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The bilateral economy of China and India is in its infancy. Yet the momentum we see suggests a powerful relationship that will keep building in the next five years. Access to complementary skills and resources will make it possible for Chindian enterprises to lead many global markets.
New joint ventures between Indian IT-service providers and their Chinese counterparts are early illustrations of how formidable this emerging economy could become. Indian companies bring to the table world-class software expertise and leadership in global markets. Chinese partners have legions of capable, low-cost employees and greater know-how with clients in Japan, Korea, and other Asian countries where English is less prevalent.
Chindia is an early work in progress. Ultimate outcomes are far from certain, but early signs are positive. Some people still remember a time, before the 1962 border war, when the two countries traded cries of Hindi Chini bhai bhai—Indians and Chinese as brothers—which Chinese premier Wen Jiabao echoed during his visit to the Indian Institute of Technology in New Delhi last year. As the economic strength of China and India increases worldwide, business strategists and IT decision-makers—who may already be engaged in business relations with one or both countries—need a framework to help them monitor their bilateral commercial activities. To be sure, these global activities will affect end users and sellers of IT products and services worldwide, but how much and how soon remain to be seen. Both economies offer high growth, inflows of foreign capital, a global IT presence, global client awareness and interest, and large markets.
Additionally, China and India are producing some of the world's best-trained computer-science and electrical-engineering graduates. Both countries will soon compete favorably for global business not simply in terms of price, as India's IT-service providers have already done, but based on competence and capability. Even more crucial to their increasing global predominance is the rapid growth of domestic markets for technology and consumer goods in China and India. Soon, both nations will have spending power equaling that of the United States and Western Europe combined.Much of the West's mainstream attention on China and India to date has focused on the outsourcing of manufacturing and low-end service jobs. Optimistic observers believe the current flow of jobs across the Pacific is immaterial in the long run, arguing that growth-oriented innovation remains strong in the West. But while their assertion is technically correct, it hides a deeper truth: China and India are getting better at driving technological innovation. More and more, traditional high-tech companies such as IBM, Microsoft, Panasonic, and Samsung are sourcing not just the assembly of their products to India and China, but also the innovation that drives these offerings.
Despite mounting stakes, the quality of information, research, and advice on how to make key decisions related to China and India is uneven. Business leaders need three basic tools: accurate information on the current state of global IT competitiveness in India and China for their internal markets; realistic scenarios that explore potential social, political, or other disruptions to these economies; and milestones for defining pivotal issues that over time can help determine when and where to invest, cooperate, compete, analyze, or ignore these countries.
China's potential power will affect every major corporation in the world, whether or not it's directly engaged with China's economy. Simultaneously, China will transform the IT industry in ways that executives and managers in the West simply must address. This is especially true for companies in financial services, retail, and other supply-chain-intensive industries that embrace advancing IT for strategic and operational advantages.
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As the software market expands, IT leaders of Western corporations operating in China need to ask when locally provisioned software and services will be available, and whether they'll be competitive with Western software and services.
The most significant inhibitor to China's vast potential for innovation is its continuing government control over the most basic economic levers. China's ability to set a practical course to ease government influence in its economy and to promote innovation is the pivotal issue in forecasting the country's future.
You may think that government policies and relations are far from your specialty or your problem—lawyers and government-relations pros, not IT executives, worry about what politicians and regulators are up to; rather, your job is to place calculated bets on big issues and market trends in cost-effective, innovative IT. Don't fall into that trap. The Chinese government often is the biggest factor in determining IT issues and trends, and business leaders can't afford to delegate these relationships or distance themselves from the core analysis.
The blunt challenge for China—now best at being a low-cost, high-volume manufacturer—is whether it can move up the global value chain to the commanding heights of innovation and global marketing prowess. In IT, the particular challenge is whether China can transfer its demonstrated expertise in low-margin, high-volume hardware manufacturing into high-margin software and IT services.
There are signs that China will rise to the occasion. By 2008, for instance, it's highly likely that the country will generate intellectual property at a rate comparable to that of developed countries and, in the same year, actually surpass the United States as the population with the largest English-language capacity. In terms of English-language comprehension and proficiency, however, China won't be the global leader, though it will remain a challenger.
We anticipate that by 2010, at least eight Chinese IT brands will be recognized internationally. The world will witness the birth of a real IT superpower if government restrictions are loosened and the instinctive talent for entrepreneurialism continues to be encouraged.
Whether China emerges as a global leader in science and technology innovation relevant to the information and communications technology (ICT) industry is another pivotal issue for corporate business strategists and IT decision-makers in the West. The outcome will influence which global suppliers can establish a strong presence in China for the long haul and which of China's strongest domestic companies can compete in international markets.
The answers to the above questions may not be clear for years. But companies must address these issues now, given the high upside potential of engagement with China and the risks of staying on the sidelines.
With its challenging logistics, stifling bureaucracy, corrupted officials, and leftist political influences, many ask if India is still worth the effort. The consensus from the vast majority of global Fortune 1,000 companies is that it does indeed pay to pursue India's opportunities. We agree. In fact, we estimate that the largest IT-service providers will add an average of 15,000 to 30,000 employees annually for the next several years in anticipation of continued rapid growth in global demand.
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The numbers explain why. India's total exports of IT services—dominated by domestic companies, not foreign-controlled subsidiaries—were worth $21 billion in 2005. In contrast, India's domestic market for IT services was worth an estimated $2.7 billion in 2005. This figure is minuscule compared with 2005 IT-service spending in other countries in the region, such as Japan ($83 billion), Australia ($12.1 billion), and even China ($4.5 billion).
The intensive activity supporting the export-focused industry has distorting effects across India's economy: It changes the focus of local IT companies; it influences government policies, such as incentives and the establishment of software technology parks; and it hampers the ability of nonexporting local employers to find and retain quality staff.
The export side of the Indian IT industry got its big break in the early 1990s, when U.S. companies began hiring huge numbers of skilled systems analysts and computer programmers. Demand for Indian staff in the United States was driven to frenzied levels by three factors: Y2K fears, the dot-com boom, and a corporate craze for ERP software.
It may seem longer, but it's only within the past five or six years that India's IT industry was transformed from a source of labor for hire to the formidable leader in IT services it is today.
Many Indian companies aren't letting the grass grow under their feet. Three works in progress serve to demonstrate the opportunities for foreign companies, the domestic industry, and the export sector:
These examples show that Indian companies can innovate, build capacity in areas not generally seen as strengths, and aggressively expand beyond a predominant U.S. focus into Asian markets generally. Such abilities have put Indian companies on the threshold of what we believe could develop into one of the great economic success stories of the pan-Asian region: the great global potential of India and China together, combining the world's IT-service powerhouse with the world's factory.
Anyone doubting India's capacity to play its part need only consider the source of its IT industry. Between 1995 and 1996, India's exports of IT services were worth about $1 million. In 2004, they reached $13 billion. In 2000, India's share of business-process outsourcing was worth $148 million. In 2004, it totaled $3.5 billion. Any student of business knows what those kinds of growth rates mean: disruptive, challenging forces that can unseat rivals and destroy business plans.
What's the significance of the current level of China-to-India and India-to-China commercial interactions? Where do the two countries stand along a potential path toward a unified economy? Modest steps recently under way provide only a hint of what India and China collectively could bring to the global economy and global balance of power in the coming decades.
Today, the two nations would hardly qualify as trading partners by conventional standards for industrialized economies. Total bilateral trade amounted to $18.7 billion in 2005—more than twice the 2003 level. But this is only a fraction of each country's foreign trade. China's foreign trade in 2005 was $1.4 trillion, rising 23% from 2004, while India's trade in the 2005-2006 fiscal year amounted to $241 billion, up 28%. Impressive as that is, the annual growth rate of internal Chindia trade is outpacing those high-stepping totals, at an estimated 30% to 40% per year.
Patterns of a widening bilateral commercial partnership are visible in increasing high-level official visits and pronouncements, conference participation, cultural exchanges, and—most of all—forecasts of accelerating goods, services, and investment flows across the Himalayas.
Despite these positive signs, there remain many unanswered questions. Can innovation be outsourced? Is it possible to compete in Asian markets without piracy of intellectual property draining away opportunities? Will the countries' mounting successes in world markets create a protectionist backlash among developed economies?
These issues may well be among the most important for setting the long-term course and success of your enterprise. The methods by which you explore them certainly will shape the quality and insight of what you find. As China and India increasingly redefine the future of technology and innovation, knowing how to map a course into that future will be a core competency of the most accomplished travelers.
Jamie Popkin, group VP at Gartner, and Partha Iyengar, VP and distinguished analyst at Gartner, are authors of "IT and the East " (Harvard Business School Press, 2007). Tell us how China and India are shaping your strategies and business decisions.
Whether your organization delivers or buys IT products and services globally, you'll find that the economies of China and India pose unprecedented threats and opportunities. Here are eight priorities to help prepare your enterprise for developments in those countries over the next five years.
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