We had our dear friends J and T over for dinner last Saturday evening. J is a money man and manages the finances of some of the richest people in the US and T is the former CFO of a large ERP software company who quit to get on the mommy track. They have adopted 3 kids from Russia and T is pregnant with their fourth child.
At the start of the evening, J and I repaired to the chairs at the back of the garden perched at a height of about 1,000 feet above Boulder featured in the header of this blog, with a couple of pints of Fat Tire beer, to set the world to its rights.
After a contemplative sip from his glass, J asked me " If you were asked to invest $100 Million in emerging markets and your choice was either China or India, where would you put the money?"
"India" I said, without having to think too much. And here is why:
1. Property Rights: There is nothing that scares prospective investors in a country more than loose property rights - either physical or intellectual. India, as a result of 200 years of British rule has a strong background in property rights and with precedence of case law reaching back into the 1800s, and has had a long and illustrious history of legal jurisprudence rivalled only by the UK, and the US. Australia and Canada have had as long a legal history as India but being smaller, less populous countries, have fewer cases in case law to act as precedents. China on the other hand still has a very tenuous grasp of modern legal practice. From personal business experience I can confidently state that a contract in China is worth as much as the honor and honesty of the parties to the contract. There is no uniform code of justice that you might be able to appeal to, should you feel aggrieved. If you're not sure of the protections offered to your property in the country it's unlikely that you would invest in the country with confidence. The Chinese government of late seems to be making some changes to secure greater property rights, but much work remains to be done.
2. System of Government: Much has been said of the fact that India is a democracy - the largest in the world. With the rapid strides made in the standard of living of Indians as a result of the reforms started in the 1990s, a Government that tries to reverse the direction of reform will not be around for long. China on the other hand is unpredictable. They still seem to want to retain control over the information people have access to, and if the opening up of markets to foreign investment threatens the hold of the ruling mandarins on the country, control will win over openness.
3. Nature of industry: Much of the direct foreign investment into China and almost all of the country's exports are in the manufacturing sector. Fully 50% of India's GDP comes from the services sector and that's where the direct foreign investment is heading as well. Niall Ferguson, whom I admire hugely, argues in his excellent book Colossus: The Rise and Fall of the American Empire that no country can become a great power without manufacturing. I am not sure I buy that entirely. With global manufacturing, low value-add manufacturing will always gravitate to the lowest cost country. Today it is China. Tomorow it may be Nigeria or South Africa. Services, particularly high value-add services such as IT out-sourcing and financial back-office processing is harder to displace, requiring as it does experience and training.
Take the example of the Apple iPod. The 30GB version retails for $299. It is designed in California and manufactured in China. The cost of manufacture of the ubiquitous device is about $75 and being driven ever downward by the relentless pressure being exerted by Apple. Apple has reportedly sold 37 milllion of all versions of the iPod worldwide. Even allowing for a staggering marketing spend of $1.0 Billion since the launch of the first iPod, that comes to about $27 per iPod spent on marketing. So all up, you could say that the total direct cost of the device to Apple is about $100 a piece - with a nice 200% markup to get to the $299 retail price tag. Now, I ask you: Do you want to be the designer (Apple in this case) making $200 on each product designed and sold, or the manufacturer (the outsourced manufacturer in China) that makes at best, 15% or $11.25 on each item manufactured?
4. Language, education, culture and the aspirational factor: English has long been the primary medium of instruction at the tertiary level of education in India. Not so in China. Hollywood movies, American and English books and music have enjoyed popularity in India since before India attained independance from the British in 1947. This has created in the urban English-educated middle-class an aspirational force that is hard to contain. Aspiration, when accompanied by opportunity and application often leads to achievement.
Additionally, a young Indian graduate I suggest, will have less of a language and cultural barrier (perhaps none at all) interacting with and being trained by anyone from the West, than would a similarly educated Chinese.
All of this makes investment in India a culturally comfortable idea for Western money managers.
As foreign investment and technology transfer in the early stages of govern economic growth, so does an educated and motivated workforce unspoilt by the kind of socialist feather-bedding commonly seen in France, Holland and Germany, support sustained economic performance, in the later more advanced stage of economic development.
All of this of course is not to suggest that India is going to walk all over China. India is fractious and seemingly ungovernable. Corruption is rampant and visible even on a petty scale. The very democracy that enables India to be a truly intellectually free country, also hobbles its ability to move forward aggressively on massive infrastructural projects. Witness the agitation surrounding the Narmada Dam issue. Without debating the moral rights and wrongs of that issue, it can be confidently stated that a similar controversy in China would have had no air-time , and may perhaps never have reached the outside world.
The kind of property acquisition and appropriation that was undertaken in Beijing to prepare for the 2008 Olympics would be impossible in a pluralistic India where such measures would be considered high-handed and would cost the goverment dearly at the next election.
But with all this, when Americans see India, they see a country which has a number of political and social parallels to their own. But China, is a strange, befudding and somewhat exotically byzantine entity that is at once enticing and forbidding.
Where money is concerned, comfort wins over byzantine.
As the sun set behind the Rockies, we left our perch and moved indoors to start on a crisp Caymus Conundrum 1999 to accompany a chilled gazpacho soup.
"I'm glad you feel that way" said J as he savored the wine. "That's exactly what I did yesterday"
"What did you do?" I asked between mouthfuls of the gazpacho.
"Moved $100 million dollars into India"
Full disclosure: I was born in India, but do not hold Indian citizenship. I live in the United States and hold Canadian citizenship.
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5 comments:
Thanks Dush, excellent post.
Second Amit there - excellent post. The only q., however, is on the point about "value added" services. The iPod example is actually a great case in point. No part of the $199 mark-up comes back to India - because the true value added for Apple is in innovative engineering and design and brilliant marketing, both of which are not skills that India has excelled at traditionally, unlike the US or Europe. However, if, and it's a pretty big if, India can develop those "value added skills", versus the backroom bravado we have just yet, we can get those $199 margins back home as well!
Very Impressive. Especially the move from beer to wine in the space of a few paras.
Yes, the few paragraphs encompassed elapsed time of perhaps an hour or so. Would you rather I had provided a timeline, to show that the move from beer to wine was not in undue haste?
Having just spent two weeks in Shanghai and Shenzen and then the following two weeks in Bangalore, Pune and Delhi. The contrast between both countries is staggering. Before i address this debate, I ask "why pick one country?" Both are going to prosper in the next decade.
For manufacturing goods, real estate and direct consumer market there is no doubt that I would pick China over India. The physical and political infrastructure in China is much more advanced than India.
For IT, backoffice and banking I would pick India and only because they have the language advantage.
I don't mean to disrespectful in any way but from your posting I'm pretty sure you have never been to China, especially Shanghai.
Disclosure: I'm now settled in Pittsburgh, PA and was raised in both New York and New Delhi. I'm a US citizen but both of my parents hail from India.
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