China/India: Shouldn’t we be worried?

Dennis Howlett at Bazaarz asks a valid question to my recent posts about doing buisness with China and India:  “What about when China (or India) becomes the powerhouse for innovation - which could happen - in say 5-10 years? Certainly from a European perspective, it's a worrisome scenario”.  And, if you see the comments under Chris Selland's post about offshoring on AlwaysOn, the topic generates other negative emotions - not just worry.

Dennis, we should all be worried – not just you in Europe. I have two young kids who will go to college in a few years and the investment in college is looking far more speculative than an investment in real estate or the stock market. (A potential topic for a future blog – should universities charge based on future earnings?). Heck, my wife and I still have a long., long way to go before retirement. Running a small business is tough enough without these global disruptions.

I worry when I read this Fortune article - Is America the World's 97-lb. Weakling?

I worry about Europe (my wife is Irish) when I read this WSJ article  - Familiar Litany of Woes Across the Pond

But then I read this Fast Company interview with Jeff Immelt, CEO of GE - he is a man who worries about his daughter Sarah and his 300,000 employees - I am somewhat less worried.

From my much humbler perch, I believe we have 2 options:

a) We can channel our worry into moving up the value chain or
b) We can worry and put up barriers

Japan evolved from a “utility” provider to an “innovation” provider. Ireland has evolved from an exporter of raw talent to one of sophisticated products and services. Virgin Airways evolved from a cut rate competitor to offering a fabulous “Upper Class”. I would suggest the world adjusted to that - and actually benefited from that. It forced GM and European call centers and BA to improve their product to the benefit of us consumers. Ford went on a quality kick. BA innovated with flat beds, modern fleets and other ideas. Not everyone survived or did well in this Darwinian process, but overall our economies adjusted

But why did Toyota and Virgin become viable in the first place? In general, the consumer in us is pretty loyal. When GM and Renault let the Japanese become world auto players it took 2 decades of neglect – boxy designs, poor quality etc. When a Virgin or an EasyJet or a Southwest grows strong, the incumbent competitors let it happen gradually. Look at the barriers to entry the Alitalias and the Deltas had in place.

Similarly, why did India and China become viable to the Western CIO and VP of Manufacturing? These are blue blooded Americans and Europeans who do not exactly enjoy wading through traffic in Mumbai or Shanghai with all the noise, heat, pollution, poverty. They go there because the incumbents – the EDSs and Accentures – have let it happen through their over pricing, poor service etc. At the same time, the competition has done better than lower prices. The Japanese worshipped Deming and his quality focus. The Indians adore the Carnegie Mellon CMM process improvement model. Half of the Chinese GDP is manufacturing focused – it is their core competence. Their kids actually compete to go to our engineering schools.

They have leveraged our best education and thinking while our incumbents have been coasting. We want our CIOs to feel guilty for offshoring. Honestly, we should blame the IBMs more. We should blame ourselves as workers for continuing to expect a lot of money for flipping SAP switches. 

But let’s look ahead. In our sector, we are used to disruptive technologies and I would like to think we will make the transition well. Like BA, we will hopefully invest in automation, improved processes, get used to lower margins and become much more competitive and innovative. Just look at what this gallery of CIOs is innovating with technology.

Also look at what happened at demand patterns in Japan (and Ireland and Singapore) as they grew affluent. They became voracious consumers of Western products - Disney, Hermes, McKinsey. In 1989, when I was assigned in London for PwC I flew with a mid-level Japanese exec to Paris. I sailed through customs and went to make a call and wait for him. 30 minutes later a custom official beckoned me back in. I was concerned – how often do you get asked to go back into customs? They wanted me to explain in my broken French why my Japanese colleague was trying to smuggle four suitcases full of stuff from Harrods? There must have been $ 25,000 worth of stuff he had bought. I had to assure French customs the items were all meant as gifts back in Japan.

Something similar is happening in India and China. The middle classes are learning to enjoy Pizza Hut, buy Italian cars and come to Disney for holidays. At the recent Paris Air show, they were the biggest buyers for Boeing and Airbus. That’s not to say we do not need to continue to push them to keep opening up their markets or appropriately value their currencies.

I think it will take India and China longer than the 5-10 years you mention to make a similar evolution from “utility” to “innovation” but the west will similarly adjust – and their own economics will catch up. As my article, “The economics of cheap” describes, the total cost of offshoring is rapidly rising. The Indian and Chinese middle class will price themselves out to the Bangladeshis (I was surprised to read recently that 65% of “Indian” restaurants in UK are actually run by Bangladeshis) and the Vietnamese.

Now let’s take the other scenario – if the West actively ignores India and China. Even if we did, Japan and rest of Asia will not, and they can continue to leverage each others domestic markets, and their appetite for oil will continue to grow. We suffer as consumers from lack of competition. As businesspeople, we will be locked out of their markets. I would rather see us engage them, influence them, sell to them – make them part of our economies.

Which brings me back to Jeff Immelt. He may say he is not worried about his daughter’s future. But GE is investing heavily in R&D.  GE is well positioned to earn money in China and India and elsewhere in the developing world. And continue to do well in the West whether we end up as services or manufacturing economies.

But when I see reasoned confidence like his, I am much less worried.  I am encouraging my kids to think about a global career, though. For the rest of us to become like GE we will have to adopt more of an global mentality, travel more, relocate more.