What Will Be the Next Chapter in China’s ‘Impressive Story’ of Development?

According to Harbir Singh, vice dean for global initiatives at Wharton, over the past three decades, “China has undertaken development which takes other countries 60 to 70 years to accomplish.” During a visit to Shanghai in early January, Singh spoke with China Knowledge at Wharton about the country’s “remarkable” transformation in infrastructure, why education and healthcare are lagging, the differences between Chinese and Indian companies, and the nature of business partnerships in China. (Singh’s research focuses on corporate acquisitions and partnerships, among other strategy issues.)

Below is an edited version of the interview:

China Knowledge at Wharton: Dr. Singh, welcome to Shanghai. How often have you visited China, and how has it changed over time?

Singh: I have visited China many times before in the past decade. We have a joint program on corporate governance with CEIBS (China Europe International Business School) in Shanghai, and I am one of the faculty members.

China has, of course, undergone tremendous growth over the last 20 or 25 years — particularly if you just look at the amount of development in Pudong, Shanghai. I remember there was really nothing here 20 years ago, and now it’s a complete city. But that’s only one indication of how much development has taken place. The major difference is [that] the country went from low-end manufacturing to higher-end manufacturing. The other difference I see is that on a daily basis, it’s getting more globalized. More people can speak English and they have a lot more self-confidence — because as a nation you have achieved a lot more than can be [ordinarily] achieved. China has really transformed itself. What has happened in the building of infrastructure is remarkable; I don’t think it has ever happened anywhere in any historical period, and it’s a good example for other parts of the world.

China Knowledge at Wharton: Your main research field is corporate strategy and alliances. What’s your view on Chinese companies in that regard?

Singh: If you look at the governance program we do at CEIBS every year, the participants are basically all directors of Chinese companies. What I have noticed is that the size of the companies and the assets are really very substantial, and I think there has been a lot of progress [in terms of] volume, manufacturing, sales and those kinds of things. What needs more thinking is the relationship between managerial goals and the goals of shareholders — for example, the owners of the company. How should you manage the company for the short term and for the long term? That tension needs to be sorted out.

Also, as wages in China rise, it will become a different kind of game. In the past, the wage difference has been a big advantage [helping] China’s manufacturing to excel. Now, as the wages rise, Chinese companies need to move to a more high-tech, higher-margin business — which is so far they have done, but the wages will keep rising, so this will be an ongoing challenge.

China Knowledge at Wharton: Yes, especially now that the external market is in a downturn, which is putting more pressure on exports.

Singh: Right, the industry has to go to domestic consumption. That means producing goods for people in the interior of the country who have not experienced the same level of advancement … and companies can still make money by making these goods. By selling to U.S. or Europe, the price can be a lot higher, but by selling domestically, the price will be lower, and the specification and the products have to be different.

China Knowledge at Wharton: What do you think these companies should be doing?

Singh: I don’t think they are making mistakes; they are doing fine in that regard. I think the big issue is [that] just as China’s infrastructure has developed so much, other things have to be developed the same way — for example, healthcare and education, including school education and education for skilled work forces in specialized fields; adding capacity to the universities; and giving people the educational opportunities they need. That’s a big issue.

China Knowledge at Wharton: Yes, we have achieved a lot in factories, buildings and highways, but not enough in software building….

Singh: But that’s just the way it is. I think it has been a very successful strategy, and everything cannot be developed with the same kind of speed. Good things have happened, and these other things will start surfacing later if you don’t pay attention to them. And it’s always easier to say than to do.

What happened is in 25 to 30 years, China has undertaken development which takes others 60 to 70 years to accomplish, so it’s a very compressed development, but the soft side cannot be compressed that fast. People in the villages and their children are educated in a particular way; that’s what they have been doing for centuries. So, that’s a different thing. But overall, I think China is a very impressive story.

China Knowledge at Wharton: Have you done similar research on Indian companies?

Singh: Yes, I have done a lot of research on Indian companies. The strategies of Indian companies are very different. India, as a country, is very different from China; it has not developed infrastructure fast and it has a lot of infrastructure problems.

I think one of the positive things about India is the English language advantage, so the service sector in India is booming. Therefore, the manufacturing is going to China and the service is going to India, and that has been good for India in the sense that China has gotten the money from manufacturing, and India’s economy has gotten some money from the service sector which allowed the economy to improve. Those are good things. I think the problem in India is that they need to develop the infrastructure. The buildings, roads, electricity, etc., are not good; they are far behind China’s.

China Knowledge at Wharton: Compared with Chinese companies, are Indian companies more competitive globally?

Singh: Because of the English language advantage, they are integrating more closely with the American model or the British model in terms of running companies. They are adopting those practices in corporate governance more quickly. I think the quality of Indian managers is good, but there is a shortage of talent in relation to the growth targets. So there are some very high quality managers available, but once you get past that pool as the economy continues to grow, you meet the challenges of the shortage of those kinds of skilled managers.

China Knowledge at Wharton: Is that because India doesn’t have enough universities?

Singh: Partly because not enough people go to universities. So it’s a multi-level economy; there is a level of the economy that is very advanced — people live very well and they can live in anywhere of the world — and there are people at the lowest level, who are very poor and they don’t have anything to live on.

China Knowledge at Wharton: What percentage is the latter population?

Singh: I would say roughly one-third of the population in India is very poor. Now perhaps 60% of the population is villagers; some of the people in the villages are doing well, but about 20% to 30% are very poor. So, the percentage of the people lifted out of poverty is more in China than in India. Because China has more manufacturing jobs, you can get a lot more people employed, but services and information services only have good jobs for particular types of people. So the benefit hasn’t trickled down to the people in a broader context….

One more difference I should say is that in India, the domestic market accounts for a lot of production, so there is much more domestic-oriented consumption than in China. In that sense, the current financial crisis has less impact on India as they are not that connected to the global economy.

China Knowledge at Wharton: What other research are you planning to do regarding Chinese companies?

Singh: …There are some interesting issues. For example, normally the shareholders are the people who have given money and became owners of the company, and then you have banks giving loans. Usually in the U.S., you have stock holders and bond holders. I think in a Chinese context, you also have assets partly nationally owned, so you have many other players — that makes it more complicated and more interesting. I am sure China will have its own model eventually in terms of corporate governance, and in terms of doing business also. Every economy is different; what works here would be similar in some ways and different in other ways [to what works in other markets]. That’s why it’s interesting.

My research is more focused on competitive strategies, and one of the other things I think is interesting is how people manage partnerships in China versus how people manage partnerships in other parts of the world. I have done a lot of work in a U.S. setting, and also some work in Europe, Italy, the UK and India, but I haven’t done a lot of work in China. That’s one of the issues I want to look at a little more closely in China.

China Knowledge at Wharton: By ‘partnerships,’ do you mean joint ventures or other forms?

Singh: Joint venture is of course the most committed relationship, but there are also non-equity relationships, Like MOU (memorandum of understanding) partnerships and others with lower level of commitment. In fact, there are a lot of non-equity relationships in the information technology business. If you look at Microsoft, HP or Compaq, they have a lot of non-equity partnerships to create enterprise solutions which they can sell to corporations. Similarly, in other industries like aerospace, there are a lot of alliances, too. If you look at Boeing’s 787, literally there are hundreds of alliances there to produce the airplanes.

China Knowledge at Wharton: Do these companies do joint work together mainly to serve clients together?

Singh: In information technology, that’s the main reason. But in aerospace, for example, that’s mostly for risk sharing and capital sharing, because aerospace is very capital-intensive. You get your returns many years later after much investment in building a plane, so there is lot of risk sharing.

China Knowledge at Wharton: I am sure you can find a lot of cases in China in terms of alliances.

Singh: I saw a lot of cases even in the governance program. I met many CEOs who have done a lot of joint ventures with American firms or within China. A quick summary is that, on one hand, Chinese companies are very well equipped to form alliances, because there is a culture of cooperation in the far east — they rely more on cooperation. On the other hand, as we see companies growing fast, they will also need expertise in acquisitions, both within and outside China.

China Knowledge at Wharton: What are the research findings on company alliances in the West?

Singh: