Telecommunications

Both India and China represent huge opportunities for international telecommunications providers. With their different industry structures and regulatory environments, services and equipment call for separate tailored approaches to business development.

Though currently small, both countries’ telecom service markets have enormous potential for growth: in just six years, they could be among the world’s largest. There the similarity ends, for India and China have contrasting attitudes toward market regulation and present very different opportunities for MNCs (Exhibit 13):

• India can be pictured as the Sleeping Beauty of the fairytale, waiting to be woken from her perpetual slumber. MNCs could see several chances to enter her castle: (1) in the recent round of licence bidding; (2) in the expected reassignment of licences when successful bidders withdraw from unattractive terms; and (3) in the eventual privatization of the state-owned carrier DOT. Would-be MNC princes face the challenge of securing licence terms, interconnect arrangements, and tariff structures that will permit them to generate decent returns.
• China, by contrast, currently resembles the terrain of the fantasy quest Dungeons and Dragons: fraught with peril and uncertainty, but promising remarkable rewards. Local state-owned service providers have not yet been forced to surrender their monopolies. Multinationals will have to court many of these domestic enterprises in the hope of finding the few that will become major carriers.

In equipment, India and China possess large markets served through different mixes of imports and local manufacturing by MNCs. Multinationals will struggle to maintain their market positions, for various reasons (Exhibit 14):

• Historical restrictions in India have created a highly fragmented local supply of small switches and PBXs, which might well be consolidated in a more attractive open market. In large switches, competition among MNCs has intensified; here the challenge will be to build sustainable scale.
• The market in China is served largely by MNCs. They need to build independent marketing and distribution to reach customers, especially in mobile and PBXs, and must also find their way through the rapidly changing market for fixed-line equipment.

Pharmaceuticals

India and China are alike in having dynamic pharmaceutical industries with huge potential markets, but their industry structures and operating conditions differ (Exhibit 15):

• India’s market in pharmaceuticals, the twelfth largest in the world at $2.5 billion, is expected to double in size by 2000. Its prices are roughly one-thirtieth of US levels. Dominated by domestic companies, the industry is highly fragmented, with a vast number of competing manufacturers. The top 50 companies can muster average market shares of only 1 to 1.5 percent. Margins, at around 4 to 7 percent, are also low against international benchmarks of 20 to 40 percent. Import duties, personnel expenses, and marketing expenditure push MNCs’ cost structures higher than those of local players.
• At $8.1 billion, and expected to grow to $19 billion by 2000, China’s pharmaceuticals market is sixth largest in the world. Already highly regulated, the industry is, unlike India’s, becoming still more so. State-owned enterprises dominate, with a 90 percent share, though gross profit margins of 4.5 to 6 percent suggest their performance is declining. Joint ventures between Chinese and foreign companies make up the rest of the market.

Opportunities for MNCs and local companies in India and China differ by degree rather than nature. Expected social service reforms will make China’s domestic market growth less attractive than before. Opportunities to improve operations and penetrate foreign markets exist in both countries. Competition in China will be constrained by the difficulty of displacing state-owned enterprises, while large Indian players may be forced into horizontal integration by increases in scale and capabilities among rivals as a result of recent alliances.

Steel

The steel industries of both India and China are growing fast, though to different effect. Currently, China competes with Japan for top ranking in crude steel production, with about 90 million metric tons in 1993, while India, with annual output below 20 million, has yet to become a major producer (Exhibit 16). Looking ahead, both countries seem likely to affect the balance between supply and demand in Asia and indeed the world, with China’s huge steel needs set to transform global demand (Exhibit 17), and India’s export ambitions perhaps altering the industry’s supply structure (Exhibit 18).

Both countries are currently plagued with inefficiencies arising from the prevalence of older production technologies, underdeveloped infrastructure, inferior raw materials, and poor labor productivity. However, protected markets and very low factor costs ensure that the industries remain profitable.

With deregulation under way on a large scale and the opening to competition of formerly protected markets, India and China are poised for dramatic changes that will bring new opportunities for domestic players and foreign investors alike. Indeed, some outsiders are already entering the markets to seize these opportunities, although capacity already planned calls for caution over further investment in India.

Within this context of very different economic scope between India and China, the main challenges for steel manufacturers are similar for both countries and fall into three groups:

• Responding to changes in regulation, external conditions, and industry structure. Key imperatives are to develop a vision of the sector and its competitive structure; to assess government policy and implementation plans; to surmount barriers in infrastructure and distribution; and to use world benchmarks to find areas where efficiency can be improved.
• Grasping growing market requirements. This means evaluating the local, regional, and global balance between supply and demand, and its impact on prices; identifying products on which to focus; predicting how factor costs will evolve over time; and, in the case of India, avoiding the overcapacity trap.
• Developing a strategy for expansion. Necessary steps include making technology choices in the light of available resources; solving the problem of capital procurement; identifying the right scale of expansion and selecting viable projects; upgrading upstream and downstream activities; developing partnering skills; and predicting and assessing competitor moves.

As their ongoing discussions and cooperation suggest, steel is one of the few sectors in which India’s and China’s development will be partly interdependent.

Paper

Not the natural owners of this industry, India and China suffer structural disadvantages that will prevent them becoming major global players:

• Wood pulp shortages, which look set to continue, restrict the production of high-quality paper and expose local players to dramatic fluctuations in international prices.
• The next-largest cost components, energy and chemicals, are competitive factors for neither country.
• In an industry that is not labor intensive, these countries’ cheap labor confers no real advantage.
• Scale and technology, the keys to success, are lacking in India and China.

Both countries face similar threats and challenges. Local supply is extremely fragmented, threatening the position of domestic players as import barriers fall. The widening gap between increasingly sophisticated customer requirements and local supplier capabilities is also pressurizing industry participants to upgrade their offerings.

Paper suppliers are consequently moving to increase their competitiveness: expanding capacity, consolidating inefficient production, modernizing facilities, and forming strategic alliances to obtain funds, skills, and raw materials. At the same time, many are realigning their product mix, shifting from unattractive commodity segments to those with higher added value.

There are also several contrasts between the two countries:

• India’s paper industry is much less developed—over a decade behind China’s.
• China’s market is the third largest in the world, whereas India’s is still relatively marginal (Exhibit 19).
• Indian demand is predominantly for low-quality commodity paper for basic educational uses. China has a much greater share of high-quality end uses, thanks partly to its economic boom and FDI inflows.
• The Indian industry has been heavily protected and is only now beginning to be liberalized. China, by contrast, has already exposed its domestic industry to global competition, and is reducing tariff barriers further. Imports are taking an increasing share of the Chinese market as a result.

Given these differences, opportunities for corporations vary by country as well as by local or multinational status (Exhibit 20).

Notes

This case study focuses on uncoated wood-free paper used for writing and printing paper.

Food

In both India and China, the food industry represents abundant development opportunities: in agricultural yields, in logistics efficiency, and in food processing and distribution. Whether these opportunities are grasped will depend on government policy and the enterprise of local and multinational corporations.

Though both countries have ample scope for improvement, China is years ahead of India in boosting yields and creating the right conditions for supply and logistics. Calculations of yield increases and wastage reduction in selected products reveal that India would have to enhance its production by 50 to 150 percent just to climb half of the way up to China’s standard. China in turn would need an equally massive improvement to push its own performance half-way toward the world’s best. Priorities for productivity efforts are shown in Exhibit 21.

Agriculture is still capable of driving domestic and export-led economic growth. In particular, the processed food industry—currently negligible in India, but holding out great promise thanks to the emergence of a strong middle class—could become an important generator of new jobs. For a strong industry to develop, however, agricultural products must be of consistent high quality, and downstream distribution must be effective.

India and China share certain priorities:

• Bottlenecks must be removed from both countries’ relatively unintegrated agricultural markets if growth opportunities along the food chain are to be captured.
• The processing industry must be opened up to foreign and domestic investment.
• Upstream, contract farming can act as a major agent of change.

But there are important differences:

• China has begun to improve supply quality and organization, but still suffers from poor infrastructure and distribution.
• In India, the small-scale industry reservation system is paralyzing the development of whole parts of the processed food industry.
• India has yet to improve its output quality, but when a strong processing industry eventually emerges, access to consumers should be easier than in China, since nationwide retailing systems do exist.

In India, agricultural policy changes and tax reforms suggest that there could be a substantial transfer of resources to this sector (Exhibit 22), though it remains to be seen whether the nation’s farmers will become significant consumers. In both countries, substantial investments and technology transfers are likely to be made along the entire food chain. Accordingly, large companies—mostly MNCs in China, and a mix of MNCs and local businesses in India—will probably come to dominate the industry within the next decade. The opportunities they will encounter are outlined in Exhibit 23.