China, India and the Future

A few facts

� Since 2005, Volkswagen has been selling more cars in China than in Germany

� In the past five years, car sales in China have risen by 300%; in India by 60%, and in the UK by 0.2%

� Britain is the world’s 5th largest economy; it has 5% of world trade, but only 0.9% of imports to China are from Britain

Total GDP (in constant US$s 1978-2006)

0200000400000600000800000

10000001200000140000016000001800000

1978

1981

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2005

$ms

China

India

Britain

Composition of Chinese and Indian Economies 2006

0%10%20%30%40%50%60%70%80%90%

100%

India (GDP) India (Pop) China (GDP%)

China (Pop%)

Tertiary%

Secondary%

Primary%

Fixed Capital Formation Trends: China v India

0

100000

200000

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400000

500000

600000

700000

800000

1978

1980

1982

1984

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1988

1990

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2004

$mill

ion

s

China

India

Capital formation: China, India and Bangladesh 1970-2005

0

5

10

15

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25

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35

40

45

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1970

1973

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%

China Gross fixed capitalformation

India Gross fixed capitalformation

Bangladesh Gross fixedcapital formation

Why is China growing so fast?

� Huge investment levels (an investment rate of 40%); Chinese investment in fixed assets is nearly 5 times higher than India’s

� Spending on construction is nearly 8 times higher in China

� Literacy level is much higher: 42% illiterate in India; 9% in China

� … so the huge rural workforce can find jobs

What changed in China in 1990/91?

� A freeing up of market access and the private sector; a major policy change to welcome FDI

� The policy change to hugely increased capital spending, especially on infrastructure

� Probably influenced by the political pressure for change after 1989

Exports of Goods and Services (in $millions)

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50000019

78

1980

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China exports

India exports

Export growth (v 12m ago)

0.00%5.00%

10.00%15.00%

20.00%25.00%

30.00%35.00%

40.00%45.00%

Q1 200

3Q2 2

003

Q3 200

3Q4 2

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Q1 200

4Q2 2

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India Exports % change China Exports % change

Can China outstrip America?

($trillions) 2006 2016 2026 2036

UK $2.34 $3.00 $3.83 $4.91

India $0.80 $1.57 $3.09 $6.08

America $13.22 $18.11 $24.81 $34.00

China $2.51 $5.94 $14.09 $33.36Assumed average GDP growth: UK 2.5% US 3.2% China 9% India 7%

How fast is India growing?

� In 2007 India was growing at nearly 10%

� And although its longer-term growth has been rooted in services, firms such as Tata (with its £1,250 car) are pushing ahead in manufacturing

� The big question is whether it can be sustained

Hitting the buffers? (2006 figs)

India China

Inflation 6.5% 2.3%

Interest rates 7.25% 4.5%

Unemployment 7.8% 4.2%

Current account ($) -26.4bn 179.1bn

Struggle in India?

Man. Growth Inflation

May/June 2004 6.6% 3.6%

February 2005 8.7% 4.4%

February 2006 9.1% 4.8%

February 2007 11.3% 6.7%

Source: Indian Government data April 2007

What does it mean for business

� Top firms should move into China: following VW, BMW, L’Oreal, Honda and McDonalds

� From the UK, the main movers into China are Kingfisher (B&Q), Tesco and BP, but we are far behind Germany, the US and Japan

� Britain has 5% of world trade, but less than 1% of all imports to China …. and

� .. success in China takes time and influence

Implications and Issues

� Can our firms think in a sufficiently long-term way? (When Sony started up in Britain in 1978, it said it would take 15 years to break even)

� Can our firms cope with major risk-taking? (Tesco dips toe in China; misses out on India – so far)

� What has held our Boardrooms back?

Constraints on British Boards

� The grip of the stock market may be a factor; much more significant than in Germany or Japan

� Low levels of manufacturing in Britain (only 15% of GDP) may mean the British opportunity is to come (when China develops services)

� May have lacked government support

Longer-term issues

� China will be the golden business opportunity of the next 20+ years

� … so clever students will learn Mandarin…

� … and clever firms will devise a China strategy (produce there? Buy there? Move there? Sell there?)

And India?

� Less exciting in general, though with far better opportunities for Britain

� … many English speakers, and a common link from the days of Empire

� Firms such as Unilever are major employers in India

� UK has a 5.5% share of Indian imports (but this figure is falling)

A classic strategic decision…

� Address a weakness by playing catch-up in fast-growing China (shareholders will probably applaud)

� Or build on a UK strength by getting in early in India …

� … perhaps India will experience the take-off enjoyed by China after 1990 – and growth will accelerate

What about the casualties?

� 2006 Data from the ILO

China India

Fatalities 73,615 48,176

Workforce 699.7m 418.6m

Fatal per 10,000 1.06 1.15

Source: Chinese and Indian Government data and other sources

And the environment?

Tonnes of CO2 Total CO2

per cap. p.a. M tonnes

India 1.1 1,100

China 3.5 4,700

UK 9.6 540

US 20.2 5,800

Russia 10.5 1,500

World 4.2 26,000Source: Energy Information International (The Guardian March 26 2007)

Conclusions

� China is set fair for many more years of sustained growth at 8-11%p.a.

� India will continue to grow rapidly, but in a more cyclical way – it needs vast investment in education and transport –it isn’t clear that it can be afforded

� China is the right horse – but it has already left Britain behind