Manage-Wise

The better performer

When it comes to economic growth between these two up-and-coming powerhouses, China is outpacing India by a mile. But take a look at how Chinese companies perform relative to Indian businesses and the results look quite different.

A Business Week analysis of financial data from Standard & Poor’s Compustat shows Indian corporations are getting more bang for their rupee. A look at over 340 publicly listed companies from 1999 through 2003 reveals that Indian businesses have, with a few exceptions, out-performed their Chinese counterparts on return on equity (ROE) and return on invested capital (ROIC).

A comparative study

Indian companies perform better across various industry groups because they face greater market pressures. Despite plenty of government regulation, India is by and large a well-functioning market economy. This leads businesses to focus more on profits and performance. When it comes to free markets, China is a work in progress. China’s government has big stakes in most publicly listed companies, so managers must be mindful of government agendas, such as employment, says Joydeep Mukherji, a director, in the Sovereign Ratings Group at Standard & Poor’s.

The two countries also differ greatly when it comes to financing. “It’s quite difficult to get capital in India,” says Marcus Rosgen, regional head of equity research at Citigroup in Hong Kong. In India, firms raise a larger share of capital in equity markets, so private investors play a key role in allocating capital and place an emphasis on return on equity. In China, the financing situation is quite the opposite. A notoriously high savings rate and large sums of foreign direct investment are keeping the cost of financing low for businesses.

The glut of capital in China is fueling excess capacity. A low cost of capital reduces the financial hurdle to start a new business or open a factory. The problem is compounded by the fact that Chinese manufacturing is concentrated in low-end production. The resulting price competition reduces profitability. And since most of China’s major banks are state-owned, there is little emphasis on maximizing returns.

Progress is being made in China. There is a noticeable difference in ROE and ROIC between companies listed in the more internationally exposed Hong Kong stock market—the so-called Red Chips—and those listed solely on mainland exchanges. In 2003, the 25 Red Chip stocks had a return on equity of 14.8 percent versus 12.9 percent for mainland listed companies. In terms of ROIC, Red Chips produced an 11.6 percent return, compared with 9.7 percent for mainland outfits.

What’s more, China is moving faster than India to improve its infrastructure. Unless India quickens the pace to improve energy production and distribution, as well as its transportation systems, the country risks stunting the growth potential of the economy and its own companies.

The new megamarkets

For decades, multinationals have viewed the immense populations of China and India as vast potential consumer markets. But until recently, they have remained frustratingly out of reach. This is changing fast as wealth spreads to greater portions of their populations and as both governments allow foreign companies greater latitude to operate. As a result, China and India now truly are emerging as the world’s most important new megamarkets for everything from cars to cell phones.

China and India share many characteristics as future growth markets. Both have an immense, upwardly mobile, and worldly emerging middle class whose aspirations and outlook on life differ dramatically from those of previous generations. Rapid social changes and greater diversity in lifestyle mean companies must become more sophisticated in tailoring their message and products to different consumer segments. Both nations also have a seemingly insatiable demand for foreign technology.

The two nations have numerous idiosyncrasies, however, that marketers must understand. Savvy multinationals are beginning to unlock those secrets. Decades of hard work and trial and error are now paying off big for companies such as General Motors, Motorola, Caterpillar, and Procter and Gamble. These companies have learned to cultivate profitable relationships and partnerships, customize products for the Chinese market, quickly exploit new opportunities, nurture local talent, and develop creative business models.

What’s more, vast portions of China remain barely tapped. Multinationals, drawn by national and local governments, are beginning to invest in heavily populated interior provinces.

Success in India can be driven by different factors. They include cultivating India as a base for global R&D, outsourced back-office operations, and the manufacture of goods with high engineering content. Success in the domestic mass market, meanwhile, often requires innovative strategies to develop very low-cost but high-quality products with appropriate technologies. There are successful strategies various companies have developed to provide goods and services at extremely low prices using technologies that are appropriate for the circumstances of Indian consumers.

In conclusion, there are different strategies that the U.S. engine maker deploys to succeed in India and China, both of which have become crucial growth markets as well as key elements to the U.S. engine maker’s game plan to boost its competitiveness in America.

It’s getting hotter in the East

For more than two decades, Western bosses chased the China dream. They professed to love the scorching Maotai served at those endless government banquets celebrating yet another costly and complex joint venture. Just as they began noticing rising profits from sales of cars or telecom gear, they get blindsided by sudden rule changes favoring local players, demands for new technology transfers, or cutthroat pricing from Chinese imitators unconcerned about profits. Some early entrants ended up writing off huge investments.

Excerpt from ‘CHINDIA’ by Pete Engardio. Reproduced with permission © 2008, Tata McGraw-Hill Publishing Company Limited. Price: Rs 395. Vishwanath_Ghanekar@mcgraw-hill.com