Monday, October 6, 2014

A Piece of the Pie a la Modi

Last week, Adobe quietly announced it would close its R&D center in China due to rampant software piracy, a strategic shift toward a cloud-based, software-as-a-service business model, and China's increasingly hostile business environment. Just a few days after Adobe's announcement, India's new Prime Minister, Narenda Modi, was having lunch with Wall Street's fattest cats, a cozy dinner with President Obama, and a loud rally with 19,000 Indian-Americans in Madison Square Garden.

Modi's Magical Mystery Tour of the US was perfectly timed. As the list of American companies being harassed, blocked, banned, investigated, censored, shuttered, or spied on by Chinese authorities continues to grow, few can blame them for seeking another billion-person market with good growth prospects. Meanwhile, Modi is making all the right noises about improving infrastructure, cutting red tape, and welcoming foreign partnership and investment. In fact, there's a big pile of cash looking for a home right about now. Foreign direct investment in China was down 17% in July, and 14% in August - the first consecutive double-digit drop since 2009. The Financial Times blames China's protectionist policies, slowed production, and distressed banking and real estate markets for this pull-back. Business growth in India, on the other hand, has rebounded from years of stagnation since Modi took office. Everything from cookies to tires is selling well, riding a wave of consumer optimism and a steadily growing middle class. One Asia-focused investment banking company, CLSA, predicts that India's economic growth rate will exceed China's as early as 2016. 

It's too soon to shift all the eggs from the Chinese to the Indian basket. India has stubborn infrastructure, bureaucracy, and poverty problems that will take years of focused, effective governing to overcome. But the contrast between the current Indian and Chinese attitudes toward partnership and investment is stark. If Modi succeeds in reforming India's huge bureaucracy and creating honest incentives, there will be excellent opportunities in a wide range of industries. Modi's own commitment will be tested when foreign companies push for lower competitive barriers (e.g., as Amazon and Alibaba battle local heroes like Flipkart and Snapdeal). But if reality follows rhetoric (not always guaranteed), smart companies will start throwing their nets a little wider to catch the world's fastest-growing big fish.

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