop the central idea that China and India are the only two countries in the world that simultaneously constitute four stories rolled into one, each of them with the potential to be game changing in its own right: (1) China and India as megamarkets for almost every product and service, (2) China and India as platforms to dramatically reduce a company's global cost structure, (3) China and India as platforms to significantly boost a company's global technology and innovation base, and (4) China and India as the springboards for the emergence of a new breed of fearsome global competitors. Many countries feature one or two of these stories, but other than China and India, no other features all four. Building robust strategies for China and India requires that the company address each of these four stories head-on.

In Chapter Two, we contend that the time for debating whether to pursue China or India is over and that the right question to ask is how best to pursue both China and India rather than which one. We begin by highlighting the important similarities and differences between China and India, as well as the rapidly growing trade and investment linkages between them. Building on this analysis, we outline the four types of strategic benefits that a company can derive by pursuing a China+India strategy: leverage the scale of both China and India; leverage the complementary strengths of China and India; transfer learning from one market to the other, thereby accelerating the pace of success in both markets; and leverage dual presence to reduce risks.

In Chapter Three, we analyze the structure of the market opportunities in China and India and discuss how a company should position itself to capture the hearts, minds, and wallets of the consumers in these two countries. We argue that unless a company operates in niche products and services, it should go wide and deep, pursuing a multisegment strategy. At the top end of the income spectrum, customers have high buying power and are likely to prefer global products and services. Thus, companies are unlikely to face much pressure for local adaptation of their products and services except for cultural reasons. The middle income segment constitutes the mass market. For most products and services, this is also the fastest-growing market in each country and can be ignored only at great peril to the company's future. This segment is often characterized by brutal competition, low pricing power, and low margins. In order to win here, a company will generally need to develop local products and services that are designed to be low cost. At the lower end of the income spectrum, a company is unlikely to generate much revenue. However, given high growth rates, this is the segment with the greatest possibilities for innovation. Every smart company should engage with this segment seriously, aim to break even, and view it as a learning laboratory for the discovery of new business models.

Chapter Four deals with the outbound part of the China and India story: how a company can use China and India as global platforms. We focus on three opportunities: cost arbitrage, intellectual arbitrage, and business model innovation. Realizing these opportunities requires a company to work on many fronts: managing internal politics; conducting a disaggregated value chain analysis to decide exactly which activities should be located in China, which in India, and which in other countries; deciding whether to set up the company's own operations or rely on outsourcing; building the necessary local capabilities; and then deploying the local capabilities globally without losing control of the value chain.

Chapter Five examines in detail the forces that are propelling the rapid emergence of global champions from China and India. We also compare the relative strengths and weaknesses of the Chinese dragons and the Indian tigers in relation to each other. Building on this analysis, we advance a multipronged strategy for multinational corporations to not only defend themselves but also compete with the dragons and tigers on the world stage: attack the new champions within their home markets and thus neutralize their home court advantage; consider joining forces with the dragons and tigers; pursue an integrated China+India strategy, thereby leveraging the combined scale and resources of both economies; and aggressively defend your existing competitive position outside China and India since defending an existing position is far easier than trying to regain lost ground.

Chapter Six looks at the human resource challenges that companies must overcome in their quest to win within China and India and leverage the strengths of these two countries for global advantage. Notwithstanding their billion-plus populations and the world's two largest pools of college graduates every year, China and India suffer from an acute shortage of professional staff such as seasoned managers and people with specialized skills (for example, accountants in China and software developers in India). As such, most companies, foreign and domestic, find themselves engaged in a perpetual war for talent. In this chapter, we begin by looking at why there exists this scarcity in the midst of plenty in China and India. We then put forward guidelines about what a company can do to increase its odds at winning the ongoing brutal war for talent.

In Chapter Seven, we pull together the conclusions from our analysis and outline what the features of a global enterprise must be if it is to emerge as one of the winners ten years from now. We argue that the magnitude and pace of change, as well as the multifaceted nature of the new reality, demands that senior leaders rethink some of their central assumptions in crafting global strategy, rethink what must be the drivers and processes to create innovations over the next ten years, rethink how the company must be organized and managed, and, above all, strive with full vigor to globalize the corporate mindset.

We conclude by noting that the successful global corporation of tomorrow will be one that figures out how to take advantage of three realities: the rapid growth of emerging markets and the increasing multipolarity of the world economy; enduring cultural, political, and economic differences across countries and regions; and the rapidly growing integration of national economies. Organizationally it will be managed as a globally integrated enterprise rather than as a federation of regional or national fiefdoms. And it will be led by business leaders who have global mindsets and are masters at building bridges rather than moats.

December 2008

Anil K. Gupta
Haiyan Wang

Bethesda, Maryland
New Delhi, India
Shanghai, China