The Chinese juggernaut continues to take colossal strides across India. Whether it is China-manufactured mobile phones, Chinese venture capital investments or the ubiquitous cheap toys, their presence cannot be denied. In India, those within the government and outside of it are showing a range of emotions from awe and anger to fear. But, what are the real implications of this growing influence? In this article, we seek out the truth, and examine the impact of China on India and its psyche. We also lay down a road map on how Indian companies, and India, could compete with the Chinese on an equal footing.THE CHINA TRIGGERS – TRIPLE PUSH> Between 1991 (the fall of the USSR) and 2011, China had just two years of growth that was sub 8 percent. This was in the aftermath of the Asian and Russian currency crisis. It was Albert Einstein who had allegedly said, “Compound interest is the eighth wonder of the world. He who understands it, earns it...and he who doesn't understand it, pays it.” Consistent 8 percent per annum growth compounded over 25 years, results in a 700 percent growth of the economy! And that’s the simple magic that China has accomplished.However, since 2011, China’s economy hasn’t crossed the 8 percent growth figure even once. During the period between 1991 and 2011, China’s working population increased to 782.6 million from 648 million. That is a growth of about 6.6 million a year. However, between 2005 and 2011, China’s worker population grew by only 16 million, and between 2011 and 2017 it grew by a much smaller number of just 4 million. And when it came to savings, between 2011 and 2014, Chinese gross savings went up to $5.15 trillion from $3.8 trillion. Between 2014 and 2017, it grew by just $0.6 trillion with bulk of the growth happening in 2017. Elementary economics dictates that a highly export-driven economy soon reaches a stage where domestic investment begins to taper off, drop, and is eventually replaced by foreign investment. This is an equation that anyone with an elementary interest in economics is aware of:Domestic Investment + Government Expenditure + (Exports-Imports) = Savings + TaxesAssuming no budget deficit, the equation becomes:Domestic Investment + (Exports-Imports) = Savings It is evident that when exports are far in excess of imports, savings are far in excess of domestic investment. The difference needs to go out as outbound foreign direct investment (FDI).This stunning fall in worker population growth, along with the slowdown in overall economic growth, is a clear reflection of the export-driven growth strategy of China, which resulted in diminishing domestic investment and a skyrocketing outbound FDI.Consequently, Chinese outward FDI tripled to about $181 billion in 2016 from about $60 billion in 2010. According to BBVA research, India received some $3.1 billion in 2017 as compared to just $1 billion in 2016. As a consequence of American protectionism and issues in Latin America, India emerged a big beneficiary in 2017, even as the Chinese Government placed curbs on China’s investments around the world.CHINA IN INDIAIn the four months of this financial year, India imported approximately $23 billion worth of goods from China. Mobile phones, parts and other electronic items accounted for the highest share at $4.4 billion. Computer hardware was next at $1.3 billion, followed by industrial machinery at $1.16 billion. If one were to consider China’s share outside Crude Oil and Gold imports, Chinese goods made up for nearly 19 percent of all imports. If Hong Kong’s contribution were included, it would add up to nearly 24 percent of all imports. In other words, nearly a quarter of India’s imports came from mainland China or Hong Kong. No wonder then that the popular impression at home is that anything imported is by default from China. Outside security issues, which are predominant in the Indian mind post the war of 1962, it is this significant import influx that has caught the people’s imagination. Indians regard the extensive presence of Chinese goods with both awe (presence everywhere) and disdain (perceived quality).CHINA IN OUR HOMES Until a few years ago, ‘Made in China’ meant buying knick-knacks sold by the local store or even a supermarket. There was also the odd novelty cracker at Diwali. Amongst all the little brands, one name managed to stand apart in a different league: Lenovo. Lenovo in many ways was a pseudo Chinese brand. Having acquired IBM’s PC business in 2005, the gradual transition from IBM to Lenovo made the latter a popular brand in India, at least in the segments that owned or used a PC. In January 2006, Lenovo had a 7.3 percent market share in India. A couple of years after its brand agreement ended with IBM in 2012, Lenovo had increased its share to 15.8 percent. That is a doubling of market share in under six years. Today, Lenovo has a 21.8 percent market share in India. Lenovo in many ways is the flag bearer of all the Chinese brands that were to follow.In 2015, Xiaomi was launched in India. Xiaomi used a combination of a great product, clever distribution, and marketing, and almost perfect pricing to break into the Indian market. With a 28 percent smartphone share, it is perhaps the most well-known Chinese brand in India. Today, Chinese mobile phone manufacturers including Xiaomi, Opp, Vivo and Honor make up for about 53 percent of the smartphone market share in India.Amongst the leading apps being used in the country – TikTok, Vigo, UC News, News Dog, Club Factory, UC browser, and Shein are leading in their individual categories. Another category that Chinese companies completely dominate are tyres. The market share of Chinese brands in the Truck and Bus Radials segment was about 23 percent in 2016-17.The Chinese invasion is unlikely to end anytime soon. Following the popular electronics brands are the Chinese auto companies. Volvo, a Swedish brand is now owned by Geely. Geely also now owns 10 percent of Daimler, the maker of Mercedes Benz. SAIC Motor Corporation will enter India soon through its Morris Garages (MG) brand. It is setting up a plant in Hallol, Gujarat. BYD, a bus manufacturer is all set to establish a plant in India, and sales have already begun. Other auto companies that are likely to launch in India soon include Changan, Dongfeng, and Great Wall Motors Company.Even Bollywood better watch its collective back. Long before mobile, PC or app companies entered the country, the most recognisable Chinese name was Jackie Chan. Jackie Chan is admittedly from Hong Kong, but that is a part of China now.> Jackie Chan caught the popular imagination with his movies from the 1980s, and he is still popular to this day. In fact, he is more popular than many politicians in this country. On Google Search for example, as many people in India search for Jackie Chan as they do for firebrand CM Yogi Adityanath. The Jackie Chan movie formula resonated with Indian expectations – great fights, some romance, some tragedy and some comedy. He is a showman and his movies have a Bollywood-esque feel about them – just minus the singing and dancing.THE B2B PRESENCEThe members list of the relatively unknown official Chindia Chamber of Commerce and Industry is very interesting. Of the 101 companies that are members:· 24 are electric, transmission, power and power-construction companies· 5 are machinery companies· 4 are steel and metal companies· 3 are construction (residential, commercial, infrastructure, etc.) companiesThere are numerous other technology, engineering and services firms. In fact, the popular brands outlined earlier only form a small percentage of this elite official industry association. The association is a reflection of the nature and magnitude of exports to India. According to a report in The Mint, Sambitosh Mohapatra, Partner, Power and Utilities at PricewaterhouseCoopers India, said, “Given that 60 percent plus of stressed assets are of Chinese origin, risk review and due diligence, especially technical, will get influenced by the geo-political situation with China, performance of machines, warranty, supply of spares, O&M (operations and maintenance) support, etc”.That is the same sort of dominance we see in the mobile phone industry. A Fortune India article in 2011 claimed that Indian power projects had already imported roughly Rs 1 lakh crore of power equipment by the end of 2010. The reason that the Chinese companies performed really well could partly be low interest rates from the China EXIM bank. Some major names include Sepco, Dongfang, Harbin and Shanghai Electric.But, it is not just power. Chinese companies were involved in the Delhi, Mumbai Ahmedabad, Nagpur and Kolkata Metro projects. The dominance of Chinese companies could have been much higher if not for security concerns raised across sectors and the Government of India actively raising duties to target Chinese imports. In 2015, the Indian Government targeted the dumping of Chinese products and imposed duties on steel imports. Further, in 2017, the government tightened rules on the import of Telecom and Power equipment over security concerns.CHINESE VENTURE AND DIRECT INVESTINGBeyond the brands, China’s presence has also been felt owing to the large VC and technology companies investing in India. Chinese companies have invested in some of the most well-known startups in India. It started off with Alibaba investing in Paytm and Tencent in Practo. Alibaba has also invested in Snapdeal, Zomato, BigBasket, and First Cry. Tencent has also invested in Swiggy, Ola, and Flipkart. Xiaomi has invested in Hungama. According to this report by The Hindu Business line, Chinese companies invested $5.2 billion in 30 Indian startups last year. That number is nearly a five-fold jump from the $930 million that companies from China pumped into 41 Indian firms in 2016. This is only likely to continue to rise as India’s startup environment has exploded, and more and more companies come up with innovative ideas to service the Indian customer. When we spoke to some entrepreneurs and influencers, who have a good understanding of the VC and entrepreneurial ecosystem in India, here is what they had to say about the Chinese investors in India:Chinese investors are very curious about Indian consumers. They ask a lot of questions about their behaviours, habits, likes, and dislikes. Most Indian entrepreneurs, on the other hand, when faced with similar questions, did not have good answers and tended to give generic responses lifted straight from TechCrunch, KPCB’s annual internet trends report, or similar US-based sources. Indian/US VCs, and some Indian entrepreneurs, do not demonstrate a deep understanding about consumers outside of the big cites. Chinese investors, on the other hand, have inserted themselves deeply into the smaller towns and cities with feet on the street and understand the real Indian consumer and real markets much better. This has led them to get to the top of several categories – news, entertainment, browser etc. – with bulk of their consumers coming from smaller towns. > Like it or not, Chinese investors have their ears (and feet) on the ground, work much harder, and are prepared to step into the sweaty and dinghy hinterland of India with sleeves rolled up in search of consumer insights and markets!India’s tolerance of investments through Singapore and Mauritius makes it difficult to estimate FDI from a country accurately. Many Chinese companies, in fact, invest from Singapore. Still, Government statistics suggest that between April 2000 and June 2014, India had received about $410 million dollars’ worth of Chinese FDI. In the first two months of this calendar year itself, Chinese FDI in India was over $1 billion and had doubled to $2 billion by June. According to the Ministry of Commerce, India received five times the FDI in the first half of 2018 as it had received in the first 14 years of this century. It is a remarkable statistic and broadly summarises the sudden increase in Chinese economic engagement in India. Still, as indicated earlier, India’s share in Chinese global FDI is very small, indicating massive potential going forward (and security issues are resolved). HOW DID THE CHINESE MANAGE TO BE SUCCESSFUL IN INDIA?Let us go back to Lenovo again.Lenovo’s success in India was built around three or four elements, and in many ways, the way some successful western companies had operated in India – intense media presence, even more intense distribution focus, and a pricing proposition that was not too cheap nor too expensive, which, for that matter, are the basics of any strategy. But it did something that other Asian companies did not do; it let Indians (and/or global managers) run the business fairly independently. Chinese companies are quite different from their other Asian rivals in this unique way. Here are some examples:CEO of Xiaomi in India: Manu Kumar Jain (Indian)CEO of Haier India: Eric Braganza (Indian)CEO of Samsung India: HC Hong (Korean)CEO of LG India: Kim Ki Wan (Korean)Sony India, one of the oldest Japanese Brands, appointed Sunil Nayyar its first Indian CEO only in 2018!The second advantage that Chinese brands had over their Asian rivals is that the Chinese were just a little ahead of India, unlike the Japanese or the Koreans. India’s per capita today is the same as China’s per capita 12 years ago. Korea was at the same level 36 years ago, and Japan 48 years ago. It is not that the other Asian rivals don’t understand the Indian consumer; it is just that it is much easier for the Chinese because they have sold to a similar market in the recent past.While there appear to be substantial cultural differences at the surface, the success of Bollywood movies in China suggests that perhaps the difference between Indians and Chinese is far less than say with the Koreans or Japanese. > For example, on Uncertainty Avoidance (Hofstede Power Distance), India and China are very similar. This makes Chinese companies far nimbler and more open to change, which is very similar to the way India operates. Chinese also have similar behaviors on Power Distance, Masculinity and Indulgence (max 10 point gap). Where they differ, however, is that they are less individualistic and more long-term-oriented than Indians. In contrast, Indians share similar scores as the Koreans on just one variable – Indulgence and the same scores as the Japanese on one variable –Individualism. This is a remarkable finding that will surprise many Indians and Chinese too.Then, there is control over costs and design. While the Japanese and Koreans have gradually moved manufacturing outside their home countries, the Chinese haven’t. This has given the Chinese enormous cost advantages and greater flexibility in design and manufacturing. Further, there are some unique elements of the Chinese character and learning that enables them to replicate their success in India.1. They have seen it all – The spending boom, the technology boom. Competition with limited understanding of the market, the need for scale, low cost of capital, and so on. The Indian market is similar to how theirs was a few years ago. 2. Many of the engagement models that worked in China also work in India – Deep discounts, micro-payments, freebies, fake accounts, sexually suggestive content.3. The need for scale – India’s large population fits nicely into Chinese companies’ large-scale mindset4. Highly adaptable approach – The Indian market requires a high degree of flexibility in changing business models and the Chinese are quite adept culturally to change as per needs. They are also quite humble and self-deprecating and rarely talk ill of their rivals. This makes them much more open mind to adapt to change.5. Indian and Chinese work ethic connects well, and this makes it easier to work in India than in any other countrySHOULD WE WORRY?India’s relationship with China is complex primarily due to China’s complex relationship with Pakistan, India’s defeat in the 1962 War, and the occasional border flare ups like the one in Doklam. Independent assessments have revealed that the 1962 War was as much a result of Nehru’s forward policy as it was of Chinese hegemony. That said, Indians could have probably forgotten the conflict of 1962 if not for China’s active prodding of Pakistan for the last 50 years, including support of their nuclear programme. The Times of India even reported how China’s support for Pakistan’s nuclear programme was actively tracked by the CIA. China’s active String of Pearls strategy also makes India, and Indians, extremely uncomfortable about the Chinese thinking. The strategy refers to the network of Chinese military and commercial facilities and relationships along its sea lines of communication, which extend from the Chinese mainland to Port Sudan. The sea lines run through several major maritime choke points with strategic maritime centres in Pakistan, Sri Lanka, Bangladesh, the Maldives, and Somalia. It is a belief amongst Chinese strategic thinkers that Pakistan must be used to keep India at bay and prevent it from emerging as a serious rival. In some ways, there seems to be a fundamental lack of understanding amongst the Chinese about how Indians think strategically and how the national values play out when it comes to doing things that are perhaps not acceptable to other countries. It is this lack of understanding that is also preventing China from becoming a much larger partner of India as it continues to face blocks in their economic strategy in India. The slowdown in the Chinese economy means that China will gradually have to increase its dependence on the only large economy (according to a report by Paris-based international grouping of the world’s leading economies, the Organisation for Economic Cooperation and Development (OECD) that is likely to grow over the next 10 years). > The increasing trade conflicts with America, and its own increased cost of production will make China more dependent on India, rather than less. As its dependence increases, the Chinese government will need to behave in a more sensible manner than they are doing at this moment. India should continue to use all available bargaining chips around the economy to push China for greater foreign policy reform in the next 10 years. If that doesn’t reform Chinese thinking, India should continue on its path of attempting to reduce dependence on China, in particular their factories. History has amply demonstrated that when the economies of two countries are deeply intertwined and symbiotic, the political relationship becomes more amiable. However, what’s currently happening between the US and China (two countries with a symbiotic relationship like no other) is creating a new trend, which seems to imply that strong economic dependencies are no guarantee for avoiding conflicts of ego and power.In the meanwhile, the Aamir Khan success in China should bolster our confidence in increasingly being confident of breaking through the Chinese market. The success of Dangal in China was based on understanding similarities in Indians and Chinese cultural viewpoints, Smart Marketing, and getting local stars to promote the movie. Contrary to the thinking of some Indians, there are numerous Indians in India and abroad who have a fairly good understanding of Chinese consumer mindset and culture. India must increasingly identify such experts and start placing more value on the opinions of this group of Individuals who can become the lynchpin of Indian exports to China. The Indian Government should constitute a strategic group that combines security experts, industry experts, researchers and a whole host of individuals to provide continuous intelligence on Chinese thinking and the best route for success for Indian companies in China. In the meanwhile, India needs to bolster its industrial and manufacturing base, get its population growth rates under control, and start innovating more, to become competitive in China. It’s time for the dawn of a new day!If the last 20 years belonged to China, we have no doubt that unless we bungle badly, the next 20 years would belong to India!