INDIA’S COMPETETIVE ADVANTAGE

(Text of talk given by Sri Rajeev Srinivasan at Vivekananda Study Circle, IIT Madras on 5^th February, 2004)

The power point text is given in the green colour

Its great pleasure for me to be here both as a former student as well as someone who is delighted to see the lot of interest you guys have in Indian culture and related topics. I have been here once before for VSC presentation that in some time in 2002 when my good friend Michel Danino spoke about Indus valley civilization. I didn’t know about the existence of such an organization and its activities until then. I am very thankful to the organizers of Vivekananda Study Circle for having invited me here. I am an alumnus. After leaving IIT, I went to US. I was there for many years, working full time, studying etc. And overtime I became fairly convinced that India was where things were happening. So I moved to my sphere of activities more and more towards India. So in a way I can say I am practicing what I preach, which is that I believe the competitive advantage matrix, if you look at it, is moving more and more towards India’s favour.

So the topic I have chosen for today is a brief look at what consists, or what comprises India’s competitive advantage. I do write for rediff.com.

AGENDA:

w Introduction

w Trends

w India’s strengths

· The Empire of the Intellect

· Science and Technology

· The End of the Socialist Burden

· Cross sectoral growth

w What has been done well

w Comparative advantage vs. China and the US

w What can go wrong

w Further reading

So this is the agenda. I want to talk about what comparative advantage means look at some of the trends in market place and how India’s strengths can enable us to take advantage of those trends. What have we done well, and then look at two major economies in the world that of China U.S. How well can we compare to them. And I am not a irrational optimist. What to see if we could take a look at what could possibly go wrong, from our perspective today. Then, some suggestions for further reading.

INRODUCTION:

w “What is your sustainable and unfair competitive advantage?”

· Standard venture capitalist question

How many of you are familiar of concept of competitive advantage. It’s a management speak. What is a sustainable and unfair comparative advantage is a question that every venture capitalist will ask you if you are a entrepreneur who goes to them for funds. What does it mean? Sustainable understand i.e. u will be able to have that advantage over a time. Unfair that means something you can prevent other people from having. For e.g. if you have patent protection you can prevent other people from coping it that would be considered as unfair advantage and every venture capitalist wants to have a sustainable unfair competitive advantage over other people so that you will be able to make a tremendous return on the money that you borrowing from them. This concept extends both to the entrepreneurs and to nations. A Professor named Micheal Porter has done a great deal of work on sustainable advantage and I will refer to him briefly later.

w Does India have a sustainable advantage?

w If so, is this an unfair advantage?

Now question is does India has sustainable advantage and is India’s advantage unfair. My belief is that we can make a claim that both are true? That we have an sustainable and unfair competitive advantage.

w This is necessary for long term success as an economy and a nation

But the fact to the matter is that if we do not have both, we will not succeed in the long rum as a nation, as an economy. So it’s important for us to identify the rooms for both these things.

WHAT IS THE KEY?

I have listed a few of these things here that I think are potential basis for competitive advantage and I am sure you can think of many others.

w Intellectual property generation?

I think the most important is the first one Intellectual property generation.

w Low cost, high quality labor?

We clearly have low cost high quality labour but here is the question of sustainability comes to picture. Today, yes our high quality labour is low cost. But if you look at the trends, the way the salaries have increased, overtime the difference between the salaries in India and west will diminish. So low cost may not be sustainable advantage.

w Giant internal market?

We do have a giant internal market where lot of countries and companies are recognising.

w The Indian Diaspora?

The Indian Diaspora I think is about 20 million is a strong source of advantage for us. This fits us first.

w Innovation and knowledge management?

We don’t realize this how innovative our culture has been. But we have been extremely innovative in the past and important to look at that, and realize that if we can be able to do that. We have also able to manage the knowledge we have generated.

w Entrepreneurial skills?

Entrepreneur skills: Undoubtedly. Over the years Indian entrepreneurs in overseas have done extremely well and over the last year or two, you can see many examples of home grown entrepreneurs doing extremely well.

w Or… all of the above?

All of these are keys to sustainable and unfair advantage. The question is, are there any other things; I am sure there are.

w That which enabled India’s pre colonial output: is that sustainable?

But are many of these things the many factors that enabled us to be the world richest nation; up until the colonial assault on us in the 1700’s. Because you may not realize this but almost all of the record history, India was the richest country in the world. This is sort of radical statement to make, because the image most of us have, and definitely what the west has is of a poor nation. But that’s a relatively recent phenomenon.

MEGATRENDS:

This is my first cut at the list of things that may give us comparative advantage. So lets’ look at the trends in the market place. These are mega trends.

w “Engineering is the oil of the 21st century”

· Joel Kotkin, Californian sociologist, circa 1997

Engineering is the oil of the 21^st century. This written by Joel Kotkin. Interesting man I have met and talked to him. What does’ it mean? He says that as oil was the prime determinant of wealth in the 20^th century similarly engineering will be prime determinant of wealth and success of success for a nation in the 21^st century. By engineering what he means exactly is not just engineering, but also intellectual property generation. Because clearly if you create the IPR pharmaceuticals that is also a source of power and wealth.

w “Demographics is destiny”

· Augustus Comte, French philosopher, 19th century CE

Demographics is Destiny, a French philosopher said this. It turns out that India’s demographics are extremely positive in terms of consuming and producing work force.

w “India has the potential to show the fastest growth over the next 30 and 50 years”

· Goldman Sachs paper “Dreaming with BRICs”, Oct 03

A very interesting white paper that came out by Goldman Sachs, called as “Dreaming with BRIC’s”. This is a very positive paper that says that if you look out of next 50 years India is going to do extremely well, compared to rest of the world.

w “India may catch up with and overtake China”

· Foreign Policy, Huang (MIT)/Khanna (Harvard), Oct 03

We have heard a lot about how China has left India in dust by opening its economy faster, and a variety of other things. But an interesting counter point was this article in American magazine foreign policy by an MIT and Harvard Professor would said India will in fact not just catch up but catch up, but even overtake China. These are trends which have been spoken about in the recent past.

INDIA AND THE MEGATRENDS:

So how do we relate these trends?

w The Empire of the Intellect:

· The greatest source of creative ideas in the world

So the first of course is the topic of Intellectual property. I claim and I can believe that I can justify this that even though India is primarily known as empire of the soul, everybody acknowledges that philosophy reaches its greatest height in India, spirituals matters reaches to greatest heights in India, I claim that it can be proven that the matters of intellect in general, not necessarily spirituals plain intellect, buddhi those heights those scaled by ancient India are among the greatest in the world. If you looked at the ideas created by Indians who were last few millennia were the greatest source of creative ideas in the world. I will attempt to show this in some of my other slides.

w A young workforce till the year 2050

· Consuming and producing populace

Why is the demographics working in our favour. Most of you aware that population in the west and Japan are aging and this is certain negative consequences. On the one hand as people age they are no longer productive as far economy is concerned, they become consumers. Consumers of expensive medical care, as well as other resources. Today lets say in US, (I am making these numbers hypothetical) two workers are supporting three old people. Over time because of demographic movement one worker supporting three old people. That’s makes much more difficult for them to grow. This is already seen in many parts in Japan. Part of reason they are struck up for so many years is because their population is aged and they do not want immigration. I read somewhere today that 35% of population of India is below 15. And all these people are going to be in work force. They will be producing and they will be consuming. This is what made a lot of multinational companies sit back and take a fresh look at India, because these people even today with boom in BPO and IT, we find a lots more people are consuming lot more things like telephony, restaurant foods etc.

w BRIC leadership is ours to lose

· Institutions, education, stability, openness

So this is an important piece of puzzle which the BRIC report really focuses on. They say that if India is able to keep its institutions from decaying, if India is able to improve its education, make education more wide spread, if there is political and, economic stability and there is openness through foreign direct investment and trade. If these things are in place we will be leader in growth over the next 50 years and that also goes back to the demographics. They say that China even though is ahead of us in terms of growth rate (at least if believed on the official statistics) they will soon start hit by the demographic time bomb, meaning that they will be moving down the path the Japan and America moving down much sooner than we will. So their growth start diminishing, then as early as year 2005 the BRIC report predicts that India’s GDP growth will exceed that of China. There after it will never go below that of China. The population which we have been told is a burden is infact turning out to be an asset in some ways. It doesn’t mean that we should be going out there and breeding like mad, its not necessarily a unmixed present.

w Local entrepreneurship vs. FDI led growth

· India has the first, and the second is now coming in

The reason why MIT and Harvard people mention that India may actually catch up and overtake China was from a different perspective. They said China’s growth, impressive as has been, is entirely due to foreign direct investment. Effectively they throw a lot of capital at the economy and you know almost naturally that is left to grow. Infact they have used up an enormous amount of capital for their growth. India has used far as less capital and grown comparably, even though little less. So India is more efficient with its use of funds. Further more the thing that is totally lacking in China, partly because of political culture is the idea of local entrepreneurship. All the growth that have come from foreign companies giving with low level factory jobs and low cost production, where as in India you all familiar with the stories of Infosys, Wipro and clutch of companies like Biocom and Sundaram fastners and what not. A whole of generation of entrepreneurs has come up, and even though a few years ago many were complaining and wondering if they could compete fairly against the rest of the world, it’s turned out that many have infact become globally competitive. So this entrepreneurship factor is major plus for India, as compared to China.

UNEXPECTED DEVELOPMENTS:

w The rise of Indian manufacturing

· Auto/ancillaries, pharma, steel, paints, tubes

I have been an India booster for a long time but I have given up on manufacturing. I thought India is a services country; we do not have any advantage in manufacturing. China is the country for manufacturing. Over the last 6 months to 1 year, I am absolutely delighted to see that Indian manufacturing is more than holding its own, in particular the auto/ancillaries. But ten years ago, classmate of mine named Papa Rao, (he was in Los angels, I was in San Francisco at that time) we sat down and did a fairly, not really scholarly paper but we did a paper where we said lets analyze about 20 different sectors in the economy and see which of these will likely become world leaders. We never thought of auto/ancillary. That was not in the picture at all. We did think of pharma (pharmaceuticals) and several other things but this is something which is came out of left field.

Pharmaceuticals you are aware of.

Steel: I believe Tata steel is the lowest cost producer in the world and Ispat is one of the world’s largest producer of steel.

o Essel Propak, Moser Baer as world leaders

Paints, tubes, Essel Propak. I have never heard of this company until I read an article by Arun Shourie. This is number one producer of laminated tubes, tubes which are used to squeeze toothpaste out of it.

o Hyundai, Suzuki, Ford to source small cars from India

Completely astonishing is that Hyundai, Suzuki, Ford are planning to make India the sole source for their small cars. Ten years ago you wouldn’t have believed that because all we have is ambassadors and marutis.

o Cipla, Ranbaxy with AIDS drug cocktail

I really take hat of these pharmaceutical guys, they terrorized the world drugs and pharmaceuticals cartel. Because pharmaceutical companies were saying that its going to cost some $2000 a year to treat a person who has Aids. But Cipla came in and said that it will do it for $300 a year and so these guys forced to reduce their prices.

w Large research projects coming to fruition

· Param supercomputer, LCA/Kaveri, cryogenic engine

We have this tendency to put down some of the work we are doing in the aeronautics area, the light combat aircraft and the Kaveri engine and so forth. It is unfair because nobody in their first run produces a perfect aviation engine in their first run. It is a very complicated engine, and the fact we are making a lot of progress here is extremely positive. The Param Supercomputer, you are aware of, cryogenic engines… and notice that all of these have been indigenous developments in the era of sanctions and so forth. In many ways sanctions have actually helped in us becoming more competitive in some of these high tech fields.

w Novel areas for business process outsourcing

· R&D, medical services, design services

Business process outsourcing, this is possibly moving upscale from call centres and low end technical support to R&D.

I think medical sources is going to be a major area where lots of patients are going to come to India from all over the world to make their medical services done cheaply , efficiently.

And well, design is going to be done as well. I have read somewhere in the last two days the chip companies Toshiba and Hitachi are looking to setup small labs in India, because they want to use Indian chip design talent to come up rapid design.

w Infrastructure growth: GQ, 7% teledensity, Delhi Metro

Infrastructural growth, you are all aware of. The Golden Quadrilateral, now the Delhi Metro and they are planning to have Bangalore Metro.

This 7% teledensity is a remarkable number because what it means is (if I am not mistaken) 7% of the common house hold in India has an access of telephony of some kind. That is an astonishing number because 10 years ago it was 0.2%. Whoever is working on that telephone reform has done a superlated job. Today India is a fastest going cell phone market in the world every month we are adding 2 million customers. Earlier China used to be seen as the big boom area for cellular telephony, but India is now seen as atleast equally good.

w The humbling of the “Chinese challenge”: quality as key

· Indian firms fought back : eg., in TVs, tires, auto parts, bicycles

That comes to, what I call, the humbling of the Chinese challenge. Two years ago every manufacturer in India was running around terrified that “Chinese will come in with their cheap products, and take away the market share from them.” But this hasn’t happened because consumer realized that Chinese product in general were of low quality. Does any body remember a company called Conca. Conca said that they are going take about 20% of the Indian Market. They sold about 200 units and exited the market, because their quality was very poor. Chinese have not been able to make an impact on our market, because our manufacturers have fought back. So that’s about manufacturing. It’s a very positive story.

THE EMPIRE OF INTELLECT:

Let me go to what I have mentioned in a minute ago as the empire of the intellect.

w India’s history of excellence in abstract thought:

I think this is a story that it is not-at-all well known that India is the greatest centre of the abstract thought of the world, and that we have invented so many Ideas.

· Panini’s grammar (500 BCE)

How many people here know what a context free grammar means? Very few people! Panini invented context free grammar 2500 years ago (BCE means before the common or the Christian era). Panini’s achievement was remarkable, if we compare this with what Einstein set out to do. Albert Einstein is considered as a greatest genius who ever lived, because he attempted to create a grand unified theory of physics, which he partially succeeded. I am not a physicist so I believe he was able to unify the gravitation theory as well as the strong interaction etc. But he was not completely successful.

What Panini attempted to do was extremely audacious. He said language which is infinite (because you can express anything in language so it is infinite) can be expressed in a finite number of words.” It was an audacious concept and no one behold, but he went ahead and did it. Panini in 4000 rules completely describes Sanskrit. What he did there was to create an language that is completely unambiguous. Those who are in computer science engineering would understand this or would have already known this. But in 1950’s when computers were first introduced, people had a major dilemma, because all natural human languages are ambiguous. A statement in a normal human language may have more than one meaning depending on the context. So they are context sensitive languages. This doesn’t mean any sense to the computer. Computer cannot deal with ambiguity. So they invented the concept of, or they thought that they have invented the concept of context free grammar. Then somebody pointed out that Panini had already done this 2500 years ago. This is a remarkable achievement. Infact it is possible to make the claim that this is the single greatest achievement of a human mind in history: The ability to describe in 4000 rules, the infinity of the language.

Let me give you an example of context sensitive language. Let me give you two sentences. The first sentence “fruit flies like an apple”. This is perfectly correct English sentence. Now the second sentence “Time flies like an arrow”. But if you give these to a computer it will confuse hell out of it. Because it is syntactically correct and semantically incorrect. The point is that you cannot write such a sentence in Paninian grammar because of the way it is constructed.

· Aryabhata’s astronomy (499 CE)

This is an astonishing insight 2500 years ago. He said that the earth was a sphere and it rotates on its axis. He calculated the circumference of the earth. He calculated the value of Π up to six decimal places, and apologetically said that it is an approximate value and his six decimal places were quite correct. He came up with a table of signs, quite accurate… so on and so forth. So great work by Aryabhatta.

· Kerala school of math: infinite series and calculus

There is a Kerala school of astronomy and mathematics which is not well known. There are a couple of people like Parmeshwara, Madhava etc. They in effect invented calculus. They came up with the ideas of calculus roughly around 1400 to 1500 (years ago). It is now the conjecture that perhaps that knowledge that was taken back to Europe by Christian missionaries who are going back and forth. That may have given Leienzb and Newton the ideas of calculus.

· Sayana and the speed of light (1400 CE)

Sayana was one of the court of Vijayanagar Kings. I think it was Krishna Devaraya. In 1400 CE he came up with a number for speed of light, which was astonishing close to the actual number. The speed of light in miles is 186,000 miles per second and Sayana’s number was 186,232 miles per second. Nobody quiet knows how Sayana arrived at this. But it is a remarkable fact.

· Kanada and atomic theory (600 BCE)

Kanada came up with atomic theory very long time ago, 600 B.C.

· Brahmagupta or Bhaskara II (?) and the zero

The unknown person who invented zero. It is not clear who, but everybody admits that it is one of the greatest inventions of the human mind.

· The greatest universities: Nalanda, Taxila

w More recently, original thinkers

· S Ramanujan, JC Bose, S Chandrasekhar, CV Raman

We had some of the greatest universities in the world and recently we had some extraordinary thinkers like Srinivasa Ramanujan etc.

The point here is that Indian thought has been abstract, powerfully abstract in terms of basic R&D kind of work. These Ideas were not meant necessarily for immediate use. This is the big difference between Indian thought and Chinese thought. Indians have always dealt with abstract thought. The Chinese always did things that were concrete. They invented paper, gunpowder, compass; all very useful things. This shows the difference between Indian mind and the Chinese mind. We like abstraction, they like concrete things, and the world is moving towards abstractions. This is the one of the reason why we were able to do well in computer science. Computer science is entirely an abstract concept. This is reason one of the reason where I think we have sustainable competitive advantage over Chinese.

SCIENCE/TECHNOLOGY IN PRACTICE:

w India accounted for 25% of the world’s manufacture as late as 1750

I was astonished when I came upon this statistics. Even as late as 1750, after about 700 years of Islamic rule and lots of warfare India still contributed about 25% of the world’s production, manufacturing. As a note of comparison: today the US which is so dominant contributes only around 21% of world’s manufacturing. See how much of world’s manufacturing India dominated then. China incidentally had 33% of the world’s production at that time. This is in proportion to their population.

· Thanjavur delta and Brahmaputra delta were two of the world’s four greatest centres of industry

There were four great centres of industry in the world. One was the Thanjavur Delta, the other was Brahmaputra delta and other two were in China. These four contributed to about 60% of the world’s manufacturing. This was a remarkable number. This also explains to some extent, why when the British came to India, they came to Chennai, and Calcutta. Because those were the places where manufacturing was happening. They want to dominate the trade and eventually they want to destroy manufacture to takeover the trade.

· The only source of diamonds in the world

We were the only source of diamonds in the world till in 1890’s when the diamonds were discovered in South Africa and Australia.

· Specialty metals: “damascene”, Iron Pillar; textiles

We had a competency specialty metals. Europeans called this particular steel as damascene, because they thought it came from Damascus, Syria. It was steel used by Arabs, the people who were fighting against crusaders. This is a wonderful steel used by Salauddin etc.; but it actually called woods, that’s a high carbon steel, which came from India.

You all know about the Iron pillar that is not rusted and no body yet knows enough metallurgy to figure out how to replicate that.

Textiles: we were among the greatest in the world.

· Specialty services: medicine, surgery

Susruta, Charaka a lot of the medical and the anatomical work they did, plastic surgery if I am not mistaken was invented by Susruta. He did plastic surgery for the people whose noses were cut off for some crimes.

o Ayurveda, kalari payat: root of East Asian martial arts/medicine

Incidentally ayurveda and kalari payat were taken by a Buddhist monk called Bodhidharma from Kerala. In roughly 400CE, he went to China and from there he went to Japan where he formed the Zen school of Buddhism and he still revered in Japan as Daruma, the preceptor of Zen school. He took kalari payet and the science of pressure coins which ended up as the source of pikando, judo and all those marshal arts, as well as acupuncture and acupressure.

· A school in every village!

An astonishing fact is that before the British came there really was a school in every village. It was not bound by caste, meaning it’s is not just for the Brahmins and the Kshatriyas, the children from all castes were able to go to the school. So we had an indigenous system of education system which the British systematically destroyed. There is a wonderful work by a gentleman named Dharampal, called “The beautiful tree”. He has gone through original British sources. When they first came here they took a lot of notes about what they saw in India. Based on that Dharampal has done a lot of research on the education system, which was ended by the British.

· The average Indian agricultural or industrial worker was much better off than his equivalent in England

Another astonishing fact: Before 1750 (before the British came to India, the battle of Plassy which they won and enabled them to take over the riches of Bengal), the industrial and agricultural worker in England was quite impoverished. The only industry that they had there was tin smelting, it was a very poor country. It is after the money from Bengal, the loot they got from Bengal to England, they were able to start industrial revolution. I claim and I have some support from well known economic historians that it is very likely that it was the loot from Bengal which acted as a venture capital for industrial revolution. Meaning it was a lot of money chasing ideas and naturally ideas came out and became successful. The dates are quite intriguing because 1757 battle of Plassy, roughly 1764-the spinning geni, 1772-steam engine; so money comes in and innovation happens.

What I want to point with those two slides is that we had a tradition of innovation in ideas and we also have a strong tradition of Industrial and economic growth. So this is what enabled us to be the richest country in the world throughout the recorded history. This is the reason why all the barbarians came to India. I don’t see America invading Burkinafashow for e.g. they invaded Iraq. Why? Because Iraq has oil, Burkinafashow doesn’t have any oil. Similarly Barbarians didn’t come to India because it is a poor country; they came because it was a rich country. The riches came from both the ideas as well as well the manufacturing.

CROSS SECTORAL GROWTH:

w Agriculture:

Over the last couple of years we have seen growth in all the sectors of the economy. Agriculture, which people think of as an albatross or as a handicap is actually not so. Infact in my opinion it has been severely under invested and we ought to pay more attention to it.

· 2nd largest producer of fruits and vegetables in the world

We are the second largest producer of fruits and vegetables in the world. In fact in one of those, we are number one. Unfortunately much it gets spoiled because we don’t package it, we don’t refrigerate it, we don’t process it and we don’t make it value added to it. These are the things need to do. For e.g. instead of selling tomatoes, we should sell ketchup; because we make more money out of it. This is value-added processing.

· Fertile, arable land, needs water management

We have a great advantage in agriculture because we have some of the best land in the world. We do not have water where we need it. I have read some where that 57% of the India’s land is arable land i.e., if we water it, we can even grow crops. The corresponding number for China is 13 %. So we are much richer than the US (I do not know the numbers for US but it is small because most of their area was semi-arid and marginal).

· Repository of genetic variation and traditional medicines

We are also lucky enough to be the originator of the number of major crops. For e.g. rice, we have many genetic variations (some of which was stolen by multinationals). Similarly the traditional medicine, based on herbs is of tremendous value.

· Lacking in packaging, refrigeration, value addition

So agriculture and related things, even though it is 25% of the Indian economy right now, I think the value added agriculture will be helpful. For example people in Kerala, when their tea and coffer plantations were sort of depressed, they started producing vanilla and vanilla is extremely lucrative. It is something like Rs3500 per kilo. So with our good land and water, we should be able to do good agriculture than we have done in the past. Overtime I think we will be America’s biggest competetion in food production

w Services:

· The big story: too well known to bear repeating

· The Internet, a disruptive technology, has changed the rules

I don’t want to go about it because everybody knows about our competency in services. What happened is also quite interesting. For long time the west created a non tariff barriers against us, by saying that your people cannot move to our countries but you should allow our capital to move in your countries; that’s what globalization means. Therefore they prevented our competent people from providing services in the west. Because of the internet (and that’s what the disrupted technologies do, they change the equation), now it is no longer important for the physical movement of the people to take place, all you need is physical movement of packets of data. This is something which nobody foresaw. Now the non-tariff barrier that the west has created before, and is creating even as we speak American senate resolution and so forth. There also I think, in the long run we are stupid and counter productive; because if the Americans don’t want to use our services other people will use it and infact the American companies will suffer from that.

w Manufacturing:

· Coming on strong, cutting costs, improving processes, building up supply chains, benchmarking against the world’s best

Manufacturing is a big success story. People have cut costs and they have come up with high quality. We are no longer back water types. Our industries are now getting best practices. They are among the best in the world as well.

SEGMENTS: BCG MATRIX:

w Stars:

· Pharma, biotech, auto, telecom, cinema, IT, ITES/BPO

Those who are MBA types may know what this BCG matrix is. It divides whatever we are considering into 3 or 4 sectors or segments, says stars These are the areas where tremendous growth going to be, where we should concentrate, put more effort. This is called the competitive advantage. This is my idea of what those sectors are. Pharma, Biotechnology, automobile components, telecommunication, Cinema/Entertainment and other areas are a big target for us. We are the only country in the world who can stand to American culture invasion. Meaning, not only in our own country but in a variety of other countries as well. I have gone to places like Bali; people come to me say Amitabh Bacchan (not calling me Amitabh, but saying they know Amitabh). Indian movies are popular in Russia, Afghanistan, and Africa. So these are the areas where we need to concentrate.

w Cash cows:

· Leather, gems/jewelry, textiles, steel, 2 wheelers

Cash cows are areas where we are already doing very well. The idea is: may be not necessary invest a lot in them but you can enjoy the fruits what they are bringing to you. Leather is a strong area for us. The gems/jewellery, textiles… these are the areas where I think we are doing very well. I believe Hero Honda is the number one manufacturer of two wheelers in the world.

w Up and Coming:

· Video/advertising, space, ayurveda, tourism, basic research, medical/financial/education services, design

There are number of sectors which are coming up e.g. video, advertising. We have terrific competency here. At Con, Indians are winning the advertising awards regularly now. Space, with the new cryogenic engine we are able to enter into the launch business successfully. Ayurveda, really hot. If we can turn ayurveda into wellness tourism, which Kerala has done quite successfully…

(End of side A)

THE SOCIALIST ALBATROSS:

w Nehruvian Rate of Growth: < 4.5% a year

· Goldman Sachs model predicted 7.5%/yr 1960-2000

· Predicted GDP now $1.5 trillion, $1400/per head

· Actual GDP now $460 billion, $450/per head

· Nehruvian Penalty of 3%/yr

This is a some what controversial slide. We have suffered from this Nehruvian albatross. The Goldman Sachs model is where I got a bunch of these numbers. I have been thinking from long time about how do I quantify the ill effects of Nehruvism, and I was able to get that from Goldman Sachs report. If you have looked at India in 1960, looking at its endowment then, India should have been growing at 7.5% every year. They did this analysis for a number of other countries as well. He said South Korea should be growing at a rate 6.5%, but actually it grew at around 7.8%. So they have done very well. India was one of the few countries which did much worse. Instead of 7.5%, it grew at 4.5% average. What that has lead to is, of instead of a 1.5 trillion GDP and $1400 per head GDP, we had 460 billion GDP and $450 per head GDP. That basically means we are severely under performing. This 3% a year adds upto a significant falling behind over a period as long as 50-60 years. We will never make up the lost years. They are gone, we will be always be handicapped by them. But hopefully, if we are able to keep up the present momentum, we can do reasonably well and move forward.

w Crony capitalism and State Owned Enterprises

· Substandard goods/services at high prices

w Expectations set about being mediocre also-ran

Some of the leftovers of Nehruvian system are crony capitalism, and state owned enterprises, which sort of set expectations. That Indian ‘Chalta hai’ good enough, we are like this only attitude. Right! We live with sub-standard products. This is not true any more. For example people now only ask for the latest cell phones. They want the best in the world these days. So that happened, you know, mindset changes happening after 50 years of Socialism.

w Lack of investment in infrastructure

We did not invest in infrastructure; we did not invest in agriculture.

w Bloated bureaucracy, license raj, rent-seeking

And what is still worse is we had this whole license raj.

w Result? 200 million continue to be in absolute poverty

I think the net pathetic result is 200 million people could have escaped poverty are still in poverty. This I think is an economic crime against humanity.

SOURCES OF ADVANTAGE:

w The Michael Porter thesis on leadership:

Moving to Michael Porter’s theory, he talks about advantage. He says, if you have a company, you have three ways in which you can be a leader.

· Low cost production

One, you should be able to sustain ably have low cost of production.

· Innovation/differentiation/customer intimacy

Second you should be able to differentiate and innovate consistently. For example Bell labs; I used to work for Bell Labs. They were able to consistently differentiate and innovate. Therefore they were able to be leaders.

· Niche focus

If you cannot do either of these (you better not bite off more than what you can chew), you can look at not every thing, but few areas.

w How does India stack up?

· Low labour cost (but not forever)

· Must focus on high value intellectual property

· Focus not on everything but a few areas

India does have an advantage in low cost labour, but I think that is not necessarily sustainable. We should also concentrate on high level intellectual property generation.

SOURCES OF NATIONAL ADVANTAGE:

w The Porter Diamond:

There is another part to this model. They call it ‘The Porter Diamond’, or competitive advantage levels of nations. So he says there are 4 – 5 factors.

Ø Competition in the economy

o India is shedding its oligopolies/public sector firms

One is: if there is significant competition in the economy, if there are lots of companies fighting with each other. This is what happened in Japan. Intense competition has enabled Japanese companies to be the best in the world, in practically every area they are in. India is beginning to have this. In the past we had only Indian Airlines, so it could afford to as shruddy as it could be. But when other Airlines came in, they really started raising the bar. So Indian Airlines has also begun to improve as well.

Ø Existence of clusters of similar firms/suppliers

o Bangalore, Tirupur, Ludhiana, Chennai, Gurgaon

Clusters: This is an interesting theory. This is what has made Silicon Valley so successful. For example in India, we have these in High-tech in Bangalore, Tirupur for textiles, Ludhuiana for sports, Chennai for automobiles, Gurgaon for call centers. So these are sort of self sustaining. Once you have critical mass, things keep on going.

Ø Factor conditions for areas of focus

o Skilled technical manpower, land/power/irrigation

They are saying, factory conditions are things that, for those we are looking at. For example we are looking at high-tech; we must have skilled man power. If we are looking at agriculture, we need to have good land and good irrigation and should have consistent power. We are not 100% at these, but we are doing reasonably well at the factory conditions.

Ø Demand conditions

o Sophisticated, choosy and cost conscious consumers

Demand conditions: are the customers tough, are they choosy? I think we are getting there. We didn’t use to be. We used to incompliantly travel around in ambassador etc; but now we are getting facility to be choosy.

Ø Other factors: government role, chance, culture

o Govt is improving; culture is a strength and a weakness

The government’s role is also fairly intrusting. We had a negative culture, but I think government is beginning to play a positive role. And as I raised, the culture we have had of innovation is really a strength, but its also an weakness in terms of being somewhat conservative.

WHAT NEEDS TO BE DONE?

w Marketing Brand India

As a marketer by profession, I am cognizant of the value of the branding. Brand IIT for example; this is a terrific brand, and it boils down to actual money. So we need to establish a brand. The top brands in the world like Mercedes etc, they create much more value than the product itself justifies. This is because the way people experience it. I have read recently (I don’t exactly remember who) that Indian software engineers have a brand that is similar to made in Japan brand for electronics. I thought that it was a great statement. That means it can command a greater premium.

w Using a spearhead to enter the market

Ø Case study: Japanese in US

o Entry with lightweight, fuel efficient bikes in Los Angeles

o Upgraded to reliable cars, then moved up the scale

Japanese do this very effectively. They entered the American market initially with these little bikes, and the Americans laughed at them. Because they were all ran around with these huge, Hollywood Davidson kind big bikes. But the Japanese managed to enter at the right time, when the oil shock hit in 1973. Their small motor bikes and cars suddenly became popular. Later they moved up in scale and now they have big cars as well.

Ø IT services is India’s spearhead into IPR generation

o Upgrade to product development, lateral to ‘virtual workers’

Similarly, using one IT services as spearhead, we need to get more and more and more into our core competency, which is IPR generation, and product development is an area. For example, I am doing that. I am doing pure product development in India. It’s not trivial, it is tough to do it here, and marketing is very difficult as well, but we need to do that.

w Marketing in India as well: “India Shining”

We also need to make Indian feel that things are looking good. So, I am delighted at the “India Shining” ads. There is also another series of ads that I saw sometime ago: the ones by ONGC oil company. I thought they were terrific. I saw a couple of them: a lady doctor somewhere, and this martyred soldier. This stuff brings tears to your eyes, makes you feel good to be an Indian. So we need to feel good.

w Infrastructure improvement

Infrastructure is improving. It should improve some more.

w Legal and related framework

There are some problems with the legal structures. Cases go forever; that needs to improve.

w Reduce paranoia about FDI: use it to gain MNC support

We shouldn’t be afraid of foreign direct investment. Multinationals are not seven feet tall (I mean metaphysically speaking). They are just people like us, and we can work with them, defeat them etc. This is something we never thought we could do. We protected ourselves behind the protectionist wall, because we were afraid to face the world. But when we have opened up, we realize that we are as good as them, or even better.

CASE STUDIES: SUCCESS STORIES:

Here is a bunch of case studies. I was talking to a friend of mine in IIM Bangalore about if we can actually write down case studies of one or more of them.

w Kerala: unique backwaters, ayurveda, packaging

Perhaps this is one of my favourite examples. (In fact this may get written fairly soon). The tourism director there, named Amitab Khan was instrumental in packaging Kerala. Rajasthan, Goa, and Delhi etc are the only places which have been under the tourist map in India before. Goa has its own particular competencies, advantages etc. When it came to look at how Kerala would present itself, they said: look we do not have a night life, we do not have cabers etc. If you want that, please don’t come here. But if you want ayurveda, if you want back waters, you come here. So they have established a tremendous brand. God’s own country etc etc. This is a wonderful story of public sector innovation. This bureaucrat an IAS guy did all this.

w Sundaram Fasteners: quality, reliability

You are all familiar with this quality story.

w Bharat Forge: quality, globalized processes

One of the biggest forges in the world. They make all kinds of components for automobile companies.

w I Flex: Entry via Citibank, customer intimacy

It is probably the biggest banking software company in the world.

w Surat’s diamond merchants: Supply chain, design

Surat has done extremely well,

w Ispat: turnaround specialists, global operations

Ispat, great stuff

w Arvind Eye Clinic/Jaipur Foot: dedication, local ingenuity

I want to spend a minute on this. It turns out that Arvind eye clinic can do a cataract operation for just $12. the same thing costs $1500 in US. So you could take a patient from the US, send him to India, give him a little vacation, and still it coasts less. (Loud applause) I am not kidding, it is literally true. It is not original idea on my part, people are already doing it now-Medical Tourism.

Similarly Jaipur foot; it costs (if I am not mistaken) $30, where as an equivalent American foot coasts $9000, and Jaipur foot is better than that on a number of criteria. This is what I am talking about in terms of local ingenuity, local competence.

w Tatas: company culture, branding, persistence

w Ranbaxy: foresight, flexibility, global perspective

w Need to build arsenal of best practices from these cases

The rest I won’t go in great detail. But what I am saying is (I was also speaking to Prof. L S Ganesh about this): why are we still using Harvard business school cases. Primary because they are available. But there are equivalent cases in India also. We can use them (I am happy to know that we are already using some). Because I think in many ways, we should look at our own best practises, instead of looking at what some white guy did, in some different situation.

COMPARATIVE ADVANTAGE V CHINA:

w India’s pluses:

If you look at the big picture, we do have a number of pluses, with all our problems.

· Stable banking system, Non performing assets < 20%

We complain about our banking system: its lousy etc. However, in our banking system, the non-performing assets are less than 10%. Some of the better banks like ICICI, HDFC, HSBC it is less than 5%. Non-performing means these are dubious loans that may not get paid. If we look at China, it is 60-70%. Their banking system is completely corrupted and hollow. Recently you might have heard how the Chinese invested $45 billion in their banking sector to improve it. This is atop of $200 billion they have invested over the last few years to bail out these essentially bankrupt banks. So this is a big deal for us. In an economy to have banks that are lousy is a major negative.

· Intellectual property protection better

Our intellectual property protection is far better than Chinese. In China the famous case of (I forgot who) a small time manufacturer of shoes. So he setup a factory with a Chinese partner and so forth. Things were going fine. Then one day he discovered that the Chinese patner was selling his shoes, under his own brand name, and he was not getting the revenues. So basically that guy just stole his intellectual property. This happens all the time in China. You wont have any legal recourse. This is a big issue for many companies trying to work in China.

· MNCs actually make money (> cost of capital)

If you look at the total returns, India gives much better returns. In China people struggle to break even. Mitsubishi has been in China for 20 years, and they never made any money there. Because any amount of money that’s made is swindled by their local partners. So it’s a tough market.

· Better land, irrigation

· More efficient use of capital

As I said before we use our capital efficiently.

w India’s minuses:

· No draconian labour laws or ruthless will

Well obviously we have some minuses. In the short term, the fact that we cannot control our labour unions is a problem. May be we have democracy handicap, but in the long run these are not handicap. If we get people on their own free will to understand that we need to work harder, we need to make some concessions, make some sacrifices etc that will have some effect. China today is able to do that because if you strike, they will just shoot you. So that quietly stops the strike.

· Dramatically poorer infrastructure; SEZs/HK/Shanghai

Their infrastructure is much better, although it’s a little deceptive. Shanghai looks beautiful, it has no slums, Why? Because poor people are not allowed to go to Shanghai. They stop you at the entrance of Shanghai, they stop you at the entrance to Shanghai, and send you back. If you did this for Bombay, you will not have Dharavi there either. So its an artificial, sort of showpiece.

· Poor marketing and perception of inherent strengths

We are poor at marketing ourselves, which saddens me as a marketing person. It’s very interesting that a lot of Indians who have gone to the US and gone to business schools are marketing people, and how come they did it so well. How come we are not good at marketing ourselves so far?

· Has allowed itself to be “contained” by wily China

China has consistently contained India by creating a bunch of alliances with Pakistan, Burma, Sri Lanka- all these other countries around us.

w Read: “The Coming Collapse of China” by Gordon Chang

I am a big time China basher. Those of you who read my columns are aware of that. But if you want somebody who is even more China basher, please read that book. Its great stuff. He is an American who lived in China for more than 20 years, and his words are music to my ears.

COMPARATIVE ADVANTAGE Vs US:

w India’s pluses:

o Civilizational inheritance and persistence of culture

o Demographic dividend; technically skilled labour

o Significantly lower costs

o Sunshine (perfect for solar energy) and water

As far as US is concerned, I think the fact that we have a strong civilizational inheritance, and this Indian culture persists over time. I have met people who left India, whose ancestors left India 100-200 years ago; people from Fiji, people from Trinidad etc. They are still to a significant extent Indian in their thinking. That is a good thing. I used to think that perhaps it’s a bad thing as they were not open to new ideas. That is not true. Its that there is something good in our civilization that they are willing to struggle to keep it. So that is a good thing.

Solar energy: this is something I wish some of you guys look at. We are the world’s kings of solar energy. We have got plenty of heat, especially Madras. If some you can invent some solar pane, which is cheap, (if you can make a silicon chip which can convert solar energy to electricity) we will be rich, energy richest country in the world. The white guys do not have much interest doing it, because they don’t have that much solar energy. So it’s up to us to do this. I went to Auroville some time ago, because they have got lot of these solar panels. They say the cost is prohibitive. They wanted to be self contained, they wanted to be completely off the Tamil-Nadu grid, but they said “we can’t do it because it costs so much to generate solar electricity today”. But hopefully that would improve.

Coming to water, our water is not evenly spread up. I think the prosperity of the Thanjavur delta was strighty due to cauvery flow, and the cauvery water is no longer enough to meet Karnataka’s and Tamil-Nadu’s needs. We got to come up with better ways of harvesting water. You might have heard of the Tarun Bharat Sangh and what they have done in Rajasthan-rejuvenating Rivers etc. If we manage that, it will be pretty good; because America is not a water rich country either, they have gone through some droughts as well.

w India’s minuses:

o Inferior higher education and fundamental research

o Obstructive labour unions, leftists, media, opposition

I think our education and research has suffered. We need to speed a lot more time on those things.

o Two hostile nuclear armed neighbours

Obviously our neighbourhood is pretty bad.

o Institutionalized inferiority complex

We tend to think of ourselves as inferior, I don’t know why. May be it has been drummed into us… Actually I do know why- it’s because of our history. If you are a student who goes through school, the entire curriculum in history constantly talks about defeat. Alexander came and defeated us, Babar came and defeated us, the British came and defeated us… So its like “we are meant to be defeated”. This goes into our heads. We actually should be talking about Raja Raja Chola, who went to Indonesia and beat up the Samaritans. That’s what we should be talking about.

We have been convinced from our childhood that we are inferior. This is true at least with our generation, may be you guys think so; I hope, because we are not inferior. I didn’t do that well in IIT. My grades we around eight point, which at that time was meant a distinction or something, but I was not a topper. But when I went to America, I found it pretty difficult not to get an ‘A’ in any class that I took. I had to really work hard to get a ‘B’. If I didn’t work hard, I will get an ‘A’. We are not inferior, at least as good as those guys, and generally better. One of the things which these Americans are just stunned is our ability to do mental calculations. They are totally lost in their calculators. So you say 5% of this plus 7% of this, they think you are a genius.

w Read: “Why Johnny can’t add and Suresh Venktasubramaniam can” for an alarmist US view

You should google search for this article. A guy, fairly wild American fellow, he said he even looked at Bell labs website, and he was looking at the names of the people who were writing papers. It is very few who were white, American type names- John, Smith weren’t there. It was Indians, Chinese, and Japanese etc. This just shows that those (Indians, Chinese, Japanese) are superior, at least they are studying harder, and an average white American guy is not doing well. So we have some strength against the Americans there.

WHAT CAN GO WRONG?

Obviously there are a lot of things that can go wrong.

w Human factors:

· Education system not delivering the goods

Our education system- it’s not delivering the goods today, and we have a sort of past topics. I don’t know why in the long run we shouldn’t recreate the Nalandas and Takshasilas, and be the centre of education for the world. We have a tradition of that. But today we are not able to reach a lot of children. We teach them often useless stuff. I have seen children going to school bearing tons of books, go into one year, and goes out the other. So creativity is destroyed, and we are teaching a lot of useless facts. Our education is pretty bad.

· Health catastrophes like AIDS

AIDS may cause demographic catastrophes if we do not work out.

w External factors:

· War, terrorism and religious riots (and fear of)

There are always external factors- wars, terrorism and equally challenging is the fear by others that these things may happen.

· Continued “containment” of India by various rivals

Containment: that China has done so well.

· Unfair trade practices, eg. tariff and non tariff barriers

Tariff and non-tariff barriers, like for example the non-tariff barriers that’s being put against our BPL.

w Internal factors:

· Political instability, stagnation, economic reform getting derailed

Our internal factors: we can go back into a situation where there is instability. The economic reforms that have been painstakingly been built up can be reversed if the wrong kind of people are in power. The liberalization can go back into licence raj. I think it is unlikely that this will happen, because there seems to be a consensus among the people at large.

· Resource problems, esp. water and energy

Then, the water is a problem. I have a nightmarish scenario which is not unlikely or impossible- the Chinese are trying to divert the Brahmaputra from Tibet. They want to divert it northwards, and if they do that, North-India will essentially become a desert. This is an terrifying scenario. I don’t know what we will be able to do, if they do that. They control Tibet, and they can build a whole bunch of Dams and store the water.

· Secessionism and regional tensions

Then secessionism is another serious problem we have.

· Poor ‘selling’ of economic agenda to the populace

Unless we convince people that economic growth is in their best interests, its not going to be sustainable.

CONCLUSION:

w India has tremendous competitive strengths

· But we must first believe in ourselves

To conclude, we do have competitive strengths, but we have always in the last 50 years not much believed in ourselves. We are beginning to believe in ourselves.

w Historically, India was a civilizational leader

We are a civilizational leader, and that will actually help us move forward.

w Intellectual Property is India’s strength

IPR, as I have explained again and again is our sustainable, unfair competitive advantage.

w But a lot remains to be done to leverage it

But we need to take advantage of that, and a lot needs to be done.