12/8/2010

Global Competitive Strategies

Surviving in the Emerging Markets

China and India

Video Set: Part 1 Part 2 Part 3

China
Napoleon: Let the Chinese Dragon Sleep

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China
Fastest growing country in the world for nearly 30 years Shows no signs of slowing Liberated millions of people from poverty and unlocked massive segments of demand 2004 China accounted for 12% of the worlds total energy consumption and 15% of fresh water consumption; consumed 50% of the worlds production of cement Within a decade will surpass both the EU and US in GDP Under Hu Jintao CCP remains in controlall major banks remain tightly linked to the state; same with key sectors such as oil, petrochemicals, and steel. SOEs still produce more than 1/3 of total output. State involved in all key aspects Development path capitalism with socialist characteristics

Shang Period 13th century BC

Ming Empire 1580

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China: A Growing Economy

China: A Growing Economy

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China: A Growing Economy

Old Shenzhen

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New Shenzhen

The Chinese Dragon Awakens

Just the Facts: 1970GDP of $106 billion; 2006$1.6 trillion Japan, FDI (foreign direct investment) = 1.1% of GDP; China, FDI = greater than 40% In 2003 China for the first time surpassed the US and became the #1 country in FDI inflows Foreign invested enterprises (wholly foreign-owned enterprises and joint ventures) account for 70% of exports 2005 U.S. corporate revenue from China almost double revenue from Mexico

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Mass affluent Chinese consumers are concentrated in a few top cities

Chinas top 14 cities are all located along the coast Top 4 cities* Next 10 cities** 100% = 85mn USD104bn populationUrban population-income concentration of top 50 cities Avg. annual income per household USD

Top 4 cities*

35%

43%

5,000

BJ

Next 10 cities**

10% 12% 4,800

SH HZ NB WZ QZ XM

Rest of 35 major cities

55% 46% 3,200

QZ SD ZS

DG SZ

GZ Population Income

* Top 4 cities = Beijing(BJ), Shanghai(SH), Guangzhou(GZ), and Shenzhen(SZ) ** Next 10 cities = Zhuhai (ZH), Shunde (SD), Dongguan (DG), Wenzhou (WZ), Foshan (FS), Zhongshan (ZS), Ningbo (NB), Xiamen (XM), Huzhou (HZ), Quanzhou (QZ)
Source: China City Statistical Yearbook 2000; McKinsey analysis

Consensus and the role of the Group

The single child phenomena

Regional diversity in taste Increasing diversity. Development of parallel consumer trends

Complex attitudes to risk

Rural/urban divide. Increasing income inequality

Increasing sophistication and Western orientation of upper-middle income group

Role of the family. Reverence for age, focus on education & self improvement
J Garner. The Rise of the Chinese Consumer. 2005

Divergence in attitude between different age groups

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Imagine the China Market: Consumer Profile

1 Billion Customers or 2 Billion Feet? Imagining the Real Size of the Market 1% population growth; however, large per capita gains yield High penetration rates for consumer goods Color TVs; refrigerators and washing machines; microwaves; and computers Automobiles (1.8% and rising) Home ownership (3/4 in urban areas privately owned) Rapidly expanding private market for real estate, health care, and other services

Urban Household

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Guanxi
Guanxi describes the basic dynamics in personalized networks of influence, and is a central concept in Chinese society

(Work Unit)

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Arbitrary rules and regulations Lack of transparency Relationships govern business interaction, not laws & regulation, lack of political institutionalization Inadequate protection for intellectual property Lack end-to-end logistics, effective infrastructure, strong regulatory systems Inadequate mechanisms for resolving disputes Emphasis on effort, not on outcomes Emphasis on imitation, not on innovation Managerial effectiveness lags Western leaders Lack of customer focus & understanding Lack of financial controls & discipline Lack of experience with process, change and project management Everything is negotiable

High Context vs. Low Context Cultures

HIGH CONTEXT
(Implicit)
High-Low High Chinese Arabian Latin American Spanish Italian English (UK) French North American (US) Scandinavian German Swiss

Low

LOW CONTEXT
(Explicit)

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Offshore manufacturers
Types (Based on reasons)
Cost Cutter Market Builders Talent Seekers

Changing incentives for manufacturers

Unified Tax Law (for foreign and local cos) High / New Technology Status Encouraged Industry Status Go-West Policy

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India

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IndiaBasic Facts
Area: 3,287,590 sq. km 29 states, 6 union territories Population: 1.08b (2004, est.); 1.5b by 2050, i.e., more than China Currency: Rupees (Rs); exchange rate: 1 $US = 44 Rs Largest cities: Mumbai (Bombay) 16.4m Kolkata (Calcutta) 13.2m New Delhi 12.8m Chennai (Madras) 6.4m Bangalore 5.7m Hyderabad 5.5m

Indias Diversity
Sikhs, 2, 2% Christians, 2.3, 2% Muslim, 13.4, 13% Buddhists, 1, 1%

Jains, 0.4, 0%

Hindu, 80.5, 82%

Religion: Hindu (80.5%); Muslim (13.4%); Christians (2.3%); Sikhs (2%); Buddhists (1%); Jains (0.4%) Language: More than 1,000 dialects and 16 officially recognized languages Languages: Hindi, Bengali, Telgu, Marathi, Tamil, Urdu, Gujrati, Malayalam, Kannada, Oriya, Punjabi, Assamese, Kashmiri, Sindhi, Sanskrit (English widely spoken and taught in high school) Official Language: Hindi Custom (food habit, dress pattern, greeting style) is different in every region Public Holidays: January 26, August 15, October 2; also major Hindu, Muslim, Christian, Buddhists, Jain, Sikh religious holidays and regional holidays

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Indias Economic Reforms

PostIndependence
1947-1991 Import Substitution Planning commission created Administered prices for commodities Capacity controls Reservation for small scale sector Nationalization of financial sector Foreign exchange control High taxation 3.5%
Avg. GDP Growth

Rao Govt. Reforms

1991-1996 Reforms Initiated Reduction of budget deficit Tariffs lowered and simplified Currency fully convertible for current account Automatic approval for foreign stakes up to 51% Capacity controls abolished Privatization program initiated

United Front Govt. 1996-1998

Capital Market Reform New takeover code 100% stakes allowed for foreign investors Deregulation of financial institutions Corporate and personal tax rates lowered India signatory to WTO Review of company and bankruptcy acts

BJP; Congress
1998-1999-2005 Continuing Reform FDI encouraged NRI Incentives Privatization mandate accelerated Share buybacks allowed Insurance reform proposed Patent law enacted New telecom policy

Public control of key sectors IMF program established

4.5%

6.5%

6.5%

Average Annual Income in US $

% of Households
0.6

# of Households (millions)
1.2

Population (millions)
6

Upper Middle Class Middle Class

10,001- 20,000

5,50110,000

6.2

12.2

61

Lower Middle Class

3,0015,500

15.2

76

20013,000

13

26.3

131.5

Lower Lower Middle Class

1,0012,000 40 78.4 392

Aspiring

1,000 or <1000

32

64.4

322

Total

197.7

988.5

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Caste Hierarchy
High
Brahmin (Priest) Kshatriya (Warrior) Status Vaisya (Merchant/Trader) Sudra (Servant)

Low Wide
Scope

Untouchables

Narrow

Macroeconomic Statistics
China
Population (millions) GDP/Capita USD Purchasing Power Parity (PPP)/Capita GDP Growth % Inflation rate (Consumer Prices) % Current Account Balance %GDP Forex Reserves (EOY 2006) R&D Expenses %GDP National Innovative Capacity Ranking Worldwide Corruption Index Ranking Poverty (% below national poverty level) Literacy rate % of population age 15+ # of Engineering graduates (yearly) Mobile Phone Penetration Rate Legal Institutions Language of choice for business 1,320 $1,096 $5,600 9.9% 1.8% 9.2% $470B 1.3% 40 78 10.0% 90.9% 125,000 51.80% Weak Chinese

India
1,095 $610 $3,800 9.4% 4.2% -1.1% $131B 0.77% 44 88 25.0% 61% 300,000 14.20% Solid English English is widely used Large # of Eng. graduates Large # of people in poverty Corruption is rampant in public sector Rapidly growing economy

Source: World Fact Book, World Bank, EIU, Transparency International

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Demographics
Due to its one-child policy, China's working-age population will peak at 1 billion in 2015 and then shrink steadily. China then will have to provide for a graying population that has limited retirement benefits. India has nearly 500 million people under age 19. By mid-century, India is expected to have 1.6 billion people and 220 million more workers than China.
India's long-term potential is greater.

CNY vs USD

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INR vs. USD

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