Workshop 2: Bursting the bubble in Chindia

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If you don’t know the answer to an investor’s question, a chief executive was told a few years’ ago, then just reply: the internet. The internet was the answer to all problems of new product development, revenue growth, or cost reduction. It was the universal answer to every particular question.

After the internet bubble burst, the stock answer miraculously transformed itself into China. To judge by the buzz at Davos this year, it could soon be India.

But is it wise for companies to plunge headlong into the two countries (known as Chindia in the modish shorthand)? How can anyone predict the future of these two giant Asian countries with populations of more than 1bn people and with multiple political, economic, and social problems?

The future of both countries was the subject for discussion at the second CEO workshop.

Setting the scene, Ged Davis, managing director of the World Economic Forum, sketched out three possible futures for each country by the year 2025 and asked the participants to split into six groups to discuss the business implications.

1)The most optimistic scenario envisaged that China’s economy would sustain its rapid expansion at around 10 per cent a year.

The collective wisdom of the break-out group suggested that telecoms, transport, and communications sectors could prove among the most attractive as the government sustained its drive to support poorer regions. Consumer demand would also shift from buying products to “experiences”, such as education, entertainment, and tourism. There would also be huge demand for non-fossil energy, be it nuclear, solar, or wind power.

The big problem for foreign multi-nationals would be recruiting and retaining talented local staff. They would also face increasingly aggressive competition from local companies.

2)The second scenario for China suggested it would be hit by rising protectionism in the US and Europe. Its growth rates would slow and it would be forced to focus more on Asian markets. Such an outcome could have serious implications for US and European multi-national companies and encourage them to shift more manufacturing to India. But domestic consumption might increase strongly as the government sought to offset falling external demand. It could also help stimulate regional trade. “It could change from Asia exporting through China to China exporting through Asia,” said one executive.

3)The gloomiest scenario was one of unfulfilled promise. Because of a stalling reform drive, GDP growth rates would fall increasing the risks of operating in China. Social instability would rise. It would become increasingly difficult to enforce the rule of law. Environmental problems would multiply. But business opportunities could emerge for companies seeking to provide private sector solutions to public sector problems. For example, sales of water filters might rise as effluent controls failed. Private education and healthcare sectors could flourish. Private wealth management companies could also boom as Chinese sought to move more money offshore. “Citibank made a fortune out of the Indonesian crisis,” noted one participant.

The audience also considered the good, not-so-good, and ugly scenarios for India.

1)In the brightest, India’s growth rate accelerated as reforms gained critical mass and the country reaped the democratic dividend. “In India the saying is that you do it without the government, but what is happening now is that you are doing it with the government.” It is assumed that this would hugely encourage the growth of Indian brands and MNCs. The healthcare, manufacturing, and infrastructure sectors all thrive. As in China, foreign companies will have difficulty in finding and keeping talented workers because of the competitive intensity. Increasing environmental concerns will also force companies to use cleaner energy.

2)The “Bollyworld” scenario suggests that India will expand by 6 per cent, higher than the old “Hindu rate of growth” but lower than potential. Reforms are inconsistent and ineffective. Education, water, and healthcare are all envisaged as promising sectors. This is a world in which it pays to be embedded. Private equity businesses could flourish in this environment as investors make a good return over the next five to seven years before things turn sour. “We would go into sustain mode,” says one executive. “Sit there and wait until the next wave. What is key is the political will. Every time India goes up it gets buggered up by politicians.”

3)The third scenario – slow growth of 4 per cent – is not fully explored, not for lack of pessimists, but for lack of participants. Lucky India. A nodding head or two in the audience suggests that China and India are not as exciting as everyone seems to think – or that the high-octane Davos agenda is taking its toll.

In the final session, the group plays the favourite boardroom game of the moment: compare and contrast the opportunities and threats of India and China for the rest of the decade. Several points emerge.

China has invested more in basic education than India and will continue to reap the benefits over the next five to six years. On the other hand, India’s manufacturing could be more robust because it adds more value to its products. Although China exports nine times as much to the US as India, the average price of India’s exports is twice as high as those from China.

One Indian participant argued that the Chinese currency would have to be revalued by 30 per cent by 2010 to help unwind global economic imbalances. But this idea was firmly rejected by the Chinese participants. “If China appreciates its currency by 30-40 per cent it would be a disaster.” Chinese companies, which already operate on wafer-thin margins, would not be able to upgrade that quickly. Even the recent revaluation of 3-4 per cent was putting huge pressure on margins.

One US businessman also raised the bugbear of intellectual property rights. A Chinese journalist responded that counterfeiting might not be such a bad thing because it helped spread awareness of western brands in China. His interlocutor was unconvinced: “If China does not get on an upward curve in 10 to 15 years from now it will threaten the private sector R&D model globally.” But, he argued, that was a huge problem for China’s local politicians because the competitive advantage of their regions was piracy.

Perhaps the most telling point was that China would not necessarily be in constant competition with India. The two could work as partners. It might not be a question of China or India, but China and India. Next year, China is likely to overtake the US as India’s largest trading partner. Chindia could become a reality.

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