The Great Reverse – Part III

SHANGHAI: Behind the headlines about a shifting power balance between the rising Asian giants – China and India – and the West, a new relationship is quietly taking shape that could profoundly affect the world economy: the rapidly growing business ties between the once estranged giants of Asia.

Newspaper headlines portray China as the world’s manufacturing base for low-cost goods, like clothing and shoes, and India as the global IT monopoly-to-be. Unfortunately, media outside Asia have failed to acknowledge the growing partnership between the two giants. According to Wang Dehua, Director of the Institute of South and Central Asian Studies, Western China has been especially eager to promote regional cooperation. In early August, a trade delegation from Yunnan province visited India and signed a joint declaration with the Confederation of Indian Industry, vowing to strengthen economic ties and further facilitate cross-border trade and investment.

Given the complementary nature of their economies and the size of their markets (nearly 2.2 billion people in total), the nascent cooperation between the two holds the potential to dramatically alter the world trade balance.

A perusal of the Shanghai technology corridor reveals a hint of the countries' industrial interconnectedness. Walk through one of the main complexes in Shanghai's Pudong Software Park, and you will see a prominently displayed sign for Infosys, one of India’s most respected IT firms. The same complex also holds Satyam, the first of India’s software service companies to set up offices in Shanghai. Nearby are the headquarters of the largest software services company in Asia, Tata Consultancy Services (TCS), which currently runs an outsourcing center for GE in the town of Hangzhou. TCS is owned by the Tatas, one of India’s most prominent business families. Across the river is NIIT, the principal software training center in India’s private sector. NIIT, operating in China since 1998, now runs an extensive two-year course in 25 provinces, training around 20,000 students to be software professionals. There is widespread speculation that Wipro, India’s only giant IT firm without a presence in the city, will establish a Shanghai office very soon.

It is no surprise that Indian software companies are setting up in China. They, like everyone else, sense great opportunity in one of the largest, fastest-growing economies in the world. What makes the activities of Indian companies particularly interesting is that they are helping to create links between these giant neighbors – two countries that have been estranged since the 1960s.

For thousands of years, the Sino-Indian "border" was crisscrossed with trade routes. The flow of goods and ideas, particularly Buddhism, had a profound influence on shaping the entire culture of Asia. As India’s first ambassador to China, K.M. Panikkar writes in "India and China: A study of Cultural Relations," the prolonged contact between the neighbors "has been the major factor in the shaping of the Asian mind, for, from China, its influence radiated to Korea, Japan, Mongolia, and other more distant lands."

In recent centuries, these links cooled and, after the Sino-Indian War of 1962, were almost completely severed. By the end of the 20th century, the two populations had become strangers. Speak to ordinary Chinese or Indian citizens about their neighbors, and they will more likely respond with stereotypes (not necessarily negative) or comments about strange eating habits than reply with first-hand knowledge or insight. Sometimes it seems that India and China appear even more exotic to each other than they do to those in the West. (This is partly due to the fact that, although flights are beginning to open up, it still costs about as much to fly from Shanghai to Bombay as it does from Shanghai to New York.)

Yet, despite this estrangement, the fates of the two countries bear an almost uncanny resemblance, beyond anything that can be explained by mere geographical proximity. Both are demographic superpowers with more than a billion people each, and both are proud nations with ancient histories whose power waned throughout the modern period. They felt similarly overwhelmed by colonial influences, and, in response, both developed strong leaders who led their respective countries to national independence. Both Nehru and Mao created highly independent modern states that pursued strategies of cultural and economic protectionism (swadeshi and zili gengsheng). These were eventually abandoned – or at least radically reinterpreted – as both India and China adopted policies of economic reform and liberalization, opening themselves to the world.

On the other hand, Asia’s giants can also appear as mirror opposites, a perception most succinctly expressed in both countries by the oft-repeated idea that China has excelled in hardware while India has excelled in software. In part, this reflects a division within the IT industry: China manufactures chips and electronic components, while India writes the codes that power the hardware. This division also demonstrates a much more profound difference between the two countries. China excels at building infrastructural hardware – buildings, bridges, power, telecoms, roads, etc. – areas where India is remarkably weak. Meanwhile, China’s great shortcomings in democratic development, information dissemination, and independent media are all soft power issues where India shines.

The realization of these complementary strengths and weaknesses has prompted a surge of interest in bilateral business relations in the last one or two years. Businesses on both sides of the border are increasingly appreciative of the potential for growth in the giant next door. "In the last couple of years the whole relationship is taking a complete U-turn," says Harsh Vardhan of Satyam. "The amount of engagement which is happening between India and China now, both at the government level and at the business level, has exponentially increased."

This renewed relationship can be concretely measured in overall levels of trade, with economic and bilateral trade tripling in the past 3 years. In addition to IT trade and interactions, India facilitates China’s economic development by exporting raw materials and semi-finished goods, as well as shipping Chinese cargo overseas. Chinese companies, for their part, have just begun to tap India’s ever-expanding consumer market by exporting electrical machinery, home appliances, consumer electronics, and mechanical goods. A decade ago, trade between India and China was a paltry US$300 million, by the end of 2004, it will cross the US$10 billion mark.

Yet, this is just the beginning. “We are going to see a lot more action in business and commerce between these two countries,” promises Prakash Menon of NIIT. And the result will not be merely the transformation of India and China from suspicious competitors to friendly collaborators.

"It's like in the early stages of infatuation," says Sunil Kumar, of the Confederation for Indian Industry, musing about the relationship between India and China. "You are mysterious to each other, but you are trying to find out more about each other." The world should pay attention and get ready for a time, in the not-so-distant future, when this infatuation turns into a full blown affair. As Prakash Menon suggests, "If India and China can learn to market to each other, I don’t think they will need any other country. In the first 50 years of this millennium, the East meeting the East is going to be a lot more powerful than the East meeting the West."