The way they work

THE SILK ROUTE, OPIUM, BORDER WAYS, Buddhism, shoemakers, Nehru, Mao, noodles ... milestones in the long, sometimes acrimonious, relationship between India and China. But like most bilateral relationships these days, it all boils down to trade—and China appears to be winning. India’s trade deficit with China reached nearly $40 billion (Rs 2.22 lakh crore) in FY12, with imports around $58 billion.

Of course, when people worry about this skewed balance of trade, someone points out that India is a democracy and China isn’t—and the resultant sense of moral superiority goes a long way in soothing bruised patriotism. (Avaaz, a global online activist community, recently said in one of its campaigns: “If we stand with the two girls arrested for harmless Facebook comments, we can stop India becoming like China.”)

But there’s certainly a huge difference in the value of the goods that China imports and exports to India. It imports unfinished goods, metals, and minerals, but exports finished engineering products, consumer goods, etc. In a recent report, the Organisation for Economic Co-operation and Development (OECD) forecasts that China will become the world’s largest economy in the next four years. The report also shows the combined GDP of China and India (measured at 2005 purchasing power parities) will surpass those of G7 economies by 2025, and exceed that of the entire 34-nation OECD by 2060. Of course, China will account for a bulk of this.

It’s begun showing up in the rise of Chinese multinationals. There were 73 on the 2012 Fortune Global 500 list compared with 61 in 2011. Chinese companies are entrenched in the U.S. and Europe as low-cost suppliers, and were early movers in Africa.

However, Indian companies are less visible in China. A few companies entered through acquisitions or joint ventures (Mahindra & Mahindra bought a majority stake in Jiangling Tractor in 2004; Tata Consultancy Services signed a $100 million deal with the Bank of China in 2007) but that’s a sliver of the huge Chinese presence in India. There’s also brisk trade in the grey market; Delhi’s Chandni Chowk market, for instance, sees a flourishing trade in cheap Chinese electronics, footwear, and eyewear. The owners of several larger shops there say they visit China regularly to stay updated on new products. But in established trade, India’s Middle Kingdom presence is limited. The government is now pushing for better access to the Chinese markets, particularly in IT, services, and pharmaceuticals.

Meanwhile, Chinese manufacturers dominate key Indian sectors—power and telecom. At 17%, Lenovo has the largest market share of the personal computer market, Huawei and ZTE have a combined 35% share of the wireless infrastructure market, control two-thirds of the wireline broadband segment, and manufacture 90% of all data cards sold in India. An undervalued currency, massive state subsidies often in the form of soft loans, and cheap labour, allow these companies to set up gigantic operations outside China. To Indians, accustomed to the British, European, and American ways of doing business (and lately, also Japanese and Korean), the Chinese way is often incomprehensible.

OVER WHAT HE says is an authentic dish of fish in a spicy Hunan sauce at New Delhi’s China Doll restaurant, Yao Weimin, vice president, corporate affairs, Huawei Telecommunications, attempts to explain the mystery of Chinese business. “Modern Western management culture was developed over hundreds of years—maybe 400 years. Even though we are much older civilisations, India and China were left behind in many areas such as modern management, science, and technology. There’s a strong sense of catching up; an urgency to learn fast, even leapfrog, and that makes the difference, not just cheap labour.”

Both China and India believe that their way of doing business is best. The two countries have different approaches to economic development—China’s resulted from a conscious decision, India’s was more evolutionary. But although China has surged far ahead of India, there’s no saying which is the more sustainable growth.

With a far shorter history of globalisation and no long history of organised business, the Chinese look to their culture for help. Cue the revival of Sun Tzu’s Art of War, and the Analects of Confucius. Although Confucian thought was given short shrift by Mao and his followers, it’s making a comeback, as successful managers realise there’s a lot of management wisdom in his writings. (Incidentally, Mao was an admirer of Sun Tzu.)

Amar Babu, managing director of Lenovo India, talks about the recent tender that the PC maker won from the Tamil Nadu government, which took it to the top of the rankings: “The rising dollar made the deal financially unviable by the end, as costs went up. Still, Lenovo met the entire order on time.” While the Chinese see this as keeping their word, a much admired Confucian trait, competitors perceive this as a hunger to grow at any cost.

In their eagerness to catch up with European and American companies in business size, Chinese companies tend to promise customers the moon. The sales head of a large European telecom equipment supplier says that his company often refuses to provide certain features because they don’t have regulatory approval. The Chinese offer all the features, regardless of approvals. “The operators ask us: If they can give this, why can’t you?” he complains. But, he adds grudgingly, the Chinese generally manage to deliver.

Customers, of course, are happy. An ex-employee of Reliance Communications, who was part of the team that rolled out the 3G network, which uses both Huawei and ZTE equipment, says that Reliance Communications had extensive requirements for the 2G and 3G rollouts. “We’d asked for almost everything under the sun. We had a lot of discussion with the Chinese about whether they really had the functionality to do it or whether they could do it in time. We were concerned that they were over-promising. But they have done it.”

European telecom equipment providers who’ve had their businesses and margins eaten away because of large orders going to the Chinese, say “their modus operandi is to win businesses at all costs. They will bend over backwards, employ every method to kill competition and get business.” The ex-Reliance Communications executive adds that the Chinese add value, such as better operational efficiencies and a lower cost of running the network. Customers appreciate this, especially when it comes with financing. “The European vendors have not added this kind of value,” he adds.

Eric Yu, head of the enterprise business at Huawei, recalls when the company was trying to get a foot in the door of the Indian telecom market. “There were questions about our quality and what we could do. So we set up a test lab at the client site, costing millions of dollars, just to display what our products could do.” Also, Huawei stationed Yu Xiangping, president of the CDMA product line, and Cai Liqun, president of the CDMA global R&D department, for a year in India, “to show our commitment,” says Yu, who led Huawei’s successful pitch to Tata Telecommunications and Reliance Communications. Despite stiff competition from European and American companies, including Sierra Wireless, Huawei’s strategy worked. Neither Tata Telecommunications nor Reliance Communication would comment.

The problem with such an aggressive strategy is that it leaves most people, even within the company, unhappy. A former employee with Huawei explains how product specifications were changed at the whim of the customer till the contract was signed—without the sales people knowing. Indian employees in Chinese companies see this as a lack of trust.

The reason is that all decisions are made centrally. The India-based Chinese head of a power equipment company says critical decisions such as pricing have to be taken in China. Indian companies that work closely with Chinese suppliers have learned how to make the best of this; Adani Power, for instance, set up a small office in China when it was negotiating the purchase of a boiler-turbine set from a Chinese manufacturer.

Adani Power was, consciously or not, following a key Chinese concept: guanxi (pronounced gwæn-si) or building influential networks. While networking is not a new concept to India or Europe, “it becomes more important in China, where information is controlled,” says Nazia Vasi, a language and culture consultant, who spent several years in Shanghai. It is not uncommon for a Chinese employee to take his boss out to dinner and give him gifts. In return “if there are other job openings or changes happening in the organisation, he’s told about it. Only the top guy has an overall picture,” says Vasi. A senior director at a Chinese equipment manufacturer in India says, “Business happens because of human connections, and guanxi with key decision makers is very important.”

POTENTIAL CUSTOMERS are also often impressed by the size of teams sent by Chinese companies to make presentations. The head of sales at a European telecom equipment manufacturer recalls an instance when his company and a handful of others were invited to make presentations to a large telecom operator in India. “We were four—two from the global operations, and the other two were local.” Waiting in the conference room, he says, he saw “16 Huawei guys walk out after their presentation. After us was ZTE, which also had 15 people. Numbers have an impact,” he says.

The head of a Chinese power equipment maker agrees that impact is one of the reasons for large numbers. Also, he says, “It tells the customer that we are putting a lot of resources behind the project. It is often consciously used as a strategic tool to send a message to the competition that we are more committed.”

Even after the pitch, Chinese companies have large teams on every account. Zhang Wen Cheng, vice president, commercial and technical affairs office, ZTE Telecom India, says, “Typically on a large account we have about 45 people working, with locals managing the front-facing part; pre-sales are handled by the Chinese.” In comparison, a European firm generally has about 15 people on a large account. The European company rep adds that Chinese manufacturers seem to have “an army to build relationships at all levels. Their CTO will have meetings with even manager-level employees at customer sites.”

An Indian power plant manager says the other reason for sending large teams to trouble-shoot is because the Chinese are, by training, specialists. “If you have a problem with the boiler, there’ll be five engineers who come for it because each one of them is a specialist in one of the systems that go into the boiler,” he says. A single Indian technician, say from BHEL, will be able to sort out most aspects of the boiler, he adds.

Vasi adds, “The Chinese have a blinkered way of working, which can get frustrating: When you talk to a manager, you expect him to have a 360° idea of the project he’s working on. He will do his job implicitly, but it’s difficult to progress if the left hand doesn’t know what the right is doing.” This is especially difficult for Indian employees, who are used to a smooth information flow, and often like to have an informal overview of a situation.

In addition, Chinese companies are quick to extend deal-sweeteners to get a project. While most vendors do this (regardless of base and the ethnicity of their managers), what sets the Chinese apart is that they come to the table with deep pockets. Incentives include low-cost credit, as well as relaxed repayment terms. The $8.3 billion order that Reliance Power placed with Shanghai Electric was entirely funded by Chinese banks, and sources in the company say interest was around 5%.

That business-at-all-costs mentality is evident even in Chinese internal practices. A former employee of a Chinese telecom company says, “Getting documents from your previous organisation can often get you monetary rewards.” But at the same company, violating IT rules can get you fired, he adds. But not before your misconduct is shared with every member of the organisation. “They have a public rebuke system, which means if you violate IT laws, or some administrative rule such as coming late, or, worse, lose business, a mail will go out to the entire office telling them what you’ve done,” he says. Indian employees who find this system dystopian soon come to terms with it when they see that even senior employees—Chinese or not—get rebuked.

Other Indian managers talk of the “+1” practice, where any Indian working in a Chinese company has a Chinese counterpart. “He always shadows you; it sends a message that they don’t trust you,” says an Indian who worked for a Chinese manufacturing company. Another HR practice that Indian employees find disconcerting is demotion. An Indian engineer who worked at a Chinese factory says, “While in China getting a demotion usually pushes the employee to work harder to regain his position, for an Indian employee demotion can demotivate.” However, senior officials at ZTE India say demotion is common, and Indians get used to it.

THEN THERE'S THE cost issue. Most manufacturing companies quote prices that include costs plus margins. Chinese companies, however, price their products at a discount to prevalent market prices, independent of manufacturing costs. They are able to do this because they are backed by state subsidies. Soft loans from Chinese banks are often enough to cut out competition. “Soft loans mean that the Chinese sometimes end up buying orders. Therefore, domestic players decided that if Chinese bid, we would not. We boycotted private tenders,” says Ravi Uppal, MD and CEO, Jindal Steel and Power.

Telecom is a different story. For most Indian operators, the entry of Huawei and ZTE has been welcome. In the highly competitive sector, most operators were struggling to keep costs down while paying high prices for European equipment from Ericsson, Nokia Siemens Networks, and Alcatel-Lucent. The Chinese offered similar products at 30% less than the Europeans. “If nothing, it compelled the Europeans to go back and rework their cost structures and pricing strategies. The Chinese have helped realise the true manufacturing cost,” says an ex-employee of Huawei with more than two decades of experience in the sector.

However, opting for Chinese equipment solely because of price is not a great idea, says Uppal, who was president at L&T Power before he took over at Jindal. Last year, he told Fortune India, “Plants based on Chinese technology may appear attractive because of lower costs, but when higher running costs and performance issues kick in, they may prove to be a huge drain on resources”.

Not everyone agrees with Uppal. Indian customers say the price difference is often steep enough to take care of higher running costs. A study conducted by Credit Suisse research last year found that in Reliance Power’s order from Shanghai Electric, the Chinese company’s price (Rs 1.5 crore per MW) was almost half that of BHEL’s price (Rs 3 crore to Rs 3.5 crore per MW).

Another attraction is that Chinese manufacturers are known for their commitment to deadlines. “It doesn’t matter if Chinese vendors have to work incessantly, or skip public holidays, they will meet their commitments, no matter what,” says Anshuman Agrawal, CEO at Minpac, a power equipment manufacturing company.

EVEN AS A CHINESE firm goes out of its way to bring in customers, it is unbending when enforcing contracts. K.V.B. Reddy, executive director at Essar Power, says, “For the Chinese, the contract is everything. They will not deviate even a little bit from what is written in the contract. So, if the contract specifies 2,000 foundation bolts, even if their own design needs 4,000, they will send 2,000.”

Kolkata-based power generation company CESC learned this too late. The company ordered the boiler turbine and generator set for an upcoming 600MW thermal power plant in Chandrapur, Maharashtra, from Shanghai Electric. When the turbine was delivered, it did not have the oil and slush flushing machine, which is critical for its commissioning. Since it was not in the contract, the Chinese did not supply this machine. Agrawal says the company came to him for the oil-flushing machine. “It cost them Rs 60 lakh and delayed the project by a month.” Agrawal adds that BHEL includes this machine in the scope of its contracts.

Another power plant, this one in central India, also bought equipment from a Chinese vendor. It received the collector plates for the electrostatic precipitator, a critical component for the boiler turbine and generator set, in parts. “Normally the collector plates come in assembled units, but here all the parts were loose,” says an engineer. When the power company contacted the vendor, the Chinese company said the contract did not specify assembly. The company had to get the plates assembled locally, which delayed the project and added to the cost.

The same rigidity is seen in customising equipment. “Anything they do, they do in bulk and they specialise in that. If you order a standard 300MW power plant, there’s no problem, but if you want a modification for a 305MW, they don’t do that,” says Seshagiri Rao, joint managing director and group CFO, JSW Steel, a company that uses Chinese vendors because of the lower cost and adherence to delivery schedules.

G. Venkat Raman, assistant professor at Indian Institute of Management, Kozhikode, who has studied and worked in China, explains the reason for some of this rigid thinking. “The Chinese characters are made of strokes, and one stroke less or more can change the meaning or even render the character meaningless. That is how they are trained to think, in rigid structures,” he says.

A senior executive at a Gujarat-based power plant adds that Chinese companies insist on using spares and parts only from Chinese sub-vendors, even if there are cheaper and better local alternatives. Rao links this to the paranoia that Chinese companies are known to have regarding intellectual property. “If their guys work with the local technicians and different options, they will have to share some information and concepts. They don’t want that as they fear we’ll be able to use that information to make a better product.” He adds that this is possibly why the technical people on projects can’t speak English; even design documents (when shared) are in Chinese or poorly translated.

INDIANS UNABLE to understand the Chinese work ethic are not alone in their difficulty. A senior official at ZTE’s office in India says the biggest challenges the Chinese face in India are “the delays and the inability of the locals to keep commitments and deadlines”. Often this results in Indians not being given responsibility for critical projects.

Language has always been considered a huge barrier to doing business with the Chinese, but here’s the irony: Most of the Chinese multinationals Fortune India spoke to do not encourage their Indian employees to learn Mandarin. “We are trying to become more and more global and there is no point in trying to get people to learn Mandarin. That would be a step back,” says Zhang of ZTE India. In fact, Haier Electronics refused to be a part of this story, saying, “We don’t want to participate in a story about Chinese companies. We consider ourselves a global company.”