Indianizing a China Business (Part One)
Business Cultural Differences Affecting China and India
Op-Ed Commentary: Chris Devonshire-Ellis
Part One of a Two Part Series: The Business Environment
Dec. 8 – As China begins to slow down, and the global supply chain shifts, India has just recorded GDP growth of 9 percent for the past quarter meaning it has overtaken China in terms of production. It is a trend that is likely to remain. As China-based businesses also start to gear up for the development of China’s domestic market, and look to the hinterlands for growth, others are also eying the India market. Exporting a business into another country is never easy, and this is especially so in the case of China and India. The countries have different administrative systems and do not necessarily agree to international conventions surrounding territories and descriptions. Then there are the immense language and written language issues. If these are not recognized, embarrassment and even criminal action can follow.
As my practice Dezan Shira & Associates has found out, care needs to be paid when replanting a subsidiary root of a business from one country to another. Not all systems or points of reference are the same. Dezan Shira & Associates first moved to establish operations in India four years ago (after 14 years extant only in China) and we found many surprising cases where what we thought we knew from a cultural perspective needed a rethink, and additional work and attention to new cultural detail. This article is designed to explain some of the practical differences in styles the China-based executive may meet when asked to look at India.
The Business Environment
A more demanding large project environment
India isn’t up to China standards when it comes to the development and execution of large-scale projects. Administrative delays, worker discipline and, above all, the interference of local politics can interfere with planning and execution. Problems, including the notorious infrastructure issues, need to be worked with and solutions found. Innovation and an ability to think outside the box are needed in India, whereas in China they’ve tended to make the administration far easier. However, there are signs that China is not what is was – increases in labor unrest, strikes (previously unheard of), and especially protectionism are growing in China. As was mentioned to me in Mumbai recently “I’m paid to sort these problems out, and that’s what my MBA program was for.” Is India more big project awkward than China? Yes. Is it solvable? Also yes.
A more welcoming social environment
While China is a generally friendly and welcoming place to be, for the small infrastructure it falls down when dealing with foreigners, and there are still barriers. Getting tickets, going out to Chinese events, finding out what’s happening online, reading international news, social networking, keeping in touch internationally with family and friends over the internet – these are all awkward or have infrastructure banned in China. While one can get used to not having Facebook in China, if you’re used to it overseas it’s a major hassle. India has both free media and social networking, and its usage of the English language just makes the social element of being in India that much more pleasant. Plus, if you’re Japanese, Indians don’t have endless spats over wartime related events and territorial disputes over 60 years old that frequently mar the Japanese population in China. Neither, apart from Pakistan and China, does India have territorial disputes with anyone else. China is currently in disputes with India, Vietnam, Japan, Taiwan, and several other nations over the Spratly Islands, is threatening potential economic sanctions with Norway after the Nobel Peace prize was awarded to a Chinese reformist, and has a history of encouraging its nationals to harass citizens of other nations when things go wrong – such as throwing stones at the U.S. and British embassies over the NATO incident in Belgrade. China is more antagonistic, is quite prepared to occasionally indulge in harassment of foreign nationals, while Indians tend to argue among themselves rather than with foreigners.
In China over the past 20 years, local management has had to be educated and developed to international standards to fulfill to the exacting standards of running an international business. Items such as FCPA, SOX and other regulatory aspects creep in, and to many Chinese managers, these are still a bridge too far when added in to corporate culture and language issues. Twenty years ago, there were very few Chinese managers with any global experience, and today the number is still relatively small. Even the Chinese government has had to embark on a program of sending its top officials overseas on university courses. The upshot is that international management operating a business in China in most cases still has to take an active role in the daily operations of the business. In India, graduates and executives have long been educated overseas and are highly familiar with international standards. Indeed, many non-resident Indians are highly sought after by Indian companies back home as they seek to upgrade their domestic enterprises. With a profound knowledge of Indian culture, language capabilities, an overseas education and managerial experience, Indian executives tend to be far more advanced globally than their Chinese counterparts who tend to hit a glass ceiling. It means that an Indian manager running your Indian operations is usually a safer bet, more culturally intoned, and better able to adapt than Caucasian executives in the same role. In our case, Indianizing our company meant handing the country over to a returning Indian national to run, and for our western executives to step aside. The senior Indian executive is often more entrepreneurial than his Chinese counterpart and more familiar with global standards of business operations.
Dealing with government officials in China and India does require the standard protocols, but there are differences. Indian politicians are democratically elected and can be pressured or lobbied via independent think tanks. China bans such bodies and does not permit any external criticism other than the Communist Party. Increasingly, Chinese officials can be aloof and uncooperative at times unless it is in their vested interest to assist you. Demonstrations of annoyance or criticism of the media as happens in China when politicians are challenged does not occur in India, where a free media helps in part to keep politicians under the microscope. That would not be tolerated in China. The difference is in the concept of being answerable to the people, which both governments profess but exercise in different ways.
The styles of corruption are different between China and India. In China, it tends to be disguised as favors and connections, and can be for serious amounts of money. However it may not raise its head on a daily basis. In India, apart from the high-end level of corruption, it exists in the form of “baksheesh” nearly everywhere, almost as a form of giving a tip. The amounts are small, but will need to be catered for in “miscellaneous expenses.” If not, your paperwork may just sit around until the tip is paid. That is what is meant when people describe corruption in India as “endemic.” In China it is not, but the amounts and the inconveniences can be far more serious, and tend to be more insidious in nature.
Just as China has experienced, power supply can be erratic in India. While special economic zones offer more protection and reliability, the more extreme weather conditions and monsoon can create problems. Businesses need to invest in generator back up supply just as they used to do in the Yangtze River Delta a few years back and as would be expected in any emerging market.
In a similar manner to China’s State Administration of Foreign Exchange, India monitors the flow of inbound and outbound capital via the Reserve Bank of India (RBI). The RBI also designates tier one banks in India to fulfill some of its duties, a situation that actually makes Indian bureaucracy at this level easier than in China, which employs capital controls. RBI approval is required for a variety of transactions, however this is relatively easy to arrange. India has about 100,000 ATMs against China’s 200,000. Generally speaking though, access to cash points is not problematic. Cash and foreign currency may also be freely exchanged at hotels or licensed foreign exchange brokers. In terms of international banks, Standard Chartered are the market leader (historically they have always had a strong India presence in much the same way HSBC is more associated with China) and most international banks maintain branches in all major cities.
Receivables and bad debt provisions
Unfortunately, although Chinese businesses are starting to migrate overseas, unlike their Indian counterparts, Chinese businesses can be tardy to the extreme when being asked to meet the final payment for goods and especially services. Our experience shows that the majority of Indian businesses will meet their financial and contractual obligations. A higher proportion of Chinese businesses will renege on the final payment, often in what can appear to be a calculated mechanism designed to exploit the fact that the cost of recovery to your business is likely to be more than the amount due. We believe this is a sign of immaturity on the evolution of Chinese businesses and will improve, however the problem does exist. For services contracts in particular, we recommend structuring payments so that as much as possible is paid prior to the end of the service and final settlement. Our experience dictates that unless this is done, an average of 50 percent of Chinese businesses fail to make final settlements or be highly tardy in doing so. If known, this then becomes a structuring issue over payment terms. In these instances, our advice is to be aware of a potential need to mitigate against this unfortunate habit or be prepared to have to deal with potentially unrecoverable receivables and debt. Contractual terms should be solid and supported by good business practice concerning payment terms. Indian clients on the other hand may be price sensitive, and negotiations take longer, but once the deal is done they tend to pay up. The acquisition of a receivables problem is more likely when dealing with Chinese customers than Indian unless your business model has already deflected this issue.
Individual income tax
India, like China, has a sliding scale for individual income tax payments, but the top threshold for tax payment is lower in India than in China. India also has in place a rather complicated system of additional surcharges and expense rebates, the latter of which are more generous that those currently available in China. Also, unlike China, India does not charge individual income tax on dividend payments from companies. This can be an important factor especially for expatriates with bonuses or stock options. India is currently undergoing tax reform, which as a general rule of thumb, will mean the expatriate is rather better off in India than China, with a basic level of 30 percent IIT in India at the highest tax bracket as opposed to 45 percent in China. As always, each case can be specific and it is best to ask for clarification on these matters beforehand as other factors such as housing allowances and so on can complicate matters and they need to be structured properly. Please contact Dezan Shira & Associates India at email@example.com for advice on individual income tax in India.
In every way, India is far superior to China in this regard. While much of China’s problems in this area are self-inflicted issues over a lack of press freedom, language issues and its notorious Great Firewall, India by comparison is a paradise. There are numerous English language daily newspapers available (I read about five of them: Times of India, The Economic Times, Hindustan Times, DNA and the Asian Age, while the International Herald Tribune, Wall Street Journal, Financial Times and USA Today are all published in same-day Indian editions). Imported newspapers are also freely available, typically 24 hours behind. Keeping up with the news then is not a problem, especially if like me you like to browse the morning newspapers over a cup of coffee. Cities such as Mumbai also provide a second daily, evening newspaper, something China’s media censorship cannot cope with. India’s domestic TV is in a plethora of languages including English language channels, and can get a bit vociferous, especially over issues concerning Pakistan or China, but respected global networks like CNN, BBC and Al Jazeera all maintain Delhi-based bureaus and programming. Meanwhile, Facebook, YouTube and total access to surf the internet is a given right in India. Also, unlike China, where calls are relatively expensive, India’s call charges are amongst the lowest in the world, and this dynamic will also lift the interconnectivity of the country as well as help bring its rural population out of poverty. India is very much hardwired into the international community and international communications, phone, internet and wireless are all world class. There is also less espionage in India, whereas China has a reputation for spying on commercial activities that affect its state owned enterprises. About 90 percent of China’s largest businesses are completely or partly state-owned and are consequently prone to government involvement or interference, while in India, about 90 percent are in the private sector. It makes business communications far simpler, and less likely to be subject to commercial espionage. From a practical time zone perspective, the time difference between Delhi/Mumbai and New York is currently 10.5 hours and Chicago is currently 11.5 hours. London is just 5.5 hours.
China’s media is censored and largely controlled by the state, and much incoming foreign media is routinely banned, both in print, TV and internet. Consequently, China’s media is rather bland and follows an organized framework. Exciting it is not. India’s media is open and is largely driven by sensationalism that can come as a bit of a shock to the newly initiated. It is sometimes difficult to determine which is the lesser of the two evils: China’s censors or India’s sensationalists. India TV media especially is very loud and driven by ramping up the “shock horror” headlines for maximum effect. Favorite subjects for Indian media do include China issues, and China is often portrayed as being a threat to India. While the TV may blare unsavory stories, usually they remain taken with a pinch of salt. Far better balanced are newspapers such as the Times of India, the Economic Times, and The Hindu. All major international newspapers are commonly found, with many also being produced in India. International TV channels are routinely available.
Chambers of commerce
These vary considerably in quality (as they do in China), some being excuses for a monthly beer drinking session, others taking a more active role in the business community. The American Chamber and European Chamber in India are particularly active, while other chambers such as the British Business Group (not called a chamber as India is part of the Commonwealth) host regular social events and feature a variety of corporate speakers. Other Asian, European, Oceanic, African, and South American nations have their own versions. Many of these organizations also have representations in other major Indian cities. The current chairman of the BBG in Mumbai, Jim James, is himself a former China expatriate, whose business in Shanghai was so awkward from the regulatory perspective that his employers moved him to Mumbai. They are now thriving in India, something that proved mission impossible in China. Interestingly, that is not an uncommon experience among expatriates living in India who have relocated from China. Also of note are the various India-country chambers, such as the India-China Chamber of Commerce, which provides a solid link between their respective governments and businesses. Google searches will reveal the chambers, groups and organizations pertinent to you.
Chris Devonshire-Ellis is the principal of Dezan Shira & Associates and established the firm’s China operations in 1992. The firm now has 10 offices across the country. He then established the practice in India in 2007, where they now have five offices. The practice handles foreign direct investment into China and India, companies needing advice or assistance with establishing their business in India may contact the firm at firstname.lastname@example.org. Chris also writes for our China-India web site 2point6billion.com, and India Briefing. Part two of this article, dealing with practical living and cultural issues, will appear tomorrow.
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