|
|
|
|
SPEAKING
FREELY
India, China
... tortoise, hare?
By Aruni Mukherjee
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click here
if you are interested in
contributing.
Consider, for a
moment, a few haphazardly scattered jigsaw pieces
of the India-China puzzle. First, a report on
August 15 suggested that the Oil & Natural Gas
Corporation (ONGC), India's flagship public sector
company for overseas acquisition of energy assets,
had submitted a US$3.2 billion bid for
Petrokazakhstan. Second, the total number of
overseas acquisitions made by Indian companies
amounted to 42 in the first half of 2005, compared
to 60 in the entire year of 2004. The value of the
deals was recorded at $948 million.
On the
Chinese side, a recent edition of The Economist
contained a cover story on 'How China runs the
world economy', examining the impact of soaring
Chinese demand on global commodity prices and
Beijing's recent revaluation of the yuan. But
there was also a reality check - reports came of
the failure of CNOOC's $18.5 billion takeover
attempt of Unocal.
The idea that Chinese
companies will buy the world has both aggravated
xenophobia in the West, and been a pipedream for
the cadres in Beijing. Several failed acquisition
attempts in recent months come to mind: Haier's
exit from the Maytag deal when Whirlpool entered
the fray; China Mobile's loss to a UAE-based
company in its takeover bid for Pakistan Telecom;
or Minmetal's $7 billion attempt to buy Noranda
fizzling out as a "damp squib". Among other
debacles to hit China Inc, the lockout at the
white goods maker Kelon, after the arrest of its
top management for financial irregularities,
instantaneously comes to mind.
The $1.75
billion purchase of IBM's PC division by Lenovo
earlier this year generated much kerfuffle as
well. However, this was more a sign of Lenovo's
shrinking profit margins back home than the result
of a distinct corporate vision. It could be argued
that the move could spell trouble for the Chinese
PC maker, as competitors such as Dell and HP were
squeezing IBM, which is why it moved almost
entirely into consulting by selling its
underperforming PC arm. Moreover, Gartner predicts
a 2-4% fall in global PC sales in the years to
come, which means that Lenovo could be fighting
for space within a declining market. Lenovo shares
have fallen by 23% since the takeover.
Scholars such as Yasheng Huang (MIT) and
Tarun Khanna (Harvard) have long argued about the
better long-term prospects of India's economy,
which is based on its strong domestic companies,
vs China's primarily FDI-based growth. It could
indeed be argued, using the aforementioned
examples, that China's own companies are on weak
legs. Although the country ranks above India on
the global FDI confidence index, its stock markets
fell by 15% in 2004, making it one of the poorest
performers in the world. It fared the worst among
all countries tracked by The Economist for two
years running in 2004. On the other side of the
spectrum, the Indian market grew by 20% over the
same period. The Bombay Stock Exchange is at
record highs of around 7,800 these days, despite
$67 a barrel crude prices and the recent flood in
Mumbai.
Shanghai Stock Exchange CEO Fang
Xinghai put it aptly, "Why do you want to visit
the trading floor? There is nothing to see." The
fundamental cause of the fiasco in China's equity
markets (the bear market on Chinese bourses is now
four years old) has been the mismanagement,
manipulation and constant intervention of
political circles in the market's operations,
which has effectively prevented firms from listing
by merit and with freedom. As a result, confidence
among investors has been terminally shaken. In
February, authorities at Baosteel were forced to
delay its initial public offering (IPO) worth $3.2
billion. Compare that with the recent announcement
of listing by Sasken Communications, a
Bangalore-based firm, whose IPO was oversubscribed
by more than a dozen times.
It is common
knowledge that business enterprises in China have
a much better atmosphere to flourish than in
India. But apart from the issues of good
governance - better roads, an uninterrupted power
supply, a low tax regime and flexible labor
regulations - this business-friendly atmosphere
also has certain dubious characteristics. These
include an undervalued currency facilitating
exports; cheap and unlimited credit for "blessed"
firms; no default on non-payments for the same (as
shown by the country's still huge nonperforming
asset burden); low-priced land; subsidies; unpaid
supplier bills waived and, ironically, (in light
of the country's view of itself as "the worker's
state") quite an oppressive labor regime.
India presents an interesting contrast -
the physical infrastructure is creaky at best, the
labor regime is inflexible, corporate taxes are
still too high by ASEAN standards, and a demented
preference policy for small firms still continues.
But Indian companies are faring well in spite of
these obstacles. Why? There are two primary
reasons. First, democratic India retains an
element of the rule of law, whereby conditions are
the same for all firms, resulting in a reasonably
competitive environment. Second, the government
has wisely refrained from intervening in "new
sectors" such as information technology, business
process outsourcing and to a lesser degree,
pharmaceuticals. Relaxation of overt regulations
has been continuous, albeit slow.
To be
sure, plentiful problems remain in both systems,
and whereas "firms are often kept from bankruptcy
by officialdom" in China, firms are deterred from
taking risks in India, as the bankruptcy process
takes nearly a decade. An even greater problem
comes when we compare the two, since the
successful firms in India and China almost never
operate in the same sectors. But a few portrayals
ought to deliver the point.
Take Huawei
Technologies as an example. Here we have one of
China's burgeoning telecom equipment companies,
which recently announced a $100 million investment
in a research and development center in Bangalore.
Although its sales have zoomed to $3.8 billion in
2004 from $1.9 billion in 2000, its operating
profit margins declined from 24% to 18% over the
same period. Similarly, while sales of China
National Petroleum Corporation for the first half
of 2004 (the last time period for which
information is available on the company website)
increased by 4.7 billion yuan (US$580 million)
compared to the first half of 2003, operating
profits declined from 24.5% to 23.7% over a period
when global crude prices have been soaring
steadily. The corresponding figure for ONGC rose
from 20% at the end of the financial year in March
2004 to 23% in March 2005. This was in spite of
the damage to ONGC's numbers from numerous excise
duties and taxes extracted by the Indian
government, and the company's insistence on not
passing on the increased cost of crude to
consumers. As for the top IT companies in India
like TCS, Infosys and Wipro, they operate at
margins well in excess of 30-35%.
It is
not for us to judge yet whether the tortoise has
finally overtaken the hare. Both countries have
different socioeconomic models, and just how
different they are is becoming more conspicuous -
the pieces of the puzzle are coming together.
China continues to attract $60 billion of FDI each
year, has soaring exports and an economy that
grows in excess of 9% a year. But most of what is
"Made in China" is in fact made by multinationals
originating in foreign countries. Chinese
companies are still finding their feet, despite
the heavy backing they receive.
India
receives about $7 billion in FDI, has a small but
growing foreign trade ratio to GDP and grows at
around 7% a year. Yet its companies, somewhat
strangled by slow-moving politics back home, are
prospering. Is it because their entrepreneurship
has been nurtured by India's free credentials,
instead of being "guided"? Hypothetically, if
governance improves with time in India and the
government in Beijing is not able to sustain its
social and economic engineering indefinitely (both
the most likely scenarios out of all the
possibilities), where will the fate of India Inc
and China Inc ultimately lie?
We return
again to the story of the tortoise and the hare -
and we all remember how that one ends, don't we?
Aruni Mukherjee is based at the
University of Warwick, UK and takes a deep
interest in the political economy of the Indian
subcontinent. He is originally from Kolkata,
India.
(Copyright (c) 2005 Aruni
Mukherjee)
Speaking Freely is an
Asia Times Online feature that allows guest
writers to have their say. Please click here
if you are interested in
contributing. |
|
|
|
|
|
|
|
 |
|
|
|
|
|
All material on this
website is copyright and may not be republished in any form without written
permission.
© Copyright 1999 - 2005 Asia Times
Online Ltd.
|
|
Head
Office: Rm 202, Hau Fook Mansion, No. 8 Hau Fook St., Kowloon, Hong
Kong
Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
|
|
|
|
