Why China should not be top priority for Indian startups

Dr. Anil K. Gupta, Michael Dingman Chair in Strategy at Smith School of Business, The University of Maryland at College Park, is widely recognised as one of the world’s leading experts on strategy, globalization and entrepreneurship. Recognised by Thinkers50 as “one of the world’s most influential management thinkers” and by HotTopics as “one of the world’s most influential professors of entrepreneurship,” he is the author of six books, including The Quest for Global Dominance, Getting India and China Right and The Silk Road Rediscovered. YourStory spoke with him to get his perspective on the prospects for India-China startup connections.

What can Indian startups learn from their Chinese counterparts?

Indian startups shouldn’t be looking to Chinese startups for inspiration. Rather, they should be looking to the US, because that’s who the Chinese startups look up to. Chinese startups are still largely, although not exclusively, copycats. As a well-known Chinese VC based in Shanghai said to me, only half-jokingly: “Chinese startups are predominantly a combination of B2B and C2C i.e., Back-to-Beijing and Copy-to-China. What Chinese startups are really good at is local adaptation.”

In your books, you claim that “By 2025, the China-India economic relationship is likely to be among the ten most important bilateral relationships in the world.” Why?

My basic argument is as follows. By 2025, US, China, and India will be among the top 4 (maybe even top 3) largest economies in the world. Economic linkages tend to follow the law of gravity i.e., larger economies that are closer to each other (not just geographically but also along a host of other dimensions) tend to have stronger trade and investment linkages with each other. Mathematically, the number of bilateral linkages among any four economies comes to six. Thus, taking a somewhat conservative perspective, we can say with high confidence that, by 2025, the China-India economic relationship will be among the 6-10 most important in the world.

But, notice that I didn’t say that their relationship will be among the top 3 or the top 5. The political tensions are too significant to be resolved anytime soon. Geopolitical and economic linkages do influence each other. In the long run, economic linkages usually cannot overcome geopolitical tensions. For instance, the probability that the US and China may even go to war in the East China Sea and/or the South China Sea is increasing. Given the rapidly growing ties between the US and India, a US-China war undoubtedly would be negative for India-China relations. Similarly, the relationship between India and Pakistan has become more tension-filled as a result of developments such as CPEC i.e., the China-Pakistan Economic Corridor.

Over the next decade, what opportunities in China do you see for Indian startups?

I am less optimistic today than I was 2-3 years ago. The Chinese economy is in a far tougher situation than it appeared a few years back. Increasingly, not just Indian companies, but also American, European, and Japanese companies are becoming more cautious about China. If they are not in China already, very few of them are looking to enter China at the present time. Those already in China are becoming cagey about increasingly their investment in the country. In fact, some Western MNCs even have a Plan B i.e., what might they do if they need to leave China altogether. In many industries, China currently suffers from massive overcapacity. With the Chinese government tilting the scale towards domestic companies, many MNCs see little reason to continue looking at China as an increasingly larger opportunity for themselves.

Unlike the case with larger companies (such as the Tatas or the Mahindras, which are already in China), I wouldn’t advise Indian startups to bother about China at all. India is a very large market, and difficult enough to conquer on its own. Thus, for Indian startups, the first priority should be India. If they choose to expand beyond India, I would give much higher priority to other markets such as the US, Europe, and Southeast Asia before thinking of China. Besides large entry barriers (such as differences in language, culture, political and legal systems etc.), China also poses much greater intellectual property risks than almost any other country. As a startup, if you’re looking to manufacture in China, the risks are very high that by the time you have merely finished setting up your factory, your product or service may already have been copied and launched in the market by one or more local competitors.

Never forget that economies not named 'China' or 'India' make up about 85 percent of the world’s GDP. For Indian startups, there are much easier markets to crack, such as the US, Europe, Indonesia, Thailand, Vietnam, South Africa, Nigeria and so forth. So, there is little logic in looking at China as the number one priority.

Looking at the picture in the other direction, over the next decade, what opportunities in India do you see for Chinese startups?

I see much greater opportunities for Chinese companies to invest in India than for Indian companies to invest in China. The Chinese economy is a little over five times as large as the Indian economy. Thus, Chinese companies that have conquered their home market tend to be much bigger than their Indian counterparts. At the very least, they have a lot more capital and much larger scale advantages that can be deployed in India.

I see three different ways in which Chinese companies might come to India. One possible strategy is to export from China to India. This strategy can be very logical and thus is quite likely in sectors such as heavy machinery, power plants, and various types of infrastructure equipment. This strategy does not make sense for tech startups from China, with the possible exception of electronics hardware companies such as those in smartphones. But, even in electronics hardware, the Indian government’s Make-in-India policy makes exporting from China to India less sustainable.

A second possible strategy is to set up green-field operations in India. Such a strategy could be viable for companies such as Alibaba in the cross-border B2B (but not B2C) sector, where it could leverage many of its current China-based advantages to succeed in India. However, I don’t think that, given competition from Flipkart and Amazon, even Alibaba could pursue such a strategy and succeed in the B2C e-commerce sector in India.

The third possible strategy is to partner with Indian companies. This could very well include making investments in Indian startups. As examples of this strategy, look at Alibaba’s investments in PayTM and Snapdeal, and Tencent’s investment in Practo. I see this type of strategy to be the most logical for and thus likely to be the most widely adopted by Chinese tech startups when coming to India.

What do you think of Xiaomi’s success in India?

Regrettably, the jury is still out on Xiaomi’s future in its home market of China and, consequently, also markets outside China, including India. The challenge for Xiaomi is rooted in the fact that its core advantages were rooted in business model innovation rather than technological innovation. Often, business model innovation can be copied and/or neutralised far more easily than technological innovation. As a direct result, Xiaomi has been rapidly losing market share in China to companies such as Huawei, Samsung, Apple and Oppo. The strategies of all of these companies are rooted in some type of technological advantage. From the very beginning, Xiaomi’s strategy has been to try and make money on services while selling their devices at very low prices – a business model innovation. That strategy is very easily copied and/or neutralised. On the other hand, technological advantage is a lot more defensible.

I am also troubled by the fact that Xiaomi is expanding into other sectors such as TVs, air purifies, rice cookers and so forth, precisely at a time when their core smartphone business is under attack. It doesn’t make sense to me. When your home is under attack, that’s not a good time to be busy looking around at the playground outside.

Do Chinese and Indian tech startups have global potential?

Both India and China have large, global tech companies - Huawei, Lenovo, TCS, Infosys, and others. But I wouldn’t consider these to be startups. In terms of tech startups, China has no prominent players. Tencent has made some headway with WeChat in some Southeast Asian markets, but that doesn’t make it a global company. Alibaba too has also made some progress in Southeast Asia through investments. Baidu has almost no global presence outside China. India, on the other hand, actually has more global tech startups - like MuSigma and Zomato. I think there is more of a prospect for Indian tech startups to become global.

In almost all sectors, and this is particularly true in tech-intensive industries, the Chinese government creates a walled garden around China that tilts the scale towards Chinese companies. Such a policy helps Chinese companies win in China. There is, however, a toxic side effect. Chinese companies are prevented from figuring out how to fight and win against global giants from Silicon Valley. By the time they start peaking outside the wall - looking at the US, Europe or India - what they find is that they have to fight the companies they were protected from, and they aren’t strong enough. For instance, Alibaba has very little chance to put up a credible fight against Amazon in the B2C e-commerce market internationally.

The competition is more brutal in India against foreign companies, but those tech startups that survive become high capable at going global and succeeding even in developed markets such as the US and Europe.

The rapid rise of Amazon and Uber has raised the question of whether Indian tech startups need government intervention to help them compete with such foreign players. Do you think Indian companies will be able to grow in spite of foreign competition? On the flip side, do you think Chinese consumers lose out because of the lack of competition?

The evidence is very clear that, as a result of the toxic side effects of the Chinese government’s policy of creating a walled garden for Chinese companies, both the Chinese consumer and the Chinese economy are not as well off as they would have been in the absence of such policies. The last thing the Indian government should do is to create a walled garden. I am worried by the tendency on the part of some ill-informed people in India to advocate copying China lock-stock-and-barrel without doing due diligence and analysis. To those who argue that, “because China provides protection, India should also do the same,” I would say that, ten years from now, without such protection, Indian startups will be far stronger on the global stage than their Chinese counterparts.

Look at the evolution of tech startups in India since 1991. Back in those days, Infosys, Wipro, and TCS were tiny companies. There was concern that IBM, Microsoft, and Accenture would wipe them out. Some companies did get wiped out, but not all did. Those that survived figured out how to compete and win against these giants – not just in India but globally. That’s why these companies are the global powerhouses that they are today.

Look also at the fact that, because they do not fear that they will lose their intellectual property to government-supported startups, the world’s top tech companies do far more next-generation R&D in India than in China. People often make the mistake of saying Google’s R&D in India or Microsoft’s R&D in India is foreign R&D. That’s just hogwash and reflects woolly-headed thinking. It isn’t. The R&D work is done in India by Indian scientists and engineers. After a few years, these scientists and engineers leave the MNC and do their own startups or go work for other companies. Remember, because slavery was banned a long time ago, they are not slaves of the MNC.

Silicon Valley is what it is because of what’s known as “the spillover effect.” Things started with companies such as Hewlett Packard and Fairchild Semiconductor. Because of the spillover effect, these companies spawned Intel, Apple, and a whole host of other tech startups. The same thing is happening in Bengaluru. When Google does R&D in India, people working for them aren’t slaves. After some time, they leave and do their own startups, leveraging the knowledge and skills they built up at Google. Foreign companies are thus making India’s tech entrepreneurship ecosystem stronger.

If the Indian government makes a walled garden for its tech startups, it would be a well-intentioned but totally wrong-headed and counter-productive policy.