A New World Economy
AUGUST 22, 2005
CHINA AND INDIA -- THE CHALLENGE
A New World Economy
The balance of power will shift to the East as China and India evolve
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
Slide Show >> 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 traffic.
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
China and India. Rarely has the economic ascent of two still relatively poor nations been watched with such a mixture of awe, opportunism, and
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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
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 innovation."
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 sta