India & China: The Ties that Bind

Chinese businesses' hunger for raw materials is being offset by India's need for mainland technology as trade is increasingly a two way street

For years, India was one of the few countries in the world that ran a trade surplus with China. It was fed by China's hunger for natural resources and the fact that, while Chinese-made goods were cheap by developed world standards, they were often beyond the means of most Indian consumers.

But all that changed last year. Chinese exports to India jumped to US$14.5 billion from just under US$9 billion in 2005 and US$6 billion in 2004. This growth propelled bilateral trade to US$25 billion in 2006, up from US$13.6 billion in 2004 and a paltry US$1 billion in 1995.

SPEEDING UPWith the consumer classes in China and India growing rapidly, big investments in infrastructure and strong demand for raw materials, bilateral trade could hit US$40 billion by 2010.

Nevertheless, given that China and India are respectively the first and second fastest growing economies in the world, they can do a lot more in terms of two-way trade. China exported US$287 billion in goods and services to the US last year. India-US trade was a lot smaller but it still came to almost US$32 billion - without including services.

The wheels are turning, though. In particular, efforts are being made to boost mutual investment, which totaled less than US$500 million between 1991 and 2006. Of that, China's direct investment in India was US$236 million or 0.28% of total foreign direct investment in India.

"Relative to the magnitude of trade, investments do lag behind," said Nirupama Rao, India's ambassador to China. Rao sees a lot of room for growth due to the complimentary nature of the two economies. India's exports to China - which totaled US$10.2 billion in 2006 - are dominated by iron ore for steel, processed cotton and yarn, plastic, precious stones and minerals. China takes these raw materials and sends back machinery, organic chemicals that feed India's generic pharmaceuticals industry, steel and fuel.

"The character and composition of the India trade basket, however, needs changes for trade to grow even faster," Rao said, noting that China has a stronger line in value-added exports than his country.

One case in point is textiles. India has plenty of cotton but it produces very few T-shirts. Indian cotton makes its way to Chinese manufacturers who, taking advantage of a highly disciplined workforce, then sell the finished T-shirts back to India. China's textile exports to India jumped from US$179 million in 2004 to US$338 million in 2006.

But, at the same time, India's cotton and yarn exports rose from US$240 million in 2004 to a huge US$905 million in 2006 - the cotton shipped to China is turned into garments that clothe consumers the world over.

This growth in bilateral trade is happening as India continues to open its doors to more foreign business, turning its back on decades of Indio-centric policy. As part of the latest budget, released on February 28, the government cut tariffs and duties while making new industries accessible to overseas investors. (See: Brick by brick: Bye-bye trade barriers)

This openness is a boon for foreign players with know-how that India needs and products India wants. Chinese companies have both.

Technology firm Huawei first entered India in 1999 and has established its largest research and development center in Bangalore, which now employs some 1,200 Indian engineers. The company has pledged to invest US$150 million in India over the next three years but it has also had to climb out of a public relations hole regarding the perception of Chinese brands.

"There was a very negative perception... that everything was cheap. You can buy it, you can use it and if it works, fine. But if it doesn't work, you can throw it out," said Ramdev Sharma, chief technology and marketing officer at Huawei in Gurgaon, India. "Low cost but poor quality."

ENGAGING INDIASharma is friendly and casually dressed. He is fluent with the company's philosophy and admits that working for a Chinese firm in India can have its challenges, particularly the language barrier and the different approaches to decision-making. Top management is mostly Chinese but more and more Indians are playing important roles.

During an hour-long conversation, Sharma's phone rings four times, once from Beijing.

Huawei has set its sights on becoming India's top supplier of telecom infrastructure equipment. When the company arrived, India had barely any mobile phone subscribers but the number had jumped to over 44 million in 2004 and more than 190 million last year. Providers balked when the government first unveiled its target of 250 million mobile subscribers by 2010. Now it is more likely to be near 300 million.

"In India, there are hardly any companies that manufacture key mobile technologies," said Sharma. "There are virtually no local manufacturers. [What] Indian so-called manufacturers have been doing is a kind of collaboration or partnerships with foreign manufacturers."

As if to underline India's role as a global technology hub, Huawei's Bangalore center, which opened last September, focuses on optical network products and wireless solutions "for global customers," Sharma noted, not just those in India.

By being in India, Huawei can also learn from the country's robust outsourcing sector. But it might find that India's outsourcing giants spend just as much time returning the gaze. Just as Chinese manufacturers are looking to cash in on India's need for infrastructure, Indian outsourcers hope to satisfy China's need for a software industry. China is also a perfect beachhead to tap into places like Korea, Taiwan and Japan.

LOOKING AT ASIAPerhaps the most obvious example is India's largest software outsourcer Tata Consultancy Services (TCS), which arrived in China a couple of years after Huawei entered India.

TCS posted revenues of almost US$3 billion last year and has set its sights on becoming one of the top 10 IT companies in the world by 2010. More than half of the company's revenue comes from America, India itself accounts for 7.9% while Asia Pacific (including but not exclusively China) makes up just 5.6%.

TCS now has 800 employees in Beijing, Shanghai and Hangzhou and it expects considerable growth going forward (See: Fast forward).

"The government has been very keen to start a software industry because in the huge Chinese economy it's the only gaping hole. They're very good in hardware, they are very good in manufacturing but they are practically invisible in software services, IT services or any kind of service," said Pradipta Bagchi, senior general manager of corporate communications at TCS in Mumbai.

China is appealing both for its size and the fact that it produces almost a million engineers every year.

TCS' plans for the country include building China's first global scale software center, which could give it a significant push towards building an outsourcing industry in the Asia Pacific region.

GROWING TOGETHERHuawei and TCS stand out as two of the trail blazers in an emerging global dynamic created by the growing trade relationship between China and India. This bond will allow the countries to use one another's expertise and demand and supply bases to boost their economies.

Obviously, these flows of trade and knowledge will not run unimpeded. The China-India relationship is unique largely because of its potential scale - in the melting pot of these two fast growing economies, dozens of established or aspiring multinationals are trying to make their presence felt and challenge Western dominance at a global level.

To achieve this, they must combine their strengths, each focusing on areas where it has a comparative advantage.

"Some guy is making a part in China, some guy is making something in Korea and they are putting it together in Japan and shipping it to the US. The need for technology to keep people talking to each other is very important," said Bagchi.

If Indian software firms can couple their systems with those of China's disciplined manufacturers, both countries can take full advantage of a combined population of 2.4 billion people. Consequently, they will be able to develop new markets and push existing industries to unprecedented levels without the need for injections of cash or expertise from the West .

TCS China and Huawei India fall into this mould. They look to their home markets for capital and the talent to use it properly; they satisfy the needs of the domestic consumers; and they branch out first to other developing and then to developed economies.

The economies of India and China are not going to overshadow the best of the West any time soon, but these two continent-sized markets will pose a significant long-term challenge. Their growing bilateral relationship can only hasten the day when this challenge will come.

"The unfolding panorama of a rapidly growing India and China has gripped the imagination and interest of the entire world," said Ambassador Rao.