Business
China not yet buying the world
Jan 7, 2013 11:40 AM , By Anuj Srivas
TALKING BUSINESS ‘The most remarkable fact is that Nokia has not been killed by a Chinese or Indian firm’

Professor Peter Nolan has researched, written and taught on a wide range of issues in economic development, globalisation and the transition of former planned economies. After receiving his BA degree from the University of Cambridge and his MSc and PhD from the University of London, he went onto become the Director of University of Cambridge’s Centre of Development Studies.

He is also in charge of the Chinese Executive Leadership Programme (CELP), which each year brings CEOs from China’s largest firms to the University of Cambridge for a three-week training programme, taught by a combination of academics and the leaders of international firms.

As the Financial Times put it: ‘Nolan knows more about Chinese companies and their international competition than anyone else on earth, including in China’. Excerpts from his recent interview to The Hindu:

What is the way forward for China now, with its new leadership, with regard to its economy?

Well, the challenges facing China at the moment are very clear, very obvious. It has had a very successful export strategy and needs to start thinking about moving from that and creating consumer demand. Great potential is coming from the service sector, of course, and another major problem is, of course, corruption which India is suffering from as well.

One of the major factors why China has grown so fast when compared with India is the ease of allowing foreign investment. Of course, yes, it is phased, but look at them, they’re thinking about opening up the services sector to more foreign competition. In India, yes, you have your reforms which are slowly happening, but it is such a colossal issue that sometimes it dampens the positive effects of foreign investment.

One of the major contentions that India has with China at the moment is the widening trade gap. What is your take on this? Is it a question of India not producing quality manufactured goods or China clamping down on Indian imports?

I think for a problem like this, the root cause, what is exactly the nature of this situation becomes very important in solving a problem. Let’s be clear, it is a long-term issue. Whether it is the penetration of Indian pharma products or IT services into the Chinese market, what you have to understand is the similarities of both China and India.

These are two countries which have companies that compete in a lot of the same areas. It is very similar to the struggle over who gets to be the leading producer of air-conditioners or any other fast moving consumer good. Not everybody can be a leader in everything and that’s where the problem starts. Sure some of the fault might be that India cannot produce high-quality goods for export, which is why most of India’s exports to China are raw materials, but the problem also extends beyond that. More rational discussion is needed.

Have Chinese and Indian firms reached the point where they can truly project themselves onto the global stage?

In a short answer, no, at least mostly no. The most remarkable thing, of the last ten years, is the fact that Nokia has not been killed by a Chinese or Indian company. It’s been brought down by two American firms — Apple and Google. Now just think about that for a second. Once you become a world leader like Nokia, it isn’t that easy to be brought down.

Ten years ago, everybody was talking about how even though low-income countries like India might not be able to catch up in terms of manufacturing, they would win the race in terms of high-tech and other forms of consumer electronics and technology. That hasn’t happened now and I don’t think it is likely to happen. There is something about the ecology of high-income countries such as the U.S. that allow them to dominate in this space.

But you have companies like Tata in India who have gone out, there might not be something too wrong with the Indian and Chinese ecology?

Well, I mean sure yes, you have a large group of very powerful companies in both China and India who are literally into everything. Those firms manufacture everything from salt to roads to trucks. But that’s the thing; if you want to be a global company you can’t diversify into everything and do that. You have to focus on one or two things. Sure you have Chinese and Indian companies which suck in huge amount of resources and produce cheap goods — but the best they can do is go out and buy a trophy company, like Jaguar Land Rover.

Where is their global dominance? The operating-system market is dominated by just two companies — Apple and Google. Over 90 per cent of market share. The problem with Indian and Chinese companies is that they have deep roots in the political economy. The Ambanis, Tatas and Birlas. The whole banking system as well. Sure, it protects them from financial shock and such, but it begs the question as to what they have really produced on a global level? This is something that needs to be reflected on.

When Chinese and Indian companies go out, however, there is mistrust. Take Huawei for example, are the recent security concerns expressed by both U.S. and Indian officials a real threat? Or is it smoke without fire?

The allegations of security problems and intellectual property theft are just absolutely ridiculous. Just because the head was a former member of the Army? Come on. Today, for example, there was a delegation of American businessmen who went to Iran to further their interests. They were made up of military men — tell me now why that isn’t a problem?

The thing about Huawei is that it is the only Chinese company which is truly competing on a global level in a very high-tech industry. They were initially disadvantaged in the Chinese market; they weren’t given lucrative government contracts and were forced to look outside Chinese borders to grow.

The upper management of Huawei is actually grateful for that, as it helped them focus — if they had taken government contracts to build roads and airports they would have become bloated and diversified.

The whole threat of security concerns is laughable. It is also hypocritical of America. Take, for example, the Chinese banking system — the reason why it is so modernised and secure is that most of them are using IBM mainframes. Isn’t that an American product in a Chinese sector that needs the greatest security? I honestly believe that this Huawei incident is a bone that is being thrown to the anti-Chinese sentiment in the U.S. The whole affair has caused deep debate in China and I am sure that there are lessons in it for India too.

With the shale gas revolution starting to gather pace, and China having abundant reserves of it, will this reduce China’s dependence on oil and other sources of energy?

Why yes, it does appear that China has large reserves of shale gas, which is very good news as this means China could become self-sufficient in terms of energy. There are, however, a couple of problems that have to be surpassed before this is realised.

One is that China needs the technology, and while there are some advances on that front it isn’t for sure.

Number two is that getting the shale gas requires a lot of water. There is a lot of water requirement for the whole process. Now U.S. has that in the form of even rainfall distribution, but China has overall very little water.

Over the last year, there have been a number of disputes between China and Japan, how has this affected business and overall relations?

Well, when people talk about these disputes the important thing to understand is that Japan’s FDI stock in China last year was in the range of $83 billion. Sure there are regional and international disputes and if it does continue, the effects, of course, will be harmful. However, there has been far too much media speculation over this.

The studies and surveys that I have personally seen show that most people in China want these disputes to be resolved by diplomatic means. I also believe that Abe will distance himself from some of the comments he made during his election campaign.

Also, to the contrary, these sentiments are not being whipped up by the Chinese Government.

There has been a lot of talk about Chinese investment into global natural resources. Is the ‘string of pearls approach’ something that India should be worried about?

I think my feelings on this can be summed up by a message from my book ‘Is China Buying the World’. The concluding sentence is this: ‘China is not yet buying the world and shows little sign of doing so in the near future’.

But let us look at the numbers and not the hype. In 2011, China’s total outward FDI in extractive industries was $67 billion, and in the manufacturing sector it was just $27 billion. China’s outward stock of FDI in the extractive industries is less than a quarter of the international assets of a single giant global company, Royal Dutch Shell, and less than one-third of that of Exxon Mobil.

China’s outward stock of FDI in manufacturing amounts to only one-twentieth of the foreign assets of General Electric, and 13 per cent of that of Toyota. Who is buying who, you tell me.

anuj.s@thehindu.co.in


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