Background
Large populations are a clear advantage enjoyed by these countries—together China and India account for more than a third of the world’s population, and when this population has a growing income level, the market potential can be huge.   It is not surprising then that managers of multinational companies are enthusiastic and interested: Andy Grove, the co-founder of Intel said, "China is the most vigorous market for US (and) its most vigorous competitor.  A senior manager of Nissan said,"Not being in India would be a huge strategic mistake. It's an investment for the future."

Historical growth and future predictions
To get a sense of the sustained growth enjoyed by these two countries, one could look at their past growth rates: Between 1979 and 2004, China grew at an annualised growth rate of 9%, and India at 6%. Estimating the current market size for specific sector/ industries is a challenging task, especially since the data may not always be available or may not be reliable and one needs to account for factors such as Purchasing Power Parity.  Aggregate level indicators are generally more easily available and reliable.  These estimates indeed support the argument about the importance of China and India.  In 2006, the combined nominal GDP (without adjusting for PPP) of these countries was US$3.574 trillion—roughly 27% of the US economy.  More importantly, Chindia accounted for 38% of world population 49% of world iron ore consumption, 55% of world cement consumption, 59% of world vegetable production.

Forecasting future market size can be more hazardous than estimating current market size since such exercises may require making forward-looking assumptions.  While noting these caveats, we identify below some of the estimates.  According to one estimate, by 2020, China’s GDP would be $12 trillion and India’s GDP would be about $3.4 trillion; together they would constitute 60% of the US GDP.  If current growth trends continue, by 2050, China’s GDP would exceed the US GDP significantly while India’s would match the US.  Low current penetration levels (in terms of ownership of durable goods) is another factor working in favour of these markets.  In 2003, only 0.9 and 1.6 percent of the population in China and India had cars—versus 55% for Japan, 25.7% for Taiwan, 22.7% for Malaysia and 9.1% for Thailand.  There is strong prior evidence about the increase in percentage of car ownership with increasing incomes—suggesting that both China and India's markets have plenty of room to grow.
 
Operating in Chindia: Plethora of misconceptions
Despite the attention received by these markets in the popular press, many misconceptions remain about these markets.  For instance, many analysts and managers tend to view China as a cheap source for low value added manufacturing and India as a cheap location for low value added high tech services (such as software and business process outsourcing) while believing that the market size for these markets is rather limited for high tech goods and services.  Another set of analysts and managers might believe that these countries offer large markets for counterfeit goods and limited opportunities for genuine goods, which often come at high prices.  Finally, some might question whether these markets are profitable to serve and wonder about the risks/rewards equation for serving these markets is appropriate—in other words whether these markets are characterized by higher levels of risk than what expected returns would suggest.  On the other hand, there are also optimists who believe that capturing even a 1% share of these markets would make a big difference to their overall performance and that achieving this should not be a tall order.

We submit that China and India's low average income levels belie the fact that they have plenty of consumers that can buy a wide variety of goods and services—whether low or high tech.  By end 2006, China had more than 350 million mobile phones subscribers and India is expected to reach this number in late 2008.  As producers, these countries will play an even bigger role in high tech industries.  India's exports of software and technology-enabled services are expected to go up from US$22 bil in 2006 to US$140 billion in 2012.  In 2005, high technology exports constituted 28% of China's total exports and amounted to US$220 billion.  In life sciences, which are the epitome of high tech sectors, China and India are expected to widen their lead over the US in terms of the sheer number of young researchers.  Even after allowing for the possibility for quality differences, the difference is sufficiently large to shift the center of gravity of these research-based industries towards Chindia. 

It may be an an opportune moment to dispel another misconception about the difficulty of operation in these countries and the risks/ rewards equation.  According to one estimate 68% of the US companies in China are profitable and for 70% of the companies, the margins in China are greater than their global margins.  The proportion of profitable companies in India is as high as 90% and the Indian operations exhibit better profitability than average for 60% of the MNCs. 

Finally, while it is true that counterfeits pose a challenge, Chindia offers plenty of opportunities for selling genuine, high-quality (and premium-priced) goods.  China is the second largest market for Louis Vuitton, the purveyor of high quality fashion accessories.  In terms of risks/ rewards equation, the challenging nature of these markets implies that once strong competitive footholds are established, they are likely to be sustainable simply because later entrants would often face similar difficulties and barriers as the pioneers.  In fact, there are several examples of firms that struggle in their home markets to compete with the leaders in their industries but have managed to capture the pole positions in Chindia—these include Buick and KFC in China and Suzuki in India. 

While the Chindia market represents a tremendous opportunity, it clearly is not without challenges.  In fact, firms rushing in and expecting that capturing 1% market share will be easy, may receive a rude shock.  Upon its initial entry into India, even Kellogg's, a company with a wealth of experience of operating in global markets struggled badly.  Its main product (Kellogg's Corn Flakes) were considered to be too expensive and inapproprriate (too bland) for the local tastes and preference.

Integrating Chindia into your strategy
So how can multinational firms integrate Chindia in their global strategy?  Below, we suggest a few thumb rules which improve the chances of success in the Chindian markets.  Our thumb rules include the following: Be early, Have a long and broad view, Be adaptable, Don't underestimate local competition, Be an insider, Forge partnerships.  We will briefly discuss each of these thumb rules below.

1. Be early: As the old saying goes, the early bird gets the worm.  In emerging markets, early movers may be able to build brands cheaply, create impregnable positions in the distribution channel and shape consumer expectations, all of which would make it difficult for later entrants to match their success.  In this regard Jorgen Clausen, CEO of Danfoss, which has enjoyed significant success in China, said: “We want to have the same high market share as in Europe.  We need to do it now when the competition is small and young”

• Singapore-based Asia Pacific Breweries, which makes Tiger beer, is a classic example in this regard.  In the Hainan province of China, where it was the first multinational brewer, it commands 80% of the market and its international brands, such as Anchor, enjoy leadership position. The same company has found success to be elusive in the Shanghai market where it was not the early mover and jockeying for market share is intense.  KFC in China and Suzuki in India provide other salient examples.  KFC not only leads McDonald's in the China market but has been growing at a faster rate (200 stores per year versus 100 stores per year for McDonald’s) and thus widening the gap between itself and McDonald's.

2. Have a long and broad view: Given the evolving nature of these markets including factors such as rules the strong role of politics (especially market-participation through state-owned-enterprises), multinationals looking for quick returns are likely to be disappointed.  On the other hand, those who patiently build their operations towards ultimate success, are likely to be handsomely rewarded.  It is also important that multinationals go beyond a pure local market orientation (as an opportunity to generate more sales) and look at these markets for diverse purposes such as sourcing products/ services/ talent; and learn new ideas. 

• Motorola in China serves as an excellent example of the importance of broad view.  It entered in 1987 by opening a representative office and followed up with the establishment of Motorola (China) Electronics Ltd. in Tianjin (1992).  Its product range included mobile phones, two-way radios, wireless communications equipment, semiconductor products and automobile electronics for the Chinese market and other markets in the world.   In June 2002, it announced "2+3+3" strategy: “2”centers (to make China into a global production base and a global R&D base for Motorola); “3” growth areas (digital trunking communication systems, semiconductors and broadband); and “3” US$10-billion targets (an annual output of US$10 billion in China by the end of 2006, an accumulative investment of US$10 billion in China (including investment from joint venture partners and suppliers) by 2006, and by 2006, accumulative local sourcing in China to reach US$10 billion.

3. Be adaptable: Adaptability is a key success factor in emerging markets.  In Sir Isaiah Berlin’s terminology, being a fox is likely to be more rewarding than being a hedgehog.  Lack of adaptability has led to many failures with Nestle’s bottled water business and Ericsson’s handsets business being prime examples.  Nestle’s bottled water business in China failed because it adopted a centralised facilities based model resulting in high costs and long delivery times.  The business also suffered at the hands of nimble competitors.  Ericsson, on the other hand enjoyed peak market share of 37% in China.  It, however, refused to deal with cases involving defective products.  The resulting bad publicity (coupled with other issues such as lackluster designs and lack of funding for product development and brand promotion due to the struggles of the parent company) led to rapid erosion of its market share.

4. Don’t underestimate local companies: Multinational firms often enjoy strong competitive advantages over local companies in the form of scale economies, technology and brand advantages.  Some multinationals, however, run the risk of underestimating local competition.  Recently many Chindian firms such as Haier, Huawei, Ranbaxy and Tata Steel have emerged as important competitors on the global stage.  A recent survey found that a smaller proportion of Chinese firms operate very old manufacturing plants (>10 years age) and a greater proportion consider innovation as being very important than US firms (54% versus 26%).  These statistics suggest (and Andy Grove’s view in the opening paragraph supports the view) that Chindian firms are likely to be vigorous competitors.

5. Be an insider: Multinational firms can significantly enhance their chances of success by becoming an ‘insider’—a term coined by the noted management consultant and writer Kenichi Ohmae.  Becoming an insider might include a broad range of strategies including developing a local supply chain, getting involved in the local communities, making extra efforts to hire local managers and presenting a local face in promotional and other strategies. Danfoss has worked extremely hard at becoming an insider in China by establishing a R&D facility (2005), sending Chinese employees to Denmark for training and thus preparing them for taking over expatriates’ roles.  Hyundai, similarly, has become an insider in India.  It was early in developing the local supply chain which has reduced its costs and helped it charge lower prices.   As a result, India has become a global centre for the export of the tall hatchback called Santro, with exports to 68 countries (including faraway countries such as Mexico).  Hyundai also employs local movie (Bollywood) celebrities as its spokespersons, which has further enhanced its popularity.  Motorola has served as an excellent corporate citizen by supporting schools and education, environmental protection and also supporting China’s bid for the 2008 Olympics.

6. Partnerships: Partnerships offer interested multinational firms several advantages over going it alone.  They can ease the task of obtaining regulatory permissions, fill competence gaps (especially in terms of local knowledge) and give a local face to the multinational entity.  In the highly regulated telecoms sector, IBM has found a way to operate in the booming Indian market without going through the trouble of obtaining a license.  IBM provides technical expertise and services to Bharati Airtel, India’s leading mobile operator, in exchange in exchange for a fee tied to Bharati’s revenues.

Is Chindia homogeneous?
While the prior arguments have treated Chindia as a homogeneous market, we didn’t intend to downplay the differences across the markets.  China is much ahead in terms of infrastructure, which helps it be ‘factory to the world’.  India’s weak infrastructure, on the other hand, has meant that it is more competitive in high tech services (which do not depend on infrastructure, in any case).  China has a mixed model in terms of its political economy while India is a vibrant (and contentious) democracy where a new round of elections might bring in a completely different set of policies.  Despite these differences, we believe that the markets are sufficiently similar for the above arguments to be applicable to multinationals seeking to build positions in both countries.  We also believe that, with passing time, these differences will become less salient.

Concluding remarks
While multinationals face significant challenges in competing in Chindia, we believe that successful establishment of positions in these markets is likely to enhance performance significantly.  McDonald’s, whose beef-based core product offends religious sensitivities in India, is an excellent example in this regard.  Over more than 10 years, it has assiduously built up a local supply chain, adapted its menu significantly (75% of its Indian menu is unique to India), worked hard at satisfying the vegetarian segment (some of its advertisement promise a ‘Veg surprise’) and reduced its prices to improve affordability with meals selling at the equivalent of US 50 cents.  While the profitability of its Indian operations is not known, it has laid a solid foundation for future growth.  In conclusion, Chindia offers significant opportunities and reward for the patient and open-minded investors and the assertion of Engardio et al (2006: 2) that “Few companies any longer can afford not to engage in China or India.  As consumers, suppliers, competitors, innovators, investors and sources of skilled labor, they are reshaping the world” is very apt.  

Selected References

· Anuradha Dayal-Gulati & Angela Y. Lee (eds) (2004), Kellogg on China : Strategies for Success, Northwestern University Press.
· Pete Engardio et al (2006). Chindia: How China and India are Revolutionizing Global Business, McGraw Hill
· George Zhibin Gu (2006), China’s Global Reach: Markets, Multinationals, and Globalization, Fultus Corporation. 
· Jairam Ramesh (2005). Making sense of Chindia: Reflections on China and India, India Research Press.
· Jagdish N Sheth (2008). Chindia rising: How China and India will benefit your business. Tata McGraw Hill Publishing Company Ltd.