Order Vs Chaos

  When The Omelette Is  (Occasionally) Better Than The Egg

Some time back, I had this discussion with a gentleman who heads one of India’s premier Industry Associations in manufacturing, and is a frequent visitor to that most revered of rivals, China. He remarked that ‘they’ were clearly ahead of us, with a long-term Vision and Strategy to play to. The monolithic Chinese Govt could “make things happen”.

I have heard this often, and often thought about how this is a limited truth. Limited because it is true under specific circumstances, for a period and for a limited purpose.

Communism ‘failed’ because it believed that a monolithic ‘planning’ process was superior to the chaos and confusion that prevailed in ‘capitalist markets’. Over 70 years of experience, the world realized that in most cases, Capitalism was less wasteful than Communism, despite its apparent chaos and confusion.

Another thing the world discovered is that beyond a certain size, organizations (in this case, countries) failed because they became simply unmanageable through top-down fiat. A far better way to manage size was to break down this organization and get the component units to be controlled closer to the frontline. The sum of the parts would be more efficient than the whole…….that was the logic of the Ma Bell break-up, and maybe, Soviet Russia.

China’s “strategy” and its single-minded pursuit of “progress” can be seen in many places…geo-politics, population policy, technology, even the more recent pursuit of natural resources. Its progress always shows good-looking ‘order’, as opposed to India’s mostly “do-nothing” approach to progress. But this is not an unmitigated blessing…witness the impact of China’s one-child policy on their future geo-political position. There were lots of things that the “strategists” did not think of……the ageing of the middle generation, the future tax base, social security issues, even the future of the consumer products industry.

Compare this with India’s ‘population policy’. For the most part, its distinguishing feature has been simply that it is not there. Yet, there is a ‘trend’ that India has achieved…not superior to China, but nobody knows whether the long-term impact of this (non) policy is going to be ‘inferior’ either. The trend has grown in response to local developments, from Kerala to Bihar. Each state has seen a local “population trend” develop, some of which may contradict each other, but is individually logical. No China-style Govt “strategy” could have evolved this. 

In the same manner, India’s IT/ BPO service sector grew out of a dysfunctional educational system, that created competitive students by giving them loads of adversity to cut their teeth on. Anybody who made it through its “survival-of-the-fittest” filters, could make good under any first-past-the-post system. That is what gave our IITs their cutting edge. In other words, chaos created excellence.

Take the current search for oil. As usual, China’s determined Govt is doing a far better job of tying up the world’s oil reserves for itself. India is behind, at least as far as Govt performance is concerned. But who is to say that Indian entrepreneurship will not turn this disadvantage around…India, faced with an oil crunch, may actually do more work on alternate energy, converting to more sustainable energy. This would be in tune with the way the world is headed. As technology and usage move towards cleaner, sustainable fuels, China may find itself bogged down with “legacy” assets and a vested interest in hydrocarbon usage, which could prevent the modernization of its transportation systems and its industrial fuel usage. India may find itself forced to adopt newer technologies faster, which gives it a longer-term advantage.

Consider the telecom story. Poor performance of the public sector Telcos, created low tele-density, leaving large “empty spaces” for the Mobile cos to capture. This gave them large potential markets, a huge unmet need……which led to immediate scale economies. Middle India converted to Mobile telephony at blinding speed, faster than the West. The earlier chaotic Fixed Line system gave way to (arguably) the best, most competitive, most sophisticated Mobile telephony network in the world. Who knows, the current chaos over GSM vs CDMA might lead to something good, in ways that we cannot yet imagine?

It is a heretical thought, but I wonder whether Indian cos would be a little inferior if they were born in, say, the US. Somebody once told me that the best doctors in India could be found in Govt hospitals, because they had seen the largest number of cases (and hence, honed their diagnostic skills), worked with no equipment (and hence, diagnosed ailments without medical aids) and made the highest number of ‘mistakes’ (ie, professional negligence)………foreign doctors did not get such “exposure” and were left behind in the skills and ability area.

It is difficult to extend this logic to manufacturing, but I shall try. At the autocomp co where I work, I notice that our customers would rather deal with us than with our Chinese competitors…we have to actually turn away enquiries because we cannot scale up any more. That is because the “mandated” manufacturing sector in China, is less sensitive to resource-efficiency than us Indians. This applies not just to capital, but to materials as well…..it could be the basis for global OE s to build their supply chains here.

In those manufacturing sectors where China has “legacy” assets, it is most ‘competitive’ because there is no cost to the capital employed. But where new assets have to be funded, it comes mostly from its famed FDI-machine. Outside these 2 quadrants, it would appear that the Chinese lose out, ie, if they have to build up businesses from the ground up, without the support of either zero-cost capital or foreign technology/management, they are not as competitive.

This is where India scores. The adversity embedded in our economy, hones the skills of our entrepreneurs, giving us the famous Indian “jugaad”. We learn to use all resources efficiently, giving us a clear head-start in those industries where new investments need to be made, and  FDI is not coming in, for various reasons.

A ‘dysfunctional’ political system imposes costs on its economy. This is like an excessive tax, which is an economic term for the “adversity makes you strong” argument that I have given above. This tax is nothing but a pound of flesh taken away from the other factors of production, which must learn to make do with less. Living with this Shylock-effect actually gives the Indian entrepreneur a motive to increase the efficiency (in other words, get more from less) of resources.

Don’t get me wrong. I am not apologizing for the inefficiency of the Indian Govt. Nor am I suggesting that this is the right way to approach Governance. I am merely arguing that all is not right with molly-coddling. Chinese Govt support to its industry may actually be weakening its industrial culture, rendering them unable to stand on their own feet.

On the other hand, Indian Govt “dis-support’ might actually be making Indian industry stronger. Too much of either (support or dis-support) will be counter-productive, for sure. But a little bit of adversity, may, in a perverse sort of way, be good for us. 

A good example of this is the sugar industry in France. With massive subsidies, French sugar is still uncompetitive. India, with some of the lowest sugar prices in the world, also has one of the lowest conversion costs in the world. The huge adversity inherent in the sugar industry in India, has actually resulted in producing some 5 players with the best operating and financial efficiencies in the world. 

To summarise, I am merely arguing that we stop saying that foreign support for their industry is an unmitigated advantage they enjoy. Or that the fact that we (Indians) have inferior governance, is a disadvantage that we labour upon. To use a sporting allegory, if every Govt had to feed its team to compete in the Olympics, it is very likely that over-indulgent Govts (like China) are over-feeding their teams. They are more likely to produce “fatsos”. A negligent Govt like ours will likely produce leaner, meaner sportsmen.

I must acknowledge here that the above allegory destroys my case. In the real (sports) world, over-indulgent China produces the best, leanest sportsmen in the world; while negligent India just produces “fatso” cricketers who are seen more in Pepsi ads than on the crease.  

Indian Business is going to be different. I live in hope, don’t you?!