The Sweet 'n Sour Chimney Broth

It's like a typical Chinese delicacy—sweet and sour. That's probably the best way to describe the current business relations between India and China. The sour taste, due to the historical baggage and the fear of Chinese goods swamping the Indian marketplace. And the sweetness, because of the potential and what India can learn from China. In fact, it's a scenario where New Delhi sees Beijing as both a partner and a competitor, a friend and a foe, a threat and a lure.

Just as Prime Minister Atal Behari Vajpayee starts his high-profile visit to the dragon land, there is a "Chinese" interest among both businessmen and policymakers. "China is no longer a threat," says CII chief Tarun Das. "China can be our strategic trade partner," feels external affairs minister Yashwant Sinha. At the same time, there are voices that hint that China will kill Indian manufacturing in the next few years. And some say that Chinese software exports could match India's by 2008!

But given the hype that surrounds Vajpayee's trip, the optimists are clearly in the majority. Indian businessmen feel China could be the biggest opportunity for Indian firms to invest in the coming years. In fact, both CII and FICCI have put together high-profile business delegations to accompany the Indian prime minister. "There are tremendous possibilities in China, especially in the context of the opening of its market in the post-WTO scenario," says Phiroz Vandrevala, executive vice-president, TCS, India's largest software exporter with a presence in China.

Other sectors are equally upbeat. Satish Kaura, CMD, Samtel Color, says: "China provides an excellent environment for research and has a huge domestic market." His company sells TV picture tubes in China and also sources raw materials from there. CII, which has conducted three surveys on China to gauge the potential in IT, biotech and pharmaceuticals, thinks China offers attractive investment incentives and, hence, this may be the ideal time Indian firms looked eastwards.

The mood is so upbeat that there's a feeling that India-China bilateral trade may jump five-fold to $15 billion within a few years. And investment flows will also improve dramatically. Several Indian firms like JK Industries and Ranbaxy have set up large bases in China. JK Industries has set up a plant at Guangzhou and signed an agreement with a Chinese firm for sharing technology.

However, the big opportunity is in the pharma sector. Boston Consulting Group estimates that China may emerge as the fifth-largest market by 2010 with sales of over $24 billion. Within the sector, there'll be scope in segments like innovative ethical or prescription drugs and differentiated over-the-counter products. The market for ethical drugs itself is expected to jump four times to $19 billion by 2010.

But then China too is looking at the Indian market. Although the fear about Chinese products inundating India have eased a bit, the possibility still looms large on the Indian market. Chinese imports grew by 40 per cent last year, while Indian exports to China grew by 70 per cent. That was taken by economists as an indicator that Chinese products were no longer a threat. But what they forget is the former figure is on a much larger base as India imports much more from China compared to her exports.

Let's also remember that Chinese firms are looking at investing in India to exploit the latter's market. In fact, that will be one of the main issues that will be discussed during the current trip. In 2002, India did not clear any investment proposal from China due to the security threat; neither did it award any major contract to Chinese firms. Only recently, when details of Vajpayee's trip were finalised, did India clear a few proposals.Now, China wants India to sign a mutual investment protection agreement that will also energise investments in both nations.

Once Chinese investments and goods flow in freely, they could capture huge marketshares as they have done in other parts of the world. But what will really determine the extent of India-China relations is the way events take shape in crucial sectors like software. Global consulting firms are talking about how China could be as big as India, if not bigger. Indian software firms too are now looking at China as a fierce competitor.

"China can fast catch up with India and it's important that Indian companies consciously improve on the essential ingredients of providing value and ability to implement, while moving up the value chain," says an Infosys spokesperson. Ravi Ramu, CFO, Mphasis, feels that like India, China can emerge "as an outsourcing base" and possesses a "huge, very efficient manpower base" waiting to be utilised.

Fortunately, the Indian IT sector can also exploit these advantages. For one, China's domestic software market is huge. For example, the demand for IT products and application software among Chinese SMEs is expected to increase to $12 billion in 2003 and further to $27 billion by 2006. The forthcoming Beijing Olympics may also generate business for Indian software firms as China plans to change its outdated financial and banking infrastructure, particularly its credit card infrastructure.

Couple this with the fact that Indian IT firms can set up outsourcing bases in China to cater to global vendors, as has been done by TCS and Mphasis. Says Ravi Ramu: "Indian firms should move in now to use the advantage of the huge manpower base available there. China, the way I see it, is a 'resources' market...."

Kingshuk Hazra, analyst, Gartner, describes the complex relationship as one of 'co-opetition', a combination of cooperation and competition. "Wherever there are opportunities, Indians should be ready to cooperate with a future focus. They should also look at competing with the Chinese industry for a bigger share of the pie."

But is working in China a challenge for Indians? Says Vandrevala: "You have to understand the culture and touch points of the place and engage with them in order to succeed." Others like Ravi Sinha, MD, SRF, feel that operational difficulties like lack of transparency and lack of legal defence for overseas companies pose roadblocks in functioning in that country. (SRF is exploring acquisitions in China.)

However, investment remains low since India does not have a bilateral investment treaty with China. Hopefully, this will be sorted out during the current trip. Other contentious issues will also be discussed to encourage India-China trade flows. Despite these optimistic signals, New Delhi will always perceive China in terms of both cooperation and competition.