The Hindu Business Line : The China-India matrix

China may be on everyone's lips, but India is not far behind. Both, as it came out at a recent economists' meet in Singapore, are the power-houses of the world, especially with a projected combined middle-class population of one billion by 2020. The key to a win-win situation is an Asian integration. RASHEEDA BHAGAT reports.

For the world at large, there is no escaping leveraging the advantages of the two Asian giants - services for India, manufacturing for China.

At a recent conference of economic editors in Singapore to discuss the findings of the latest survey sponsored by MasterCard International as part of its ongoing research and analysis on business dynamics, financial policies and related activities in the Asia-Pacific region, it was a little disappointing to note that journalists from Thailand, Malaysia, the Philippines and Singapore showed very little interest in seeking information on the India economy. They were very keen to get the latest on China, though.

Granted the title of the survey report was `China and the New Global Economy,' but it did contain a lot of information on how India had come on the global stage with its strategic contribution to the services sector. Also, the crux of the report was that by 2020, China and India would have a middle-class consumer base of one billion people, a number that should have any manufacturer of consumer goods drooling.

Middle-class defined

Of course the definition of a "middle-class" person given by Dr Yuwa Hedrik-Wong, who led the economists' panel that conducted the survey, was one with an annual income of or above $5,000. His survey estimates that with a "conservative" projected growth of the economies, by 2020, China would have 650 million "middle class" people and India 350 million. In 2004, this number was 79 million and 12 million respectively.

But the most fascinating aspect of the report, which also explained to a certain extent the South-East Asian journalists' interest in China, was how that surging economy has changed the economic equations in the entire region, drawing the major produce from these countries, including India, to emerge an exporter to the Western world.

Might of Middle Kingdom

Dr Yuwa used World Bank data to illustrate China's growing importance on the world stage and drive home why it can no longer be ignored by global businesses. In 1990, China's share of global GDP growth, on a purchasing power parity basis, was only 10 per cent. But by 1995 it had increased to 23 per cent, by 2004 it was 33 per cent or one third of the global economic growth rate "and I guess the figure for 2005 would be even higher." Coming to China's mighty labour force on the manufacturing side, Dr Yuwa said that "between 2000 and 2005 about 30 million Chinese workers could be construed to be producing directly for the global market, by 2006-2010 this workforce is estimated to double to 60 million, an increase by 30 million people, which is the entire population of Canada!"

This, he added, would have far-reaching implications for the rest of the world. An increase in the global supply of labour would mean that in the next few years wages could be suppressed, unless a country had a highly specialised labour force.

The India story

It is in this context that the importance of India, "which is yet to make inroads into the manufacturing sector," is emerging, Dr Yuwa said. "At the moment India's impact in the global arena is one of service exports and it is going from very, very basic to increasingly complex and sophisticated areas — from mere call centres, to low value add and then increasingly to R&D activities, what people now call business process outsourcing."

While this was bound to continue, the only constraint for its future growth is "India's supply of skilled labour force. We're talking about 200,000 Indian graduates passing out every year, but according to a McKinsey report, only 20-25 per cent of these graduates are good. Thanks to the shortfall in quality we're already seeing a huge amount of job-hopping in the services sector in India; with a marginal increase in pay people switch jobs because the competition is keen," he said.

Leveraging China's growth

While this had the potential of "slowing down India's growth in the services sector, at the moment what we're seeing is that on the manufacturing side China is providing huge supply in terms of both labour and capacity." The trick, therefore, lay in corporates in the region leveraging China's growth, its huge domestic market and its lower manufacturing costs, to drive economic growth in their individual countries by building up a partnership with China. Japan had been an early bird in doing exactly this; many Japanese corporates had shifted their manufacturing base to China, and gained the advantage of cheaper labour and cheaper logistics, while maintaining the quality of Brand Japan, said the report.

Explaining how China's impact on Japan was dramatic, Dr Yuwa said: "Today Japan's recovery is not only sustainable, but it is also putting the country on a completely high growth trajectory because of what Japan has managed to do with the China market. The profit of Japanese corporates is at an all time high."

In 2003-04, the sales of 30 Japanese corporates grew by only 1.5 per cent, but their profit grew by 15 per cent and this was thanks to their leveraging China. "The equation is very simple; it was the same brand and the same global market, except the product was made in China, allowing the profit margins to boom. Increasingly in Japan they no longer talk about `Made in Japan', but `Made by Japan in China'," Dr Yuwa, said, giving the example of how Toshiba today no longer makes a single colour TV in Japan, having shifted its entire manufacturing base to China.

Key service supplier

Terming the phenomenon of China emerging as a pan-Asia supply chain and India's foray into the services sector as a "positive supply shock", and underlining the importance of synergies among various players, Dr Yuwa said: "India's $40 billion dollar per year service exports are reducing by 2 to 3 times the business operating costs of its outsourcing clients. Manufacturing is becoming increasingly service intensive and India now is actually becoming a key supplier in the service dimension of manufacturing. My message is that globally there is no escape from leveraging from countries which have different advantages... manufacturing for China, and services for India."

He added that sometimes at business conferences people came up to him and said: `Oh, but that is happening in China or India. How will it affect the rest of the world?' To which his reply has been that today you can't be a company in the US Midwest and say you never export to global markets and it doesn't matter to you what's happening in China or India.

"My argument is that you still cannot escape the impact. If your competitor can tap into India for a bit of what they do in terms of service outsourcing or buy from China because it is cheaper there, then your competitor will beat you in the domestic market. So even if you have nothing to do with the global market, you cannot escape the impact of this positive supply shock coming out of Asia."

Pointing out how growth of China had positively impacted growth in the region — in the last 10 years India's annual export growth rate to US was only 12.5 per cent, but its annual export growth rate to China was 50.21 per cent — he said, "That gives an idea of how growth in the region has changed. Taiwan was discussing whether they could impeach their President or not; its domestic economy is in deep depression, in fact it does not have an independent economy on its own, for all practical purposes its economy is integrated with that of China. This explains why in the 10-year period from 1994-04, while its export to its traditional market — the US — grew at an annual rate of 1.26 per cent, its exports to China grew by a huge 75.86 per cent. Today Taiwan is completely dependent on the China market."

Asian Integration

Dr Yuwa said that, ultimately, there was no getting away from regional integration in Asia for the benefit of each participant. He was optimistic that this would happen, and was already happening in many areas, because "fortunately, economic integration in Asia is not driven by governments but businesses. In terms of government policies, it's a mess. Some people are pessimistic and ask: Gee, when are we going to see an Asia Free Trade policy, and my answer to them is: `Probably never'. But that's not the point; the point is that economic integration is driven by business, the way they position their productions centres, maintain their supply chain, etc."

A win-win situation for all would be when there is extreme integration "without government policy intervention, or despite the lack of govt policy initiatives!"

And one hopes that very soon a time will come when the South-East Asian media will be as interested, if not more, in India as in China!

Response may be sent to rasheeda@thehindu.co.in