The China story: Lessons for Indian industry

On July 30th we had a very interesting webinar by Dr Mrityunjay Athreya, the famous management thinker and consultant on how China has developed over the years and what India can learn from that country. This is the 14 th webinar in the ICFAI Wise views series. The webinar was moderated by our Prof R Prasad and Prof Sudhakar Rao.

Dr Athreya studied at Loyola College, went on to complete his ICWA (with a gold medal), then pursued his Masters at Stanford Business School and also did his DBA at Harvard Business School. He returned to India in 1967 and since then has been involved as a management consultant in various important projects and initiatives in the government and private sector. For example, in 1971, he was appointed by the Civil Aviation Minister, Dr Karan Singh to help restructure Air India. In 1972, he was involved in restructuring of state enterprises in Jammu and Kashmir. Dr Athreya has also been on the RBI committee for selecting top executives for public sector banks. He received the Padma Bhushan in 2014. He is currently the president of Sampradan, an NGO that promotes charitable initiatives by high-net-worth individuals. Dr Athreya has taught at reputed institutions such as IIM Calcutta and London Business School.

Introduction

Dr Athreya started his talk with a world map that bought out two points vividly: the proximity and the big difference in size between the two countries. (China is also about 6-7 times bigger than India when it comes to GDP.) Relations between the two countries have been volatile over the years. But as Dr Athreya mentioned later, we must learn to engage with China. A key point to note here from the security point of view is that the Himalayas are no longer offering as much protection as they have historically. For all practical purposes, China is our next door neighbour.

Rapid GDP growth

Under Mao Zedong, China did not grow much. The Great Leap forward and the Cultural Revolution did little to accelerate the country’s GDP growth. (In 1958, Mao launched the Great Leap Forward   that aimed to rapidly transform China's agrarian economy into an industrial one. This led to the worst famine in history   and the deaths of tens of millions of people over the next 4 years. In 1966, he initiated the Cultural Revolution during which his personality cult was elevated, and tens of millions of people were persecuted. Hundreds of thousands of people died. After years of ill health, Mao suffered a series of heart attacks in 1976 and died at the age of 82.)

It was in the 1980s under the leadership of Deng Xiaoping that the Chinese economy started to take off. He was a wise man who believed in economic reforms and set up several economic zones to catalyse China’s GDP growth. It took a few years for China to get on to the growth trajectory. Then there was no looking back. For over 20 years, China's economy grew impressively at double digits, led by exports. Though the global financial crisis of 2008 was a setback, China showed a lot of resilience. Even in the pandemic year of 2020, the Chinese economy grew by 2.3% while most other countries in the world showed a negative GDP growth. India, for example, has lost at least two years of GDP growth due to Covid.

China’s GDP is now about 14% of the global output compared to 2%. when the economic reforms began.

As mentioned earlier, China’s GDP is currently about 6-7 times Indian GDP. Even a growth rate of 5% for China, coming on a much larger base, will be far more impressive that 10% for India. But given the current infrastructure constraints, the maximum potential for India’s GDP growth is probably about 7%. India has a high savings but a poor capital to output ratio. Our investments are not very productive.

The Chinese are now moving to the next phase of economic development, depending more on the domestic market and building their indigenous capabilities. Given the current realities, they are aware that they cannot depend completely on overseas markets. To strengthen political stability by keeping people happy, the Chinese Communist Party is allowing higher consumption and a better lifestyle among the people.

One advantage India has compared to China is that our population is still young. The Chinese population is aging mainly due to the one child policy introduced by Mao. Now they are promoting a three-child policy, but it is not very clear whether the Chinese really want to have so many children. All over the world, the trend is towards having a smaller number of children.

Lessons in manufacturing

China illustrates how manufacturing can be scaled up rapidly. Today the Chinese account for 28% of global manufacturing compared to India’s 3%. China’s manufacturing sector got its initial boost thanks to the infusion of both foreign technology and foreign investment. The government also paid a lot of attention to skill development and got the people ready to operate the factories that were being set up. Heavy capital investments and labour training led to high productivity. Quality was a problem to start with, but it improved over time. The Chinese are no longer making cheap, commoditized goods. They have become global leaders in various high-tech industries such as 5G.

The Chinese have also become very good at managing mega projects. Some great examples are the Three Gorges dam and the Pudong industrial zone. Compare how efficiently China hosted the Olympic Games in 2008. China has shown that they can execute multibillion dollar projects without any major cost overrun. Unfortunately, in India, our projects take too long to complete and involve cost overruns, long gestation periods and finally the output is often of low quality. There are some exceptions like Jio, but these are few.

India is trying to promote manufacturing. But on the ground, the ease of doing business in India has still not improved significantly. The solution probably does not lie in the hands of politicians. Or for that matter, the bureaucrats who are caught up in mundane issues and cannot think strategically. The corporate sector clearly must take the lead and think big.

Marketing lessons

China offers a great example of how by building low margin, high volume products, it is possible to gain market share. The Chinese also believe in global distribution. Starting with low end products, the Chinese companies have moved on to more sophisticated products and invested in brand building. The Chinese are good at flexible pricing. They try to meet the customer needs and often operate on marginal cost or deferred profit pricing.

The Chinese logistics management is also world class. The country is a leader in container shipping and in building and managing ports. The belt and road initiative is a vivid illustration of China’s capabilities in building logistics infrastructure. As already mentioned, China accounts for 28.7% of global manufacturing compared to USA (16.8%) and Japan (7.5%).

Growth finance

China has enthusiastically welcomed foreign direct investment in contrast to India's hesitant stand characterised by discretionary approvals, sector by sector. The Chinese have also higher debt capacity on the balance sheet. The assured export market and state backing means that companies can afford to carry more debt. The Chinese also emphasise reinvestment for growth. They don't believe in paying dividends. The Chinese save a lot, almost 36 to 40% of GDP. That means more capital is available for investment.

Action plan

As mentioned earlier, the onus is on the corporate sector. The Indian companies must demonstrate servant leadership. They must closely work with the government and the bureaucrats since it is not easy in our country to challenge their authority. The top Indian companies should not only meaningfully engage with the government but also work together in the interest of the nation. The success of Individual companies is not adequate. There is a need for coordinated action. Politicians and bureaucrats will come and go but the corporate sector must work with the government. The Indian industry must think of mega investment plans. Ola’s investment in Tamil Nadu is a great example. (Ola has commenced construction of the world's largest two-wheeler mega-factory on a 500-acre site in Tamil Nadu's Krishnagiri district in Tamil Nadu. This 'Ola Future Factory' will be operational by 2022.)

Manufacturing is a critical sector for the country, and it is important that we get our act together. There are some examples here and there are of what we can do when we really get our act together. Reliance and the Tatas have successfully executed some mega projects. The Orissa government has been able to supply tap water to people all over Puri.

Q&A

On how China has succeeded

China has a bad memory of colonialism. The country had four colonial rulers. The Chinese could never forget the humiliation and the Japanese atrocities during World War II. It was Mao who unified the party and provided the leadership that enabled China to become a Republic in 1949. Mao could not do much for the economy but under Deng Xiao Ping, the economy took off.

The Chinese leaders have always had a poor view of democracy. They were not at all happy with Gorbachev who introduced perestroika and glasnost in the Soviet Union. The Chinese leaders have not been comfortable with democratic movements. That is why they controlled the Tiananmen square uprising with brute force. The Chinese also control the Internet and how capitalists can operate. Xi has also made himself a lifetime president. He probably has another 15 to 20 years to go. While other leaders in the democratic world come and go, he will be around for a long time to come.

China initially learnt from Singapore which had prospered a lot under Lee Kuan Yew. The country also learned from the Asian tigers. in contrast, we were an arrogant nation and failed to learn from other countries, arguing that we are different from other nations. It was only in 1991 when Mr PV Narasimha Rao became the Prime Minister that we reached out to Lee Kuan Yew to understand more about their model of development. The Chinese had a strong desire to catch up with Japan and other smaller East Asian countries which developed very rapidly.

A point which Dr Athreya emphasized is that when there is no democracy, higher growth is needed. China may not be a democracy, but the leaders understand that to retain political stability and keep people happy, higher economic growth is necessary. On the other hand, democracy tolerates mediocrity. (India is the best example!)

On whether India can decouple from China

The current decoupling is on account of the military tensions which prevailed in the summer of 2020. In the long run, the benefits of trading with China can be significant. We must remember that India and China together have a population of 3 billion and account for 40% of the global market. So, it would make a lot of sense for the two countries to work together and for India to take the help of China in complementary areas.

However, an unfavourable trade deficit cannot be sustained in the long run. China has done a lot to protect its exports. For example, it has kept its currency undervalued.

On the impact of Covid

Dr Athreya felt that Covid is a short-term problem. It will go away after some time but the longstanding issues between China and India must be addressed. China is both India's problem and an opportunity. We need to find ways to work together.

On Ethics and values

On paper, we have high concepts in India, but we do not really practice them. In fact, Dr Athreya felt that in recent history, the period between 1857 and 1947 was the highest period of Dharma for India, when people made tremendous sacrifices for a larger cause. After 1947, ethics began to take the back seat. Prime Minister Lal Bahadur Shastri’s death was a huge setback for the nation. His successor, Mrs Gandhi proved to be a poor role model. But now things are improving and are certainly better than what they were during the Emergency of 1975. Governments are realizing that to be re-elected they must do something good for the people. NGOs are more active.

The Chinese tradition is rooted in the Buddhist ethos. They are more transparent, consistent and have a much stronger work ethic. In China, there is also much higher trust and understanding between consumers and manufacturers. The problem is more with the Communist Party.

On what we can learn from China in education

India must make up for a long period of historical errors. We have never invested adequately in education. PM Jawaharlal Nehru’s priorities (capital goods sector and more specifically public sector enterprises which he called the temples of modern India) were misplaced. He did not adequately emphasise social sector spending. The Chagla Commission had recommended universal primary education. Unfortunately, government schools in rural areas do not function properly. The private sector has stepped up, but private schools are not affordable to many. So public education needs to improve a lot. There is also gross ill treatment of the girl child.

There is a lot of pompous arrogance at the government level. The world is moving ahead of us, and we need to catch up. However, we can still salvage the situation by making massive investments. Our IT services companies have already demonstrated that it is possible to develop human resources quickly. (The success of these companies has largely centred on creating a parallel education process to train techies.) These companies even go to second and third tier towns and recruit students from campuses with whom they have a tie up for upgrading the curriculum and so on. We must accept that across the world, governments do not give ready made products to industry. So, industry must be proactive.

On private universities in India

These universities have a great role to play. They have shown that education providers can be financially solvent. They are also emerging as innovators. Private universities should re invest in growth and in new campuses and collaborate with the industry. With their campus-based approach, these universities can provide much more value to students than public universities.

It is an important role of the universities to encourage students to stay and work in this country. Dr Athreya feels that nothing will facilitate global economic development more than the intelligent people of each country working in their own country. The Chinese do go abroad for higher studies, but they come back. We have a lot of educated intelligent people in this country but unfortunately, we have seen a major brain train. We must inspire good people to stay back (or return) with an India vision. Research has shown that even if a single Indian professor is in touch as a mentor, the student returns to India.

There is a lot of scope for private universities in science and technology. They should be more focused on the main industries in their catchment region. It makes sense to focus on the low hanging fruits and achieve success.

On entrepreneurship and career planning

India has seen an explosion of start-ups in the last two years. Many unicorns like Zomato have been created. The success of Zomato demonstrates that a company need not be high tech. Consumers want simple things and if we can give it to them efficiently and reliably, they will accept it.

Students in general must gather three to five years of experience and learn the basics of business. Then they should try to become entrepreneurs. if students are clear about what they want to do when they are in college, they can become entrepreneurs right away. Of course, entrepreneurship carries its own risks. Thus, it is important for entrepreneurs to be prepared to fail and fail early as far as possible.

Universities could run courses in entrepreneurship using both concepts and case studies. Entrepreneurship is required for the creative destruction in an economy. New businesses must proactively kill old businesses.

On the ICFAI online curriculum

R Prasad mentioned that he had spent a decade as an entrepreneur. Nothing teaches you more than being an entrepreneur. The ICFAI online program has been designed and centred around the concept of entrepreneurship. Throughout the course, students have opportunities to showcase their ideas, do projects and so. Prasad added that the trend is for more and more students to become entrepreneurs. Infosys Chairman Nandan Nilekani had recently mentioned that companies are worried about losing their best employees to start ups.

Dr Athreya mentioned that students should be taught to begin any venture with the market needs in mind. Only if we identify the customer needs (articulated or unarticulated) and then execute better than the others, the business will succeed. Dr Athreya added that IIT Madras has set up a Tech Park and private universities could also set up similar parks. Prasad pointed out that we already have an Institution Innovation Council and an incubator in our university will come up as per the plan..

On the need for a mindset shift

We need a burning desire to put our country on the global map. We used to generate 25% of the global trade before British rule. Now we account for only 1%. We must have a mindset to sell to the world. We should develop the confidence in ourselves recognise our potential and leave behind the past. We must recall our history as a great trading nation. In the ancient times, traders were respected, and the term Vaishya Dharma was commonly used.

We have high IQ. We are knowledgeable people, but the problem is with our attitude, skills and habits. We tend to be arrogant. We are not good team players and often suffer from ego. We also do not have adequate interpersonal skills. In contrast, in countries like Japan and Korea, the people have developed good habits.

Self-discipline is very important for succeeding in life. During the pandemic, the people who have done well are those who maintain a daily routine. Dr Athreya mentioned that he follows a strict routine of work, exercise and diet. He goes to sleep at 10:00 PM and wakes up at 5:00 AM every day. We Indians tend to be lax when it comes to discipline. We need to become Karma yogis and not Karmacharis. We need a combination of IQ, EQ and SQ (Spiritual Quotient). Whatever we do, if we believe we're doing it for the country, we will never feel tired. Selfishness is the root cause of many of our problems.

Is India ahead of China in any area?

India is ahead of China in IT services. Our people have good technical skills which we can be proud of. Even in agriculture, we can become the granary of the world provided we can improve productivity. In horticulture and dairy also, there is tremendous potential. In auto components, companies like Bajaj, Hero Motors and TVs are already global leaders. We don't have an IT product company. But then building a product requires heavy investments in R&D and brand building. We have the talent but not enough managerial resources to build product companies.

Dr Athreya admired ICFAI’s energy and initiative and conveyed his blessings for the university’s success in the years to come.

We thank Dr. Vedpuriswar for bringing out the highlights in the form of this note