COMPLIMENTARY AND COMPETITIVE-FINANCIAL TIMES
INDIA AND CHINA PART 1: A share of the spoils: Beijing and New Delhi get mutual benefits from growing trade 

India's prowess in services and China's manufacturing strength are complementary but both countries can also grow in sectors where they compete directly. Other nations should consider how to respond, write Edward Luce and Richard McGregor

The Financial Times
Published: February 24 2005

China and India, the world's two most populous countries, used to be described as giant ships passing in the night, such was the paucity of economic and other ties between the two neighbours. But they are starting to sound the foghorns as they draw closer.

Perhaps the most important shift in perception has been from the fast- growing, increasingly powerful Chinese side, which long dismissed India as being backward in contrast. Huang Jinxin, of the University of Wisconsin-Madison, recalls that standard Chinese school textbooks compared India unfavourably with China on key indicators. "Based on India's comparative experience, the Chinese concluded that development and democracy were a trade-off," she says.

But India's economic performance in the last few years has prompted a re-assessment by Beijing. The emergence of a world-class Indian software outsourcing industry has been the most important factor in changing China's mindset. This is increasingly translating into trade and investment.

More than 25,000 Chinese software students have already passed through the doors of NIIT, India's largest software training company, which has 106 "education centres" in China - up from just two in 2001. "China is our number one overseas market and growing rapidly," says Vijay Thadani, chief executive of NIIT, from his offices in New Delhi. "China's thirst for Indian software skills is remarkable."

Meanwhile in Bangalore, Liu Hongqi, India head of TCL, the Chinese consumer electronics enterprise, talks of the growing purchasing power of India's middle classes. TCL recently set aside $150m to build an Indian factory and market its televisions, DVD players and air conditioners to Indian consumers. "India is not only a new market for us but [is becoming] a strategic market as well," says Mr Liu.

The two countries are held up as having contrasting models of development and economic records, with the Chinese hare outstripping the Indian tortoise. But this is to overlook the growing interaction between the two neighbours, borne out by the experiences of companies such as Mr Liu's and Mr Thadani's.

From only $1.8bn in 2001, bilateral trade will hit $14bn during India's current financial year, which ends next month. By Chinese standards the numbers are still small - its exports are more than $300bn. But in the next two years China is set to overtake the European Union to become India's largest trading partner, having been its ninth largest in 2001. Until 2002 there were no direct flights between India and China: now there are five a week with the number set to rise in the next year.

India and China are even exploring ways of joining forces to find cheaper sources of supply and boost their competitiveness. There is increasing awareness - especially in India - that, far from competing in a zero sum game, both countries are growing at such a speed that there is enough room for each to accommodate greater productive capacity.

"People used to say it was China and not India, then it was China against India - but if you look at any number of sectors the real story is more likely to be China and India," says N. Srinivasan, head of the Confederation of Indian Industry.

To some extent China and India's strengths are complementary rather than clashing. Whereas China has become the world's workshop for manufactured goods, India is developing a highly competitive services sector.

From only a handful in 2000, there are now 90 Indian companies with offices in China. They have a presence in sectors ranging from pharmaceutical production to automotive components but are mostly software and information technology companies. Infosys and Tata Consultancy Services, two of India's largest software companies, have technology and development centres in Shanghai and other cities.

Each company has hired some 150 to 200 locally trained engineers, comparable in cost to skilled workers in India but much cheaper than IT professionals in the US and Europe. Their immediate target is the market for customised software for multinationals in China. "That's where we are aiming to go - we want to replicate our model [in China]," says R. Narayanan, the financial manager of Infosys Technologies in Shanghai. "In the past two to three years especially, all the major Indian software companies have looked at China in a big way."

Likewise, Chinese manufacturers are starting to target India's growing purchasing power. Shenzhen-based Huawei Technologies, the telecommunications equipment maker, is one of a number prospering in India. Huawei spent $100m to establish a research and development centre in India in 1999 and will expand its workforce from 800 to 2,000 in the next three years.

"The size of the Indian market and the low costs are not the most important reasons for being here - it's essential to our strategy of being a genuinely international corporation," says James Yuan, the chief operating officer of Huawei in Bangalore.

Yet bilateral trade and investment ties are not simply about India selling software to China and China selling hardware to India. The division of labour is not so clear cut.

A few years ago there was deep fear in New Delhi about the prospect of cheap Chinese imports flooding into India. Yet India actually has a modest trade surplus with China, driven largely by the export of Indian raw materials such as cement and iron ore, but also by exports of manufactured goods including plastics and steel.

Executives at Tata Steel, India's most competitive steel producer which last week sealed a $300m acquisition of NatSteel, a Singaporean steel company, describe an almost unquenchable thirst for steel in China, India and beyond.

Tata Steel plans to double its production within two years. To improve delivery times for its exports for China and elsewhere Tata is constructing a port from scratch in the Indian state of Orissa and building a $3bn steel mill nearby.

Tata estimates India is roughly 10 to 15 years behind China's steel production, which, at more than 250m tonnes a year, is well ahead of India's 40m tonnes. But India's output is set to double in the next four years.

"The issue is not competition between India and China - there is no way production can keep up with demand in either country," says a senior executive at Tata. "The real question is how quickly what remains of global production will move to China, India and Brazil."

Foreign direct investors, who have long shunned India in favour of China, are seeing the advantages of having large-scale manufacturing operations in India as well. Last week Posco, the Korean steel company, said it would set up an $8bn steel plant in Orissa to produce steel for export and India's domestic market.

In textiles, too, the two countries look to be able to compete side by side. China is far ahead of India, with about five times the volume of textile exports. But India is second only to China in reaping the benefits of last month's abolition of the global Multi-Fibre Arrangement, which had imposed quotas on developing country textile exports to the developed world. Last month India's overall exports were 33 per cent up on the previous January, driven mostly by Indian garment makers making the most of the abolition of quota ceilings.

Executives say that India's textiles exports would be much greater if they enjoyed the same conditions as Chinese manufacturers. Dinesh Hinduja, chief executive of Gokal Das Exports, one of India's largest clothing exporters and a supplier to Wal-Mart, Marks and Spencer, Gap and other western retailers, says he can only envy the advantages of his Chinese counterparts.

Chinese textile companies import manufacturing equipment at zero duty, compared with 25 per cent in India. China has impressively modern ports, highways and power supply compared with India's rusting infrastructure. Most importantly, China has more liberal labour regulations: Mr Hinduja's Chinese counterparts can hire at whatever pace they like without fear of being stuck with a huge payroll in a downturn. In India, by contrast, downsizing is expensive and difficult. Mr Hinduja is unable under India's labour laws to sack even a chronically absentee employee.

Yet somehow India manages to compete. Gokal Das's exports are rising sharply - from $140m last year to an expected $200m in the next 12 months. "When I visit China I am in awe of the benefits that government makes available to its textile manufacturers," says Mr Hinduja. "But we have skills where the Chinese are weak: high quality design and software, the ability to interract with western customers in English and a managerial talent pool which has a very flexible and cosmopolitan mindset."

All this makes Indians believe that they can continue to compete even on turf where China seems to have the advantages. At any one time Gokal Das Exports is producing 200 different clothing items for 26 separate western labels. Mr Hinduja points to the £88 price tag on an item produced for Marks and Spencer. "This would be several hundred pounds if it had been made in England," he says. "It is uneconomic to manufacture these in the west any more. Once one company outsources to China or India, all its competitors have to."

Mr Hinduja's observation would serve for almost any sector, whether in services or manufacturing, call centres or car components, in China or India. "All that will be left to the west is personalised tailoring," he predicts. he much higher quality of China's infrastructure and India's continuing inability to move rapidly ahead with micro-economic reform make it more likely that China will continue to outstrip its democratic neighbour - albeit with the gap narrowing over time.

But China can also learn much from its neighbour, something that policymakers in Beijing and elsewhere have begun to recognise. India's success in software, although by no means yet comparable in dollar earnings to China's manufacturing performance, has sparked Chinese envy. Beijing and Shanghai now compete aggressively for Indian IT investment. "This is really hot right now," says Zhu Peifen, head of the Hi-Tech Industry Development Division for the Beijing city government. "The Indian software sector can be a good teacher for us."

The two countries are also tentatively exploring areas of co-operation, for example as partners for joint purchases in markets such as energy and commercial aircraft. Such a prospect - which Boeing or Airbus would not welcome - is so far not much more than talk. Nevertheless there is a determination in both capitals to consider the unmatchable economies of scale that would be available to them as joint buyers of some of the materials and technology that both countries lack.

That would help to ensure the 21st century would belong both to China and India - regardless of which of the two neighbours posts the best growth figures over the next few years. Tomorrow: the energy race. For yesterday's article go to www.ft.com/analysis

The low point in the recent history of Sino-Indian ties - the moment when, in 1998, New Delhi exploded its first nuclear bomb - was in retrospect also the starting point for the increasingly vigorous bilateral relationship of today. While earning it short-term opprobrium, the bomb gave India strategic parity with its hitherto mostly disdainful neighbour.

Chinese scholars say Beijing helped spur India's nuclear programme by pointedly refusing a request from New Delhi in the early 1990s for a guarantee of no first strike. Without a bomb of its own, India did not merit such a promise, Beijing reasoned. "China did not respect India," says a Chinese academic, "and it did everything possible to show that China was a great nation and that India was not. This was a big mistake."

Symbolic in rectifying that will be a trip to New Delhi - perhaps as early as next month - by Wen Jiabao, the Chinese premier. The summit he is to hold with Manmohan Singh, Indian prime minister, follows a 2003 visit to Beijing by Atal Bihari Vajpayee, Mr Singh's predecessor.

Disagreements include a border dispute remaining from China's humiliation of India in their 1962 war and India's harbouring of Tibetan exiles. But they are learning how to agree to disagree. Such has been the progress in relations that New Delhi points to the negotiating framework on the border issue as a model for resolving its differences with Pakistan over Kashmir. The border dispute "may never be resolved, but the two sides will still maintain peace and tranquillity along the (lines) of actual control," says Shen Dingli of Fudan University in Shanghai.

Still, India and China this month took their relations to a new level when they inaugurated what they said would be regular talks about issues of "mutual strategic concern", such as terrorism, energy co-operation and United Nations reform.

"The model is to put all the bilateral differences to one side and allow economics to drive the relationship," says Raja Mohan, a leading Indian analyst. "This doesn't mean that the disputes will necessarily be resolved, but it does raise the cost of not resolving them."

India's success in the software industry, and its emergence in the last few years as a potential regional economic superpower, has also helped transform its image in China. Cheng Ruisheng, a former Chinese ambassador to New Delhi, says: "We both need a peaceful environment to develop our economies."

There is talk of opening negotiations to establish a bilateral trade agreement - but such a project is probably still some way off. Indeed, many in both countries maintain a deep distrust about the motives of the other.

"There is very little goodwill on the Chinese side," says an Indian academic who has had extensive contacts with China. "They are very clear that they see us as a dangerous long-term competitor - and they are simply looking for a way in which we can be neutralised."

India's economic emergence is openly encouraged by the 10-member Association of South East Asian Nations, which has become increasingly concerned about the growing preponderance of China. In much the same way as the US hopes India will become a geopolitical counterweight to China over the next decades, Asean hopes India will become an economic counterweight.

That may be premature. India, with its sensitivity about sovereignty, bristles at being asked to play roles on behalf of other countries. But economic ties between India and China will continue to grow and a convergence of the two giants' broader interests at the World Trade Organisation and elsewhere will help bring them closer together.

INDIA AND CHINA PART 2
As Beijing and New Delhi enter foreign deals to bring them the oil and gas needed by their surging economies, regional politics is tending to the pragmatic though territorial claims show a sharper tone, writesVictor Mallet

By Victor Mallet and Khozem Merchant
The Financial Times: Published: February 25 2005

China National Offshore Oil Corporation is considering a nearly $14bn (£7bn, €10.6bn) takeover of Unocal of the US. Sinopec, another Chinese state-controlled oil group, has struck a $70bn deal to buy Iranian crude oil and liquefied natural gas over three decades. China has sent $6bn to Rosneft, the Russian company that bought the main production unit of the embattled Yukos oil group, as advance payment for oil supplies.

India has just reached a $40bn agreement to import LNG from Iran and develop Iranian oilfields, and is promoting pipeline projects to bring oil and gas across neighbouring countries to supply its energy-hungry economy.

These deals are among the largest of their kind but hardly a week goes by without Indian or Chinese companies announcing smaller energy accords from Ecuador to Gabon. The race by Asia's two emerging economic giants to secure fuel has begun in earnest.

With world energy supplies already tight, the question is not whether the rising demand from India and China will bring them into commercial competition with each other and with other big importers such as the US and Japan: that is already happening. The question is whether it will lead to diplomatic tension and ultimately increase the risk of military conflict in the Asia-Pacific region.

For the moment, the competition for resources is fierce but not hostile. The main evidence of concern is that Beijing, nervous about the possible use of US and Indian naval power to control oil supplies from the Middle East in the event of conflict, is rapidly strengthening its own navy. "The Chinese are building up a capability to defend those sea lanes," says Gary Samore, director of studies at the London-based International Institute for Strategic Studies. "There is a naval rivalry building up in south-east Asia and the Indian Ocean."

There is no doubt that India and China, which together account for more than a third of the world's population, must greatly increase their imports of oil and gas if their economies are to continue growing at annual rates of 6-10 per cent. China was once an oil exporter but is now the world's biggest oil consumer after the US and is increasingly dependent on imports: already, a third of its oil is imported.

India, although its economy and its energy needs are smaller than China's, is even more dependent on imports than its dynamic neighbour. Mani Shankar Aiyar, petroleum minister, reckons India's import dependency will increase from 70 per cent of consumption this year to 85 per cent in 15 years.

In Mapping the Global Future, an assessment of the world's prospects in 2020, the US government's National Intelligence Council says China is expected to boost its energy consumption by 150 per cent and India by nearly 100 per cent if they maintain steady growth. "The single most important factor affecting the demand for energy will be global economic growth, particularly that of China and India," says the report, released in December.

Both countries lack domestic resources and need to ensure access to imports. "The need for energy will be a major factor in shaping their foreign and defence policies, including expanding naval power," says the intelligence report, adding that this is likely to prompt China to be more "activist" in the Middle East, Africa, Latin America and Eurasia.

This, too, is already happening. In recent years, Beijing has courted nations rich in natural resources. Trips by Hu Jintao, the Chinese president, to countries such as Kazakhstan and Gabon are at least partly inspired by China's thirst for energy.

Rivalry between China and India would be a concern even if it occurred in a world where other demands for energy were unchanged. But that is not the case. With oil and gas remaining the essential fuels for industrial societies, the importance of Middle East suppliers will increase as reserves elsewhere are depleted.

"Last year the UK for the first time became a net gas importer, as a result of which there is a lot of interest in pipeline and LNG deals in the UK and Europe," says Anna Howell, a Hong Kong-based consultant for Herbert Smith, the international law firm. "That is exactly what we're already seeing here in India and China."

Japan, the world's second largest economy, and South Korea, which recently sealed an agreement to buy $20bn of LNG from the Russian far east and Yemen, also remain highly dependent on energy imports. The continuing confrontation between China and Japan over a gas field in a disputed part of the East China sea and the fierce diplomatic battle (apparently won by Japan) over the route of a proposed Russian pipeline carrying Siberian oil show that the dangers of energy competition are real.

Not everyone, however, is pessimistic. Claude Mandil, executive director of the International Energy Agency, the club of industrialised oil consumers, says the difficulty of meeting China's and India's need for fuel imports can and should be eased by international and regional co-operation.

India's Mr Aiyar takes the same view. He dismisses the idea that the tussle may become a new version of the "Great Game" for influence between rival 19th century imperial powers, saying he plans to visit Beijing later this year for consultations. One of his aims is to avoid damaging competition between Indian and Chinese oil companies for the overseas energy assets coveted by both countries. "India and China don't have to go through fratricide in order to arrive at the conclusion that it is better to co-operate on energy security," he says. "Of course there will be competition where the market dictates."

The need to secure oil and gas supplies for the Indian economy may also help improve relations with other neighbours including Pakistan, its long-time enemy. Among the pipelines under consideration are one bringing gas from Burma across Bangladesh, one from Iran across Pakistan, one from Turkmenistan across Afghanistan and Pakistan, and even one across India from Iran to China.

S. Chander, an energy and infrastructure expert at the Asian Development Bank, notes that reaching access agreements with neighbouring states is easier than before, at least financially. "For these countries like China and India with booming exports, to pay out a couple of hundred million dollars to Pakistan or Bangladesh is not a big deal, as it might have been five or seven years ago when foreign exchange was tight."

The need for governments to co-operate on long-term infrastructure projects thus points at least to the possibility of improved relations between previously hostile states. "People are getting pragmatic," says one Asia-based strategist at a big international oil company. he energy squeeze is not so good for human rights or environmental protection, in central Asia or countries such as Burma. Governments in oil importing countries typically care more about energy security than the politics of the exporter. Democratic India has forged close relations with Burma's military junta and all but abandoned support for the pro-democracy opposition led by Aung San Suu Kyi. Like China, India is prepared to sacrifice other goals in the search for energy security.

In this search, both countries are implementing an array of policies designed to keep their power stations, factories and vehicle fleets running in the years ahead. The first and most obvious step is to boost domestic output of oil and gas, but the two governments accept that domestic production, even if it can be increased, cannot be enough to meet fast-growing demand.

The next step is to ensure good relations with suppliers, which is why India hosted a meeting of Gulf oil exporters and big Asian oil consumers (including China) last month. It also explains why India, China and Japan are all prepared to risk the wrath of the US by striking deals with Iran.

Another priority is to guard against disruptions to supply. Both India and China have decided to create oil stockpiles for this purpose and India has signed a memorandum of understanding with the IEA on the co-ordinated release of stored oil. China is expected to begin its stockpile this year.

The fourth strategy is to diversify sources of supply, both geographically and in terms of fuel types. In short, no one wants to depend on oil from the Gulf. China and India are enthusiastic new customers for LNG from various sources, with India's first terminal operating and several more being constructed and planned in each country.

"The objective of LNG imports is to substitute for liquid petroleum imports from the Middle East," says Mr Chander. "It will, if not reduce the dependency, then at least hold it to a manageable level." Both Beijing and New Delhi are also eager to exploit more nuclear power. China wants to quadruple its output of nuclear-generated electricity in the next decade.

A fifth policy, favoured by environmentalists and finance ministries, is to allocate imported energy to the most suitable users and increase the efficiency with which the energy is used. Much fuel would be saved if India's cars and China's power stations and factories were as efficient as vehicles and plants in Japan and the west.

Yet analysts doubt that improved efficiency can make a noticeable difference to energy consumption. Joe Zhang, head of China research at UBS, argues that for the policy to work it must be universally adopted, or else the few plants that do invest in better equipment would simply be at a financial disadvantage. "If one factory does it, it's no use," he says. "You need 200,000 other factories to do the same."

Mr Zhang believes it is unfair to compare China's high energy use per unit of gross domestic product with the lower figures recorded in western countries because the whole point about China's economic growth is that the nation has attracted heavy, high-energy industries from richer countries. China, furthermore, is importing particularly large amounts of energy at the moment because it is building so much physical infrastructure - roads, ports, buildings and power stations.

The last and most controversial strategy, pioneered with spectacular lack of success and large financial losses by Japan in the 1970s, is to try to achieve energy security by purchasing overseas exploration and production assets, or even whole oil companies. China has pursued what it calls a "go out" strategy for a decade and its oil companies have secured footholds in countries such as Venezuela and Sudan. The mooted Unocal bid is another example.

It is an idea that attracts only scorn from financial analysts. "It's actually a silly thing to do," says Mr Zhang. "Whether the energy is produced by you yourself or by somebody else in Canada or Australia, you still have to pay for it. It makes sense to buy the reserve, the resource, only if you are a better producer. It doesn't change your energy dependency at all."

David Hurd, energy analyst at Deutsche Bank, adds that it is odd for CNOOC to think about buying Unocal, whose share price has recently been valuing its reserves at about $8 per barrel of oil equivalent, when it is buying gas assets in Australia for a quarter of the cost. "The argument about oil security is in my opinion irrelevant until you control the sea-lanes of the world," he says. Pipelines are even more insecure, as shown by repeated sabotage of pipes in Iraq and in the Pakistani province of Baluchistan.

Indian companies are starting to play the same game, and Indian and Chinese groups are now partners in one project in Sudan. "We are a late starter," says Ravi Mohan, chief executive of Crisil, the Indian credit rating agency. "In the early round of this, I think China is perhaps ahead of India, but India has woken up, so we can expect to see more action on this front."

Yet even the best of the strategies India and China are adopting to improve their energy security will make a difference only at the margins. The two countries will inevitably compete to buy oil and gas, just as they will compete with other energy importers in developed and developing countries. The challenge is not to stop the competition but to keep it amicable. For the previous two articles go to www.ft.com/analysis
India bids high to catch up

China's rising energy needs have forced the country's oil and gas companies to acquire vast assets around the world, overshadowing their Indian counterparts. But India's state-owned energy giants, led by Oil and Natural Gas Corporation, the largest domestic exploration company, are trying to catch up now that they have been given the green light from the government to expand internationally.

The aim is to triple the annual flow of oil from India's overseas energy assets to 20m barrels by 2010. Over the same period, domestic output from India's mature fields is expected to rise from 30m barrels to 50m.

Securing captive foreign reserves will not ease India's dependence on imported oil. Economic growth of 6 per cent a year will push the share of imported oil from 70 per cent of total energy consumed in India to 86 per cent by 2025.

This explains why India has recently thrown political weight behind the search overseas for large, long-term sources of fuel. "We need the support and we are getting it," says M.S. Ramachandran, chairman of Indian Oil Corporation, the largest refiner in India.

In recent months, for example, ONGC has announced a partnership in Russia, , IOC a gas development project in Iran, and Gas Authority of India a stake acquisition with a Chinese energy company. These deals will add to newly-acquired Indian presence in Burma, Sudan, Libya, Russia, Syria, Ivory Coast and Vietnam. IOC, for example, will invest $1bn to develop jointly with Iran's Petropars one of the Islamic Republic's largest natural gas fields. "We're excited, as it could lead to more exploration in Iran," says Mr Ramachandran.

"We're late entrants but we feel we have a comparative advantage here," says a senior official at India's petroleum ministry, referring to the leverage that New Delhi is able to exercise in so-called "frontier countries" where exploration is taking place and with which India has historically enjoyed close ties. Yet Chinese and Indian energy companies are chasing the same long-term energy assets - and the Chinese are winning. "We are bumping into each other everywhere, says Subir Raha, chairman of ONGC, the most active Indian energy company overseas.

One consequence of this competitive bidding is to push up the price of assets, which is likely to hurt an Indian company more than a typically bigger one from China. Observers also say Indian companies' aggressive bids in exploration auctions reflect a readiness to accept a lower rate of return than western companies in order to secure a strategic asset.

Mr Raha has argued for more collaboration with China because "the current situation is unfeasible - we can't keep fighting". He favours Indo-Chinese agreement on where to bid, with the winner swapping or sharing recoverable reserves. "There are many permutations but agreement will cap spiralling prices, which only benefit sellers." He says he has won over Indian officials, whose suspicion about China had once ruled out any accommodation. "My talks with executives at Chinese companies also suggest they understand."

Some observers are sceptical, however, arguing that, while it is in the Indian companies' interests to seek co-operation, the cash-rich Chinese can afford not to. In Sudan, for example, ONGC holds a one-fifth share in a producing field where the concession leader is China National Petroleum Company. Yet in Angola, ONGC's bid last year for a block auctioned by Shell that would have doubled the Indian bidder's production in Africa was trumped by a late Chinese package pumped up with bilateral aid.