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ANewWorldEconomy
August21,2005
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Itmaynottopthemustseelistofmanytourists.ButtoappreciateShanghai'sambitiousviewofitsfuture,there
isnobetterplacethantheUrbanPlanningExhibitionHall,aglassandmetalstructureacrossfromPeople's
Square.Thehighlightisascalemodelbiggerthanabasketballcourtoftheentiremetropoliseveryskyscraper,
house,lane,factory,dock,andpatchofgreenspaceintheyear2020.
TherearewhiteplasticshowpiecetowersdesignedbyarchitectssuchasI.M.PeiandSirNormanFoster.There
areimmensenewindustrialparksforautosandpetrochemicals,alongwithnewsubwaylines,airportrunways,
ribbonsofexpressway,andanelaborateriverfrontdevelopment,siteofthe2010WorldExpo.Ninefuturistic
plannedcommunitiesfor800,000residentseach,withgenerousparks,retaildistricts,manmadelakes,and
nearbycollegecampuses,riseinthesuburbs.Themessageisclear.Shanghaialreadyislookingwellpastits
industrialagetoitsexpectedemergenceasaglobalmeccaofknowledgeworkers."Inaninformationeconomy,
itisveryimportanttohaveurbanspacewithabetternaturalandsocialenvironment,"explainsArchitectural
SocietyofShanghaiPresidentZhengShiling,akeycityadviser.
Itiseasytodismisssuchdreamsasbubbleeconomyhubrisuntilyoutakeintoaccounttheaudaciousgoals
Shanghaialreadyhasachieved.Since1990,whenthecitystillseemedcaughtinasocialisttimewarp,Shanghai
haserectedenoughhighrisestofillManhattan.TheoncerundownPudongdistrictboastsaspaceageskyline,
someoftheworld'sbiggestindustrialzones,dozensofresearchcenters,andabullettrain.Thisisthestoryof
China,whereanextraordinaryabilitytomobilizeworkersandcapitalhastripledpercapitaincomeina
generation,andhaseased300millionoutofpoverty.Leadersnowarefreneticallylayingthegroundworkfor
decadesofnewgrowth.
INVALUABLEROLE
NowhopaplanetoIndia.Itishardtotellthisistheworld'sotheremergingsuperpower.Joltingsightsof
extremepovertyaboundeveninthebusinesscapitals.Alackofsubwaysandadearthofexpresswaysresultin
nightmarishtraffic.
Butvisittheofficetowersandresearchanddevelopmentcenterssproutingeverywhere,andyouseethemiracle.
Here,Indiansareplayinginvaluablerolesintheglobalinnovationchain.Motorola,(MOT)HewlettPackard
(HPQ),CiscoSystems(CSCO),andothertechgiantsnowrelyontheirIndianteamstodevisesoftware
platformsanddazzlingmultimediafeaturesfornextgenerationdevices.Google(GOOG)principalscientist
KrishnaBharatissettingupaBangalorelabcompletewithcolorfulfurniture,exerciseballs,andaYamaha
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organlikeGoogle'sMountainView(Calif.)headquarterstoworkoncoresearchenginetechnology.Indian
engineeringhousesuse3Dcomputersimulationstotweakdesignsofeverythingfromcarenginesandforklifts
toaircraftwingsforsuchclientsasGeneralMotorsCorp.(GM)andBoeingCo(BA).Financialandmarket
researchexpertsatoutfitslikeB2K,OfficeTiger,andIriscrunchthelatestdisclosuresofbluechipcompanies
forWallStreet.By2010suchoutsourcingworkisexpectedtoquadruple,to$56billionayear.
Evenmoreexhilaratingisthepaceofinnovation,astechhubslikeBangalorespawncompaniesproducingtheir
ownchipdesigns,software,andpharmaceuticals."IfindBangaloretobeoneofthemostexcitingplacesinthe
world,"saysDanScheinman,CiscoSystemsInc.'sseniorvicepresidentforcorporatedevelopment."ItisSilicon
Valleyin1999."BeyondBangalore,Indiancompaniesareshowingaflairforproducinghighqualitygoodsand
servicesatridiculouslylowprices,from$50airflightsandcrystalclear2centsaminutecellphoneserviceto
$2,200carsandcardiacoperationsbytopsurgeonsatafractionofU.S.costs.Someanalystsseethebeginnings
ofhypercompetitivemultinationals."OncetheylearntosellatIndianpriceswithworldquality,theycan
competeanywhere,"predictsUniversityofMichiganmanagementguruC.K.Prahalad.AddsA.T.Kearney
hightechconsultantJohnCiacchella:"Idon'tthinkU.S.companiesrealizeIndiaisbuildingnextgeneration
servicecompanies."
SIMULTANEOUSTAKEOFFS
ChinaandIndia.Rarelyhastheeconomicascentoftwostillrelativelypoornationsbeenwatchedwithsucha
mixtureofawe,opportunism,andtrepidation.ThepostwarerawitnessedeconomicmiraclesinJapanandSouth
Korea.Butneitherwaspopulousenoughtopowerworldwidegrowthorchangethegameinacomplete
spectrumofindustries.ChinaandIndia,bycontrast,possesstheweightanddynamismtotransformthe21st
centuryglobaleconomy.Theclosestparalleltotheiremergenceisthesagaof19thcenturyAmerica,ahuge
continentaleconomywithayoung,drivenworkforcethatgrabbedtheleadinagriculture,apparel,andthehigh
technologiesoftheera,suchassteamengines,thetelegraph,andelectriclights.
Butinaway,evenAmerica'srisefallsshortincomparisontowhat'shappeningnow.Neverhastheworldseen
thesimultaneous,sustainedtakeoffsoftwonationsthattogetheraccountforonethirdoftheplanet'spopulation.
Forthepasttwodecades,Chinahasbeengrowingatanastounding9.5%ayear,andIndiaby6%.Giventheir
youngpopulations,highsavings,andthesheeramountofcatchinguptheystillhavetodo,mosteconomists
figureChinaandIndiapossessthefundamentalstokeepgrowinginthe7%to8%rangefordecades.
Barringcataclysm,withinthreedecadesIndiashouldhavevaultedoverGermanyastheworld'sthirdbiggest
economy.Bymidcentury,ChinashouldhaveovertakentheU.S.asNo.1.Bythen,ChinaandIndiacould
accountforhalfofglobaloutput.Indeed,thetroikaofChina,India,andtheU.S.theonlyindustrializednation
withsignificantpopulationgrowthbymostprojectionswilldwarfeveryothereconomy.
Whatmakesthetwogiantsespeciallypowerfulisthattheycomplementeachother'sstrengths.Anaccelerating
trendisthattechnicalandmanagerialskillsinbothChinaandIndiaarebecomingmoreimportantthancheap
assemblylabor.Chinawillstaydominantinmassmanufacturing,andisoneofthefewnationsbuilding
multibilliondollarelectronicsandheavyindustrialplants.Indiaisarisingpowerinsoftware,design,services,
andprecisionindustry.Thisraisesaprovocativequestion:Whatifthetwonationsmergeintoonegiant
"Chindia?"Rivalpoliticalandeconomicambitionsmakethatunlikely.Butiftheirindustriestrulycollaborate,
"theywouldtakeovertheworldtechindustry,"predictsForresterResearchInc(FORR).analystNaviRadjou.
Inapracticalsense,theyinandyangoftheseimmenseworkforcesalreadyareconverging.True,annualtrade
betweenthetwoeconomiesisjust$14billion.ButthankstotheInternetandplungingtelecomcosts,
multinationalsarehavingtheirgoodsbuiltinChinawithsoftwareandcircuitrydesignedinIndia.Asinteractive
designtechnologymakesiteasiertoperfectvirtual3Dprototypesofeverythingfromtelecomrouterstoturbine
generatorsonPCs,thedistancebetweenIndia'slowcostlaboratoriesandChina'slowcostfactoriesshrinksby
themonth.Managersinthevanguardofglobalization'snewwavesaytheimpactwillbenothinglessthan
explosive."Inafewyearsyou'llseemostcompaniesunleashingthismassiveproductivitysurge,"predicts
InfosysTechnologies(INFY)CEONandanM.Nilekani.
Toglobalization'sskeptics,however,what'sgoodforCorporateAmericatranslatesintolayoffsandlowerpay
forworkers.LittlewondertheWestissufferingfromfutureshock.EachnewChinesecorporatetakeoverbidor
revelationofamajorIndianoutsourcingdealelicitshowlsofprotestbyU.S.politicians.Washingtonthinktanks
arepublishingthickwhitepaperschartingChina'srapidprogressinmicroelectronics,nanotech,andaerospace
andpaintingdarkscenariosaboutwhatitmeansforAmerica'sgloballeadership.
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Suchalarmismisunderstandable.ButtheU.S.andotherestablishedpowerswillhavetolearntomakeroomfor
ChinaandIndia.Forinalmosteverydimensionasconsumermarkets,investors,producers,andusersof
energyandcommoditiestheywillbe21stcenturyheavyweights.Thegrowingeconomicmightwillcarryinto
geopoliticsaswell.ChinaandIndiaaremoreassertivelypressingtheirinterestsintheMiddleEastandAfrica,
andChina'smilitarywilllikelychallengeU.S.dominanceinthePacific.
OneimplicationisthatthebalanceofpowerinmanytechnologieswilllikelymovefromWesttoEast.An
obviousreasonisthatChinaandIndiagraduateacombinedhalfamillionengineersandscientistsayear,vs.
60,000intheU.S.Inlifesciences,projectstheMcKinseyGlobalInstitute,thetotalnumberofyoungresearchers
inbothnationswillriseby35%,to1.6millionby2008.TheU.S.supplywilldropby11%,to760,000.Asmost
Westernscientistswilltellyou,ChinaandIndiaalreadyaremakingimportantcontributionsinmedicineand
materialsthatwillhelpeveryone.Becausethesenationscanthrowmorebrainsattechnicalproblemsata
fractionofthecost,theircontributionstoinnovationwillgrow.
CONSUMERSRISING
Americanbusinessisn'tjustshiftingresearchworkbecauseIndianandChinesebrainsareyoung,cheap,and
plentiful.Inmanycases,theseengineerscombineskillsmasteryofthelatestsoftwaretools,aknackfor
complexmathematicalalgorithms,andfluencyinnewmultimediatechnologiesthatoftensurpassthoseof
theirAmericancounterparts.AsCisco'sScheinmanputsit:"WecametoIndiaforthecosts,westayedforthe
quality,andwe'renowinvestingfortheinnovation."
Arisingconsumerclassalsowilldriveinnovation.Thisyear,China'spassengercarmarketisexpectedtoreach
3million,No.3intheworld.Chinaalreadyhastheworld'sbiggestbaseofcellphonesubscribers350million
andthatisexpectedtonear600millionby2009.Intwoyears,ChinashouldovertaketheU.S.inhomes
connectedtobroadband.LessnoticedisthatIndia'sconsumermarketisonthesameexplosivetrajectoryas
Chinafiveyearsago.Since2000,thenumberofcellularsubscribershasrocketedfrom5.6millionto55million.
What'smore,ChineseandIndianconsumersandcompaniesnowdemandthelatesttechnologiesandfeatures.
Studiesshowtheattitudesandaspirationsoftoday'syoungChineseandIndiansresemblethoseofAmericansa
fewdecadesago.SurveysofthousandsofyoungadultsinbothnationsbymarketingfirmGreyGlobalGroup
foundtheyareoverwhelminglyoptimisticaboutthefuture,believesuccessisintheirhands,andviewproducts
asstatussymbols.InChina,it'sfashionablefortheupwardlymobiletoswitchhighendcellphoneseverythree
months,saysJoshLi,managingdirectorofGrey'sBeijingoffice,becauseanoldmodelsuggests"youarenot
gettingaheadandupdated."Thatmeansthesenationswillbehugeprovinggroundsfornextgeneration
multimediagizmos,networkingequipment,andwirelessWebservices,andwillplayagreaterroleinsetting
globalstandards.Inconsumerelectronics,"wewillseeChinainafewyearsgoingfrombeingafollowertoa
leaderindefiningconsumerelectronicstrends,"predictsPhilipsSemiconductors(PHG)ExecutiveVice
PresidentLeonHusson.
Forallthehugeadvantagestheynowenjoy,IndiaandChinacannotassumetheirroleasnewsuperpowersis
assured.Today,ChinaandIndiaaccountforamere6%ofglobalgrossdomesticproducthalfthatofJapan.
Theymustkeepgrowingrapidlyjusttoprovidejobsfortensofmillionsenteringtheworkforceannually,andto
keepmanymillionsmorefromcrashingbackintopoverty.Bothnationsmustconfrontecologicaldegradation
that'sasobviousasthesmogshroudingShanghaiandBombay,andfacerealrisksofsocialstrife,war,and
financialcrisis.
Increasingly,suchproblemswillbetheworld'sproblems.Also,withwagesrisingfast,especiallyinmany
skilledareas,thecheaplaboredgewon'tlastforever.Bothnationswillgothroughmanyboomandharrowing
bustcycles.AndneithercountryisyetproducingcompanieslikeSamsung,Nokia(NOK),orToyota(TM)that
putitalltogether,developing,making,andmarketingworldbeatingproducts.
Bothcountries,however,havesurvivedearliercrisesandpossessimmenseuntappedpotential.InChina,serious
developmentonlynowisreachingthe800millionpeopleinruralareas,wherepercapitaannualincomeisjust
$354.Inareasoutsidemajorcities,wagesareaslittleas45centsanhour."ThisiswhyChinacanhaveanother
20yearsofhighspeedgrowth,"contendsBeijingUniversityeconomistHaiWen.
Veryimpressive.ButIndia'slongtermpotentialmaybeevenhigher.Duetoitsonechildpolicy,China's
workingagepopulationwillpeakat1billionin2015andthenshrinksteadily.Chinathenwillhavetoprovide
foragrayingpopulationthathaslimitedretirementbenefits.Indiahasnearly500millionpeopleunderage19
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andhigherfertilityrates.Bymidcentury,Indiaisexpectedtohave1.6billionpeopleand220millionmore
workersthanChina.Thatcouldbeasourceforinstability,butagreatadvantageforgrowthifthegovernment
canprovideeducationandopportunityforIndia'smasses.NewDelhijustnowispushingtoopenitspower,
telecom,commercialrealestateandretailsectorstoforeigners.Theseindustriescouldlurebigcapitalinflows.
"Thepaceofinstitutionalchangesandindustriesbeingliberalizedisphenomenal,"saysChiefEconomist
WilliamT.WilsonofconsultancyKeystoneBusinessIntelligenceIndia."IbelieveIndiahasabettermodelthan
China,andovertimewillsurpassitingrowth."
Foritspart,Chinahasyettoproveitcangobeyondforcedmarchindustrialization.Chinadirectsmassive
investmentintopublicworksandfactories,awildlysuccessfulformulaforrapidgrowthandjobcreation.But
consideringitsmassivemanufacturingoutput,Chinaissurprisinglyweakininnovation.Afull57%ofexports
arefromforeigninvestedfactories,andChinaunderachievesinsoftware,evenwith35softwarecollegesand
planstograduate200,000softwareengineersayear.It'snotforlackofgenius.MicrosoftCorp.'s(MSFT)180
engineerR&DlabinBeijing,forexample,isoneoftheworld'smostproductivesourcesofinnovationin
computergraphicsandlanguagesimulation.
WhileChina'sbigstaterunR&Dinstitutesareclosetothecuttingedgeatthetheoreticallevel,theyhaveyetto
yieldmanycommercialbreakthroughs."Chinahasalotofcapability,"saysMicrosoftChiefTechnologyOfficer
CraigMundie."Butwhenyoulookunderthecovers,thereisnotalotofcollaborationwithindustry."Thelack
ofintellectualpropertyprotection,andBeijing'sheavyroleinbuildingupitsowntechcompanies,makemany
othermultinationalsleeryofdoingseriousR&DinChina.
Chinaalsoishugelywasteful.Its9.5%growthratein2004islessimpressivewhenyouconsiderthat$850
billionhalfofGDPwasplowedintoalreadygluttedsectorslikecrudesteel,vehicles,andofficebuildings.
ItsfactoriesburnfuelfivetimeslessefficientlythanintheWest,andmorethan20%ofbankloansarebad.
TwothirdsofChina's1,300listedcompaniesdon'tearnbacktheirtruecostofcapital,estimatesBeijing
NationalAccountingInstitutePresidentChenXiaoyue."Webuildtheroadsandindustrialparks,butwesacrifice
alot,"Chensays.
India,bycontrast,hashadtodevelopwithscarcity.Itgetsscantforeigninvestment,andhasnoroomtowaste
fuelandmaterialslikeChina.IndiaalsohasWesternlegalinstitutions,amodernstockmarket,andprivatebanks
andcorporations.Asaresult,itisfarmorecapitalefficient.ABusinessWeekanalysisofStandard&Poor's
(MHP)Compustatdataon346toplistedcompaniesinbothnationsshowsIndiancorporationshaveachieved
higherreturnsonequityandinvestedcapitalinthepastfiveyearsinindustriesfromautostofoodproducts.The
averageIndiancompanyposteda16.7%returnoncapitalin2004,vs.12.8%inChina.
SMALLBATCHEXPERTISE
TheburningquestioniswhetherIndiacanreplicateChina'smassmanufacturingachievement.India'sinfotech
servicesindustry,successfulasitis,employsfewerthan1millionpeople.But200millionIndianssubsiston$1
adayorless.ExportmanufacturingisoneofIndia'sbesthopesofgeneratingmillionsofnewjobs.
Indiahassophisticatedmanufacturingknowhow.TataSteelisamongtheworld'smostefficientproducers.The
countryboastsseveraltopprecisionautopartscompanies,suchasBharatForgeLtd.Theworld'sbiggest
supplierofchassispartstomajorautomakers,itemploys1,200engineersatitsheavilyautomatedPuneplant.
India'sforteissmallbatchproductionofhighvaluegoodsrequiringlotsofengineering,suchaspower
generatorsforCumminsInc.(CMI)andcorecomponentsforGeneralElectricCo.(GE)CATscanners.
WhatholdsIndiabackarebureaucraticredtape,rigidlaborlaws,anditsinabilitytobuildinfrastructurefast
enough.Therearehopefulsigns.NokiaCorp.isbuildingamajorcampustomakecellphonesinMadras,and
SouthKorea'sPohangIron&SteelCo.plansa$12billioncomplexby2016inOrissastate.ButitwilltakeIndia
manyyearstobuildthehighways,powerplants,andairportsneededtorivalChinainmassmanufacturing.With
Beijingnowpushingsoftwareandpledgingintellectualpropertyrightsprotection,someIndiansfretdesignwork
willshifttoChinatobeclosertofactories."ThequestioniswhetherChinacanmovefrommanufacturingto
servicesfasterthanwecansolveourinfrastructurebottlenecks,"saysPresidentAravindMelligeriofBangalore
basedQuEST,whose700engineersdesigngasturbines,aircraftengines,andmedicalgearforGEandother
clients.
Howevertheraceplaysout,CorporateAmericahaslittlechoicebuttobeengagedheavily.Motorola
illustratesthevalueofleveragingbothnationstolowercostsandspeedupdevelopment.Mostofitshardwareis
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assembledandpartlydesignedinChina.ItsR&DcenterinBangaloredevisesabout40%ofthesoftwareinits
newphones.TheBangaloreteamdevelopedthemultimediasoftwareanduserinterfacesinthehotRazrcell
phone.Now,theyareworkingonphonesthatdisplayandsendlivevideo,streammoviesfromtheWeb,orroute
incomingcallstovoicemailwhenyouareshiftinggearsinacar."Thisisavery,verycritical,stateoftheart
resourceforMotorola,"saysMotorolaSouthAsiaPresidentAmitSharma.
CompanieslikeMotorolarealizetheymustsucceedinChinaandIndiaatmanylevelssimultaneouslytostay
competitive.Thatrequiresstrategiesforwinningconsumers,recruitingandmanagingR&Dandprofessional
talent,andskillfullysourcingfromfactories."Overthenextfewyears,youwillseeadramaticgapopening
betweencompanies,"predictsJimHemerling,whorunsBostonConsultingGroup'sShanghaipractice."Itwill
bebetweenthosewhogetitandarefullymobilizedinChinaandIndia,andthosethatarestillpondering."
Inthecomingdecades,ChinaandIndiawilldisruptworkforces,industries,companies,andmarketsinwaysthat
wecanbarelybegintoimagine.TheupheavalwilltestAmerica'scommitmenttotheglobaltradesystem,and
shakeitsconfidence.Inthe19thcentury,Europewentthroughasimilartraumawhenitrealizedanewgiant
theU.S.hadarrived."ItisuptoAmericatomanageitsownexpectationofChinaandIndiaaseitherathreat
oropportunity,"sayscorporatestrategistKenichiOhmae."AmericashouldbeasopenmindedasEuropewas
100yearsago."HowtheseAsiangiantsintegratewiththerestoftheworldwilllargelyshapethe21stcentury
globaleconomy.
ByPeteEngardio
LIMITEDTIMEOFFERSUBSCRIBENOW
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Jointhediscussion
AnumakondaJagadeesh 2yearsago

China,IndiatogetherwithKoreaandTaiwancanmakeastrongeconomicforceinAsianRegion.
Dr.A.JagadeeshNellore(AP),India

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MuhammadNaeemUlFateh 3yearsago

Europeneverbeenopenminded.However,thisisagreatthreattoUSAasmoralvaluesand
respectinothernationindecline.HoweverUSAstillhasrighttoruletheworldsincetheir
contributionisgreaterthenanyothernationinlastandcurrentcentury.Pakistanistheonlycountry,
sufferedgreaterthenanyothercountryandgavesacrificesfortheworldstability.
MuhammadNaeemulFateh

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