Schumpeter

The other elephant

Barack Obama thinks that the rise of India will be good

for American jobs. There is another side to the story
ON THE eve of the 2008 New Hampshire primary Bill Clinton finally gave vent to
his fury with the Obama campaign. He dismissed Barack Obama’s message as “the
biggest fairy tale” he had ever heard. (“Give…me…a…break,” he roared at the
startled crowd.) And he denounced underhand tactics, particularly a description of
Hillary Clinton as “the senator from Punjab”.

On November 5th Mr Obama, fresh from his humiliation in the mid-term elections,
flies to India accompanied by an entourage of almost 250 businesspeople. His
message for the folks back home will be that India could be a goldmine for
American jobs. And he will clinch a succession of huge business deals with India
—not least a $5.8 billion aircraft sale by Boeing.

Mr Obama’s win-win rhetoric is plausible enough. India is growing at about 8% a

year at a time when America can barely manage 2%. It is also set to add 240m
people to its working population by 2030. And America produces all sorts of
things that Indians crave, from iPads to MBAs to fighter planes.

Yet the rise of new economic powers always brings problems as well as
opportunities for incumbents. New companies displace old ones. New business
models disrupt established ones. Comfortable workers in the rich world are forced
to compete with hungrier ones in the poor world.

India is producing a legion of new global giants that are competing head-to-head
with established American companies. Look at Arcelor Mittal and Tata Steel in
steelmaking; Bharat Forge and Sundram Fasteners in car parts; Hindalco in
aluminium rolling; and a host of companies, including Infosys, Tata Consulting
Services (TCS), Cognizant and HCL Technologies, in information services.
Twenty years ago India had no global companies worth mentioning. Today the
Tata group earns 60% of its revenues abroad, and Indian companies ranging from
natural-resource firms, such as Reliance Industries, to health-care companies, such
as Pirmal Healthcare, have been snapping up American brands.

American companies are also setting up shop in India. Bangalore and Hyderabad
have “electronic cities” crowded with America’s leading companies. In Bangalore
Cisco spent $1 billion on its Globalisation Centre East and General Electric (GE)
opened a swanky research centre. IBM employs more people in India than in the
United States.
For American workers the most worrying thing about all this is the flight of brain-
intensive jobs to India. Americans reconciled themselves to the loss of
manufacturing jobs with the thought that they would keep the smart jobs. But they
reckoned without two things: the power of the internet and the hunger of emerging-
market companies.

India has long since turned itself into the world’s back-office—subjecting paper-
processing hubs such as Kansas City to the same forces of competition that
devastated former industrial cities such as Gary, Indiana. Now Indian-based
companies are moving into an wider range of services: reading CT-scans and X-
rays, processing legal documents and helping with animation. They are also
moving into sophisticated niches. TCS and Infosys compete directly with IBM and
Accenture in consulting. American companies are adding to the trend by moving
more of their important operations to India: John Chambers, Cisco’s boss, has
decreed that 20% of the firm’s leadership should be in Bangalore.

Companies in India are challenging American ones in an area that they have long
considered their own—innovation. The Boston Consulting Group’s 2010 survey of
innovation notes that the number of American companies on its list of top
innovators is declining while the number of Indian companies is rising. It also
points out that the Indian firms place a higher value on innovation than the
American companies.

Most strikingly, Indian companies have produced a new type of innovation,

variously dubbed “frugal”, “reverse” and “Gandhian”. The essence is to reduce the
price of a product or service by a breathtaking amount—80% rather than 10%—by
removing unnecessary bells and whistles. Tata Motors is selling its “people’s car”
for $3,000; GE’s Indian arm offers a medical ECG machine for $400; Bharat
Biotech sells a single dose of its hepatitis B vaccine for 20 cents and Bharti Airtel
provides one of the cheapest wireless telephone services in the world. These frugal
products are likely to disrupt established Western companies (including GE itself)
by forcing them to engage in a bloody price war.

Luring them back

To add to this general turbulence Indian-based companies are also on a hiring

binge. For decades America has gorged itself on a seemingly limitless supply of
brilliant Indian PhD students and entrepreneurs. Half of Silicon Valley’s start-ups
were either founded or co-founded by Indians. But these paragons are now
returning en masse to the mother country (just as America makes life more difficult
for immigrants). Why work for a sluggardly American firm when Infosys is
growing at double digits? Why live in a flimsy bungalow in the Valley when an
Indian company will provide you with a villa in a gated community, membership
of a country club and a chauffeur-driven car?
There is an upside to these downsides. Frugal products will be a godsend for
America’s pinched consumers. They may even prevent the American economy
from being crushed by the health-care Godzilla. But Americans need to get back on
the treadmill. In a recent speech Mr Obama told schoolchildren in Philadelphia
that: “When students around the world in Bangalore or Beijing are working harder
than ever, and doing better than ever, your success in school is not just going to
determine your success, it is going to determine America’s success in the 21st
century.” That is not a bad theme for the next two years of his presidency.