Anil K. Gupta & Haiyan Wang argue the strategic importance of China and India to Fortune 1000 companies.
The current financial crisis has accelerated an ongoing shift in the world’s economic center of gravity from the West to the East, especially to China and India. In 2009, these are the only two economies – among the world’s 12 largest – that will not only grow but do so in the 5-8 percent range, a rate of growth that would be envy of the developed economies even in the best of times. Obviously, this rate of growth is a sharp slowdown from the 9-11 percent range of the last five years. This fact tells us that, in an increasingly integrated world, no country can remain unaffected by turmoil in a major economy such as the United States. It also tells us that, if you are looking for top-line growth, you have little choice but to start deepening your market push into China and India.
However, as we argue in our forthcoming book, Getting China and India Right, it is important to note that the strategic importance of China and India is multi-faceted, encompassing not only high rates of sustained growth but also two of the world’s lowest cost structures for both blue and white collar work as well as two of the world’s largest pools of science and engineering talent. The massive challenges facing the global pharmaceutical industry serve as a striking window into the growing centrality of China and India for the survival and success of multinational firms in many industries.
Pfizer’s decision in early January 2009 to lay off as many as 8 percent of its worldwide research staff is just the tip of the iceberg in terms of the pharmaceutical industry’s gargantuan problems. According to Jean-Pierre Garnier, the recently retired CEO of GlaxoSmithKline, the top 15 pharma companies lost roughly $850 billion in market value between December 2000 and February 2008. This was before a further tumble in late 2008. The industry’s collective investment in R&D has exploded from $2 billion in 1980 to over $40 billion today with no increase in the number of drugs being approved by the FDA. Pharma companies have compounded the problem by hoping that their sales and marketing staff could somehow overcome the low productivity of their R&D colleagues. The industry now spends twice as much on SG&A as it does on R&D. Given the ballooning health care costs and the burden that they have imposed on the U.S. economy (despite millions of uninsured citizens), it is impossible to imagine how the pharma industry can continue passing on the costs of its poor productivity onto American employers and consumers. Any pharma company that still wants to be standing by 2015 will have to figure out how to dramatically increase its R&D productivity while reducing the cost of R&D and to look for new growth opportunities beyond the mature developed markets.
Consider now the potential multi-faceted role of China and India as global platforms for the needed transformation of the global pharmaceutical industry. Each of these two countries produces five times as many chemists at the bachelor’s level and three times as many at the master’s level as the U.S. does on an annual basis. Importantly, this talent costs only about one-fifth to one-third of that in the U.S. The other side of drug development is clinical testing. Given the large populations and low income levels in China and India, enrollment in clinical trials can be fast, easy, and highly efficient as a single site can recruit a much larger number of patients. According to GSK’s Garnier, the cost of Phase II and Phase III clinical trials at a top notch academic medical center in India is less than one-tenth the cost of similar trials at a second-rate medical center in the U.S. In short, if a global pharmaceutical company wants to boost its innovative capabilities while at the same time trimming its R&D budgets, it has little choice but to rely increasingly heavily on China and India as R&D platforms. If it wants to play the generics game (which is rapidly eating market share from the patented drug segment), it will have to leverage India, one of the world’s market leaders in generics. And, if it wants to look for new growth opportunities beyond the mature developed markets, it has to go where the growth is – to China, India, and other emerging markets. According to industry estimates, by 2017, pharma sales in just the big emerging markets are likely to be larger than those in the United States plus the top five European markets combined. In short, no major pharma company can hope to still be around by 2020 if it does not make China and India central to its R&D strategy, its manufacturing strategy, and its marketing strategy.
Other industries affected
The pharmaceutical industry is hardly an isolated case. Similar dynamics are playing out in a number of other industries such as cars, computers, telecommunications, and home appliances. Take the auto industry. During 2000-2007, China and India accounted for over 50 percent of the worldwide growth in the auto sector. By 2015-2020, China will quite likely be the world’s largest market for cars and India one of the three or four largest. As illustrated by China’s BYD (which showcased a plug-in hybrid in January 2009) and India’s Tata Motors (which demonstrated the $2500 Nano in January 2008), both countries are also becoming global centers for automotive R&D and ultra-low-cost production.
The ongoing rise of China and India is a game-changing phenomenon. They are the only two countries in the world that simultaneously constitute “four stories rolled into one,” each strategically crucial in its own right. The four stories are: (a) China and India as mega-markets for almost every product and service, (b) China and India as platforms to dramatically reduce a company’s global cost structure, (c) China and India as platforms to significantly boost a company’s global technology and innovation base, and (d) China and India as the springboards for the emergence of a new breed of ambitious global competitors. Many countries feature one or two of these stories but, other than China and India, there is none that features all four. For most Fortune 1000 companies, survival and success over the next five to 10 years will demand that they address each of these four stories head-on and with urgency.
Anil K. Gupta (firstname.lastname@example.org) is the Ralph J. Tyser Professor of Strategy at the Smith Business School, The University of Maryland. Haiyan Wang (email@example.com) is Managing Partner of The China India Institute. They are the coauthors of The Quest for Global Dominance (John Wiley, 2008). Their next book, Getting China and India Right, will be launched globally by John Wiley in February 2009.