China and India are the two big growth markets at the moment, so U.S. companies are making no mistakes about getting friendly with the two governments.
But the Chinese economy is maturing, so it doesn’t need to lean on the U.S. that much. And somewhat like the son that’s been nourished and nurtured and ready to leave home, China is now in a position to move out. So it doesn’t see itself as a low-cost manufacturing destination any longer and is busy building its own IP and expertise.
India on the other hand is still struggling to find its legs. The country churns out a huge number of specialized professionals many of whom move to developed nations because of the limited scope for employment. So while the exchange differential does allow for some labor arbitrage, there is also a high level of skill readily available.
In October, IBM mentioned some telling numbers from Evans Data Corp (India currently produces 2.75 million software developers, which is expected to jump 90% to 5.2 million in 2018 when it will be higher than the U.S.). So U.S. players can make use of both the cheap labor/infrastructure as well as the skill for high-end jobs.
India growth rates are also turning up: the country is expected to surpass China for the first time this year. China is, in fact, expected to decelerate to 6.8% in 2015, 6.5% in 2016 and 6% in 2017. India, on the other hand, will grow 7.8% this year, 8% next year and 8.1% in 2017, according to Fitch estimates. Just as well, because Fitch estimates that the other BRIC countries (Brazil and Russia) are in recession and will barely recover over the next couple of years.
The World Bank numbers are only slightly different: it expects India to grow 7.5% this year and China 7.1%, with Brazil dipping into negative territory. Overall, developing countries are expected to grow 4.4% this year, 5.2% in 2016 and 5.4% in 2017. Falling oil prices have greatly benefited oil importing countries this year.
The IMF sees India growth at 7.5% and China at 6.8% with India holding steady next year while China drops to 6.3%.
The UN World Economic Situation and Prospects (WESP) report sees India growth at 7.6% this year and 7.7% in the next. For China, it’s expected to be 7% and 6.8%.
Whatever the exact growth numbers, everyone seems more or less agreed on the fact that India will outgrow China this year and the trend will continue. So let’s see how the big technology companies have been gearing up to tap the opportunity-
In China
IBM: IBM is taking its Bluemix cloud infrastructure to China through a collaboration with 21Vianet Group, a Chinese carrier-neutral Internet data center services provider. IDC says that China has 10% of the world’s developers, so here too, as in India, the company will be using local talent, entrepreneurship and innovation to grow its business. The focus will be on hybrid cloud-driven innovation and next-generation cognitive, analytics and IOT app development.
Google (GOOGL: Google started in China with its search engine but fell out with the Chinese government over censorship issues and indications of cyber attack by the Chinese government on Gmail users. But the market is just too big to ignore and Google is now ensuring that regulators are happy.
Earlier this year, it was reported that the Play Store would soon be available in China with the government likely agreeing because Chinese app makers selling through the Play Store can reach millions of Android users all over the world. In this connection, Google Ireland Holdings has registered a subsidiary called Pengji Information Technology (Shanghai) Ltd to carry on "IT development, computer software development, and computer systems integration" in the Shanghai FTZ.
Google was previously banned from web page searching and email services in China, but these two are reportedly included in Pengji’s business scope. The FTZ allows companies engaged in app store businesses to own more than 50% of the shares with the balance held by the government. Outside the FTZ, companies are limited to 50% ownership.
Microsoft MSFT: The company recently formed a JV with China Electronics Technology Group (“CETG”), a state-owned enterprise that provides IT hardware and software to the country’s government agencies (especially its military) as well as certain state-owned companies. The government will use Microsoft technology after checking it to make sure that there are no security concerns (given the U.S. government’s spying controversy). Earlier, the two agreed that Baidu would be the default homepage and search engine in Microsoft’s Edge browser in China.
Intel (INTC: The company is investing up to $5.5 billion in its Dalian facility to boost capacity for 3D NAND memory chips. Intel expects these efficient non-volatile memory devices to start shipping in the second half of 2016. China is one of the largest consumers of semiconductor devices (TrendForce estimates that China will consume 29% of NAND chips produced this year). Intel’s chips will help boost its data center revenues, provide it a strong base in the fast-growing market and endear it to Chinese regulators who are eager to bring more chip fabrication into the country.
Intel Capital is also sinking $67 million in eight Chinese startups in furtherance of the Chinese government’s goal of boosting the country’s innovation and its own relationship with the government. The investment covers a broad spectrum of technology spanning vehicles, semiconductors, communications technology, cloud computing and film making.
Cisco CSCO: Cisco’s China business declines have been monumental and the company has reportedly been dropped from the government’s procurement lists. Local players Huawei and ZTE are also strong competitors. So it’s playing ball with China’s National Development and Reform Commission (NDRC), promising $10 billion to be used for innovation, equity, R&D and job creation.
And that isn’t all: it’s also signed agreements with the Association of Universities of Applied Science (AUAS) to create training programs for some 100 colleges for the development of local technical skills. Cisco’s returns aren’t clear, but currying favor with the government can generate sales and help it develop local talent for absorption into the company.
Amazon (AMZN: The ecommerce giant released its Fire 7 tablet in China and announced a deal with Baidu wherein it would be the default search on Amazon devices. Baidu, which is China’s leading search engine will also integrate its app store and offer video content on Amazon devices.
In India
IBM IBM: International Business Machines has opened its first public cloud data center in Chennai, India to offer the full range of SoftLayer infrastructure services and make use of local talent to build its cloud business. So it has also tied with the National Association of Software and Services Companies (NASSCOM) to launch Techstartup.in, which will allow it to get active on the startup scene in the region.
Google: Google decided to relaunch Android One in India after initial sales fell below expectations. The problem with the strategy seems to be that Google was trying to push the latest and greatest to lower-end customers who are accustomed to more functional devices. So on the one hand, it was losing clout with partners because they weren’t able to differentiate and so, adopt different pricing strategies. And on the other, it didn’t generate great sales because customers weren’t able to appreciate the difference. This time, the company has lifted hardware restrictions to a great extent, so sales should improve.
CEO Sundar Pichai recently visited India to announce that Google was tying with the National Skills Development Council to train 2 million software developers; it would provide free Wi-Fi to 400 railway stations the first 100 of which would be operational by 2016-end; it would open a new campus in Hyderabad and step up employment in Bangalore and Hyderabad; an in-principle agreement with the government to use its Project Loon for Internet connectivity to rural India; more Indian languages to be included in the Translate app for immediate translation within any app; plans to get more small businesses online; and develop India-specific products as well as products for developed markets in India.
YouTube’s soon-to-be-launched studio for film creators in India’s film city Mumbai will offer creators and their students access to high-end audio, visual and editing equipment, training programs, workshops and community events. YouTube has seen initial success in India with the top creators AIB and TVF saying that they have both exceeded a million viewers, according to the company..
Facebook FB: India is currently Facebook’s second biggest market. The Indian Prime Minister Narendra Modi has really warmed up to social media (both Facebook and Twitter) and is currently one of the most influential persons on social networks. However, a huge chunk of the population is not yet connected or is on much slower 2G connections. So for the yet-unconnected people, Facebook announced Internet.org along with some other companies to provide some stripped-down Internet services to people (mostly in rural areas).
But this created quite an uproar because it enabled free access to some sites and not others thereby going against the principle of net neutrality. Some of the most vocal protestors were travel site ClearTrip, news portal NewsHunt and TV company NDTV. Facebook has since made some modifications. For people with slower connections, it offered Facebook Lite, which loads pages without some of the rich content so there are fewer delays. Later, it announced a slide show ad format instead of video for slower Internet connections.
Facebook followed up its U.S. launch of Instant Articles in May with an India launch in November. And similar to the U.S., where its launch partners included leading media houses like The Atlantic, BBC News, Bild, BuzzFeed, The Guardian, National Geographic, NBC, The New York Times and Spiegel, in India too, it has signed a deal with India Today, The Quint, Aaj Tak, Hindustan Times and the Indian Express.
Microsoft: The company launched three Azure data centers in the country, in Pune, Chennai and Mumbai. It also announced a plan to extend Internet connectivity in 500K villages in India.
Twitter: Twitter has chosen Bangalore, India as its first R&D center outside the U.S. The ZipDial team, which it recently acquired for $40 million will start this effort. India and Indonesia are expected to be high-growth markets this year, so Twitter likely intends to boost user growth through focused effort on the region.
Amazon: Amazon, which will open its AWS infrastructure hub in India next year, is also investing very heavily in its retail business. Following its $2 billion investment last year, the company announced another $5 billion this year. Given extremely strong sales in India, Amazon is also building Amazon-branded retail storefronts (store-within-a-store) in several Indian states under a project code-named Udaan. While Udaan currently operates in Maharashtra and Tamil Nadu states in the southern part of the country, the company has also inked a deal with the Rajasthan state government (in western India) to open 36K stores all over the state.
The stores are being built in regions with limited Internet access where customers can book online on Amazon.com. When their chosen items arrive at the store, they receive an SMS alert. The store owner earns a commission. India also has unique delivery challenges so Amazon has been improvising. Last year, the company launched Easy Ship, which significantly reduces the cost of storing, packing and shipping individual packages.
Amazon also uses Seller Flex in India, which gives sellers the option of storing and shipping certain slower-moving items (Amazon provides training to do everything Amazon-style). Easy Ship has been so successful, that it is reportedly set to launch in the UK as well
Alibaba: The Chinese ecommerce giant is looking to enter India via the acquisition route. Figuring that its ecommerce capabilities would complement the capabilities of Indian payments company Paytm, it was looking to build position. Ant Financial, Alibaba’s finance arm, already had a 25% stake in Paytm’s parent. The company finally invested in Paytm’s parent One 97 Communications to bring Alibaba Group and its subsidiary Ant Financial to a 20% stake each. Paytm is India’s largest online payments portal (more than 100 million wallet users with more than 75 million transactions each month according to Tech Crunch).
The company also invested $500 million in leading Indian ecommerce site Snapdeal. The Indian ecommerce company was looking for foreign investment to boost technology on its platform and has therefore avoided an IPO. There was also a rumor that Ant Financial may be looking for a 25% stake in Micromax, one of the leading Indian smartphone makers, valuing the company at $5 billion
Final Words
The U.S. markets turned volatile on news of a China market slowdown but the concerns appear to have been overblown. Despite all the concerns, Apple still grew China sales 99%! The Chinese economy is slowing down, but it’s still growing much faster than most other markets. In fact, the Chinese government has started investing in U.S. technology companies as it strives to boost the domestic market. The Indian market represents huge opportunity over the next few years, with infrastructure constraints being the primary hurdle.
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