Why India is Winning the Entrepreneurial Battle with China

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Op-Ed Commentary: Chris Devonshire-Ellis

Jun. 7 – As China and India continue to show some of the world’s fastest GDP growth rates, both are also undergoing huge demographic changes. In some ways, there are similarities between the two, yet in others, completely opposite positions exist. Understanding these subtleties is key to working out where future innovation, talent and growth will come from.

In terms of similarities, it is interesting to note that 20 years ago, the average age of a worker in China was 23. That is now the age of the average worker in India today, while the average age of a worker in China has risen to 37. So India’s current young, dynamic, and maybe somewhat undisciplined, workforce is at the same age and in similar numbers to China’s 20 years ago; the very same demographics that propelled China from 11th position in global GDP rankings 20 years ago, to 2nd position today behind only the United States.

While India may be 15 years behind China in its infrastructure development, it has now inherited that worker demographic dividend. Given the right set of policies, India should start to rise along similar growth curves that China has shown over the past two decades.

Also 20 years ago, in China, over 60 percent of the country’s workforce was employed by massive state-owned enterprises. At the time, many of these SOEs were unprofitable behemoths pouring out shoddy products with employees given little incentive to change under the iron rice bowl system. China modified that system and relaxed labor laws, making it easier to offload working staff. Although labor laws were re-tightened a couple of years ago as China’s workforce aged and the State needed to protect pensions and employment, the effect was a reduction in the number of Chinese workers employed by SOEs to around 20 percent today. China, in effect, has a huge latent entrepreneurial class.

But there are problems. While much of the work force has been shed from China’s SOEs – the State’s funding of them has not caught up. China’s banks continue to pour billions of dollars into its SOEs, and are likely to continue to do so as many government officials are far from impartial when it comes to their financial involvement in these same companies. That is bad news for that group of potential Chinese entrepreneurs – they are denied access to funds.

Indicative of this is the situation concerning China’s mainland stock markets. On both the Shanghai and Shenzhen bourses, 90 percent of the listed companies are either partially or wholly state owned. Private entrepreneurship in China is still unofficially discouraged by means of denying them access to funds. China’s SOEs – and the officials who control them – certainly don’t want domestic competition springing up to challenge this cozy relationship between banks and state owned companies. Why would they?

Dealing with this is probably the toughest part of Xi Jinping’s mandate over the next 10 years. China needs economic reform to get the state-owned enterprises off State funding and move them to being funded on a more competitive, financial market model. If that doesn’t happen – and I suspect we’ll know within the next five years whether he will succeed or not – China’s bubble will very quickly start to deflate.

Business therefore, in China, is politicized. This has been aptly demonstrated on numerous occasions, especially against the Japanese. A diplomatic spat over some islands? China’s factories “forget” to process orders bound for Japan in certain strategic industries. Consumers are warned of buying Japanese products. China uses trade as a weapon, and Chinese businessmen, in order to succeed, need to know how to play by the rules set in China. Connections, subterfuge and opaqueness over who is really doing what remains the best way to conceal illicit or dubious commercial behavior.

China as a university for learning how to develop as an international business is not a suitable environment from which to develop a bona fide multinational corporation. While China may be investing massive amounts overseas, much remains the preserve of the SOEs; of those, it is only Haier in my opinion that seems to have grasped the true nature of international business, ethics and transparency. If I am right, for China to have only developed one company to global standards of compliance is a very poor showing indeed.

Meanwhile, the thousands of potential entrepreneurs in China remain devoid of funding – in fact, many young people are now actively seeking careers back in China’s SOEs as they seek more protection and state assurances. This bodes ill for the ability for future generations being able to provide China with innovations that could turn it into a global leader. China as an innovator? Not unless the Chinese banks start to encourage and fund the nation’s entrepreneurs, and China gets its politics out of business.

Meanwhile, India sits in complete contrast. Looking at the Bombay Stock Exchange (Asia’s oldest) and the benchmark Sensex Index, one notes that 90 percent of Indian companies are owned and run by Indian entrepreneurs. The government, with the exception of key strategic industries, just does not get involved in commerce, and encourages its citizens instead to take the lead. The banking system, while like all could be somewhat more risk friendly – is not tethered to huge loans having to be made to state-owned giants and can, will, and does lend to small businesses and start-ups.

The top selling, most desirable autos in China right now? Either Land Rover or a Jaguar. Both owned by Tata, an Indian company. Volvo, purchased by China’s Geely, has yet to make even a dent in the domestic market. While it remains true that China sold more cars last year, most were produced and funded by the State. For an Indian company to break into that market, in China, would have been unheard of even five years ago. Yet that is exactly what has happened. Jaguar and Land Rover sales increased in China by 48 percent in 2012 at some 77,000 units. While small in the grand scheme of things, that’s still an impressive figure for a luxury marque. Geely’s Volvo sales in China fell 11 percent in the same period to just 42,000 units. The bottom line message is this: once you strip out the Chinese state-owned monopolies, an Indian entrepreneur is doing a better job of selling cars in China than the Chinese can.

It’s a message I have been delivering over the past year across the United States and Europe. Meeting with city mayors, state governors and the occasional congressman, mindful of my 20 plus years in China they ask me, “Chris, please send us some Chinese investors!”

I tell them they’re looking at the wrong country. While China will invest in commodities, resources and infrastructure, the Indians will invest wherever they see a profit. It drives a different breed of business mentality – one that leads to a dynamic entrepreneurial class and, with an independent judiciary in India, one that knows if they run an opaque, corrupt or poor business that they will go under one way or another. Indian entrepreneurs therefore are buying into the global standards of transparency that the United States and Europe enforce. It is making them globally savvy – which is why Indian MNCs are now making serious inroads into global markets. There are numerous Indian MNCs operating worldwide to international standards, and they are being innovative and successful. Reliance, Infosys, Tata, Mittel…the list goes on.

India may be 15 years behind China in terms of what needs to be done in that country to get its infrastructure up to scratch. And yes, as the world’s largest democracy, and 1.3 billion people all wanting a say in decisions, progress can appear slow compared to China’s one party model. But in terms of developing an entrepreneurial class, and one that will in the future provide the innovative products that will shape our future world, my bet is firmly on the Indians to take that crown, and it is my belief that they are already significantly ahead of China in doing so.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email asia@dezshira.com, visit www.dezshira.com, or download the company brochure.

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9 responses to “Why India is Winning the Entrepreneurial Battle with China”

  1. Sai Prakash says:

    Great article. The west led by US took the wrong decision politically as regards India and Pakistan, and in economics the mistake has been vis a vis India and China. Your article is in right time.

  2. Thank you Sai your kind words!

  3. Easwaran G says:

    Good article. I operate both in China and India as a professional. In the past China has excelled in manufacturing with their dedicated workforce and liberal labor policies. But currently they are tightening labour laws which may pose some difficulties for forign companies operating in China. While they mastered manufacturing, their import regulations are cumbersome whereas India liberalised import regulations much earlier which forced Indian companies to be competitive and innovative. I believe this has also encouraged entrepreneurship in India.

  4. Joseph says:

    This is a case of grass being greener on the other side, Chris. “The (Indian) government, with the exception of key strategic industries, just does not get involved in commerce”. This is nonsense. The meddling is endless. The licensing Raj, protection from foreign competition, even corruption is state-organised and seems to be encouraged. Commerce takes place despite India’s government and has only ever truly flourished once (IT) and that was behind the government’s back. Had they the wit, the Indian government would have meddled it to death like they do to the other glimmers of economic development. And one more thing; youth in great numbers does not guarantee economic growth – particularly when so few receive a good education and whilst governmental investment in education is pathetically low.

  5. Sheena Burnell says:

    Succinctly put Chris, I’ve been thinking this for the last couple of years in a rather nebulous way but you’ve put my thoughts into a nice coherent argument, thank you!

  6. Kannan Aiyar says:

    Your article about India’s upper hand in entrepreneurship is very interesting. It brings out many truths about business and government in both countries, but I wonder whether some factors should not be given more weight in predicting the progress in India.

    For one, you do mention that the young Indian work force maybe somewhat undisciplined. However, it should be remarked that the discipline inherent in the Chinese culture has been a great driver enabling Chinese factories to achieve much higher productivity than their Indian counterparts. I do not know the statistics, but I have observed this while visiting factories in both countries. The Chinese have also attained a higher level of sill in planning and managing work. This accounts for the fact that Chinese companies can still deliver the product at a much lower price than Indian companies despite the much higher average wage rates in China today.

    In mentioning the highly visible differences in infrastructure, you have stated that “given the right set of policies”, India should be able to repeat the growth curves that China did 20 years ago. Here, it should be mentioned that policies do not get implemented in both countries with equal effectiveness. The Golden Quadrilateral highways plan in India, announced in 1998, was declared completed last year, but China has connected many more second tier and third tier cities with much better highways in a lot less time. China continues to build 18,000 km of new high speed railway tracks a year with trains travelling over 200kmph. Mr. Scindia proposed a high speed rail system in India 30 years ago, and the government upgraded this proposal to White Paper level in 2009. A state corporation was set up last year, and pre-feasibility studies are scheduled to start this year.

    Certainly, Indian entrepreneurs are more innovative. The article points out that most of the business in China is SOE’s or partial SOE’s, and states that the Indian government does not get involved in commerce. However, it fails to point out the devastating effect that the government officials have on Indian businesses with the blatant corruption. There was a bulletin from Swiss bankers in 2011 that Indian citizens held deposits of close to one trillion USD in numbered Swiss bank accounts. It is common knowledge in the streets of India that most of this money belongs to government officials, not private entrepreneurs. It can be said that entrepreneurs in India plough ahead in spite of the government, and not because of it.

    India, as a former British colony, naturally came to fit in to the western standards of business, its graduates having been schooled in western models for a couple of centuries. Such models and education have been excluded in China because of the communist form of government. While SOE’s suffer from this greatly, foreign-owned companies do not have such a handicap. China’s state-run auto companies may not be very successful, but cars like the Chinese-made Hyundai offer a much higher level of quality and performance than almost any Indian-made cars except perhaps the Jag and Merc, which benefit from the superior licensed technologies.

    The opaqueness and subterfuge that are mentioned in the article may not be apparent in some very large corporations in India. Tata, in particular, has always insisted that all its employees subscribe to the high ethical standards of its founding family. But let us not forget Satyam computers, the G2 scandal; it is safe to assume that there are more of those in the offing, yet to be discovered.

  7. Good points Kannan, and I wouldn’t disagree. Its such a huge subject that its almost impossible to get everything in – and is why we open these articles up for debate. Your comments are very valuable. I agree with the corruption issue, however I suspect that in China its even worse. If Indian officials get caught, they go to jail. That’s not necessarily the case in China, depending on how much discomfort the individual can cause to the party. Many steal but never get punished, even when found out.
    Concerning Satyam, that failure is in my opinion directly down to the lack of reform in India’s legal and Audit professions. Vested interests do not want them opened up to foreign investment, whereas that is preceisly what they need – injections of capital and internatioanl expertise. Satyam happened because the rate of accounting and financial sophistication in Indian MNC’s has outstripped that of its domestic auditors – allowing Satyam to hoodwink their auditors and commit massive fraud.

    If India had a better and more professional audit profession to international standards, instead of hundreds of small poxy firms all shitting themselves over foreign competition – Satyam and the other frauds would be far less likely to have occured. The Government knows this – I bought the subject up personally with Mr. Chidambaram – but getting the powerful professionals in the audit and legal industries onside to open up their industry will take some doing and huge political arm wrestling. – Best wishes – Chris

  8. jordan grass says:

    The opaqueness and subterfuge that are mentioned in the article may not be apparent in some very large corporations in India. Tata, in particular, has always insisted that all its employees subscribe to the high ethical standards of its founding family. But let us not forget Satyam computers, the G2 scandal; it is safe to assume that there are more of those in the offing, yet to be discovered.

  9. @Jordan – well you get corruption at the top in many large companies internationally, that’s not just an Indian thing. The Satyam case was essentially a disconnect between the clever (if corrupt) behavior of their executives, and the inability of the audit firms to detect it. Indian audit practices need to get better up to speed to and open up to foreign investment is the take away I got from that particular scandal. But its not unique to India. GSK haven’t exactly been good boys in the US or China recently for example. – Chris

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