For years, Dr. Reddy's Laboratories Ltd., a leading Indian pharmaceutical company, made fat profits manufacturing norfloxacin, a basic ingredient in antibiotics, for the domestic market. But in the late 1990s, rivals from China began selling norfloxacin in India for half the price commanded by Dr. Reddy's. Executives at the Hyderabad-based company realized they couldn't keep up and soon abandoned the norfloxacin business. "China overtook us," recalls Satish Reddy, Dr. Reddy's managing director. "In mass production, we can't compete with China."
The same chorus is being sung in boardrooms throughout India. In recent years, Chinese companies have been flooding the nation with cheap televisions, toys, and other products, putting pressure on thousands of Indian manufacturers. If that weren't bad enough, the Chinese are now targeting the one industry where India still enjoys a lead over its giant neighbor: software.
But Dr. Reddy's is showing how Indians can respond to the China challenge. To cut costs, the drug company is buying raw materials from China. It has set up a joint venture in Shanghai, where 100 employees are developing drugs for the Chinese market as well as conducting trials on drugs for sale worldwide. Like Dr. Reddy's, Indian companies specializing in everything from software to home appliances are developing China strategies to gain sales in the mainland, enhance their positions back home, and become more competitive players worldwide.
As Corporate India mobilizes to counter the China threat, the government is starting to wake up, too. After more than a decade of halfhearted economic reforms, New Delhi is getting serious about privatizing state companies, opening up such key sectors as telecom and agriculture to more competition, and building new highways, ports, and airfields. Aware that China has more investor-friendly labor regulations, the government of Prime Minister Atal Bihari Vajpayee in February announced reforms of India's rigid labor laws to allow companies to fire workers more easily. And New Delhi plans to ease the rules further by opening more than a dozen special economic zones.
To be sure, India faces a monumental task. The fact that China launched its own SEZs 20 years ago shows how far behind India lags. And one need only visit the two nations' business capitals--gleaming, high-tech Shanghai vs. crumbling, faded Bombay--to witness the progress gap. All of which explains why last year China vacuumed up $46.8 billion in direct foreign investment, while India attracted just $2.3 billion. Mahamegha Kharabela, an Indian member of Parliament, was struck by China's progress when he and a dozen other MPs visited last year. "I came back inspired," he says. "I told the Prime Minister, `We have to shape up."'
That the Indians are looking to China as a model shows how much the bilateral relationship has changed in recent years. Not so long ago, trade and investment were the last things the two Asian giants had in common. Rather, Beijing and New Delhi viewed one another with distrust and hostility. Now economic ties are blooming and the relationship is entering a more pragmatic phase. Bilateral trade, which was just $1.8 billion in 1998, jumped to $3.5 billion last year and is likely to hit $10 billion by 2005.
At the same time, Beijing sees India as more than just a market for its cheap goods. Chinese leaders want to emulate the success of India's thriving software companies. A highlight of Premier Zhu Rongji's January trip to India was a tour of Bangalore, the high-tech hub. "Don't think about competition but about complementarities," Zhu told an appreciative crowd. "We have our respective advantages and should learn from each other." Back in China, the Shanghai Pudong Software Park is working hard to attract Indian investment. "We want top Indian companies here," says park director Hu Hongliang.
It's already happening. During his Bangalore visit, Zhu gave permission for software power Infosys Technologies Ltd. to open a Shanghai office, with a software development center likely to follow. A few days later, another top player, Satyam Computer Services, opened shop in Shanghai, with a development center due by yearend. Like Infosys and Satyam, other Indian IT companies such as Zensar Technologies Ltd. are looking at China's domestic market as an opportunity. Moreover, China fits into the Indians' goal of expanding into other Asian markets and reducing their reliance on the U.S. Says Infosys CEO Nandan M. Nilekani: "We're looking at China as a resource for our global operations."
For the time being, the move to China is less about code-writing and more about training Chinese to become software literate. NIIT Ltd., India's largest software training company, has 42 training centers in China and expects to have 500 by 2005. In China, NIIT has established partnerships with such major schools as Qinghua University in Beijing and Jiaotong University in Shanghai. "In India," says NIIT Chairman Rajendra S. Pawar, "it's almost impossible to make a business deal with a university." Within a few years, Pawar predicts, NIIT should be making as much money in China as in India.
Besides all the new opportunities in China, Indian companies are finding it a welcome vacation from Indian bureaucracy. Consider New Delhi-based pharmaceutical company Ranbaxy Laboratories Ltd. With 2001 profits of $52 million on sales of $594 million, Ranbaxy is a star of Corporate India, employing 7,100 and exporting to more than 35 countries. Yet its headquarters is in a ramshackle Delhi building where the elevator works intermittently--hardly an image for a company with global aspirations. It has taken Ranbaxy 11 years to win permission to build a modern HQ in another part of town. The company has no such issues in China, where it took Ranbaxy five months to establish itself in the southern city of Guangzhou. Assuming China continues to open up, says Kanwal Puri, Ranbaxy's Guangzhou-based chief of China operations, "our business here can be almost as big as our business in India."
Industrial giants are following suit. Now that China has entered the World Trade Organization, Tata Group, a conglomerate with $8 billion in sales, wants to sell steel to Chinese auto makers. Tata already produces ferro chrome, a key steel ingredient, in China, thanks to the lower utility costs there. The company also exports leather to Chinese shoemakers. Why not make shoes in India? Because government regulations aimed at preserving jobs allow only small companies to handle such work. So Tata turned to Chinese manufacturers to make shoes for U.S. brands. Now, because of India's bad roads and ports, Tata finds it can't guarantee timely delivery of the leather to global clients. So the Bombay company plans to open a factory in China, where it will make shoes for the West and India. Says Sudhir Deoras, managing director of Tata International: "The productivity advantage [of China] is unbelievable." Bombay's Essel Propack Ltd. agrees. High productivity at the Guangzhou factory of this laminated toothpaste-tube maker helps it dominate in China, supplying local and foreign clients like Colgate-Palmolive Co.
It's not that Chinese workers are always cheaper than their Indian counterparts. In fact, Chinese wages can be three times those of India's. However, due to China's passive labor unions, better infrastructure, and lower utility charges, even Indian companies with no interest in selling to China are making products there and selling them in India. For instance, Bajaj Electricals Ltd., part of the Bombay-based Bajaj Group, says it costs 40% less to make fans, microwaves, and other electrical products in a Guangdong factory than at home. The cheaper costs, says Bajaj Chairman Shekhar Bajaj, means the company can sell more appliances at competitive prices in South Asia, the Middle East, and Africa. Since Bajaj started selling China-made products in 2000, its sales in India have soared. Of course, that success has prompted others to follow Bajaj's lead. "Now everybody is sitting in China," he says.
Well, not everybody. Azim Premji, chairman of Wipro Ltd., a leading software-services company, has resisted the temptation to set up shop in China because, he reckons, the Chinese "will use our software and then compete against us." It's not an entirely unfounded fear. China has aspirations of becoming a software power and remains at best three years behind India. So while Wipro wouldn't mind getting business in China through such clients as Cisco Systems Inc. that have operations there, the Bangalore-based company has no plans to employ code jockeys in the mainland.
Sometimes India's fear of China borders on full-blown paranoia. Last year, bureaucrats prevented Infosys from bringing Chinese engineers to Bangalore for training. They were afraid the Chinese would steal trade secrets. Then there is the rumor that Beijing has dispatched 100 female spies to India's tech centers to entice local programmers to surrender their code. Hardly a day goes by in India's Parliament when the issue of China doesn't come up. "No matter whom you talk to--left, right, or political center--they're all talking about China," says Surjit S. Bhalla, head of the Oxus Fund in New Delhi. "The Chinese bamboo is pinching our collective behinds."
While the stampede into China has clear benefits for a range of Indian companies, the potential impact on the domestic economy is mixed. Certainly, the China threat is already transforming labor relations in India as workers find it harder to demand raises. Moreover, Indian managers are waking up to the need for change. "It's become a matter of survival," says Shekhar Bajaj. "In the next two to three years there will be a lot of bloodshed, but those who survive will be the tough companies."
The Vajpayee government knows it needs to make India a more attractive place to do business. And while that won't be easy in a raucous democracy, there are signs that New Delhi is determined to move reform along. In mid-February, after nearly a decade of debate, Parliament amended the pro-labor Industrial Disputes Act. Among other things, the new law clears the way for the SEZs, where companies with fewer than 1,000 employees will have the right to lay off workers without official permission. It also forces unions to provide 45 days notice before striking. The China threat is definitely behind this burst of reform. The question now is whether India can turn its fear of China into lasting change. By Bruce Einhorn in Bangalore and Manjeet Kripalani in Shanghai