Asian Business Environment: India and China

INB 311

Asian Business Environment: India and China

ICT

11/4/14

Dr. Lairson

Andrew Kennedy, "India in the Global ICT Game." 2/25/13
indiaictgame.docx

Is India emerging as an ICT power? Not yet. In 1990, the U.S. and Japan accounted for 51 percent of global value added in ICT, according to figures published by the U.S. National Science Foundation last year. By 2010, that figure had fallen to 38 percent. Yet, India wasn’t the reason for this fall; China was. Whereas China’s share increased from 1.7 percent to 12 percent, India’s share barely budged, rising from 0.6 percent to 1.5 percent. Even in computer programming – India’s strong suit – the country’s share remained just 1.7 percent.

In 2011, total MNC spending on R&D units in India – across all industries – was about $7.0-7.5 billion USD, according to the Indian consulting firm Zinnov. Yet, the gap between China and India’s value added in ICT alone was about $300 billion USD in 2010.

Over the past decade, the wage gap between skilled software programmers in India and those in less expensive American locales has fallen significantly. In the meantime, companies are discovering that outsourcing information technology work can carry unanticipated costs as they lose touch with key parts of their business. To attract ICT investment in the future, India will have to offer more than cheap labor.

Relate to restructuring – can India rely on markets to provide this kind of change?

China excels in the “hardware” of technological innovation – money, technicians, and equipment – but it still needs much better “software” – legal protections, risk-tolerance, and connections between enterprises and universities. Moreover, China’s Internet controls not only limit information, but also competition from foreign firms.

Still, the question remains: why is India’s ICT industry lagging behind? For some, China’s autocratic system holds the key. After all, China can compel its companies to invest in new technologies as few other governments can. Yet it is far from clear that Beijing’s attempts to move ahead through bureaucratic fiat are effective.

More important, perhaps, is the fact that China’s strong foundation in manufacturing is now overlaid with a vast market for ICT products. China has become the world’s largest market for mobile phones, including smart phones, and for PCs as well. MNCs are no longer coming to China just to export, but more and more to compete for local customers. That means more local R&D to adapt products to local tastes, more retailing, and more after-sales service.

China’s gigantic market has also created incentives for Chinese firms to upgrade, as Loren Brandt at the University of Toronto and Eric Thun of Oxford University have shown. It is no easy task for Chinese companies to compete in developed economies; their understanding of the market is poor, and technological demands are higher. On their home turf, however, the barriers to entry are lower. Chinese firms can compete for Chinese consumers, and the ones that succeed also have incentives to upgrade to escape the vicious price competition at the bottom of the market.

Can India follow in China’s footsteps? To a limited degree, it may be doing so already. Chasing the country’s vast population of mobile phone users, foreign handset maker Nokia has developed an extensive presence – including manufacturing – in India. Meanwhile, according to Business Monitor International, Indian handset makers raised their domestic market share from 1 percent in 2007 to 15 percent in 2010. More generally, however, India is struggling to keep up in the ICT business. In fact, India’s imports of electronics products are surging, as Indian businesses and consumers are hungry for everything from new telecom equipment to tablet PCs. The result is growing concern about depending on imports for potentially sensitive technologies, as well as worries about the growing trade deficit.

In January, the Indian government responded to these concerns by floating new rules that would require tech firms to manufacture their products domestically. This is the wrong approach. India should position itself to add value to the global production networks through which ICT products are made, rather than simply finding ways to decrease imports.

The Economist, "Indian Technology Firms," 3/16/2013
indiatechfirms.docx

India has played the outsourcing game to a big success

Today that outsourcing industry is a capitalist marvel. It has annual sales of $100 billion, mostly from abroad, and these export earnings have been vital in a country with a weak balance of payments. Millions of good jobs in India have been created. Young Indians have seen that globalisation creates winners. India’s reputation in the world has changed, too: Bangalore’s shining IT campuses have become as famous as the Ganges and the Gandhis.

Yet India has been a comparative failure in terms of innovation over the past decade. You might have expected India’s many advantages (the English language, abundant engineers and a thriving diaspora in Silicon Valley) to pay off spectacularly on the internet. But only a few start-ups have made clever technical innovations that have been sold abroad. And at home e-commerce is in its infancy, with sales only 6% of China’s. Thanks to lousy infrastructure, useless regulation and a famously corrupt telecoms sector, the web is available to only 10% of Indians, many of them squinting at screens in cafés.

India boasts no big internet firms to compare with Chinese giants such as Alibaba, Baidu and Tencent, nor start-up stars like Facebook’s Mark Zuckerberg. Instead, it has seen a succession of false dawns, from its version of the dotcom bubble in 1998-2002 to more recent hype over deal-of-the-day websites and text-based cricket updates. In 2010-11 lots of start-ups raised cash, but they have struggled since. Venture capitalists grumble that their returns have been poor. The original emerging-market tech pioneer has fallen behind in the internet era.

The good news is that India now has a chance to lead again; the bad news is that this opportunity relies in part on Delhi’s bureaucrats not messing it up.

Optimism springs, first, from a healthy stock of young entrepreneurs

The second change is the mobile internet. India’s fixed-line system may be abysmal, but cheap smartphones and fast wireless networks are rapidly spreading. India is poised to leapfrog the era of the personal computer and go straight to the mobile-internet age. Already a quarter of internet traffic is from phones, compared with a seventh worldwide. E-commerce sites are getting a surge in activity from phone-users.

But this budding revolution needs clever regulation. Outsourcing boomed in part because it avoided government: the product was exported through global networks. The mobile internet needs capital, payment systems and wireless capacity. In all three areas the government is in the way.

The e-commerce industry appears stymied by the same restrictive rules on foreign investment that have bedevilled bricks-and-mortar retailing. Only a fifth of Indians have credit or debit cards—and using them online is a nightmare, again thanks to regulations (India could learn a lot from Africa’s use of mobile money). And India needs more and better wireless networks; some big players such as MukeshAmbani, India’s richest man, have been tempted in, but the telecoms regime is a tangle of overcomplicated rules and graft.

India’s New Internet Entrepreneurs

Yet if you walk to the exit of that hotel and reject the option of an expensive limousine, or of hailing a bashed-up street taxi, and instead press “Book now” on your phone screen, another Indian tech scene appears. The application links a network of taxis using satellite positioning, cheap Chinese-made smartphones, souped-up Google maps and credit cards. A 6km (4-mile) drive north in a modern car will deliver you to a snack shop, above which is the firm that runs the system. Olacabs was set up in 2010. Its co-founder, BhavishAggarwal, is a 26-year-old engineer who has worked for Microsoft in Seattle. He has raised a slug of venture capital, some of it American, and says business is growing at 30% a month

India needs a million Olacabs: start-ups that use technology to overcome everyday problems. The economic benefits would be huge. And in a country with a stuffy business culture, in which commercial and political dynasties are all too common, a technology revolution would be a colossal breath of fresh air. It would help unleash the energy of a generation of young people. But will it happen?

India has already had one technology revolution. In the 1980s middle-class engineers from a dirt-poor socialist India somehow persuaded Western firms to outsource their back-office functions and bits of their IT operations to the subcontinent. Thus began a three-decade-long boom.

The revolution fed its children well. Thanks to IT, some 3m Indians now work in well-paid formal jobs of the kind that India needs so badly. Perhaps another 10m knock-on jobs have been created for maids, drivers and the like. Technology services have saved India from bankruptcy—exports were 4% of GDP in 2012, keeping the balance of payments in passable shape. As well as local champions such as Infosys, TCS and Wipro, 750 multinational firms have outsourcing and technology hubs in India. Many perform research and development.

Their country has so many advantages: the English language, engineers with global experience, a conspicuously successful diaspora in Silicon Valley. Why, then, has it failed to produce a new generation of big tech firms? In contrast to America’s constant regeneration, India’s champions have spare tyres and grey hair.

The gulf between Indian hype and reality over the past decade is best shown in numbers. One veteran venture capitalist reckons the investments made in “new-generation” (ie, excluding IT services) technology firms are worth $5 billion-6 billion today. The largest listed firm has a market capitalisation of $700m. By way of comparison, China’s listed internet firms have a combined value of over $100 billion and its e-commerce sales are about 18 times India’s. Other emerging economies, such as Russia, Argentina and South Africa, have produced multi-billion-dollar internet champions. During the past decade India has fallen behind.

Fortunately things are changing. First, the internet is becoming popular. Penetration is just 3-4% of the population, if judged by the number of moderately fast fixed internet lines and smartphones that use 2.5G and 3G services. About two-thirds of these connections are mobile. If you include people who access the web through cafés, at work, on friends’ computers or through basic phones with small screens, penetration is 10%. Most surfers are young. Many live in provincial towns that the IT revolution has hitherto bypassed.

That 10% is a big figure in absolute terms—122m people—and it will rise as smartphones get cheaper.

The second change for the better is that the start-up scene now has depth, partly as a result of all those mini-booms and busts. The venture-capital industry, with a mix of local and American firms, is now well developed and capable of writing big cheques. And a new generation of entrepreneurs has emerged, most of whom combine technical skills with global experience. Of the 15 technology-firm founders interviewed by The Economist for this article, 12 have worked in America or for multinationals in India.

What kind of companies are these new entrepreneurs creating? SandeepSinghal of Nexus, a venture-capital firm, describes India’s new tech scene as a mixture of Israel and China. The “Israeli” bit involves selling clever innovations to foreigners. It is still fairly small. InMobi, which sells technology and services for advertising on the mobile internet, is unusual in that it broke into other emerging markets, such as Indonesia and South Africa, before cracking America. “A lot of firms struggle to innovate because the [Indian] market is too small,” says its founder, Naveen Tewari. They need to look farther afield, adds MrTewari, a Harvard and McKinsey alumnus who has become something of a hero for budding entrepreneurs.

Only a brave few follow this advice. Cloudbyte, for example, makes storage software for use in data centres. It has just moved one of its co-founders to America. “The market is largely in the US. We want to be a global company with our engineering talent in India,” says the co-founder still in India

The “Chinese” part of the industry is much bigger. The label refers to local firms that sell to locals, as China’s internet giants do. Such firms account for about three-quarters of activity by next-generation Indian tech firms (see table). Some sniff that Indian e-commerce firms are mere copies of Western ones, or that they largely serve the rich. Such gripes miss the mark. The real achievement of India’s digital merchants has been to create reliable supply chains and systems in a country where few things work smoothly.

These firms are exciting but still small. All e-commerce sites in India between them had sales of $10 billion in 2012, about four-fifths from travel products such as plane tickets, according to McKinsey. It forecasts that sales will approach $100 billion in the next five years, roughly the same size as the conventional Indian IT industry is today. Most of that growth is expected to come from a surge in the number of people accessing the web on their phones. In this scenario India will bypass the PC era and leapfrog straight to the mobile internet.

It is at this point that veterans of the telecoms industry chortle. India’s 700m mobile subscribers are stingy. Only 5% pay for mobile broadband and only a fifth of those engage in e-commerce, says one network boss. Handsets using Google’s Android operating system are available at $100 or less, but their quality is poor. About a fifth of smartphone buyers use them only for voice calls and as a fashion accessory.

Yet the mobile internet is spreading. About a quarter of internet traffic in India is now from mobile phones, reckons RajanAnandan, the head of Google in India. The global figure is 14%, according to StatCounter. E-commerce sites are seeing a shift towards mobile. Flipkart says phones account for 6-7% of sales, most of it from new users. This should reach 20-25% in a year. Hrush Bhatt of Cleartrip, a travel site, reckons 8% of his sales are now from mobile and this will reach 25-30% in a year. “People underestimate how quickly India will adopt the mobile internet,” he says.

Robosoft Technologies. It is a big developer of mobile apps globally (mainly for the iPhone) and builds sites for third parties as well. Thus far only a small part of MrBhat’s business is in India, but he expects that to change. “In 2013 you’ll see some success stories. By 2014 it will be huge.”

The hope is that as mobile e-commerce booms, it will boost software and hardware start-ups. Vani Kola, a venture capitalist, says that “India will never build the next Oracle. We don’t have pure science innovation—we’re not winning Nobel prizes. But India will develop technologies that could take off around the world, from cheap internet-access systems to payments processes.” If that happens, the boom would change India and create a new generation of exporters.

To lead a mobile-internet revolution, India’s entrepreneurs must overcome three problems. The first is payments systems. Only about a fifth of Indians have debit or credit cards and those who do are scared of using them online. When they try the process is clunky—a quarter of attempts to pay on the Indian Railways site, probably India’s most frequently used, fail. The good news is that regulators are easing the rules for small transactions. Anish Williams quit HSBC to co-found Transerv, a firm that has just launched a pre-paid mobile wallet that can be bought from street vendors and downloaded onto phones. It piggybacks on the credit-card payments system and should make buying online easier. Firms like this could make a big difference.

The second bottleneck is capital. India’s e-commerce industry will need billions of dollars to grow. But local venture-capital firms struggle to write cheques of over $100m. Some fear that foreign investment in e-commerce may fall under the same rules as apply to bricks-and-mortar retailers such as Walmart. These let individual states ban activity.

The third impediment is India’s telecoms sector. Once celebrated, it is indebted, loss-making and fragmented. To blame are a price war, graft and licensing rules that prevent consolidation and roaming. The industry is cutting investment in networks at exactly the wrong time. There are multiple different spectrum and licence charges; big operators pay up to a third of their sales on such levies and on taxes. Telecoms firms are so fed up they refuse to participate in new spectrum auctions.