It may not top the must-see list of many tourists. But to
appreciate Shanghai's ambitious view of its future, there is no better place
than the Urban Planning Exhibition Hall, a glass-and-metal structure across from
People's Square. The highlight is a scale model bigger than a basketball court
of the entire metropolis -- every skyscraper, house, lane, factory, dock, and
patch of green space -- in the year 2020.
There are white plastic showpiece towers designed by architects such as I.M. Pei
and Sir Norman Foster. There are immense new industrial parks for autos and
petrochemicals, along with new subway lines, airport runways, ribbons of
expressway, and an elaborate riverfront development, site of the 2010 World
Expo. Nine futuristic planned communities for 800,000 residents each, with
generous parks, retail districts, man-made lakes, and nearby college campuses,
rise in the suburbs. The message is clear. Shanghai already is looking well past
its industrial age to its expected emergence as a global mecca of knowledge
workers. "In an information economy, it is very important to have urban space
with a better natural and social environment," explains Architectural Society of
Shanghai President Zheng Shiling, a key city adviser.
It is easy to dismiss such dreams as bubble-economy hubris -- until you take
into account the audacious goals Shanghai already has achieved. Since 1990, when
the city still seemed caught in a socialist time warp, Shanghai has erected
enough high-rises to fill Manhattan. The once-rundown Pudong district boasts a
space-age skyline, some of the world's biggest industrial zones, dozens of
research centers, and a bullet train. This is the story of China, where an
extraordinary ability to mobilize workers and capital has tripled per capita
income in a generation, and has eased 300 million out of poverty. Leaders now
are frenetically laying the groundwork for decades of new growth.
Now hop a plane to India. It is hard to tell this is the world's other emerging
superpower. Jolting sights of extreme poverty abound even in the business
capitals. A lack of subways and a dearth of expressways result in nightmarish
But visit the office towers and research and development centers sprouting
everywhere, and you see the miracle. Here, Indians are playing invaluable roles
in the global innovation chain. Motorola, (MOT
) Hewlett-Packard (HPQ ), Cisco
Systems (CSCO ), and other
tech giants now rely on their Indian teams to devise software platforms and
dazzling multimedia features for next-generation devices. Google (GOOG
) principal scientist Krishna Bharat is setting up a Bangalore lab complete with
colorful furniture, exercise balls, and a Yamaha organ -- like Google's Mountain
View (Calif.) headquarters -- to work on core search-engine technology. Indian
engineering houses use 3-D computer simulations to tweak designs of everything
from car engines and forklifts to aircraft wings for such clients as General
Motors Corp. (GM ) and Boeing Co
(BA ). Financial and
market-research experts at outfits like B2K, OfficeTiger, and Iris crunch the
latest disclosures of blue-chip companies for Wall Street. By 2010 such
outsourcing work is expected to quadruple, to $56 billion a year.
Even more exhilarating is the pace of innovation, as tech hubs like Bangalore
spawn companies producing their own chip designs, software, and pharmaceuticals.
"I find Bangalore to be one of the most exciting places in the world," says Dan
Scheinman, Cisco Systems Inc.'s senior vice-president for corporate development.
"It is Silicon Valley in 1999." Beyond Bangalore, Indian companies are showing a
flair for producing high-quality goods and services at ridiculously low prices,
from $50 air flights and crystal-clear 2 cents-a-minute cell-phone service to
$2,200 cars and cardiac operations by top surgeons at a fraction of U.S. costs.
Some analysts see the beginnings of hypercompetitive multinationals. "Once they
learn to sell at Indian prices with world quality, they can compete anywhere,"
predicts University of Michigan management guru C.K. Prahalad. Adds A. T.
Kearney high-tech consultant John Ciacchella: "I don't think U.S. companies
realize India is building next-generation service companies."
China and India. Rarely has the economic ascent of two still relatively poor
nations been watched with such a mixture of awe, opportunism, and trepidation.
The postwar era witnessed economic miracles in Japan and South Korea. But
neither was populous enough to power worldwide growth or change the game in a
complete spectrum of industries. China and India, by contrast, possess the
weight and dynamism to transform the 21st-century global economy. The closest
parallel to their emergence is the saga of 19th-century America, a huge
continental economy with a young, driven workforce that grabbed the lead in
agriculture, apparel, and the high technologies of the era, such as steam
engines, the telegraph, and electric lights.
But in a way, even America's rise falls short in comparison to what's happening
now. Never has the world seen the simultaneous, sustained takeoffs of two
nations that together account for one-third of the planet's population. For the
past two decades, China has been growing at an astounding 9.5% a year, and India
by 6%. Given their young populations, high savings, and the sheer amount of
catching up they still have to do, most economists figure China and India
possess the fundamentals to keep growing in the 7%-to-8% range for decades.
Barring cataclysm, within three decades India should have vaulted over Germany
as the world's third-biggest economy. By mid-century, China should have
overtaken the U.S. as No. 1. By then, China and India could account for half of
global output. Indeed, the troika of China, India, and the U.S. -- the only
industrialized nation with significant population growth -- by most projections
will dwarf every other economy.
What makes the two giants especially powerful is that they complement each
other's strengths. An accelerating trend is that technical and managerial skills
in both China and India are becoming more important than cheap assembly labor.
China will stay dominant in mass manufacturing, and is one of the few nations
building multibillion-dollar electronics and heavy industrial plants. India is a
rising power in software, design, services, and precision industry. This raises
a provocative question: What if the two nations merge into one giant "Chindia?"
Rival political and economic ambitions make that unlikely. But if their
industries truly collaborate, "they would take over the world tech industry,"
predicts Forrester Research Inc (FORR
). analyst Navi Radjou.
In a practical sense, the yin and yang of these immense workforces already are
converging. True, annual trade between the two economies is just $14 billion.
But thanks to the Internet and plunging telecom costs, multinationals are having
their goods built in China with software and circuitry designed in India. As
interactive design technology makes it easier to perfect virtual 3-D prototypes
of everything from telecom routers to turbine generators on PCs, the distance
between India's low-cost laboratories and China's low-cost factories shrinks by
the month. Managers in the vanguard of globalization's new wave say the impact
will be nothing less than explosive. "In a few years you'll see most companies
unleashing this massive productivity surge," predicts Infosys Technologies (INFY
) CEO Nandan M. Nilekani.
To globalization's skeptics, however, what's good for Corporate America
translates into layoffs and lower pay for workers. Little wonder the West is
suffering from future shock. Each new Chinese corporate takeover bid or
revelation of a major Indian outsourcing deal elicits howls of protest by U.S.
politicians. Washington think tanks are publishing thick white papers charting
China's rapid progress in microelectronics, nanotech, and aerospace -- and
painting dark scenarios about what it means for America's global leadership.
Such alarmism is understandable. But the U.S. and other established powers will
have to learn to make room for China and India. For in almost every dimension --
as consumer markets, investors, producers, and users of energy and commodities
-- they will be 21st-century heavyweights. The growing economic might will carry
into geopolitics as well. China and India are more assertively pressing their
interests in the Middle East and Africa, and China's military will likely
challenge U.S. dominance in the Pacific.
One implication is that the balance of power in many technologies will likely
move from West to East. An obvious reason is that China and India graduate a
combined half a million engineers and scientists a year, vs. 60,000 in the U.S.
In life sciences, projects the McKinsey Global Institute, the total number of
young researchers in both nations will rise by 35%, to 1.6 million by 2008. The
U.S. supply will drop by 11%, to 760,000. As most Western scientists will tell
you, China and India already are making important contributions in medicine and
materials that will help everyone. Because these nations can throw more brains
at technical problems at a fraction of the cost, their contributions to
innovation will grow.
American business isn't just shifting research work because Indian and Chinese
brains are young, cheap, and plentiful. In many cases, these engineers combine
skills -- mastery of the latest software tools, a knack for complex mathematical
algorithms, and fluency in new multimedia technologies -- that often surpass
those of their American counterparts. As Cisco's Scheinman puts it: "We came to
India for the costs, we stayed for the quality, and we're now investing for the
A rising consumer class also will drive innovation. This year, China's passenger
car market is expected to reach 3 million, No. 3 in the world. China already has
the world's biggest base of cell-phone subscribers -- 350 million -- and that is
expected to near 600 million by 2009. In two years, China should overtake the
U.S. in homes connected to broadband. Less noticed is that India's consumer
market is on the same explosive trajectory as China five years ago. Since 2000,
the number of cellular subscribers has rocketed from 5.6 million to 55 million.
What's more, Chinese and Indian consumers and companies now demand the latest
technologies and features. Studies show the attitudes and aspirations of today's
young Chinese and Indians resemble those of Americans a few decades ago. Surveys
of thousands of young adults in both nations by marketing firm Grey Global Group
found they are overwhelmingly optimistic about the future, believe success is in
their hands, and view products as status symbols. In China, it's fashionable for
the upwardly mobile to switch high-end cell phones every three months, says Josh
Li, managing director of Grey's Beijing office, because an old model suggests
"you are not getting ahead and updated." That means these nations will be huge
proving grounds for next-generation multimedia gizmos, networking equipment, and
wireless Web services, and will play a greater role in setting global standards.
In consumer electronics, "we will see China in a few years going from being a
follower to a leader in defining consumer-electronics trends," predicts Philips
Semiconductors (PHG ) Executive
Vice-President Leon Husson.
For all the huge advantages they now enjoy, India and China cannot assume their
role as new superpowers is assured. Today, China and India account for a mere 6%
of global gross domestic product -- half that of Japan. They must keep growing
rapidly just to provide jobs for tens of millions entering the workforce
annually, and to keep many millions more from crashing back into poverty. Both
nations must confront ecological degradation that's as obvious as the smog
shrouding Shanghai and Bombay, and face real risks of social strife, war, and
Increasingly, such problems will be the world's problems. Also, with wages
rising fast, especially in many skilled areas, the cheap labor edge won't last
forever. Both nations will go through many boom and harrowing bust cycles. And
neither country is yet producing companies like Samsung, Nokia (NOK
), or Toyota (TM ) that put it
all together, developing, making, and marketing world-beating products.
Both countries, however, have survived earlier crises and possess immense
untapped potential. In China, serious development only now is reaching the 800
million people in rural areas, where per capita annual income is just $354. In
areas outside major cities, wages are as little as 45 cents an hour. "This is
why China can have another 20 years of high-speed growth," contends Beijing
University economist Hai Wen.
Very impressive. But India's long-term potential may be even higher. 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 and higher fertility rates. By mid-century, India is
expected to have 1.6 billion people -- and 220 million more workers than China.
That could be a source for instability, but a great advantage for growth if the
government can provide education and opportunity for India's masses. New Delhi
just now is pushing to open its power, telecom, commercial real estate and
retail sectors to foreigners. These industries could lure big capital inflows.
"The pace of institutional changes and industries being liberalized is
phenomenal," says Chief Economist William T. Wilson of consultancy Keystone
Business Intelligence India. "I believe India has a better model than China, and
over time will surpass it in growth."
For its part, China has yet to prove it can go beyond forced-march
industrialization. China directs massive investment into public works and
factories, a wildly successful formula for rapid growth and job creation. But
considering its massive manufacturing output, China is surprisingly weak in
innovation. A full 57% of exports are from foreign-invested factories, and China
underachieves in software, even with 35 software colleges and plans to graduate
200,000 software engineers a year. It's not for lack of genius. Microsoft
Corp.'s (MSFT ) 180-engineer
R&D lab in Beijing, for example, is one of the world's most productive sources
of innovation in computer graphics and language simulation.
While China's big state-run R&D institutes are close to the cutting edge at the
theoretical level, they have yet to yield many commercial breakthroughs. "China
has a lot of capability," says Microsoft Chief Technology Officer Craig Mundie.
"But when you look under the covers, there is not a lot of collaboration with
industry." The lack of intellectual property protection, and Beijing's heavy
role in building up its own tech companies, make many other multinationals leery
of doing serious R&D in China.
China also is hugely wasteful. Its 9.5% growth rate in 2004 is less impressive
when you consider that $850 billion -- half of GDP -- was plowed into
already-glutted sectors like crude steel, vehicles, and office buildings. Its
factories burn fuel five times less efficiently than in the West, and more than
20% of bank loans are bad. Two-thirds of China's 1,300 listed companies don't
earn back their true cost of capital, estimates Beijing National Accounting
Institute President Chen Xiaoyue. "We build the roads and industrial parks, but
we sacrifice a lot," Chen says.
India, by contrast, has had to develop with scarcity. It gets scant foreign
investment, and has no room to waste fuel and materials like China. India also
has Western legal institutions, a modern stock market, and private banks and
corporations. As a result, it is far more capital-efficient. A BusinessWeek
analysis of Standard & Poor's (MHP
) Compustat data on 346 top listed companies in both nations shows Indian
corporations have achieved higher returns on equity and invested capital in the
past five years in industries from autos to food products. The average Indian
company posted a 16.7% return on capital in 2004, vs. 12.8% in China.
The burning question is whether India can replicate China's mass manufacturing
achievement. India's info-tech services industry, successful as it is, employs
fewer than 1 million people. But 200 million Indians subsist on $1 a day or
less. Export manufacturing is one of India's best hopes of generating millions
of new jobs.
India has sophisticated manufacturing knowhow. Tata Steel is among the world's
most-efficient producers. The country boasts several top precision auto parts
companies, such as Bharat Forge Ltd. The world's biggest supplier of chassis
parts to major auto makers, it employs 1,200 engineers at its heavily automated
Pune plant. India's forte is small-batch production of high-value goods
requiring lots of engineering, such as power generators for Cummins Inc. (CMI
) and core components for General Electric Co. (GE
) CAT scanners.
What holds India back are bureaucratic red tape, rigid labor laws, and its
inability to build infrastructure fast enough. There are hopeful signs. Nokia
Corp. is building a major campus to make cell phones in Madras, and South
Korea's Pohang Iron & Steel Co. plans a $12 billion complex by 2016 in Orissa
state. But it will take India many years to build the highways, power plants,
and airports needed to rival China in mass manufacturing. With Beijing now
pushing software and pledging intellectual property rights protection, some
Indians fret design work will shift to China to be closer to factories. "The
question is whether China can move from manufacturing to services faster than we
can solve our infrastructure bottlenecks," says President Aravind Melligeri of
Bangalore-based QuEST, whose 700 engineers design gas turbines, aircraft
engines, and medical gear for GE and other clients.
However the race plays out, Corporate America has little choice but to be
engaged -- heavily. Motorola illustrates the value of leveraging both nations to
lower costs and speed up development. Most of its hardware is assembled and
partly designed in China. Its R&D center in Bangalore devises about 40% of the
software in its new phones. The Bangalore team developed the multimedia software
and user interfaces in the hot Razr cell phone. Now, they are working on phones
that display and send live video, stream movies from the Web, or route incoming
calls to voicemail when you are shifting gears in a car. "This is a very, very
critical, state-of-the-art resource for Motorola," says Motorola South Asia
President Amit Sharma.
Companies like Motorola realize they must succeed in China and India at many
levels simultaneously to stay competitive. That requires strategies for winning
consumers, recruiting and managing R&D and professional talent, and skillfully
sourcing from factories. "Over the next few years, you will see a dramatic gap
opening between companies," predicts Jim Hemerling, who runs Boston Consulting
Group's Shanghai practice. "It will be between those who get it and are fully
mobilized in China and India, and those that are still pondering."
In the coming decades, China and India will disrupt workforces, industries,
companies, and markets in ways that we can barely begin to imagine. The upheaval
will test America's commitment to the global trade system, and shake its
confidence. In the 19th century, Europe went through a similar trauma when it
realized a new giant -- the U.S. -- had arrived. "It is up to America to manage
its own expectation of China and India as either a threat or opportunity," says
corporate strategist Kenichi Ohmae. "America should be as open-minded as Europe
was 100 years ago." How these Asian giants integrate with the rest of the world
will largely shape the 21st-century global economy.