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Contents Autumn l 2012 l Vol. 08

Column 04 The future of Chindia: anticipating the hip-hopping Draphant 4 Kang Tae-young Korea’s response to China’s industrial restructuring 7 Song Byoung-jun A look at India from a long-term growth perspective 11 Kim Kyung-yool

Can Chindia’s economy overcome 15 the global crisis? A round-table discussion: Chindia’s economy amidst 17 the global financial crisis Chinese firms catch an opportunity from the global 29 financial crisis Chung Sang-eun

Korean companies’ response 37 to the tumbling Indian economy Diagnosis of the faltering Indian economy 39 Lee Dae-woo Automakers in India should revamp product lineup 45 and improve sales skills Park Sang-min

China’s domestic market 53 China boosts domestic demand in the face of the eurozone 55 financial crisis Chung Cheol-ho Chinese and Foreign companies compete independently 61 or in alliances Chung Whan-woo India’s accelerating urbanization 71 India’s urbanization widens regional and class gaps 73 Kim Chan-wahn India toils to improve infrastructure 79 Imm Jeong-seong

Issue Analyses 87 The scope of Wen Jiabao’s vision of China’s political reform 89 Cho Yong-sung The Kim Jong-un regime heralds changes in North Korea- 97 China relations Cho Bong-hyun From Finance Minister to President 105 Santosh Kumar For how long will the Indian rupee continue to depreciate? 111 Choi Ho-sang India’s anti-business policies hurt foreign investment 119 Lee Soon-chul

Corporate 125 Asia Seed, filling Indian dining tables with Korean vegetables 127 Kim Yeung-ki Samsung finds a future in China 131 Kim Dong-ha

Culture 137 Jiang Taigong, the founder of China’s management philosophy 138 Kim Chang-do A false accusation against Muslims in Indian history 144 Lee Kwang-su The future of Chindia: anticipating the hip-hopping Draphant COLUMN

Kang Tae-young CEO & President, POSCO Research Institute

hanks to high economic growth, China and India have often been dubbed “flying dragon” and “running elephant.” China achieved an average annual growth rate of more than 10% for T the 33 years from 1978 to 2011. China surpassed Japan to become the world’s second largest economy in 2011. For the three decades from 1980 to 2010, India achieved an average annual growth rate of more than 6%, and emerged as a global superpower. In 2011, India was the world’s eleventh largest country by nominal GDP and the third largest by purchasing power. Given the circumstances, it is only a matter of time until China and India become the world’s largest and second largest economies. With a huge combined population of 2.5 billion people (China’s 1.3 billion and India’s 1.2 billion), Chindia will surely become the world’s largest consumer market. With China’s competitive edge in manufacturing and India’s strength in the IT sector, Chindia has unlimited potential. However, the prospering Chindia’s economy is recently faltering as the eurozone crisis spreads. China’s economic growth fell to 7.4% in the third

4 POSRI Chindia Quarterly�Autumn 2012 quarter of 2012, a three year low since the first quarter of 2009, when the figured stood at 7.9%. China’s economy has slowed for six consecutive quarters, triggering discussion about a hard landing. Also, India’s economic growth is low at 5.3% in the first quarter and 5.5% in the second quarter of 2012. With economic downturns and aftereffects of a long period of high growth, both countries are facing daunting tasks. China should respond appropriately to the disparity among regions and cities, and an increasing number of labor disputes. It needs to promptly sophisticate its industrial structure, because most of its industries, including the steel industry, suffer from oversupply. China should also shift from an export-dependent economy to a domestic-based economy. For its part, India should solve the problem of ongoing deficits of trade, current account, and fiscal balances. India has other issues to deal with: weak fundamentals of the secondary and manufacturing industries, excessive democratic processes and the caste system, bureaucracy, and corruption. All in all, the myth of Chindia seems to end here. However, there is something not to be overlooked. Even though China and India’s economies are faltering rather badly, they are still performing better than the economies of other countries. Facing many challenges under the current global recession, China and India have achieved economic growth rates of about 7% and 5%, respectively. Moreover, China and India are populous countries with populations of more than 1 billion each. They have also deftly overcome the 2008 financial crisis. Prestigious financial firms, including Global Insight, Goldman Sachs, and Citigroup, are still optimistic about the future of Chindia. They predict that China and India will achieve an economic growth rate of more than 6% for the next several decades. They do not doubt that India will become the world’s second largest economy within 30 years. No one doubts that, before this happens, China will become

5 Autumn 2012�POSRI Chindia Quarterly “If Chindia becomes the the world’s largest economy. When the world’s largest market, it unique characteristics of China and

will give Korean companies India are well harmonized, giving rise ample opportunities. “ to the Draphant (Dragon+Elephant) that creates new hip-hop dances in the global economy, Chindia will bolster the global economy in the medium- to long-term. If Chindia becomes the world’s largest market, it will give Korean companies ample opportunities. What would be good entry strategies into Chindia for Korean companies? First, Korean companies should actively target the Chinese and Indian markets, considering the characteristics of their domestic demand. In China, Korean companies should focus on the end-user market and intermediate goods for domestic use, rather than those for export purposes. In India, they need to pay close attention to Indian consumers in their 20s and 30s, who will become the main pillar of the future Indian market. As China and India are diverse countries, Korean companies should diversify and fractionate strategic bases in China, with its 31 provinces, and India, with its 28 states and 7 union territories. In addition, Korean companies should establish self-sufficient local systems in both countries. To this end, they need to localize R&D, manpower, and marketing. In particular, it is important to secure local distribution networks and establish cooperative relationships with local companies. Since the first publication of the Korean monthly magazine Chindia Journal in September of 2006, and the English quarterly magazine Chindia Quarterly in January of 2011, POSCO Research Institute has dealt with the past, present, and future of Chindia. I hope the outcomes of this open innovation research will help Korean companies successfully enter Chindia’s market.

6 POSRI Chindia Quarterly�Autumn 2012 Korea’s response to China’s industrial restructuring COLUMN

Song Byoung-jun President Korea Institute for Industrial Economics and Trade (KIET)

s worries spread that the global economic slowdown will linger due to the ongoing European financial crisis, the world is paying close attention to the future of China’s economy, Awhich currently leads the global economy. The growth rate of China’s exports, which had previously been around 20-30%, only stood at 7.6% for the first quarter of this year. In particular, China’s exports to the EU, which receives the lion’s share of China’s exports, declined by 1.8 percentage points in that quarter. China’s economic growth is projected to be at approximately 7.8% this year. However, a sharp decline in China’s exports is highly likely to realize worries about partial oversupply in Chinese industries. In addition to traditional industries, such as the steel, shipbuilding, petrochemical, and display panel industries, where oversupply has been an issue, the problem seems to be worsening in the new and renewable energy industries, such as photovoltaic and wind power. Oversupply in Chinese industries is different from what Korean industries have experienced in the past in terms of

7 Autumn 2012�POSRI Chindia Quarterly “With continuous monitoring of diagnosis and remedies. In the Chinese economy, Korea Korea’s case, due to its small must formulate a new policy for domestic market, a slight failure

economic cooperation with of government policies and China. “ overinvestment by the private sector immediately translated into structural oversupply in the economy, leading to massive industrial restructuring. In contrast, it would be possible for China to prevent overall oversupply because its domestic market is expanding with rising incomes and the urbanization of inland China. If the export environment improves, oversupply could be easily addressed by Korean industries, which account for a small proportion of the global market. With Chinese products dominating the global market, however, the oversupply problem would not be easily remedied by exports in China. For these reasons, the need for industrial restructuring in the Chinese economy cannot be assessed on the basis of Korea’s experience. Industrial restructuring is significant in that it eases quantitative imbalance in supply and demand and sophisticates the industrial structure by adding great value to industries. Most countries experience industrial restructuring during the process of industrialization. China will most likely follow this course. Despite the high growth rates in the past years, vestiges of the socialist economic system still remain in the Chinese economy. As many of China’s leading companies in major industries are state-owned, over- employment is still a problem. Industrial restructuring entails massive downsizing. If large-scale unemployment comes simultaneously with an economic slowdown, the Chinese government would find itself in a political bind. For this reason, China has recently claimed that oversupply

8 POSRI Chindia Quarterly�Autumn 2012 in the country is not so serious as to require restructuring. As each province has a distinctive industrial structure, the negative ripple effects of restructuring, such as a sharp increase in unemployment in the short term, would vary among the provinces. This suggests that each local government’s attitude toward restructuring and will to implement would be different. Many local governments are voicing their desire for other local governments to undergo restructuring first, or for the central government to cover the expenses of restructuring. In addition, restructuring in certain industries or areas could lead to idle manpower flowing into other industries or localities, resulting in a balloon effect that would weaken the effects of restructuring. In this sense, the Chinese government’s recent measures to encourage restructuring by raising electricity prices and increasing production costs are proving to be ineffective in some areas. If the global economic slowdown continues, the Chinese government is likely to consider applying additional measures to the local governments with little success in restructuring. However, the recent cut in interest rates is interpreted as a measure for refocusing on growth, which would lessen the urgency of restructuring. The possibility of a hard landing for the Chinese economy still seems small, contrary to what some people have predicted. However, there are clear signs that China is trying to shift its economy from quantitative growth to qualitative growth by expanding the domestic market and promoting industrial restructuring. With continuous monitoring of the Chinese economy, Korea must formulate a new policy for economic cooperation with China. In response to China’s industrial restructuring, Korea should diversify export channels to China by entering China’s services market and expanding its presence in China’s domestic market. Moreover, Korea should go beyond current exports, which are based on processing trade, and

9 Autumn 2012�POSRI Chindia Quarterly increase exports of consumer goods such as cosmetics and foods and beverages, as well as durable goods such as automobiles, furniture, and high-end electronic products.

10 POSRI Chindia Quarterly�Autumn 2012 A look at India from a long-term growth perspective COLUMN

Kim Kyung-yool Director General, Korea Trade Centre Korea Trade-Investment Promotion Agency (KOTRA)

ndia, often dubbed “post-China” or “running elephant,” is recently faltering, with its economic indicators flashing red. The domestic and overseas media are fueling anxiety by constantly running I unfavorable news about the Indian economy: high inflation, dwindling foreign exchange rates, and weakening investor confidence. International rating agency Standard & Poor’s has downgraded India’s credit rating from “stable” to “negative,” chilling investor confidence. After hitting a high economic growth rate of 8.5% in 2010, India’s economic growth sat at only 6.5% last year. It slumped in the first quarter of this year to 5.3%, the lowest it had been in nine years, since the first quarter of 2003, when it was 3.6%. This slowing economic growth is to be expected due to the government’s continuing tight policies. India is in a vicious cycle of high wages and inflation, a side effect of hyper economic growth since 2003. Exacerbated by recent fluctuation in oil prices and unstable agricultural yields, India’s consumer price index surged to 14% at one point.

11 Autumn 2012�POSRI Chindia Quarterly “Although the Indian economy is To tame the uncomfortably being temporarily held back, it high inflation rate, the Indian is important to remember that government hurriedly played the

the great elephant is still up and high interest rate policy card. Since running. “ March of 2010, the central bank has raised India’s benchmark rate 13 times, from 4.75% to 8.5%. India’s bank loan interest rate surged to 15%. India took the opposite direction from other countries, which have adopted low interest rate policies to boost their economies. India’s high interest rate policy has led to shrinking consumer confidence and delayed investment in production facilities, and is pushing down private consumption and investment. The more serious problem is India’s increasing trade deficits. India imports about 75% of its crude oil requirement. The recent oil price hike has put a significant burden on India. What is worse, India is suffering from poor exports and rising trade balance deficits due to the economic crisis in the eurozone, which accounts for 20% of India’s total exports. India’s trade deficit last year was unprecedentedly high at USD 140 billion. Under these circumstances, devaluation of the rupee is inevitable. The Indian rupee was 44.08 per dollar in August of 2011, but dwindled to 57.33 per dollar on June 22, 2012. The rupee against the dollar has declined by 21% over the last year. Amidst these unfavorable economic conditions, the Indian government has been indecisive about its reform policies. The Indian government decided to open up its multi-brand retail distribution market to foreign investors, but soon reversed the decision in the face of complaints from opposition parties. The government has also imposed excessive taxes on foreign firms in order to cut fiscal deficits, angering global companies.

12 POSRI Chindia Quarterly�Autumn 2012 It is true that the Indian economy is in a difficult situation. However, the forecast is not so pessimistic. Experts have no mixed opinions about India’s great potential in the long term. With its large population of 1.2 billion people, India has maintained the highest economic growth rate after China. The International Monetary Fund projected India’s economic growth to be around 6% this year. Given that other BRIC’s members Brazil and Russia achieved economic growth of 2.5% and 4.3% last year, respectively, this figure is quite high. Although it is rather slow, India’s continuous reform is also considered to have a positive impact on the Indian economy. Despite dismal economic conditions, foreign direct investment in India increased to USD 46.5 billion in FY 2011, a 34% increase year-on-year. India is still an attractive investment destination for foreign investors. Korean companies should carefully review their entry strategies into India from a perspective of long-term growth, rather than forming pessimistic or optimistic outlooks based only on economic indicators. Although the Indian economy is being temporarily held back, it is important to remember that the great elephant is still up and running. In particular, Korea’s competitor, Japan, invested more than USD 3 billion in India last year, and Japan’s aggregate private investment in India was nine times higher than that of Korea. Japan’s active expansion of investment in India provides insight for Korean companies that are pondering entering the Indian market.

13 Autumn 2012�POSRI Chindia Quarterly Can Chindia’s economy overcome the global crisis?

�A round-table discussion: Chindia’s economy amidst the global financial crisis

�Chinese firms catch an opportunity from the global financial crisis :: Can Chindia’s economy overcome the global crisis?

A round-table discussion: Chindia’s economy amidst the global financial crisis

China Kim Dong-ha, Professor, Busan University of Foreign Studies Lee Chi-hun, Director, Korea Center for International Finance (KCIF) Chung Sang-eun, Professor, Hannam University Choi Yong-min, Head of the Office of the Chairman, Korea International Trade Association (KITA) Han Gwang-soo, President, Han Gwang-soo Institute for Chinese Studies

Indina Kim Chan-wahn, Professor, Hankuk University of Foreign Studies (HUFS) Park Hyun-chae, Professor, Chonnam National University Moosup Jung, Research Fellow, Samsung Economic Research Institute (SERI) Cho Choong-jae, Head of South Asia Team, Korea Institute for International Economic Policy (KIEP)

○● Q: What is the current status of Chindia’s economy amidst the global financial crisis?

Choi Yong-min: Is the Chinese economy in crisis at the moment? Let us take a look at the indicators. China’s exports in July increased by only 1%; this is the smallest increase since November of 2009. Foreign direct investment has also declined this year. The investment increase rate for non-current assets fluctuated between 24% and 30% between 2003 and 2011, but the rate is about to fall below 20% any time now. Consumer spending, China’s biggest concern, increased 13.7% in June, far lower than the 21.5% increase during the 2008 financial crisis. However, China has

17 Autumn 2012�POSRI Chindia Quarterly the means to overcome this crisis. Commodity prices are stable, and China’s broadest measure of money supply, M2, was up 13.6% at the end of June, compared with a year earlier. This increase is far smaller than the 27.7% increase in 2007. The real estate fervor has cooled down. China’s fiscal deficit is only 1% of GDP, and it also has ample government deposits. What I want to emphasize here is that an economic growth rate of 7% is not a determinant of a financial crisis. This is just China’s normalized economic growth rate.

Cho Choong-jae: India’s economic slowdown can be explained by four highs: high inflation, high interest rates, high fiscal deficit, and high foreign exchange rates. We cannot expect global cooperation in the European sovereign debt crisis as there was among the G20 in the 2008 financial crisis. In particular, India has little room to increase fiscal expenditure. Now, cutting interest rates is the only plausible means, but this would not work well due to inflation pressures, a major challenge facing the Indian economy. As foreign investment has been flowing out of the Indian stock market until recently, foreign exchange rates have surged. The sharp increase in foreign exchange rates worked as pressure for import prices to rise, which makes it difficult to cut interest rates. Moreover, as monsoon rainfalls are insufficient for cultivation, and global food prices are rising, interest rate cuts are being delayed. If the European crisis remains unchanged and the central bank starts cutting the benchmark interest rate, the Indian economy would recover faster than expected, as it did after the 2008 financial crisis.

Park Hyun-chae: The question, “Can India overcome the current financial crisis?” naturally leads to the question, “Are India’s fundamentals strong?” As we now live in an era of knowledge industry, talent pools are important. In this sense, India has many advantages. India has a talent pool, as one can

18 POSRI Chindia Quarterly�Autumn 2012 :: Can Chindia’s economy overcome the global crisis?

easily guess from the fact that it is one of the three countries in The possibility of a hard the world that can make landing is very low in both supercomputers on its own, and China and India, but the risk its capacity to develop software of an economic downturn and a slow recovery is very high. is the second highest in the world after the USA’s. Also, India’s dependence on foreign trade is around 30%, far below China’s 50% and Korea’s 97%. Taking these factors into account, the Indian economy will have a difficult time for a while, but it can overcome the crisis in the medium- to long-term.

Chung Sang-eun: The Chinese government seems to have learned many lessons from the 2008 financial crisis. During the 2008 crisis, China enjoyed continuous economic growth thanks to its RMB 4 trillion stimulus package, but it paid the price. China suffered inflation, an oversized public sector, a widening gap between the rich and poor, a deteriorating private sector, and local governments’ fiscal delinquency. Therefore, in response to the current financial crisis, China is spurring restructuring, to which it had previously paid little attention. Rather than a massive stimulus package, China has opted for interest rate cuts that are barely sufficient to protect the economy from dramatic fluctuations.

Moosup Jung: The Indian economy declined in the first quarter of this year because the government raised interest rates the previous quarter. Underdeveloped economies, such as India’s, are easily influenced by interest rates. India is rather unlucky. Insufficient monsoon rains influence food supply, and reduce income, which leads to reduced consumption. They also restrict hydroelectric power generation. The Indian economy is expected to have low growth for a while. Then, inflation will ease. When we

19 Autumn 2012�POSRI Chindia Quarterly take it positively, rupee depreciation increases foreign investment. The service balance and balance of transfer are surging. India’s foreign exchange authorities seem to keep the rupee depreciated. If private funds complement insufficient government financing of infrastructure construction, India could show signs of recovery next year. Due to such innate factors, the Indian economy looks good in the medium- to long-term.

Kim Dong-ha: Aside from fiscal policy, China has many means of tackling the recent financial crisis, such as expanding domestic demand through urbanization, tax cuts, inducing yuan depreciation, and supporting export companies. This year, China gave up baoba (保八), a term that describes the 8% annual economic growth rate that officials believed was critical to ensuring social stability, and set a new target of 7.5%. Therefore, China will not resort to a huge stimulus package this time, as it did in the 2008 financial crisis, when its RMB 4 trillion stimulus package resulted in many side effects. China is now pondering different methods, such as increasing investment in the private sector and expanding tax cuts. In July of 2012, China released a new set of guidelines to promote domestic private investment, the New 36 Articles. In the second half of this year, China will expand tax cuts in order to encourage private investment.

Lee Chi-hun: The possibility of a hard landing is very low in both China and India, but the risk of an economic downturn and a slow recovery is very high. In particular, with insufficient fiscal capacity and high inflation, India has little room to tweak policy in response to an economic downturn. This means that India has a higher risk of economic slowdown than does China. The reason India has a lower risk factor than China is that its export-to-GDP ratio is 14.2%, far lower than China’s 26%. Therefore, India is less influenced by external shocks than is China. With declining potential growth

20 POSRI Chindia Quarterly�Autumn 2012 :: Can Chindia’s economy overcome the global crisis?

rates, China and India will likely face a W-shaped recession, in which they will recover slowly in the second half of this year, before falling again in the second half of next year.

○● Q: For how long will the Chinese government’s control and social stability last?

Chung Sang-eun: The Chinese Communist Party (CCP) is maintaining control, but its logical validity is diminishing. In order to keep control, the CCP should help the public increase incomes and solve many problems, such as the widening gap between the rich and poor, corruption, privatization of state-owned enterprises, high unemployment, and insufficient social security. The CCP lacks the ability to solve all of these problems. Quite the opposite, it is being criticized as the main culprit behind these problems. However, the situation is not so dismal as to cause dramatic political changes or turmoil. The problems will come to a head around the time that Xi Jinping (習近平) wins his second-term. If incomes continue to rise, problems are sure to follow.

Lee Chi-hun: The Chinese government’s control is unlikely to collapse in the short-term as happened in the Middle East after the Jasmine Revolution. However, social instability will likely become a serious problem in the long- term. Among the many reasons for social unrest, complaints about economic disparity are especially likely to surface, aided by widespread use of the Internet. Inequality in education and health care under the hokou (戶 口) system is also a serious social issue. Even though the Chinese government understands the gravity of the situation, the current Chinese political structure makes it difficult to address the issues. Social unrest will surface in the next five to ten years.

21 Autumn 2012�POSRI Chindia Quarterly Kim Dong-ha: I believe that the Chinese government will properly respond to the current crisis, but it will face new challenges in the medium- to long- term. First, the advantage from its huge population will end. China’s population is aging, so it will be difficult to achieve growth rates as high as those achieved in the past. Second, unemployment of migrant urban workers is serious. More than 20 million of China’s 120 million migrant urban workers have been laid off as a result of the recent economic slowdown. What is worse, these people create social unrest after returning home and finding no jobs. Third, a record 6.8 million college graduates, the first from the “post-1990” (90后) generation, born in the 1990s, will enter the workforce this year. Recent economic instability has caused many jobs to be lost. Massive unemployment among the new generation is a challenge that the Chinese government has never experienced before.

Han Gwang-soo: Koreans living in China have different opinions about China from people in Korea. China is not as unstable as Koreans worry. Rather, Chinese people worry that Korea does not have adequate solutions to current problems. Different opinions about China will create inefficiency in Korea’s approach to China in the future. Therefore, a logical and analytical approach is all the more necessary for Korea. We need to look at China from a balanced, broad perspective.

○● Q: India’s politics and social infrastructure are dragging down the economy. Is there any solution?

Cho Choong-jae: Many problems in India, such as corruption, taxes on foreign companies, and land acquisition clashes, are both structural problems and growing pains. It is difficult to solve these problems quickly, but these ongoing problems are working positively by advancing transparency, legislation, and institutionalization.

22 POSRI Chindia Quarterly�Autumn 2012 :: Can Chindia’s economy overcome the global crisis?

Moosup Jung: In India, the public sector is dragging down the private sector. India has a high degree of media presence. The private sector and the media have been working hard to transform the government, as India becomes a more rational and transparent state. Recently, excessive taxes on foreign firms became a hot-button issue; however, the country’s general attitude toward the government’s foreign investment policies is positive. In India, there is no discrimination against foreign companies in the manufacturing sectors, such as the chemical and automotive sectors.

Park Hyun-chae: To overcome the current crisis effectively, India needs to quickly address three major problems─corruption, bureaucracy, and inadequate infrastructure─in order to transform itself into a country with a better business environment. India should more strictly enforce laws on government officials and entrepreneurs connected to corruption. India should revise exponentially increasing government subsidies and improve infrastructure to attract more foreign investors. India should nurture industries with high potential, such as tourism and distribution. In addition, India must actively seek free trade agreements with foreign countries in order to further develop the software and pharmaceutical industries, in which it has a competitive edge in the global market.

Kim Chan-wahn: India has a population of 1.2 billion people, and 1.2 billion problems. Bihar is the most backward state, but recently it is growing the fastest among Indian states. Its infrastructure is still backward, and foreign investment has not picked up. However, Bihar is growing very quickly because the local government has changed. With better governance, India can realize more of its potential. Indian people see a bright future. They have high expectations for the newly-elected Finance Minister-turned President. Considering India’s weak manufacturing sector, the Indian government is actively supporting information technology and bio technology at the national level.

23 Autumn 2012�POSRI Chindia Quarterly ○● Q: With what strategies do companies in Chindia respond to the global economic crisis? And what are the strategies of Korean companies?

Cho Choong-jae: Some Indian companies are now taking action in order to make the most of the depreciation of European assets. In particular, Infosys and TCS are actively trying to acquire prestigious European IT firms to expand their presence in the European market. In the past, Hyundai Motors and LG Electronics entered the Indian market through sole ventures and large initial investments, but now those strategies might not work well. For smooth land acquisition, Korean companies might choose M&A’s and joint ventures over green field investment. In economic cooperation between Korea and India, investment especially by Korean small- and medium-sized enterprises in India, should be promoted. In this sense, it is very important to develop an industrial complex exclusively for Korean SME’s. Recently, Japan is actively utilizing its own industrial complex for Japanese companies, and entering India through M&A’s.

Park Hyun-chae: Indian companies in the telecommunications and pharmaceutical industries are competitive. They seek growth through M&A’s. In particular, companies in the steel and telecommunications industries are actively buying European companies. Indian pharmaceutical companies pursue marketing by acquiring companies from Europe, the USA, and Japan. They even conduct field surveys to enter the Korean market. The Indian domestic market keeps developing. However, agricultural products require more investment because India has a substandard distribution system, despite its high agricultural output.

Moosup Jung: Indian companies depend on imports of raw materials and facilities. India cannot afford to invest in facilities due to exchange rates. Its

24 POSRI Chindia Quarterly�Autumn 2012 :: Can Chindia’s economy overcome the global crisis?

industrial production in the second quarter was poor because the country deferred investment in facilities. If interest rates start to decline, there will be investment in facilities. Encouraging domestic consumption, especially by the low-income population, may have a positive outcome. In the information and telecommunications technology sector, a crisis may turn into an opportunity thanks to the effects of cost saving and outsourcing. Foreign companies’ rush to enter the Indian market did not subside due to the depreciation of Indian assets. Foreign companies in India depend increasingly on local procurement.

Kim Chan-wahn: India should begin locally sourcing parts for which it is highly dependent on imports. Mergers and acquisitions of local assets and vertical integration are plausible. India should also invest in real estate. India is expected to invest about USD 1 trillion in infrastructure. Various businesses of Japanese companies and other global companies, including Siemens and GE, are entering the Indian market at the same time. They need to form clusters in each region to share information and buildings. The Korean government should assist Korean companies in entering India.

Park Hyun-chae: Korean companies need to establish a hub for research and development in order to expand their B2C model in response to the growing Indian middle class, and make the most of India’s engineering talent pool. Foreign companies’ investment in India is mainly focused in service and telecommunications. Aside from investment in the traditional manufacturing sectors, such as the automotive and electronics sectors, Korean companies should diversify investment in services to target India’s domestic market. Korean companies should expand investment in India to utilize the country as a springboard into Africa. At the same time, they need to find a different angle on entry into India, such as developing products for

25 Autumn 2012�POSRI Chindia Quarterly India’s bottom of the pyramid (BOP) market, and targeting the global market with such products.

Kim Dong-ha: The Chinese government’s prescription to local companies responding to the recent financial crisis is summarized in two parts: prepare for a prolonged war and strengthen risk management. A model case of heeding this prescription is Sany Heavy Industry’s layoffs. Sany is China’s largest heavy machinery manufacturing company, with a global workforce of 60,000 and more than RMB 50 billion in sales in 2011. The state-owned company began laying off its workforce earlier this year due to falling demand and the financial crunch. The layoffs have been well received in China as a preemptive measure. This is in stark contrast to the past, when the country mainly criticized layoffs. This can be interpreted as the Chinese government sending a new signal to businesses, encouraging local companies to boost their medium- to long-term responsiveness to the recession. Chinese firms recognize well that the era of profits as high as 10% is already over. They all agree that they need to have countermeasures to be prepared for the next three to five years.

Chung Sang-eun: Korean companies should carefully examine the changes in Chinese companies’ management strategies, and take the outcomes as guidelines for setting strategies regarding China and global management during and after the financial crisis. Considering that a crisis often turns into an opportunity, Korean companies should be determined and ready to take on any profitable business. If they have an opportunity in India, they should take that opportunity, even though it is not their core business.

Lee Chi-hun: Korean companies should respond to the Chinese government’s policies flexibly when entering the Chinese market. They should enter the Chinese market with high value-added goods and services

26 POSRI Chindia Quarterly�Autumn 2012 :: Can Chindia’s economy overcome the global crisis?

in line with China’s policies for industry sophistication. Korean companies should actively examine entry into China through M&A’s in response to China’s policy of privatizing state-owned companies. Korean companies should try to improve investment efficiency by the sharing of information and other benefits, through the “fleet-style” market entry strategy, wherein big and small companies put their heads together to plan their entry strategies from the very start, and the “chain” strategy, wherein related companies jointly enter foreign markets.

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Chinese firms catch an opportunity from the global financial crisis

Chung Sang-eun Professor, Department of Chinese Studies Hannam University

any Heavy Industry (三一), China’s largest heavy machinery manufacturing company, recently announced that it would cut 30% of its workforce. The Chinese government, which is S sensitive to employment indicators, has atypically praised the cut as a model of restructuring. Sany Heavy Industry has the largest market share in China’s ready-mixed concrete and excavator markets. Sany was the first company to supplant Doosan Infracore at first place in the Chinese market. Since its establishment in 1994, Sany has achieved a growth rate above 50% each year and become the leading company in the industry, with RMB 50.8 billion in sales and 20% operating profit (RMB 10 billion). Even during the global financial crisis in 2008, Sany reported an increase of 58% in sales. Is the recent financial crisis so severe in China that even Sany resorted to personnel cuts? Sany bought German concrete pump maker Putzmeister earlier this year. Despite help

29 Autumn 2012�POSRI Chindia Quarterly from the Chinese government, this was too big an M&A for a faltering company that was forced to reduce its workforce. How do we interpret Sany’s contradictory moves and the Chinese government’s response?

○● Chinese firms’ responses differ between the 2008 and 2011 crises Sany’s recent moves are representative of Chinese companies’ response to the European financial crisis, which started in the second half of 2011: seeking solid management through workforce reduction within, while actively making external moves, such as export expansion and M&A’s with advanced foreign companies. The Chinese government unveiled a RMB 4 trillion stimulus package immediately after the 2008 global financial crisis; however, there was no such move after the recent financial crisis. Perhaps the Chinese government concluded that the massive stimulus package did more harm than good. Even though China maintained its high economic growth thanks to the RMB 4 trillion stimulus package, it also suffered many side effects: an overheated real estate market, inflation, bankruptcy of local governments, oversized state-owned enterprises, and a widening gap between the rich and poor. Learning lessons from this experience, China seems to be taking the recent crisis as an opportunity to improve efficiency across its economy by utilizing institutional measures to control the economy, such as cuts in the reserve requirement ratio, rather than large scale and artificial stimulus support, together with companies’ own measures for restructuring. In this sense, Chinese firms’ response to the recent financial crisis is quite different than it was to the previous financial crisis, when they had been solely dependent on the government’s stimulus measures.

○● Utilizing the Chinese government’s stimulus package The recent financial crisis has dealt a lethal blow to China’s small private exporting companies. These companies, which had difficulty with

30 POSRI Chindia Quarterly�Autumn 2012 :: Can Chindia’s economy overcome the global crisis?

rising labor costs and raw material prices, suffered from plummeting orders from the EU, the largest export destination. It was as if their lifeline had been cut. As small exporting companies have become financially distressed since the second half of 2011, many such companies in provinces like Guangdong and Zhejiang, where many exporting companies are concentrated, have gone bankrupt. A series of cases have occurred where presidents of small and medium-sized enterprises (SME) failed to pay back bank or private loans and absconded overseas overnight, causing a serious social problem. To solve the problem, the Chinese government unveiled measures to expand loans to SME’s in October of 2011, and one month later, Premier Wen Jiabao visited Zhejiang and Wenzhou Provinces to encourage the local governments to increase financial support to SME’s. The Chinese government has also announced a variety of stimulus measures: three cuts in reserve requirement ratios since December of 2011, two cuts in interest rates, RMB 26.5 billion worth of subsidies for energy efficient home appliances for one year from June 1, 2011, and large-scale public projects. These measures were not as grand as the stimulus package of 2008, but some measures tailored to exporting SME’s deserve attention. The Chinese government decided to allot 30% of government procurement to local SME’s this year. China depreciated its currency by around 1% against the dollar this year, after a 4.7% appreciation last year. Eyes are on this currency depreciation because it is one of the few stimulus measures taken by the Chinese government in response to the recent financial crisis.

○● Restructuring boosts competitiveness Beyond government support, Chinese companies are increasing their competitiveness through restructuring and layoffs. In addition to Sany, major Chinese companies including Medea Electric Limited (美的), BYD Auto, and ZTE (中興通信) are laying off huge numbers of employees. Since

31 Autumn 2012�POSRI Chindia Quarterly the end of 2011, Medea, China’s largest air conditioner maker with RMB 140 billion in sales, has slashed 30% of its workforce, which stood at about 90,000 at the end of 2010, to 70,000 workers. ZTE, the world’s fourth largest mobile phone maker, has cut 10,000 employees, while BYD Auto, the largest Chinese auto brand, has cut 5,000 employees. Moreover, LDK, the world’s fifth largest solar panel maker, has slashed 5,000 workers, while textile and leather supplier Huaxi Group (華西) has laid off 1,000 workers, 60% of its total workforce. These companies resorted to downsizing mainly due to poor performance, such as falling sales and rising outstanding amounts; however, problems in their own structures, such as over-employment, were also significant. Medea benefited most from the government subsidies given to rural communities in 2008 for purchasing home appliances (家電下鄕). In 2009, at the peak of the policy, Medea’s workforce totaled 200,000. In the meantime, labor-intensive companies, including Huaxi, are actively seeking facility mechanization and automation, rather than trimming workforce, to tackle rapidly rising labor costs.

○● M&A’s turn crisis into opportunity Despite the global economic slowdown, Chinese companies are on a domestic and overseas M&A spree. They are especially targeting European companies at discount prices after the European economic crisis. Sany bought Germany’s largest concrete pump maker, Putzmeister, for EUR 570 million. Putzmeister has been leading the concrete pump manufacturing sector for decades. The company was an ideal target company for Sany, which has set a world record for vertical pumping height at 492 meters. Chinese auto parts maker Hebei Lingyun Industrial Group has acquired its German peer Kiekert. Chinese companies are eyeing European companies because many European companies are for sale at low prices, and brand power and

32 POSRI Chindia Quarterly�Autumn 2012 :: Can Chindia’s economy overcome the global crisis?

technology are attainable at the same time. It is noteworthy that Companies will become more Chinese firms are especially competitive as they tackle the interested in buying world-class crisis, and troubled companies German companies, which will will be nudged out of the market, making the fundamentals of help them boost technology and China’s economy stronger. trust in one stroke. This is in stark contrast to their M&A’s after the 2008 global financial crisis, when they bought hollow US companies for scrap values. CITIC Securities, China’s largest securities firm, has sealed a deal to buy Hong Kong-based brokerage CLSA Asia Pacific Markets from its struggling parent, France’s Credit Argricole SA. The China National Offshore Oil Corporation (CNOOC) has agreed to buy Canada’s Nexen for USD 15.1 billion in the biggest overseas takeover by a Chinese company. These two M&A’s are examples of China’s active moves to improve the competitiveness of its less competitive sectors, such as state-of-the-art technology, finance, and natural resources.

○● Chinese firms go global and seek new markets Chinese manufacturers are offshoring plants to Cambodia, Bangladesh, Myanmar, and Indonesia in order to avoid rising labor costs and land prices in China. Fourteen Chinese companies are already located in Sihanoukville, a port city in southern Cambodia, creating a Chinese industrial complex. China’s biggest online apparel retailer, Vancl (凡客) has decided to increase production in Bangladesh, which has low labor costs, and is actively examining relocation of its production bases to Southeast Asia. Vancl stated that it was difficult to maintain production facilities in China, as the monthly salary of a Bangladeshi worker is around RMB 500, while a Chinese worker is now paid at least RMB 2,000 per month. China’s average monthly pay for

33 Autumn 2012�POSRI Chindia Quarterly urban migrant workers under 35 was RMB 2,513 in 2011, a 30% increase from 2009. Chinese manufacturers, especially in light industries such as clothing and textiles, will speed up their relocation overseas. With labor costs skyrocketing in China, overseas production is more profitable despite shipping expenses. Chinese firms are redrawing their export map, expanding from the USA and the EU to Latin America, Africa, and other regions. China’s trade with Latin America grew 113% from 2009 to 2011, and its exports to Latin America totaled USD 241.5 billion last year. China Confidential predicted that Latin America will become China’s largest export region around 2017 due to the rising demand for Chinese products by the middle class in Latin America. Changhong Electric (長虹) exports most of its PDP TV’s to South Africa. Polaris Jewellery’s exports to Russia totaled USD 35 million last year, three times bigger than its USD 10 million in exports to the USA. Chinese manufacturers are performing well in the emerging markets not only with consumer goods, but also with construction equipment and other heavy industries. China’s exports of heavy equipment to emerging countries grew by 25% annually on average from 1998 to 2010, thanks to its increased investment in emerging markets. As Chinese firms have expanded investment in Africa, China’s exports of capital goods, such as goliath cranes for construction, are also rising.

○● Post-crisis responses All things considered, the recent crisis poses risks to China’s economy and to Chinese companies; however it also provides opportunities. Of course, China will face massive layoffs, an economic slowdown, and other troubles in the process of overcoming the crisis; however, given that the Chinese government has the means and capability to ward off severe economic slowdown, China’s economy will not fall into a downward spiral. Rather, companies will become more competitive as they tackle the crisis,

34 POSRI Chindia Quarterly�Autumn 2012 :: Can Chindia’s economy overcome the global crisis?

and troubled companies will be nudged out of the market, making the fundamentals of China’s economy stronger. It will no longer be the case that China’s huge stimulus packages will serve as a driving force of recovery from global economic crises. If the current crisis becomes more severe, the Chinese government will have to implement massive stimulus packages, but there has been no sign of this. Korean companies should carefully examine what strategies Chinese companies have adopted in responding to the global economic crisis, and take the outcomes as guidelines for setting strategies regarding China and global management during and after the financial crisis.

35 Autumn 2012�POSRI Chindia Quarterly Korean companies’ response to the tumbling Indian economy

�Diagnosis of the faltering Indian economy

�Automakers in India should revamp product lineup and improve sales skills :: Korean companies’ response to the tumbling Indian economy

Diagnosis of the faltering Indian economy

Lee Dae-woo Senior Business Analyst of POSCO Research Institute

he Indian economy has been tumbling recently. India’s exchange rate had been fluctuating from the end of last year, and earlier this year it plunged. This was a fatal blow to India’s T real economy, which had already been faltering in the wake of the European financial crisis. Its economic growth rate was 5.3% in the fourth quarter of FY 2011. Global credit rating agencies are adding fuel to the fire. On May 14, 2012, Moody’s downgraded the hybrid ratings of India’s three largest private sector banks, ICICI Bank, HDFC Bank, and Axis Bank, from Baa3 to Baa2. Moody’s alluded that the ratings of the private banks were deeply related to the sovereign rating of the nation, indirectly suggesting that India’s sovereign rating had declined. On June 11, Standard & Poors (S&P) warned that India may lose its investment grade rating, dropping from investment grade to speculative grade. India’s current sovereign credit is rated BBB-, the lowest level for investment. If India loses its investment grade, it will fall into junk status (speculative grade). S&P warned that India

39 Autumn 2012�POSRI Chindia Quarterly may become the first among the BRICs countries to break the trend of high growth. Why is the Indian economy faltering so severely?

○● Inflation, the main culprit of the recent depression As the global financial crisis broke out in 2008, economic growth rates across the world nosedived, and the sense of urgency was amplified. One after another, countries around the world adopted policies for fiscal expansion and monetary expansion, dragging down interest rates significantly. India’s benchmark interest rate declined continuously from July 3, 2008, when it recorded at 9%, to 4.75% on March 19, 2010. The Indian government’s fiscal expansion and interest rate cut led to ample liquidity in the market, resulting in rapid inflation. The wholesale price increase rate, which was negative in June of 2009, rose continuously, exceeding 10% in early 2010, and remained above 9% for almost two years, causing commodity prices to fluctuate. The Indian government returned to a tight monetary policy and continued to raise interest rates. An interest rate hike, which started on April 20, 2010, stopped as late as April 17, 2012, pushing up the benchmark rate from 4.75% to 8.5%. As the rate increased, the growth rate naturally declined. India’s quarterly growth rate fell from 9.3% in the first quarter of 2010 to 5.3% in the fourth quarter of 2011. The Reserve Bank of India (RBI) has set out to raise interest rates in order to curb excessive inflation. When economic growth rates fell more sharply than expected, however, the RBI eased its tight policy and cut its interest rate slightly on April 17, 2012. The wholesale price increase rate is currently stable at around 7%, but the figure is still burdensome. India’s economic growth rate has plummeted in line with the European financial crisis, deepening the Indian authorities’ agony. In the end, the RBI curbed inflation by raising interest rates and seemed

40 POSRI Chindia Quarterly�Autumn 2012 :: Korean companies’ response to the tumbling Indian economy

Wholesale price increase rates

12 (Unit: %)

10

8

6

4

2

0 3 5 7 9 3 5 7 9 3 5 7 9 3 5 11 11 11 -2 2009.1 2010.1 2011.1 2012.1

Source: Indian Ministry of Statistics and Programme Implementation

to partially succeed in inflation control. Despite the decline in growth rates, the outcome is not negative politically, considering the economic impact of inflation on the common people. If inflation subsides and the European financial crisis is addressed, Indian economic growth will very likely get back on track. However, the persistence of pessimistic outlooks coming from both inside and outside of India is worrisome.

○● External confidence diminished by government incompetence The continuous devaluation of the rupee, which started last year, has been attributed to external factors, such as an increasing preference for safe assets since the European financial crisis, and European capital outflows from India to Europe, the epicenter of the crisis. However, given that other Asian currencies did not plunge as deeply as the Indian rupee, the problem is not that simple. The biggest problem is India’s current account deficit. India’s current

41 Autumn 2012�POSRI Chindia Quarterly account deficit was USD 27.9 billion during the 2008 financial crisis, but surged to USD If inflation subsides and the European financial crisis is 78.1 billion in 2011. What is worse, its deficit addressed, Indian economic continues to grow. The main culprit of the growth will very likely get current account deficit is India’s trade balance back on track. deficit, which stood at USD 189.7 billion in 2011. India’s strengths─IT software export and foreign remittance─are not enough to reduce the trade balance deficit, so the current account deficit is continuously growing. The increase in trade balance deficit was mainly caused by oil price hikes, but rising imports of manufactured goods also played a role. As industrialization proceeds in India, imports of capital goods and intermediate goods, which are necessary for industrialization, are increasing. Imports of consumer goods are also on the rise. With the Indian economy expanding, India has become dependent on imports of capital goods, intermediate goods, and even consumer goods, making the current account deficit even bigger. It is questionable why India cannot develop import replacement industries. According to a report by the Indian Council for Research and International Economic Relations (ICRIER), India’s weak manufacturing is attributed to its inadequate infrastructure and labor laws, which are an impediment to the nurturing of manufacturing industries. As India’s labor laws are rigid, labor-intensive light industries have difficulty prospering. Inadequate infrastructure leads to an increase in manufacturing overhead costs, hindering the development of heavy industries. Manufacturing should be promoted in order to replace imports and nurture export industries; however, labor law reform and dramatic infrastructure development are just hollow government propaganda. In reality, nothing has changed. How have measures for labor law reform and infrastructure improvement been implemented? In the 2009 general elections, the ruling

42 POSRI Chindia Quarterly�Autumn 2012 :: Korean companies’ response to the tumbling Indian economy

India’s quarterly economic growth rates

(Unit: %) 9.3 8.9 8.3 7.8 8.0 6.7 6.1 5.3

2010 2010 2010 2010 2011 2011 2011 2011 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Source: Indian Ministry of Statistics and Programme Implementation

United Progressive Alliance (UPA) retained power. In the process, leftist groups, who had always opposed the government’s reform policies, left the Cabinet. Expectations of reform measures ran high. However, what happened afterwards suggests that the current UPA government was lethargic and incompetent, lacking any will. The party even complained that the former UPA party was better than it was. Following the forced eviction of migrant workers for the Commonwealth Games 2010, the 2G spectrum scandal of 2011 and a series of other scandals in both the central and local governments occurred. Amid mounting populism, politicians have rushed to lay down policies for maintaining the status quo, rather than seeking long term benefits for residents. For example, in order to improve the lot of residents, backward mountainous areas should be developed by improving infrastructure to give access to residents, supplying electricity to improve their living standard, and introducing companies to help create jobs and raise incomes. In reality, however, politicians are making countless policies to nullify development projects out of fear of resident opposition, and using the tight budget for pork barrel measures. This is a vicious cycle that makes

43 Autumn 2012�POSRI Chindia Quarterly backward areas more backward. The Special Economic Zones (SEZ) have fallen prey to populism. The Indian government’s decision to impose an minimum alternate tax (MAT) on the developers of SEZ’s and lift tax exemptions for dividend income makes people doubt the government’s will to develop the zones. The development of SEZ’s is often hampered by the difficulty of land acquisition, thus the Indian government’s decision caused a loss of market confidence. In addition, inconsistent policies on the opening of the Indian market to mega distributers, and the imposing of retroactive taxes on Vodafone, disregarding a ruling by the Supreme Court, clearly show who should take the blame for the loss of market confidence.

○● A silver lining The news is not all bad. Foreign direct investment (FDI) in India is not declining. Excluding reinvestment, new FDI inflows into India totaled USD 35.8 billion in 2011, a significant increase from USD 22.2 billion a year ago. Moreover, India has successfully overcome both the 1998 and 2008 financial crises. Perhaps the Indian economy has resistance to external variables because it is dependent on domestic demand. Now is the time for the Indian government to think hard about ways to boost domestic demand.

44 POSRI Chindia Quarterly�Autumn 2012 :: Korean companies’ response to the tumbling Indian economy

Automakers in India should revamp product lineup and improve sales skills

Park Sang-min Head of Export Group of Hyundai Motor India

he BRIC’s countries have been driving global economic growth for the last five years; however, their economic conditions look dismal these days. India, a BRIC’s member, is T having hard times in the wake of the European economic crisis. India’s economic growth had a 9-year low of 5.3% in the fourth quarter of FY 2011 (January-March of 2012). International rating agencies have downgraded India’s economic outlook one after another. Among the many suggested reasons for the instability of the Indian economy, two explanations are the most plausible: outflows of European hot money and uncertainty about the Indian government’s policies.

○● Aggravating external conditions in the auto industry The Indian government’s deteriorating budget balance is casting a dark cloud over the country’s medium- to long-term economic outlook. The worsening fiscal deficit creates a vicious cycle of dwindling public expenditure and tax hikes.

45 Autumn 2012�POSRI Chindia Quarterly Annual automotive industry outlook (Unit: 10,000)

2011 2012 (e) 2013 (e)

Production capacity 390 417 442 Sales Volume 292 311 338

Domestic demand 243 257 278 Export 49 57 60

Statistics on 16 carmakers (Tata Nano excluded) Source: Hyundai Motors India

The situation is particularly bad for the automotive industry. After the release of the FY 2012 budget, India’s goods and services taxes (GST) increased by 2-5%, and potential consumers delayed their purchase of cars, leading to falling demand. After March and April of 2012, some local governments raised vehicle registration taxes by 2-4%, and increased other vehicle-related taxes. In addition, the central government raised gasoline prices by 13% on May 24, adding to the woes of the automotive industry.

○● No more high growth in the auto industry In the past, the Indian automotive market was dominated by three major automakers, Maruti Suzuki, Hyundai, and Tata Motors, which accounted for about 80% of the market. However, late movers, such as Toyota, Nissan, Volkswagen, and Renault, have changed the competition landscape with a variety of lineups and customer services, making competition fiercer. Amid this fierce competition, the Indian automotive market has maintained an annual average growth rate of 14.3% for the last five years. The automotive industry is seeking to expand investment and production capacity in order to cope with industrial demand effectively. Despite harsh economic conditions, automotive demand in the first half of this year is expected to grow by 4.8% year-on-year, with a passenger

46 POSRI Chindia Quarterly�Autumn 2012 :: Korean companies’ response to the tumbling Indian economy

Percentage of Sales Volume by Fuel Type (Unit: %)

Hyundai Maruti Tata Nano Toyota GM VW Others Average

Gasoline 83 70 36 65 61 34 38 62 2011 Diesel 17 30 64 35 39 66 62 38 Gasoline 76 62 41 23 30 31 41 55 2012 Diesel 24 38 59 77 70 69 59 45 (Jan.-Jun.) Comparison -21 -7 14 32 25 24 14 to average Comparison to the 7 8 -5 42 31 3 -3 7 previous year

Source: Society of Indian Automobile Manufacturers (SIAM)

vehicle sales estimate of 2.54 million units. However, the forecast will inevitably change if the European financial crisis spreads, the Indian government further raises taxes on diesel cars, or the price of diesel fuel increases. The Indian automotive market in the first half of this year can be summed up by a rapid increase in sales of diesel cars and UV’s (SUV and MPV). Since the second half of 2011, the Indian government has continued to increase gasoline prices in order to reduce oil consumption, widening the gap between diesel and gasoline prices. The price of gasoline has increased by 27% since 2010, while the price of diesel has increased by less than 8%. In its recently released budget, the Indian government decided to increase taxes on both gasoline and diesel cars by 12%; however, it has not actually imposed taxes on diesel cars, leading to further distortion in the automobile fuel market. Based on the Indian government’s fuel policies, automakers are expanding diesel-related investment: Maruti Suzuki has built a diesel engine plant, and Honda has launched the Honda Brio diesel model. Since Toyota, Volkswagen,

47 Autumn 2012�POSRI Chindia Quarterly India’s automotive demand outlook (Unit: 10,000 units; %) Current outlook If the eurozone crisis spreads 2011 2012 Growth 2013 Growth 2012 2013 Growth rate rate rate

Passenger cars 195 206 5.6 235 14.1 206 235 14.1 IHS UV Outlook (incl. vans) 48 49 2.1 68 38.8 49 68 38.8 Total 243 255 4.9 303 18.8 255 303 18.8 Passenger cars 195 202 3.6 212 5.0 195 201 3.1 HMI UV Outlook (incl. vans) 48 52 8.3 66 26.9 50 57 14.0 Total 243 254 4.5 278 9.4 245 258 5.3

Source: Hyundai Motors India

and Skoda revamped their sales lineups to include diesel vehicles a few years ago, they have been absorbing much of the demand for diesel vehicles. Due to substandard road conditions, large families, and increasing household incomes, demand for UV’s is rising in India. The rapid growth of UV’s means a change in the Indian automotive market, which has been dominated by low-cost small cars. The low-cost UV market has served as a growth base for local car brands, such as Tata Motors and Mahindra & Mahindra, which have been producing UV’s for years. For example, Mahindra & Mahindra, which had only UV and passenger car lineups in the past, had a whopping 28% increase in sales year-on-year in the first half of 2012, thanks to increasing sales of diesel vehicles and rising demand for UV’s. Toyota is also growing fast in India, with increasing sales of strategically developed compact car Etios Sedan and its diesel variant, the Etios Liva hatchback.

48 POSRI Chindia Quarterly�Autumn 2012 :: Korean companies’ response to the tumbling Indian economy

○● Targeting rural areas with low cost models Automakers in India are experimenting with various measures in response to changes in the automotive market. Toyota, Honda, and Volkswagen, which are highly dependent on auto parts imports, have slashed production of gasoline models, by reducing or suspending operations, while rushing to diversify diesel models and advance the scheduled launching of low-cost UV models. Nissan is planning to launch low-cost compact models under the Datsun brand name, and is seeking to During an economic slowdown, expand sales by shifting nothing is more important than from medium- and high-cost maintaining appropriate stockpiles and meeting production targets. models to low-cost models. Some automakers are actively expanding dealer networks and boosting marketing in rural areas with a strong preference for gasoline models. Accordingly, Maruti Suzuki plans to expand its sales in rural areas from around 30% up to 50%. It is also trying to reduce stockpiles of gasoline vehicles by expanding exports. Between March and April, India’s exports of gasoline vehicles rose by 9% year-on-year. In particular, exports of Toyota’s Etios, Maruti Suzuki’s Ertiga, and Nissan’s Micra have grown significantly.

○● Hyundai’s response strategies During an economic slowdown, nothing is more important than maintaining appropriate stockpiles and meeting production targets. To this end, Hyundai is implementing various measures to ensure sustainability, while focusing on maintaining its sales momentum to keep its previous production output. In the short term, Hyundai plans to increase its supply of diesel models

49 Autumn 2012�POSRI Chindia Quarterly Models to be launched in 2012

Maker Model Type Launching date

Mini Xylo MPV 7 Mahindra & Mahindra Verito 9 Tata Motors Safari Storme SUV 10 Renault Duster SUV 7 Force Motors Force One SUV 9 New Cruze 6 GM Sail 12

Ertiga MPV 4 Maruti Suzuki Replace Compact 12

in line with the increasing sales of diesel models, and launch a new model equipped with a diesel engine in order to increase sales. It seeks to push up sales by extending dealer networks from urban areas to rural areas with a relatively low preference for diesel vehicles. Hyundai has developed various promotional programs to meet customer needs, such as promotional programs related to second-hand car sales. It has developed training programs for dealers and salespeople to strengthen sales skills for qualitative growth. It is currently operating a program to designate best-selling dealers as platinum dealers, together with a special education program for the next generation of dealers who will become a main pillar of next-generation dealer management. Hyundai offers field trips to all salespeople at all dealerships in India to boost their pride in the company, and gives the best salespeople an opportunity to visit the headquarters and plants in Korea and experience Korean culture, helping them learn Hyundai’s philosophy, values, and spirit. Hyundai also endeavors to boost brand awareness by

50 POSRI Chindia Quarterly�Autumn 2012 :: Korean companies’ response to the tumbling Indian economy

strengthening public relations and marketing through corporate social responsibility, corporate advertisement, and sports marketing. As the largest automaker in India, which accounted for 49% of India’s total exports of passenger cars in 2011, Hyundai Motor India is making efforts to secure a stable supply of production and boost profitability by expanding exports, making the most of the devaluation of the rupee. In the medium- to long-term, Hyundai is spurring development of UV’s in response to increasing demand. It is also systematically developing automotive financing solutions in order to provide customers with better payment plans. Proper risk management is important in the slowing Indian economy. In order to strengthen the fundamentals of the company, it is essential to establish long-term strategies, such as improving the capability of salespeople, developing internal systems to redouble sales skills, and developing new products to meet future customer needs.

51 Autumn 2012�POSRI Chindia Quarterly China’s domestic market

�China boosts domestic demand in the face of the eurozone financial crisis

�Chinese and Foreign companies compete independently or in lliances :: China’s domestic market

China boosts domestic demand in the face of the eurozone financial crisis

Chung Cheol-ho Head of Beijing Office, POSCO Research Institute

hina’s economic downturn has lasted for more than two years, since early 2010. In the second quarter of this year, China’s growth slowed to a three-year low of 7.6%, amplifying C worries of a possible hard landing for China’s economy. On the one hand, some people claim that such worries are unfounded. However, this year, China’s growth is very likely to hit its lowest point in 13 years, since 1999.

○● The European financial crisis and local government debts What are the reasons for China’s economic slowdown? There are internal and external factors. The biggest external factor is clearly the European financial crisis. The European financial crisis, which started in the PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain), shows no signs of abating, but rather seems to be spreading to the entire eurozone, despite the stimulus packages of the European Central Bank (ECB) and joint

55 Autumn 2012�POSRI Chindia Quarterly Contributions of consumption, investment, exports to GDP after 2000 (Unit: %)

70 Final consumption Gross capital Net export expenditure formation 60

50

40

30

20

10

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: National Bureau of Statistics of China

responses by several European countries. The crisis is spreading to Germany and France, the center of the eurozone. There is a possibility that Greece will leave the eurozone. The European financial crisis has a great impact not only on the global economy, but also on the Chinese economy. Europe is one of China’s largest export destinations, receiving 21.8% of China’s entire exports in 2011 (22.5% in 2010). Europe’s economy was so enormous that it accounted for 25% of global nominal GDP in 2011, showing its great influence over the global economy and China’s economy. China’s dependence on exports accounted for 26.9% of GDP in 2010. It is no wonder that China suffered a serious shock from the weakening global economy. Internal factors of China’s economic slowdown include government policies. During the 2008 US-led financial crisis, the Chinese government implemented severe policies to prevent an economic slowdown, such as a RMB 4 trillion stimulus package, policies to promote 10 major industries, cuts in interest rates and reserve requirement ratios, and policies to promote consumption of automobiles and home appliances. Side effects, such as

56 POSRI Chindia Quarterly�Autumn 2012 :: China’s domestic market

inflation and a real estate price surge, appeared from the second half of 2010, and the Chinese government has aggressively implemented real estate regulations and policies to stabilize inflation. China has changed its investment and export-oriented growth to consumption-driven growth under its 12th Five-Year Plan (2011-2015), and cut its goal for annual average growth from 7.5% under the 11th Five-Year Plan (2006-2010) to 7% under the 12th Five-Year Plan. This shows China’s strong will to pursue qualitative growth, even if it means sacrificing quantitative growth. Such changes in China’s policies are inevitable. So far, China has been too dependent on investment for growth. The contribution of investment to GDP reached as much as 49.2% in 2011, while the share of consumption continued to decline. Overinvestment resulted in worries about overcapacity and delinquent financial institutes. In particular, since China’s local governments took out loans to finance competitive development in 2008, local government debts have become the most significant stumbling block for China’s economy. Now, China faces limitations in investment-oriented growth.

○● A possibility of recovery after stimulus injection The Chinese government’s shift to domestic demand-oriented policy is a necessary step in the right direction. With such great uncertainty in the global economy, a dramatic downturn in China’s economy would have a wide-reaching ripple effect. Fortunately, however, optimism is prevailing in China’s economic outlook. Economic forecast agencies believe that China will recover in the third quarter of this year, recording an annual growth rate of more than 8%, and will continue to recover next year. This forecast is based on expectations that the stimulus package implemented in May by the Chinese government will start to bear fruits, and the fact that the Chinese government has the capability to defend the economy in an emergency. Since May, the Chinese government has cut interest rates two times and

57 Autumn 2012�POSRI Chindia Quarterly the reserve requirement ratio once. It has also implemented a series of stimulus packages, such as expansion of approvals for investment in infrastructure, and subsidies for buying energy-saving home appliances and automobiles. China has much more favorable conditions for implementing

It seems difficult for the Chinese stimulus packages than other countries. government to find a silver bullet China has a better fiscal balance and less for the side effects of stimulus government debt than the USA, Japan, and packages, while minimizing France. China has as much as USD 3.3 instability from unemployment. trillion in foreign exchange reserves. With the high level of policy interest rates and stable commodity prices, the Chinese government can implement strong stimulus packages as it wishes. Moreover, with its rapid urbanization, China still has great capacity for development. China has room for growth, given that its gross national income per capita is only USD 5,000. For these reasons, China will be able to maintain high growth for some time.

○● European and political variables It is a mistake to be too optimistic about China’s economy. The expectation that China’s economy will recover in the third quarter of this year is premised on the assumption that the eurozone crisis will not worsen. Currently, Europe’s economic conditions are very unstable. Even if things do not worsen, early recovery is most likely unattainable. If the eurozone crisis becomes worse, and so does China’s economy, the Chinese government should implement more aggressive stimulus packages. China’s leadership is scheduled to change with the 18th National Congress of the Communist Party in November of 2012, for the first time in ten years. With this change of government officials at the nation-level, the government’s policy responsiveness could become weaker than ever before. The

58 POSRI Chindia Quarterly�Autumn 2012 :: China’s domestic market

Conditions for implementation of stimulus packages

China USA Japan France

Budget balance (% of GDP) -1.2 -9.6 -10.1 -5.3 Government debt (% of GDP) 25.8 102.9 229.8 86.3

Foreign exchange reserves 33,050 14,950 12,777 1,716 Policy interest rate 6.31% 0~0.25% 0.05% 1.0% Increase in consumer price 3.0% 1.7% 0.2% 2.0%

Source: IMF and BOK Note: Budget balance and government debts based on figures from 2011; China’s foreign exchange reserves based on end of March of 2012; other countries’ foreign exchange reserves based on end of May, 2012; consumer price based on May of 2012; policy interest rate based on end of June of 2012

government will have to depend on investment-oriented growth in case of emergency. With social stability being all the more important in the face of the leadership change, the Chinese government will be unable to implement aggressive policies that would overheat real estate and trigger inflation. It is also problematic that the incumbent government used every possible stimulus measure, leaving the incoming government no option. China is in a difficult position for making significant policy decisions. The Chinese government proclaimed that it would maintain real estate restraint policies despite a growth rate of 7.6% in the second quarter of this year. This shows the government’s determination to preclude real estate prices rising in anticipation of stimulus plans. A minority in China expect the Chinese economy to continue to slow down. Pan Xiangdong, analyst of China’s Galaxy Securities, said, “Due to the prolonged crisis in the eurozone and slowing demand in China, China’s GDP growth is expected to be 7.7%-7.8% this year, and to remain above 7% in 2013. There is a possibility that this figure will drop below 7% in 2014.” His claim is based on several factors: the government’s lukewarm stance on structural reform, labor shortages, an aging population, and other causes of

59 Autumn 2012�POSRI Chindia Quarterly diminishing growth potential. In addition, OECD Composite Leading Indicators (CLI), the HSBC Purchasing Managers’ Index (PMI), the stock price index, and other leading Chinese economic indexes, all foretell that China’s economy will continue to slow down. For these reasons, one should be wary of optimism in China’s economic recovery.

○● Avoiding side effects from stimulus packages The Chinese government seems to have the ability to defend its economy. However, China is accepting its economic slowdown half- voluntarily and half without choice. China is refraining from making a massive stimulus injection like the quantitative injection in 2008. China is delaying the easing of real estate regulations, the most effective measure for economic recovery, showing just how prudent China is being this time. The current external uncertainty seems to be having an impact on China’s economic slowdown and employment. Under GDP growth rates between 9% and 10% during 2009-2010, 11.68-12.21 million jobseekers in urban areas found jobs. If the annual GDP growth rate falls below 7%, the number of newly-employed in urban areas is expected to drop by more than 3 million. Increased unemployment worsens the imbalance in household incomes, resulting in increasing social instability. Currently, it seems difficult for the Chinese government to find a silver bullet for the side effects of stimulus packages, while minimizing instability from unemployment. If China fails to respond appropriately, it will face severe troubles. Now, China is suffering a period of ordeals, and needs to implement policies to boost domestic demand in response to the eurozone crisis.

60 POSRI Chindia Quarterly�Autumn 2012 :: China’s domestic market

Chinese and Foreign companies compete independently or in alliances

Chung Whan-woo Research Fellow, Institute for International Trade

n 2009, Taiwan’s Yulon Group (裕隆), a long-time local assembler and sales agent of Nissan cars, launched its own car model, Luxgen, in China, jointly with China’s Dongfeng Motor (東風). With low I domestic demand, Taiwan has had no domestic automakers. Yulong’s project is the first of its kind. China’s huge and rapidly expanding domestic market has allowed the Taiwanese company to venture out into a field that was unimaginable for the company in the past. Another Taiwanese company Master Kong (康傅) has emerged as the world’s largest instant noodle maker after it conquered China’s huge market. As these cases show, many companies from Hong Kong and Taiwan are targeting the Chinese market. Foreign companies are following suit. Strategies for entering China’s domestic market and coping with market changes have become a crucial factor that determines the fate of many companies around the world. Let us take a look at the offensive and defensive plays of Chinese and foreign companies competing in China’s

61 Autumn 2012�POSRI Chindia Quarterly domestic market, in the sectors that the Chinese government pledged to support through consumption stimulus policies in May of 2012.

○● Home appliances: a market of unlimited competition, led by local firms

In China’s domestic market, local firms have always held the largest market shares in the home appliance sector. There are more than 150 home appliance makers in China. Some of the best known are Haier, which has the largest market share in China’s washing machine and refrigerator markets It is clear that the Chinese market and is also well known in Korea; Hisense, has become a global standard the leader of the television market; and market where global companies Gree and Midea, the largest and second compete to introduce world-class largest companies in the air-conditioner goods and services. market. Most global home appliance makers are doing business in China, though their market shares are smaller than those of Chinese companies. German companies include Siemens, which is famous for front-loading washing machines, and Bosch, which sells refrigerators. There are many Japanese companies in China. After buying Sanyo, Panasonic is performing well in the washing machine, television, and air-conditioner markets. Sony and Sharp are also making a lot of efforts in the television market. Though their market share is insignificant, America’s Whirlpool and Sweden’s Electrolux have a presence in China. Korean companies are doing well in China, too. Samsung is gaining a footing in the television and refrigerator markets, while LG is gaining ground in the front-loading washing machine and refrigerator markets. With competitive LED technologies, Korean companies will lead the high value-added and energy-saving

62 POSRI Chindia Quarterly�Autumn 2012 :: China’s domestic market

product markets. China’s indigenous companies have been able to grow rapidly since the country’s reform and opening-up policies, given that it takes a relatively short time for companies to become competitive in technology and products in the home appliance sector. China’s home appliance market is characterized by unlimited competition among 200 foreign and local companies. There is no case of joint venture or partnership in the industry. Global firms’ strategies seem to vary in this industry. However, they have one thing in common: their competitiveness in the Chinese market comes from tailored strategies that are based on strengths acquired through years of competition in the global market. German companies’ strategy is to provide Chinese consumers with strong and trustworthy products made with verified technologies. Japanese companies’ competitive edge is precise and simple design and functions. Chinese firms are already going beyond the local market. Haier, the front runner of the home appliance market, went global a long time ago. It already knocked on the door of the Korean market many years ago. Other Chinese companies are in the early stages of going global, focusing mostly on Southeast Asia. As it announced last May, the Chinese government considers the home appliance sector a major target of its consumption stimulus policy, with plans to strengthen its control over energy saving and environmental protection. In China’s home appliance industry today, the Chinazation of global companies is intersecting with the globalization of Chinese companies in a competition landscape that allows only for sole competition, with no room for horizontal or vertical alliances. There are pressures for energy saving and environmental protection, and demand for high-end goods and demand for low-end goods coexist.

63 Autumn 2012�POSRI Chindia Quarterly ○● The automotive sector: alliances, competition, and government policies In China, private local carmakers are chasing one another, while most global carmakers have partnered with China to produce and sell cars through joint ventures. The Chinese government is pursuing strong policies for development and arbitration within the automotive industry, such as policies supporting the development of independent technology and brand promotion, and policies to nurture energy-saving and new energy vehicles. The competition between Sino-foreign joint ventures and private local carmakers, together with the Chinese government’s ambitious policies, has resulted in wildly varying degrees of success for all involved. Such mixed results are well reflected in the changing landscape of the automotive market. China’s “Big Three” carmakers─Shanghai GM (Shanghai Motors + GM), Shanghai VW (Shanghai Motors + Volkswagen), and FAW VW (First Automobile Works + Volkswagen)─have led the rapid expansion of the market, but they faltered slightly in the early 2000s, when they were challenged by late movers, such as Korean companies Hyundai and Kia, and local carmakers. With their product and brand competitiveness and extensive lineups, however, China’s “Big Three” carmakers have shown their latent power by boosting their market share since the mid-2000s. Korean carmakers Hyundai and Kia, which achieved great success for three to four years after their first production in China in 2002, but took a hard blow between 2006 and 2007, have shown this same kind of power. One should not overlook the fact that the success of China’s “Big Three” carmakers, and of Hyundai and Kia, in China, is the result of the successful application of their global competitiveness to the Chinese market. With their product and brand competitiveness, which has been proven over a long time, and their competitiveness in full lineups, these companies are targeting the Chinese market. Volkswagen, the first global carmaker in China, established joint ventures with FAW and Shanghai Motors many years ago.

64 POSRI Chindia Quarterly�Autumn 2012 :: China’s domestic market

Market share of Chinese carmakers (Unit: %)

8.0 Shanghai GM Beijing Hyundai Shanghai VW Guangzhou Honda 7.0 FAW VW 6.0 FAW VW FAW Toyota Beijing Hyundai Shanghai VW 5.0 Dongfeng 4.0 Shanghai GM 3.0 DongfengCSV Cherry 2.0 Geely 1.0 Dongfeng Kia Dongfeng Kia BYD 0.0 2005 2006 2007 2008 2009 2010 2011

Source: CEIC

Volkswagen is dominating China’s market by rolling out various car models through these two joint ventures, without overlap. Volkswagen excels in the selection of partners and in localization, and holds the largest market share. It is fair to say that China has sustained Volkswagen since the 1980s. Of course, some global companies are struggling in China. They are mostly Japanese companies. Despite endless efforts, Toyota, Honda, and Nissan have failed to recover their diminishing market shares. This is a result of many factors working in conjunction: decision-making methods, timing, relations with the Chinese government, and national brand image. Comparisons between German and Japanese carmakers offer meaningful insight into China’s automotive market. Challenges by China’s indigenous carmakers in the mid-2000s made global companies nervous. However, Chinese carmakers suffered inexplicably from declining market share from the late 2000s. Chinese carmakers, including Geely, Cherry, and BYD, enjoyed fairly high market shares between 2007 and 2008, bolstered by government policies to nurture

65 Autumn 2012�POSRI Chindia Quarterly The competition environment for consumption stimulus sectors

Characteristics of Foreign & Chinese Sector management and companies’ corporate Government policy competition strategy

Sole competition (F) Independent - Subsidies for buying among Sino-foreign market entry energy efficient Home appliances and Chinese firms (D) Independent products - Chinese firms have a market entry - Selective preferential competitive edge in treatment for foreign- the market invested companies

Led by joint ventures (F) Market expansion - Chinese firms going chased by Chinese by collaboration global firms (D) Competition - Subsidies and tax cuts Automotive through independent for buying energy- companies or joint efficient small cars ventures - Selective preferential treatment for foreign- invested companies

Sole competition (F) Market exploration - Subsidies for buying among foreign and with technology energy-efficient Machinery & Chinese firms competitiveness products Equipment - Foreign companies (D) Chasing foreign - Selective preferential have a competitive companies treatment for foreign- edge in technology invested companies

Sole competition (F) Leading the market - Selective preferential among foreign and with technology treatment for foreign- Chinese firms competitiveness invested companies (D) Targeting the low- - Preferential IT & Electronics end market treatment for - Cooperation & advanced technology collaboration between Chinese and Taiwanese companies

Note: Selective preferential treatment means the promotion of investment with restrictions on investment methods, and shareholding limits. Taken from various sources

66 POSRI Chindia Quarterly�Autumn 2012 :: China’s domestic market

Chinese car brands and save energy. Their market shares have recently been falling, and their products have been labeled knockoffs with substandard technology and design. Time will tell whether this is a temporary setback or fundamental limitation. However, it is clear that Chinese carmakers need more time to show significant competitive prowess. There are some key points determining the present and future of China’s automotive market: rapid market expansion, various levels of demand and the sophistication of consumers, the Chinese government’s determination to develop its own technology and to nurture brands, and energy saving and environmental protection. Based on the effects of these key points, some 100 carmakers will continue to write stories of success and failure, through sole competition or through horizontal and vertical alliances.

○● IT and electronics: global brands chased by allied Chinese firms The front runners of the IT and electronics market, represented by mobile phones, are Samsung with the Galaxy series and Apple with the iPhone. They are chased by Nokia, which once dominated China’s market, and by Chinese companies. Entry strategies into the Chinese market are various, as are the results and their implications. The reason for this variation is the characteristics of the Chinese market: rapid market expansion, the huge size of the market, and diverse demand. China is one of the largest battle fields for Samsung and Apple. Samsung, the number one company in China’s smart phone market, is building and operating an independent development and production system based on its advanced production technologies. Samsung has almost completed the relocation of its global production bases to China. For Samsung, China is a global manufacturing base and an export destination. While utilizing China as an outsourced production base, Apple is making efforts to increase sales in the Chinese market. Even though Apple

67 Autumn 2012�POSRI Chindia Quarterly started doing business in China in earnest as late as 2009, it surpassed Nokia and became China’s second largest smart phone maker in 2011. Apple is making strenuous efforts in the Chinese market, as shown by recent moves: promotion of iOS localization, acceptance of App Store payments in yuan, and addition of the Baidu search engine to Chinese iPhones. On the other hand, Nokia, which used to be the front runner in the mobile phone market, fell to third place by market share in 2011. Taiwanese companies are playing a unique role in China’s IT market, and solidifying their foothold in the IT industry, earning the name “China’s allied force.” With their manufacturing technology, their management capability, and their workforce within China, Taiwanese companies have strengthened their position as original equipment manufacturers (OEM) for global companies. A good example is Hon Hai’s Foxconn, the largest OEM for Apple and HP. Another strategy of Taiwanese companies is to provide Chinese low-end mobile phone makers with technology platforms. Thanks to Taiwanese IT firms, Chinese companies were able to increase their market shares with cheap mobile phones, including knockoffs. In 2010, Media Tek, the leader in low-cost mobile phones, expanded its facilities for producing mobile phone SIM cards. In addition to Foxconn, other Taiwanese IT sourcing companies include Inventek (laptops), Quanta (laptops), and Innolux (LCD panels). These companies, which have formed “China’s allied force” with their own technologies, and production and sales networks within China, have recently been seeking cooperation with Korean companies.

○● Machinery and equipment: competition and partnerships based on technology and price Companies are competing independently with one another in the machinery and equipment industry. Global companies have a competitive edge in technology. Global companies with abundant technology, such as

68 POSRI Chindia Quarterly�Autumn 2012 :: China’s domestic market

Germany’s Siemens and Japan’s Hitachi, are leading the equipment and production facilities market, excluding the general machinery market. Korean and Taiwanese companies that have a competitive advantage due to high quality relative to price, are close behind, followed by Chinese companies with inferior technology and quality, but with good price competitiveness and networks in China. This industry is domestic consumption-oriented, with a high proportion of B2B transactions. It takes a long time to gain enough experience in the industry to be competitive in technology. For this reason, cooperation and collaboration between global and local companies is prevalent in this industry. The Chinese government has prioritized the nurturing and protection of the industry, facilitating increased cooperation between global and local companies. Kawasaki Plant System (plant construction), Toray (water treatment facilities), and Nordex (environmental facilities) have increased investment in China through cooperation and collaboration with Chinese firms. On the other hand, Chinese companies are not partners, but strictly competitors of Korean and Taiwanese companies. It is not easy to sum up the competitions and collaborations among the many companies striving to secure their places in China’s domestic market. They can only be explained through a comprehensive analysis of demand by sector, the competition landscape, industrial and technological characteristics, market growth potential, government policies, and corporate case studies. However, it is clear that the Chinese market has become a global standard market where global companies compete to introduce world-class goods and services. In addition, the Chinese government’s unique industrial policies make it all the more difficult for foreign companies to secure positions in the Chinese market. That is why it is important to pursue a balance between corporate-level efforts and government cooperation in trade.

69 Autumn 2012�POSRI Chindia Quarterly India’s accelerating urbanization

�India’s urbanization widens regional and class gaps

�India toils to improve infrastructure :: India’s accelerating urbanization

India’s urbanization widens regional and class gaps

Kim Chan-wahn Professor of the Graduate School of International and Area Studies Hankuk University of Foreign Studies

he Indus Valley Civilization that flourished around 3000 BCE was a well-planned urban civilization. Indian ancestors achieved a brilliant civilization 5000 years ago. However, T today’s India suffers from low urbanization rates and substandard infrastructure, making it hard to believe that Indians are the descendants of those who lived in planned cities 5000 years ago. Still, many Indians living in rural areas aspire to live in cities. With deteriorating growth rates in the agricultural sector, it is hard to make a living in rural areas. Parents living in villages brag of their children who work for even small companies in the city─reminiscent of Korean villages in the past.

○● Rapid urbanization in West and South India With the rapid growth of the Indian economy, urbanization across India is also accelerating. Currently, India’s urbanization rate is above 30%. According to a McKinsey report released in 2010, India’s urbanization rate

73 Autumn 2012�POSRI Chindia Quarterly is expected to rise to 40% by 2030. Breaking down this figure by state and city, five states among the 28 (Tamil Nadu, Gujarat, Maharashtra, Karnataka, and Punjab) will have more than half of their populations living in cities. Overall, India is expected to have 68 cities with populations of more than 1 million, 13 of which will have more than 4 million people. By 2030, in addition to the four megacities of Mumbai, Delhi, Kolkata, and Chennai, Bangalore and Pune will become megacities with populations of 10 million or more. Cities with high urbanization rates are usually located in South and West India. In 2008, except West Bengal and Madhya Pradesh, the ten states with the highest urbanization rates were all located in the southern and western areas of India. Even though the southern state of Rajasthan has a quite low urbanization rate at the moment, its urbanization will speed up once the Delhi-Mumbai Industrial Corridor Project (DMIC) is implemented. This will keep South and West India at the center of India’s industrial landscape.

A plan for the Delhi-Mumbai Industrial Corridor Project (DMIC)

Haryana

Delhi

Rajasthan Uttar Pradesh

[ India ] Gujarat Madhya Pradesh

74 POSRI Chindia Quarterly�Autumn 2012 :: India’s accelerating urbanization

○● India’s urbanization: the worsening divide between the industrial belt and the red belt If the gap in urbanization levels between West and East India continues, urbanization will worsen the regional imbalance and hinder national and social integration. People in backward regions still believe that the incompetency of politicians and public officials in their regions is the main cause of backwardness; however, when their education levels rise and broadcasting media develop, they will be able to compare their situation to advanced regions, and will likely vent their anger. Such complaints are expected particularly in eastern and northeastern regions, which have hardly benefited from the government’s policy reform. The per capita income of these regions is three times lower than that of the western area, which has the highest per capita income in India. North East India has the second lowest income level in India, after East India. In this sense, economic

Five states are likely to be more than 50 percent urbanized

Urban Urban Urbanization rate, 2008 population Urbanization rate, 2030 population %, total population Million %, total population Million Tamil Nadu 53 35.4 67 53.4 Gujarat 44 25.2 66 48.0 Maharashtra 44 47.9 58 78.1 Kamataka 37 21.6 57 39.6 Punjab 36 10.0 52 19.0 Haryana 31 7.5 45 15.2 West Bengal 29 25.8 40 41.5 Kerala 28 9.7 41 15.8 Andhra Pradesh 28 23.4 46 45.5 Madhya Pradesh 25 17.2 32 29.9 Jharkhand 25 7.6 31 12.0 Rajasthan 24 15.5 33 29.5 Chhattisgarh 24 5.8 40 11.7 Uttar Pradesh 21 39.2 26 68.9 Orissa 18 7.0 24 11.0 Himachal Pradesh 12 0.8 20 1.8 Bihar 9 8.9 17 21.3 Source: Mckinsey Global Institute, India’s Urban Awakening (April 2010)

75 Autumn 2012�POSRI Chindia Quarterly reform, which the Indian government has been carrying out for the last 21 years, has deepened the regional gap between West and East India. The radical left Maoists that flourish in East India, including Chhattisgarh, Jharkhand, and West Bengal, are also relevant to this issue. If the Indian government fails to address the issue of regional imbalance amidst rapidly expanding urbanization, India will likely be divided into an industrial belt and a red belt led by Maoists and other radical leftists.

○● Urbanization eases caste discrimination, but worsens religious conflicts With rapid urbanization rates in India, conventional social institutions, such as the caste system, will lose significant ground. Of course, urban residents are still not free from the yoke of caste when it comes to marriage; however, the practice of openly discriminating against the lower castes has largely disappeared in cities. Discrimination against the lower castes in public places and companies has almost completely disappeared. As Indian society becomes urbanized, caste- based discrimination is coming to an end. Urbanization, however, is likely to worsen religious conflicts. Many religious conflicts have occurred in India’s megacities, such as conflicts between Hindus and Muslims, Hindus and Christians, and Hindus and Sikhs. One of the biggest reasons for such religious conflicts in big cities is that some politicians and religious groups use competition for limited resources, such as jobs and commercial rights, for political purposes. A case in point is the Hindu-Muslim violence that happened in Mumbai in 1993. The violence, which started with a fight over commercial rights in Mumbai, exploded into religious conflicts. Much of the mass violence in Gujarat in 2002 happened in cities. With Indian society becoming urbanized and westernized, the possibility of religious conflicts is hard to rule out.

76 POSRI Chindia Quarterly�Autumn 2012 :: India’s accelerating urbanization

○● Adult ailments, another drawback of urbanization The rural-urban income gap, which is already wide, will become far wider by 2030. By 2030, India’s average national income is expected to rise to INR 136,000, and the average per capita income of urban residents is expected to increase four-fold to reach INR 239,000. With increased income levels and improved living conditions, the rising prevalence of adult ailments has emerged as a drawback. According to a 2006 study by CNN-IBN, an Indian broadcasting network, 31% If the gap in urbanization levels of the Indian population is between West and East India vegetarian. Contrary to what continues, urbanization will many imagine, the majority of worsen the regional imbalance Indians are not vegetarian. With and hinder national and social rising incomes, Indians consume integration. more foods and take in more animal protein. As a result, the increasing prevalence of adult ailments, such as diabetes and high blood pressure, has emerged as a social problem. As of 2010, the number of patients with diabetes (aged 20-79 years) was as many as 50 million, and the number of deaths attributable to diabetes surpassed 1 million. The increase in adult ailments is basically caused by the kinds of food Indians consume and their dietary habits; however, changing patterns in urban life also play an important role. In particular, the middle class and upper class living in cities use cars, and spend less time walking than people living in villages, who engage in manual labor. Indians have dinner at around 8 or 9 o’clock in the evening due to the hot weather, and dinner time for urban residents can be even later if all family members sit down for dinner after returning home from work. With increased income, Indians are more likely to have foods that are high in protein or fat. Afterward, they enjoy sweet deserts, and then go straight to sleep. Recently, an increasing

77 Autumn 2012�POSRI Chindia Quarterly number of India’s middle class realize the risk of obesity and try to work out. As the number of the middle class increases, the problem of adult diseases is going to become more serious. Ironically, a rise in adult diseases could be a good opportunity for some companies.

○● Business opportunities and risks to Korean companies Generally speaking, urbanization has a positive impact on production and demand. Korean companies should expand their business in line with India’s urbanization. It seems better for them to target West and South India, which have high urbanization rates. As India becomes more urbanized and westernized, conflicts are likely to become serious in many aspects. As experience shows, the possibility of religious conflicts still remains in cities. Therefore, Korean companies having a presence in India should be cautious not to get involved in religious violence. As East India is increasingly affected by rapid industrialization and urbanization, Maoists who thrive in East India will likely resist. They are strongly opposed to industrial development, contrary to the rights and interests of the poor, regardless of whether it is done by Indian or foreign companies. If companies intend to mine iron ore, coal, and other natural resources in East India, or want to acquire land from farmers in order to carry out industrial projects, they must acknowledge such risks and prepare countermeasures.

78 POSRI Chindia Quarterly�Autumn 2012 :: India’s accelerating urbanization

India toils to improve infrastructure

Imm Jeong-seong Senior Business Analyst of POSCO Research Institute

lumdong Millionaire (2008) won eight Oscars at the Academy Awards in 2009, including Best Picture and Best Director. The film was also very popular in Korea. Being more impressed by S the dismal environment of Mumbai slums than by the plot, many people who have seen this movie asked me whether the situation in the film is true. Unfortunately, what they saw in the movie is the reality of more than 6.5 million slum dwellers in Mumbai. To show the reality of India, the film was actually shot in a real slum, and characters in the film are played by real slum kids. Sadly, more than half of the population of Mumbai, the economic capital of India, lives in slums. Many of these slums are located in downtown areas, because slum dwellers live near their work places downtown, such as large- scale laundry fields, small factories, and shops. Interestingly, laundry fields, where Dohbi (the lower caste group specializing in washing clothes) work,

79 Autumn 2012�POSRI Chindia Quarterly are a famous tourist destination for foreigners. In addition, one tour program includes a tour to Dharavi, one of the largest slums in Asia. About 30% of the 1.5 million constituents of Mumbai South Central Lok Sabha constituency live in Dharavi. This means that Dharavi residents’ votes have a decisive impact on elections. Many candidates visit the slum before elections to win the hearts of Dharavi voters.

○● Inferior infrastructure Every monsoon season, urban floods in India vividly show how inferior infrastructure is in Indian metropolises. Without proper sewage systems, roads are quickly inundated by heavy rains even in a very short time. Traffic jams, pollution, and noise are severe in cities like Bangalore and Jaipur, as well as in Mumbai, Delhi, and Kolkata. Moreover, Indian cities generally have substandard infrastructure and public services, such as power, drinking water, waste treatment, and public health. In 2010, McKinsey Global Institute demonstrated the current status of Indian urban infrastructure based on basic services standards. According to the report, the performance of India’s cities is poor. Across India, only 20% of urban residents have access to storm-water drains, and 74% of the population has access to a piped water supply. Only 30% of sewage generated actually gets treated. The country also has inadequate public transportation, which results in bad traffic jams. India’s health care and education are poor as well. There are two main reasons for India’s poor urban infrastructure. The first is the rising urban population. The population of India’s cities increased from 220 million in 1991 to 290 million in 2001, and to 340 million in 2008. The urbanization rate also increased, from 26% in 1991 to 28% in 2001, and to 30% in 2008. In 2011, the figure is assumed to be about 35%. According to a recent study by The Energy and Resources Institute (TERI), Indian cities are growing faster than city planners had expected.

80 POSRI Chindia Quarterly�Autumn 2012 :: India’s accelerating urbanization

The current performance of India’s cities

Current Basic Item Unit A/B status (A) service (B)

Water supply quantity Liters per capita per day 105 150 70%

Piped water coverage %, population 74 100 74%

Sewage and septic tank %, population 63 100 63% coverage

Sewage treated %, sewage generated 30 100 30%

Solid waste collected %, total waste generated 72 100 72%

Storm-water drains %, road coverage 20 100 20%

Share of public transportation %, total trips 30 50 60%

Peak vehicles per lane Vehicular congestion 170 112 152% kilometer

Health care Hospital beds per 1,000 2 4 50%

Slum population %, total population in cities 24 0 -

Parks and open space Square meters per capita 2.7 9.0 30%

Student-to-teacher ratio in Education 48 30 160% primary schools

Source: McKinsey Global Institute, India’s urban awakening (April 2010)

Over the last three years, medium-sized cities such as Jaipur, Kanpur, and Lucknow, have had higher urbanization rates than big cities such as Delhi, Mumbai, and Chennai. The urban population has been increasing through a growing number of rural-to-urban migrants. Due to dwindling growth rates in the agricultural sector, it has become increasingly difficult to make a living in rural areas. Moreover, the number of young people with higher education levels moving to cities to find better jobs is increasing.

81 Autumn 2012�POSRI Chindia Quarterly The second reason is local governments’ labor shortages and poor revenues. Local governments have to take responsibility for improving their cities’ poor infrastructure, but they are not functioning properly. Local governments of medium-sized cities are known to be worse than those of big cities.

○● JNNURM─India’s bold plan to upgrade infrastructure In 2005, the Ministry of Urban Development launched a bold plan to actively deal with the urban infrastructure issue─the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), named after India’s first Prime Minister, Jawaharlal Nehru. So far, the main priority of the Indian government has been the development of rural areas, especially less- developed areas. With mounting problems in cities due to rapid urbanization, however, the Indian government has established a policy for urban redevelopment. The primary objective of the JNNURM is “to create economically productive, efficient, equitable, and responsive cities.” For seven years, INR 660 billion (or USD 13.2 billion) has been earmarked in an effort to improve social and economic infrastructure in urban areas, provide the urban poor with basic services, and implement a wide range of reforms to boost the capacity of local governments. To achieve the objectives of the JNNURM, 63 mission cities across India have been designated to upgrade infrastructure. The 63 mission cities include 7 cities with populations greater than 4 million, 28 cities with populations greater than 1 million but less than 4 million, and 28 cities with fewer than 1 million people. Various projects have been conducted in mission cities, involving water, sanitation, redevelopment of slum areas, urban transportation (roads, national roads, highways, and subways), and waste treatment. The problem is that the JNNURM, one of the major initiatives of the

82 POSRI Chindia Quarterly�Autumn 2012 :: India’s accelerating urbanization

United Progressive Alliance (UPA), has been ineffectual. The JNNURM was described as a “failure” by a government panel of the Planning Commission at its meeting held at the end of April of this year. Only 10% of the projects in the pipeline have been completed, for reasons such as a limited capability to use funds, delays, and cost overruns. Some people criticize that the JNNURM was implemented with no concrete plan. Fitch Ratings, which ranked 21 urban local bodies (ULB) in India, said in its report that only 22 out of the 120 sanctioned infrastructure projects (18.3%) were completed by the 21 Fitch-rated ULB’s by the end of December of 2011. India’s substandard infrastructure The JNNURM’s progress has provides golden business opportunities been delayed due to slow for Korean companies. grant approval processes, lack of manpower, and the absence of sound government oversight mechanisms. While some project delays are attributed to the slow land acquisition process, the lack of human resources is analyzed to be the most significant reason for the delays. In addition, the rating agency pointed out that low governance capacity obstructs urban transformation in Indian cities. Financing the large sums required is crucially dependent on reforms in ULB’s, and their institutional ability to attain the desired service delivery and revenue generation. Amidst mounting criticism, Urban Development Minister Kamal Nath acknowledged at the end of April that the lack of capacity of ULB’s to implement plans was the main cause of delays in the first phase of the JNNURM. “In the first phase of the mission, cities with a population of one million or more were included,” he said. “In the second phase, the government is planning to include cities with a population 500,000 and above.” He added that without upgrading urban infrastructure in medium- sized cities, it would be difficult to curb massive migration from rural

83 Autumn 2012�POSRI Chindia Quarterly communities to large cities. Cities with populations of two million are being considered for modern rapid metro rails. “We have already asked the local governments to conduct feasibility studies for a metro rail,” he said. He also stated that the first phase of the JNNURM has failed because ULB’s lacked the ability to use funds properly; therefore the central government will take responsibility for implementing projects in the second phase.

○● Urban infrastructure projects provide opportunities for Korean companies The Planning Commission estimated that more than INR 1.6 trillion of investment will be required to meet the rising demand for urban infrastructure in the future. Securing this sum of money, which is 2.4 times larger than the INR 660 billion spent in the first phase of the JNNURM, is one of the big challenges for the 12th Five-Year Plan, which started in April of 2012. According to recent statistics by the World Bank, the population of Indian cities is estimated to reach 500 million by the end of March of 2017, when the 12th Five-Year Plan ends. Given that McKinsey’s 2010 report projected that 588 million people, or 40% of the population, is likely to live in cities by 2030, urbanization is happening faster than expected. The development pattern of urban infrastructure is expected to be in line with that of infrastructure across India: rising demand exceeds supply. The central government and ULB’s are joining forces to upgrade infrastructure through Public-Private Partnerships (PPP’s), but this will not be achieved quickly due to numerous problems, including bureaucracy, corruption, lack of manpower and resources, and India’s unique political and social characteristics. India’s substandard infrastructure provides golden business opportunities for Korean companies. For urban redevelopment of slum areas, Korean companies can participate in the construction of skyscrapers

84 POSRI Chindia Quarterly�Autumn 2012 :: India’s accelerating urbanization

and houses, and real estate development. They also need to seek opportunities in construction projects for plants, sewage systems, waste treatment facilities, water purification systems, and metro and other public transportation systems. In addition to the direct building and construction business, Korean companies should seek opportunities in providing construction materials and building automated systems.

85 Autumn 2012�POSRI Chindia Quarterly Issue Analyses

�The scope of Wen Jiabao’s vision of China’s political reform

�The Kim Jong-un regime heralds changes in North Korea-China relations

�From Finance Minister to President

�For how long will the Indian rupee continue to depreciate?

�India’s anti-business policies hurt foreign investment :: Issue Analyses

The scope of Wen Jiabao’s vision of China’s political reform

Cho Yong-sung Author, Ten Years into China’s Future

f democracy and the rule of law have not been perfected, then “ power has no effective restraint. Some people may exploit the power in their hand to contravene and even trample on law. I Promoting more democratic and scientific decision-making is not only an issue of leadership methods and work style, but also involves the issues of political structural reform and the intensification of the development of democratic politics.”

○● Premier raises his voice over political reform at the end of his term On June 15, after presenting letters of appointment to the new counselors to the State Council in Zhongnanhai, Chinese premier Wen Jiabao made a forceful remark, stressing the necessity of democracy and the rule of law. Earlier in March, at the press conference on the closing day of the National People's Congress (NPC) and The Chinese People's Political Consultative Conference (CPPCC) Sessions, Wen Jibao spoke strongly in

89 Autumn 2012�POSRI Chindia Quarterly support of political reform, saying, “Without the success of political reform, a historical tragedy like the Cultural Revolution may occur again.” Wen Jiabao raised the concern that “As the economy developed, it has caused unfair distribution, corruption, and other issues. To solve these problems, it is necessary to not only enter into economic reform but also political reform.” He added, “Without political reform, not only economic reforms cannot be carried out, but also the results that we have achieved may be lost.” In China, political reform has been a taboo subject for some time. Former general secretary Hu Yaobang pursued political reform and was eventually forced to resign. Another former general secretary, Zhao Ziyang, also had to resign after sympathizing with Tiananmen Square protesters, who called for political reform. Since then, advocacy of political reform has been left to political dissidents or young, high-spirited scholars. Wen Jiabao is the first member of the Politiburo Standing Committee, the highest decision-making organ of the Comminist Party, to advocate political reform since the Tiananmen protests. However, Wen Jiabao has only emphasized the importance of political reform, without proposing when or how reform might play out. Wen Jiabao will retire from the Central Politiburo Standing Committee at the National Congress of the Communist Party of China in November. Wen is also set to retire as premier in March of next year. With fewer than four months left in his term, a realist statesman’s comment on political reform seems futile. Wen has neither the time to carry out his convictions, defeating opposition within the Party, nor a strong political influence at present. After all, Wen Jiabao has expressed his sentiments on political reform numerous times since 2010. Looking back, Wen Jiabao’s first public remark on political reform was in August of 2010, during the 30th Anniversary Celebration of the Shenzhen Special Economic Zone. He said that without political reform, the fruits of

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economic reform would be lost. Two months later, in an interview with the USA’s CNN, Wen Jiabao said, “The people's wishes and need for democracy and freedom are irresistible.” Between August and October of 2010, Wen Jiabao brought up the issue of political reform as many as seven times in official meetings. A premier’s mention of political reform may in itself be meaningful. However, there is little real evidence that he has carried the cause forward. Wen Jiabao’s remarks on political reform are limited to the importance of reform; neither specific direction nor means of reform have been suggested. For this reason, young critics have accused him of merely paying lip service to the issue. Some people say that Wen Jiabao’s idea of political reform is different than how it is perceived by the world. When Wen speaks of political reform, the international press and the Chinese people tend to visualize a multi-party system or a direct presidential election system. His comments are often interpreted as allowing for a new party to rival the Communist Party, which comprises the single-party government of China, or for a direct election system for leaders, as in the USA.

○● Premier Wen’s stance on reform does not extend beyond democratization within the Party Wen Jiabao’s idea of political reform in no way prescribes forming a multi-party system or introducing a direct election system. At the 2011 World Economic Forum Annual Meeting of New Champions, held in September of 2011, he proposed a direction for China’s political reform, saying, “There must be changes in the Party’s dominance of government affairs, its absolute power, and the over-concentration of power.” He reminded the public, “These are tasks that Deng Xiaoping spoke of 30 years ago.” He said that China must continue to “promote social fairness, safeguard judicial justice, protect the people’s democratic rights, and resolutely combat corruption.” On expanding democracy, he said that China should start “within the Communist

91 Autumn 2012�POSRI Chindia Quarterly Party.” These are Wen’s most specific elaborations on his vision of political reform. In other words, he is proposing political reform as advocated by Deng Xiaoping, and calling for democratization to begin with the expansion of democracy within the Party. Deng Xiaoping proposed clear steps for China's economic development until the year 2050. Before his death, he pleaded for China to not stray from these steps. Deng’s dying wishes are still considered by the Although Wen has limited the scope Communist Party of China to be of political reform to democratization the highest good. within the Party, everyone agrees Deng Xiaoping implored that he has succeeded in creating an image for himself by repeatedly that China adhere to his “One speaking of political reform. Center, Two Basic Points” until 2050. The central focus of his tenet is economic development. Under Mao Zedong, the proletarian revolution was of ultimate importance to the Communist Party. When Deng Xiaoping rose to power, he facilitated a dramatic shift in the Party’s focus, toward economic development. One of the two Basic Points is aggressive market reforms and openness to the outside world as a means of economic development. The second Basic Point is centralized political control (i.e., the Four Cardinal Principles: the socialist path; the people's democratic dictatorship; the leadership of the Communist Party of China, and Marxist-Leninist-Maoist thought). While upholding the Communist Party’s single-party rule, Deng Xiaoping advocated gradual democratization within the Party in order to support the people's democratic dictatorship. The Tiananmen protesters called for the adoption of Western-style democracy, opposing the single-party rule of the Communist Party. This was the reason that, after long consideration, Deng Xiaoping decided on an armed crackdown on the Tiananmen protests. Carrying on single-party rule

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is still the Communist Party’s unwavering goal. Early this year, Bo Xilai, former secretary of the Communist Party's Chongqing branch, was removed from his posts. Some people suggest that his downfall was caused by his coveting of imperial charisma, and his independent leadership that went against the collective leadership of the Communist Party. Ultimately, Wen Jiabao’s political reform does not extend beyond democratization within the confines of the Communist Party’s single-party rule, which Deng Xiaoping supported. In March of 2011, Wu Bangguo, Chairman of the Standing Committee of the National People’s Congress, second in command among Communist Party leaders, said that China should “not copy the systems of laws of certain Western countries,” and that “China would unwaveringly keep on the socialist path of political development with Chinese characteristics.” To the outside world, it seemed that Wen Jiabao was standing on the side of reform, while Wu Bangguo was siding with conservative viewpoints. This was interpreted as a difference of opinion among the Party’s leadership, and the isolation of Wen Jiabao. In truth, however, Wen Jiabao and Wu Bangguo were arguing the same point. One spoke of expanding democratization within the Party, and the other spoke of maintaining the Communist Party’s single-party rule, but the two opinions are connected. The Constitution of the Communist Party of China, which includes the directing points of the Communist Party, clearly states the need for democratization within the Party for the nation’s development.

○● What Premier Wen stands to gain What is Wen Jiabao’s motivation in crying out for political reform? Is he driven by his own conviction? Although Wen has limited the scope of political reform to democratization within the Party, what he truly wants for the nation is perhaps a Western system of democracy. Whatever the reason, everyone agrees that he has succeeded in creating an image for himself by

93 Autumn 2012�POSRI Chindia Quarterly repeatedly speaking of political reform. Among the younger professors in Beijing, there has been speculation that Premier Wen Jiabao wishes to be remembered by the Chinese people as an icon of political reform, following in the footsteps of his predecessors, Hu Yaobang and Zhao Ziyang. The Chinese public thinks highly of Wen Jiabao. He has been the first to run to the sites of earthquakes and floods, and change into work clothes to take part in relief efforts. After a mining accident, he was seen deep in a mine shaft, having lunch with on-duty miners. He visited and shed tears with the victims of the Great Sichuan Earthquake, and held the hands of AIDS patients in a Henan Province hospital. His continuing humanitarian acts have in turn won him the respect and love of the Chinese people. In contrast, intellectuals’ estimation of Wen’s actions is not so generous. They assert that his humanitarian actions are merely image-building tactics, and that Wen lacks initiative, drive, and vision. They also condemn Wen’s cry for political reform for being hollow. During Deng Xiaoping’s reign, former general secretary Hu Yaobang lost his post after advocating partial introduction of Western-style democracy. Although he had been chosen by Deng Xiaoping, Hu Yaobang publicly opposed Deng. In the process, Hu Yaobang gained broad support from young intellectuals. Hu Yaobang’s death was followed by heated student gatherings, which, riding a general wave of mounting grievances, led to the Tiananmen Square protests. In order for Wen Jiabao’s call for political reform to be recognized as earnest and true, Wen needed to follow in Hu Yaobang’s footsteps, leading by example, in addition to raising important questions and sending out big messages. However, Wen Jiabao is about to retire without any record of such efforts. Wen is proficient at image-building. Moreover, he has the know-how to survive in the Communist Party, after years of serving the powerful government agency. Leading up to his retirement, Wen has repeatedly

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introduced the term political reform in front of the international media, exaggerating the expansion of democracy within the Communist Party, which is included in its Constitution, as political reform. Criticism that Wen Jiabao’s rhetoric on political reform is a hollow cry by a crafty politician for the purpose of image-building is not unfounded. Only time will tell what effects Premier Wen Jiabao’s comments will have on Chinese society.

95 Autumn 2012�POSRI Chindia Quarterly :: Issue Analyses

The Kim Jong-un regime heralds changes in North Korea-China relations

Cho Bong-hyun Business Analyst, IBK Economic Research Institute

hat has been happening in North Korea since the death of Kim Jong-il? The world is paying keen attention to North Korea. A few months ago, North Korea said that it would W make an “important announcement” through the state-run media, including the Chosun Central News Agency. After the dismissal of Lee Young-ho, the North Korean Army General Counsel, many people waited for this important announcement, wondering what it would be. At noon on July 18, an announcement was made that North Korean leader Kim Jong-un had been given the title of Marshal. The news seemed rather insignificant. In addition to the titles of Supreme Commander of the North Korean People’s Army, First Secretary of the Workers’ Party, and First Chairman of the National Defense Commission, Kim Jong-un had been given the title of Marshal. North Korea was quick in completing the succession of power. As Kim has come to control the Party, the military, and politics, he has become North Korea’s undisputed leader. The era of Kim Jong-un has come.

97 Autumn 2012�POSRI Chindia Quarterly ○● Increasing dependence on China to solve economic problems Since Kim Jong-un took power, he has drawn global attention for his unconventional behavior. Unprecedentedly, North Korea has revealed the first lady. Mickey Mouse and Winnie the Pooh appeared at a performance by Moranbong Band. The performance was quite different from those of the Kim Jong-il era, which were as dull as a black and white photograph. Kim’s experience studying in Switzerland as a teen might have influenced his sensibilities. Mere gestures of change, without solutions to economic problems, will not guarantee a firm foothold for Kim Jong-un’s regime. Kim’s biggest challenge is solving his country’s economic problems. North Korea has limitations in its ability to solve these problems on its own. North Korea’s natural and financial resources are nearly depleted. As the international community has tightened economic sanctions against North Korea, and inter-Korean Economic Cooperation has deteriorated, North Korea has lost its means of earning dollars. North Korea’s economy is besieged by hardships. North Korea has little choice but to turn to his best ally, China. North Korea’s trade with China hit an all-time high of USD 5.63 billion last year, and increased by a further 30% in the first half of this year. The increase was attributed to the fact that North Korea sold mineral resources, such as anthracite coal, in order to reduce foreign currency shortages. Between January and May of 2012, North Korea’s exports to China totaled USD 1.05 billion, a 29% increase year-on-year, while North Korea’s imports from China were USD 1.46 billion, up 27.1% year-on-year. North Korea’s total trade volume with China was up 27.9% year-on-year. Last year, China accounted for 89.1% of North Korea’s total trade, excluding inter-Korean trade.

98 POSRI Chindia Quarterly�Autumn 2012 :: Issue Analyses

○● China demands North Korea change its market system From August 13 to 18, Jang Sung-taek, Chief of the Central Administrative Department of the Workers’ Party, visited China to attend the Third Meeting of the DPRK-China Joint Steering Committee for the Development of the Hwanggumpyong and Wihwado Economic Zone and the Rason Economic Zone. He also met with President Hu Jintao and Premier Wen Jiabao in Beijing. Both countries agreed to establish their own management committees for joint development of the two economic zones. They were able to narrow their differences on the development of the economic zones North Korea and China will likely reach consensus by the end of regarding power supply, this year. After 2013, the two construction of infrastructure in nations are expected to accelerate Hwanggumpyong, and the start bilateral economic cooperation. of the development of the Wihwado Economic Zone. Jang visited Jilin and Liaoning Provinces in an effort to secure investment in North Korea. His visit built momentum for the revival of the project, which had been stalled despite several visits by the late North Korean leader Kim Jong-il before his death, to settle agreements on joint development, and for the ground-breaking ceremony in June of 2011. North Korea-China relations, which became rather icy after North Korea’s failed launch of a long-range missile earlier this year, seemed to melt thanks to Jang’s visit to China. A visit to China by Kim Jong-un is imminent. After China’s upcoming change in leadership, relations between the two countries will become even closer. The Kim Jong-un regime is in desperate need of China’s cooperation and support in order to address the country’s financial distress and achieve regime stability, while China needs to utilize its relationship with North Korea if it is to succeed in the development of its three northeastern provinces under its long-term strategy

99 Autumn 2012�POSRI Chindia Quarterly for expanding its influence over North Korea. However, daunting tasks lie ahead before bilateral economic cooperation can be achieved. China’s leadership has demanded North Korea transform its existing framework. President Hu Jintao proposed to Jang Sung-taek during his visit to China that both countries find new methods of cooperation, based on their own strengths. By doing this, Hu implied that the existing cooperation system no longer works, and North Korea should boldly alter its legislative and institutional foundations. In a meeting with Jang, Premier Wen Jiabao said, “China should encourage its companies to invest in North Korea, but China should first solve the practical problems and difficulties they face.” He added, “North Korea should create favorable conditions with regard to land acquisition, taxation, and various support measures by promoting the role of market mechanisms.” After returning to Pyongyang, Jang likely reported to Kim. Although the details of this report have not been revealed, one can assume it included the following: The trip to China was successful; North Korea and China agreed to pursue closer economic cooperation; it is time for North Korea to seek its own style of economic growth with help from China. Kim probably instructed Jang to carry out his vision for economic growth, expecting results.

○● The presumed details of Kim’s 6.28 Policy Kim Jong-un heralds a new era. In his first public speech in April of 2012, he vowed that he would not make his people tighten their belts again. On June 28, he reportedly ordered the Workers’ Party and the Cabinet to devise a plan for new and concrete economic policies. The North Korean Cabinet is presumed to be at the center of this new plan. This is Kim Jong- un’s so-called 6.28 Policy. The new economic management system can be interpreted as an attempt to improve the lives of the North Korean people. It is based on the 7.1 Economic Reform Measures, released on July 1, 2012, which North Korea boldly implemented. The new policy will likely be an

100 POSRI Chindia Quarterly�Autumn 2012 :: Issue Analyses

Presumed details of North Korea’s new economic management policy

Details

�Reduction of the size of farm units at collective farms from 10-24 people to 4-6 people Agriculture �Nurturing of family farms (7:3) and corporate farms �Ensuring of market sales and consumption �Initial supply of seeds, fertilizers, and agricultural machinery by the State �Autonomy to procure raw materials, decide production and sales, and set Corporations prices �Independent profit making �Autonomy in hiring and firing of employees �Formulation and institutionalization of the markets, including the black market Market �Free market trade among residents �Setting of proper market prices: commodity price control �Establishment of banks that offer international finance and banking �Deposits and loans Finance �Partial permission to use foreign currency �Establishment of a computerized financial network �Preferential treatment for foreign companies (taxation, etc.) Foreign �Application of market principles to the management of foreign companies investment �Liberalization of profit remittance and protection of investment assets

Source: Author

improvement on those measures. The focus of the policy is to amend North Korea’s existing economic system so as to institutionalize and legalize elements of a market economy. In its details, the 6.28 Policy is expected to include agricultural reform that will solve food problems. A representative idea is to change some collective farms to family unit farming, giving autonomy to corporate management in order to help farms independently plan, produce, and sell agricultural products for profit. The policy will also

101 Autumn 2012�POSRI Chindia Quarterly likely contain details on curbing inflation by legalizing or normalizing the market. North Korea might be pondering how to circulate money and stabilize exchange rates through financial reform.

○● Building consensus between China and North Korea It is too early to jump to the conclusion that North Korea under the control of Kim Jong-un will move toward reform and opening up in earnest. His father, Kim Jong-il, introduced the Economic Management Improvement Measures to expand the role of the market, but these measures soon failed as he could not give up the planned economic system and the court economy, the foundations for maintaining his regime. The Kim Jong-un regime has many obstacles to overcome. Kim must stifle complaints from the military and political bigwigs, while gaining their support. In order to address shortages of natural and financial resources, he must strengthen his country’s supply capacity. He must regain trust from the international community to elicit support and cooperation. None of the above will be easy. Therefore, North Korea will continue to change and become more dependent on China in order to solve its difficult economic problems. In turn, China will continuously demand that North Korea pursue reform and opening up policies. North Korea and China will likely reach consensus by the end of this year. After 2013, the two nations are expected to accelerate bilateral economic cooperation.

○● A trilateral economic cooperation model What should South Korea do if North Korea-China economic cooperation expands, and North Korea adopts a market economy and chooses a path of reform and opening up, as requested by China? This would be a good opportunity to improve the conditions for inter-Korean economic cooperation. Looking from a broader perspective, however, South

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Korea should not be a bystander. North Korea-China relations could determine the future of a unified Korea. North Korea’s major infrastructure, such as ports, railroads, and roads, can be taken over by Chinese money, and China can take control of North Korea’s mineral resources. North Korea’s distribution market has long been dominated by China. The Bible says, “New wine must be stored in new wineskins.” South Korea is in desperate need of new policies toward North Korea to facilitate reform and opening up of North Korea. How inter-Korean relations develop in the beginning of 2013 will inform future relations. Getting off on the right foot is important. South Korea should relinquish its existing perceptions of and policies toward North Korea, which were formed during the Kim Jong-il regime. South Korea should take the initiative in inter-Korean economic cooperation in order to prevent North Korea from misunderstanding reform and opening-up as the collapse of the regime, and to help North Korea shift from military-first policies to policies for improving its economy. Both countries should expand the inter-Korean economic cooperation model with an emphasis on special economic zones, by advancing the second stage of development of the Kaesung Industrial Complex, and building the next Kaesung Industrial Complex. Inter-Korean financial cooperation should be started anew. A training center should be built, and training programs should be implemented for North Korea’s market economy. In addition, South Korean companies should seek ways to participate along with China in the Hwanggumpyong and Rason Economic Zone projects. Now is the time to shift from separate economic cooperation models, between North Korea and South Korea, China and North Korea, and South Korea and China, to a trilateral cooperation model for North Korea, South Korea, and China. The future of the Korean peninsula should be envisioned within the broader framework of Northeast Asia.

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From Finance Minister to President

Santosh Kumar Manager, POSCO-India

he United Progressive Alliance (UPA) candidate Pranab Mukherjee has been elected the 13th President of India in the election held on July 19, 2012. He defeated the National T Democratic Alliance (NDA) candidate P.A. Sangma. Mukherjee polled a vote value of 7,140,000 or about 69% of the total valid votes. Mukherjee was sworn in as the President of India by the Chief Justice of India on July 25, 2012 when his predecessor Pratibha Patil quit as the President. In the Indian political system, the President enjoys very limited power because the real executive power rests with the Council of Ministers led by the Prime Minister. The election of Mukherjee as President is a significant development because it marks the return of a seasoned and active politician to the presidential office after a gap of 10 years. Two of Mukherjee’s predecessors, Pratibha Patil and Abdul Kalam, were neither an active politician nor a politician at all. Mukherjee was the Finance

105 Autumn 2012�POSRI Chindia Quarterly Mukherjee’s Biography

* Born in year 1935 in West Bengal * Married in 1957 to Suvra Mukherjee * Rajya Sabha Member in 1969 * Finance Minister (1982-84) * Rajya Sabha Leader (1980-85) * Planning Commission Dy. Chairman in 1989 * Foreign Minister (1995-96) * Leader of Lok Sabha (2004-12) * Defence Minister (2004-06) * Foreign Minister (2006-09) * Finance Minister (2009-12) * Elected President of India (July 2012)

Minister in the UPA-II government led by Prime Minister Manmohan Singh. He is loyal to the Sonia Gandhi family and also a troubleshooter for the ruling Indian National Congress (INC) in difficult situations.

○● Easy victory for Mukherjee There were lots of political manipulations in the President’s election. TMC leader Mamta Bannerjee had initially opposed Mukherjee’s candidature. However, she gave in later on. Mukherjee’s victory in the President election was easy because he was supported by the ruling INC and its coalition partners, including NCP, TMC, DMK. He was also supported by other friendly parties like SP, BSP, RJD, etc. Besides, he was also able to win support of the parties like JD(U) and Shiva Sena from the NDA. Meanwhile, there was also political realignment in the NDA. The NDA could not stop its allies like JD(U) and Shiva Sena from voting to Mukherjee but it got new allies like BJD from Odisha and AIADMK from Tamil Nadu. It is hoped that

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Former Presidents of India (1950-2012)

Names Tenure Highlights

Rajendra Prasad 1950-1962 Difference with Nehru

S Radhakrishnan 1962-1967 Pushed the education sector

Zakir Hussain 1967-1969 Education for muslims

VV Giri 1969-1974 Indira Gandhi’s loyalist

FA Ahmed 1974-1977 Emergency proclamation

Neelam S. Reddy 1977-1982 Belonged to Janta Party

Zail Singh 1982-1987 Controversy with Rajiv Gandhi

R Venkataraman 1987-1992 Appointed Narsimha Rao as PM

SD Sharma 1992-1997 Appointed Vajpayee as PM

KR Narayanan 1997-2002 First dalit President

APJ Abdul Kalam 2002-2007 Missile man

Pratibha Patil 2007-2012 First woman President

in future both BJD and AIADMK can join NDA.

○● Election to the presidential office For eligibility of election to the President, a person should be an Indian citizen and should be 35 years of age. He should also be qualified for election to the Lok Sabha. He should not hold any office of profit under any government and should not be a member of the Parliament and State Legislature. In India, the President is not directly elected by the people but indirectly elected. He is elected by an electoral college consisting of the elected members of the both houses of the Parliament (Rajya Sabha and Lok Sabha) and the elected members of the Legislative Assemblies (Vidhan

107 Autumn 2012�POSRI Chindia Quarterly Sabhas) in the States and Provinces. He is The first challenge before elected for a period of five years. His term newly elected President can end if he resigns or is impeached for Mukherjee is to restore the violation of the Constitution or his term people’s confidence in the office of the President. expires. In India, there is no limit on how many times a person can be re-elected to the post of President.

○● Powers of Indian President Unlike the Presidents of other countries, the Indian President does not enjoy much power because he is not directly elected by the people. He is a merely constitutional head of the country. Even though the executive power of the central government vests in him, he acts only on the advice of the Council of Ministers led by Prime Minister. However, his role is crucial at a time when he has to discharge his discretion as to which political party should be invited to form government when no party has got majority. Besides, the President has power to grant pardons, reprieves and respites of punishments granted by the court. He also visits foreign countries to improve the relations. He has also got certain powers in relation to tribal area administration.

○● Challenges before New President The tenure of his predecessor Pratibha Patil as the President is not so significant. Rather, it is marred by corruption controversies embroiling her. It eroded people’s confidence in the office of the President. Therefore, the first challenge before newly elected President Mukherjee is to restore the people’s confidence in the office of the President. It will be a hard task for him because he carries the burden of mismanaging the economy of India as Finance Minister. He has been severely blamed by the critics for not controlling inflation, downfall of the rupee, etc. Experts find that his

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promotion from the Finance Minister to President is more a result of easy political calculation rather than a result of his performance as the Finance Minister. Critics think that he is an ‘imposed’ President.

○● Congress loyalty vs. constitutional obligation Social networking sites like Facebook are full of doubtful comments about Mukherjee’s tenure as the President. People think that a person, who has been loyal to the Sonia Gandhi family and who has been elected to the office of the President only at Sonia Gandhi’s grace, cannot be a fair custodian of the Constitution. The critics think that even as the President he will not be able to abdicate his loyalty to the Sonia Gandhi family and Congress. It is a tough personal task for him.

○● His role in 2014 and beyond The Parliament election will be held in 2014 and as the experts predict that the 2014 elections will be the most keenly contested election between BJP’s Gujarat Chief Minister Narendra Modi and Congress Rahul Gandhi. Mukherjee, who owes so much to the Sonia Gandhi family, would certainly wish Rahul Gandhi to become the Prime Minister. If Rahul Gandhi becomes the Prime Minister, it would be easy for him to work. However, if Narendra Modi, who is known for fast and ruthless decision-making, becomes the Prime Minister, the job of Mukherjee will be very hard. It will not be easy for him to deal with Narendra Modi. The experts find that if Narendra Modi becomes PM, there will be many situations in which Modi will be in overriding conflict with Mukherjee. However, Modi’s projection as Prime Minister candidate depends a lot on his performance in the Gujarat Assembly election scheduled in November, 2012.

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For how long will the Indian rupee continue to depreciate?

Choi Ho-sang Research Fellow, The Korea Center for International Finance

he Indian economy has recently been at risk of coming to a deadlock due to the falling value of the rupee. The value of the rupee against the dollar has declined since August of 2011, T hitting a record low of 53 rupees to the dollar in December. The rate continued to fall from February of this year and reached 56.1 at the end of May. This figure is 21.2% lower than at the end of July of 2011. During the same period, among BRICs countries, the Indian currency depreciated the second most, after the Brazilian real (23.2%). It is feared that the sharp decline in the rupee is not merely currency devaluation, but could lead to a shortage of foreign currency. Some people even suggest the possibility of the next financial crisis. The degrading value of the rupee has emerged as the biggest risk for the Indian economy.

○● The rupee continues to fall despite government intervention In order to prevent the rupee from falling sharply, the Reserve Bank of

111 Autumn 2012�POSRI Chindia Quarterly India (RBI) has implemented a series of measures to attract capital and prevent currency speculation; for example, direct market intervention by purchasing foreign currency, a rise in investment ceilings on government and corporate bonds for foreign investors, and an increase in forex deposit interest rates for Non-resident Indians (NRI). While carefully monitoring foreign exchange rates and capital inflows with regard to raising interest terms of external commercial borrowings (ECB), the RBI is making efforts to prepare countermeasures. Some companies find themselves in a difficult situation with financing because depreciated currency value and diminished capital inflows have pushed up the costs of international financing. Despite the government’s intervention in the foreign exchange market, India seems to have a hard time preventing the value of the rupee from falling. At the end of March of 2012, India’s foreign currency reserves were USD 268.7 billion, a decrease of USD 25.7 billion from USD 294.4 billion at the end of July of 2011. If India’s foreign currency reserves continue to decline, the Indian authorities’ ability to intervene in the foreign exchange market will diminish.

○● Weak fundamentals─the main cause of anxiety in the foreign exchange market The rupee’s decline is caused by weak economic fundamentals, including a chronic current account deficit, high dependence on external debts, and enormous government debts. When comparing India’s current account, external debts, and government debts for 2010 with those of other emerging Asian countries, India’s vulnerability is easy to spot. India is an emerging country with high growth potential; however, its prolonged current account deficit has led to meager domestic savings. To address this issue, India needs to have stable foreign capital inflows. Unfortunately, foreign capital inflows to India are usually indirect

112 POSRI Chindia Quarterly�Autumn 2012 :: Issue Analyses

investment, such as equity investment, rather than direct investment. This explains why India’s financial system has become more vulnerable to the volatility of the international financial market than any other emerging Asian economy. As of 2010, India’s current account to GDP ratio was negative 2.6%. This is in stark contrast to other Asian countries, which keep their current accounts in The Indian economy is highly likely the black through trade to suffer from internal and external surpluses (excess exports). troubles for some time due to the With insufficient capability for expansion of the European financial crisis, inflation pressures, industrial production, India and the unstable rupee. has a trade structure wherein high economic growth rates translate into rising imports and expanding trade deficits (excess imports). For this reason, India cannot significantly cut trade deficits only though service income (the development of software and the operation of call centers for western companies) or remittance from NRI’s. India’s net external assets and debts to GDP ratio is negative 9.7%. As suggested by its external debts, India is mainly dependent on equity investment and loans, having a low percentage of direct investment. When the international financial market is stable, massive inflows of foreign capital can be made through equity investment and loans to the market, but this structure is, in turn, highly influenced by the volatility of the financial market. India’s policy, which makes it difficult to raise direct investment, has become an issue. India’s government debt to GDP ratio is 64.1%. This is one of the highest ratios among emerging Asian countries, raising concerns about India’s financial soundness. Due to its current account deficit, India has low

113 Autumn 2012�POSRI Chindia Quarterly The Indian rupee trend

40 (Rupee/Dollar) 42 44 46 48 50 52 54 12.14 (53.7) 56 5.31 (56.11) 58 2011 2012 78910111212345 Source: Bloomberg

domestic savings and high government debts. Under such a structure, funds in the market cannot be smoothly circulated through the private sector. As the European sovereign debt crisis is deepening, countries with weak fundamentals, such as India, are likely to experience rapid retraction of foreign investment and the pressure of long-lasting currency depreciation. Also, there is a possibility of domestic funds fleeing overseas. It will take much time until overseas funds that have fled from India due to the slowing growth of the economy after the first quarter of 2011 flow into India again.

○● Structural problems keep the rupee weak The value of the rupee is likely to either remain unchanged or to fall further due to internal and external risks. The International Monetary Fund (IMF) projects that India’s economic growth for 2012 will be 6.9%. India’s GDP growth in the fourth quarter of 2011-12 (Jan.-Mar. 2012) was 5.3%, the lowest growth rate since the first quarter of 2003. According to a survey of 28 investment banks conducted by Bloomberg, the Indian rupee to U.S. dollar currency exchange rate will continue to rise and fall, averaging

114 POSRI Chindia Quarterly�Autumn 2012 :: Issue Analyses

The BRIC currency devaluation

5 (Unit: %)

0

-5

-10

-15

-20

-25 Brazil India Russia China Korea

Note: The BRIC currency depreciation against the dollar as of the end of May, 2012, compared with the figures as of the end of July, 2012 Source: Recalculated from Bloomberg

around INR 50, until the first quarter of 2013. If the rupee maintains its weak trend in the long term, Indian exporters will be restricted from securing foreign currency necessary for purchasing intermediate goods. Due to deteriorating external economic conditions, Indian companies could have trouble borrowing money from overseas. Korean companies doing business in India are expected to see their U.S. dollar-denominated operating profits fall. Automobile and home appliance makers, which are highly dependent on imports of raw materials and parts, will inevitably face deteriorating profitability. Therefore, the auto parts sector and other sectors that have already established their production bases in India, are expected to increase their local purchasing within India.

○● Increasing risk of economic downturn amidst internal and external troubles The Indian economy is highly likely to suffer from internal and external troubles for some time due to the expansion of the European financial crisis, inflation pressures, and the unstable rupee. Serious inflation pressures are standing in the way of expanding domestic demand. In September of 2011,

115 Autumn 2012�POSRI Chindia Quarterly 2010 Current account, external debts, and sovereign debts of major emerging Asian economie (Unit: USD 1 bln, %) External debts Current Net external Sovereign External assets and account Direct Equity debts assets net debts (to GDP) Total invest invest Loans (to GDP) ment ment (to GDP) India -2.6 381 504 164 117 122 -9.7 64.1 China 5.2 4,126 2,335 1,476 222 239 30.5 33.8 Korea 2.8 688 825 127 491 139 -13.5 33.4 Indonesia 0.8 98 316 108 96 105 -40.6 27.4 Malaysia 11.5 251 216 79 85 n.a. 18.2 54.2

Note: External assets and debts, and net external assets and debts to GDP of India, Indonesia and Malaysia are based on figures as of the end of 2009. Source: IMF DB

India’s wholesale price index decreased by 10% year-on-year, and remained low until rebounding by 7.2% in April of 2012. The rising price of raw materials and manufactured goods is the biggest factor of inflation pressures. Moreover, the prolonged rupee depreciation has pushed up import prices, hindering inflation stabilization. Prolonged inflation is having a negative impact on consumption, and the rise in interest rates and raw material prices is leading to sluggish investment and production activities. The Indian government is unable to cut interest rates for economic recovery for fear of further inflation. The implementation of fiscal policies is limited, because government debts are huge. India’s policies to expand domestic demand have limitations in that India needs stable capital inflows to reduce its chronic current account deficit. On the other hand, some people believe that a wholly negative outlook for the Indian economy is inappropriate. As India is not an export-driven economy like China and Southeast Asia, the European crisis will trigger the

116 POSRI Chindia Quarterly�Autumn 2012 :: Issue Analyses

depreciation of the rupee and the reduction of capital inflows to some extent; however, the ripple effect on the real economy will be limited. Unfortunately, though, India seems to have insufficient means to curb rupee depreciation, which is its most urgent issue. India’s main sources of foreign currency are limited to exporting intermediate goods for the light and petrochemical industries, overseas outsourcing, software development, operation of call centers, and overseas remittance. Of course, part of goods and services exports will become more price-competitive due to the depreciating rupee; however, India’s ability to increase exports to the eurozone is low due to the European sovereign debt crisis. Variables such as external shocks, including financial crises, have a more negative impact on developing countries with relatively weak economic fundamentals, such as India. Therefore, rather than implementing short-term remedies such as market intervention, the Indian government must improve its fundamentals by nurturing its manufacturing industries, strengthening the competitiveness of each industry, reducing fiscal deficits, and increasing foreign direct investment, in order to prevent further decline in the rupee and curb economic risks.

117 Autumn 2012�POSRI Chindia Quarterly :: Issue Analyses

India’s anti-business policies hurt foreign investment

Lee Soon-chul Assistant Professor, Department of Russian & Indian Business Studies Busan University of Foreign Studies

proposal by the Indian government to amend its tax code to impose taxes retroactively on foreign takeovers dating back to 1962 has sent shudders through foreign investors. Why A did the Indian government intend to apply the stricter tax law to foreign investors? Because India is facing severe fiscal deficits.

○● Uncertain policies drove USD 10 billion in investment out of India Many policies of the Indian government have confused foreign investors. In November of last year, India decided to open its retail market to foreigners, but it soon reversed the decision due to rising public complaints. Such uncertain policies have made foreign investors opt for divestment or delay their planned investment in India. Actually, a growing number of foreign institutional investors (FII) have increased their investment in India since the end of last year, in expectation of

119 Autumn 2012�POSRI Chindia Quarterly India’s FDI and FII inflows

(Unit: USD 1mln) 10,000 FII FDI 9,228 8,000

6,041 6,000 5,656 5,392 4,413 4,000 3,440 3,003 3,121 2,302 2,004 2,211 2,000 2,538 1,353 1,099 1,540 1,766 1,628 741 76 2,302 0 -552 2011.4 2011.5 2011.6 2011.7 2011.8 2011.9 2011.10 2011.11 2011.12 2012.1 2012.2 2012.3 -2,000 -1,308 -516 -1,709 -1,821

-4,000 Source: Reserve Bank of India (RBI)

India’s economic recovery. According to statistics by the Reserve Bank of India (RBI), the country’s net inflow of investment totaled USD 2.3 billion in December of 2011. This figure surged to USD 5.4 billion in January, and to USD 9.2 billion in February. This is an auspicious start for 2012, given that the total net inflow for all of 2011 stood at only USD 230 million. The National Stock Exchange of India has also risen by more than 11%. However, due to a series of recent anti-business policies, net inflow by FII’s dropped to negative USD 550 million in March, showing that outflow surpassed inflow. In addition, foreign direct investment (FDI) in India has been low, around USD 2 billion per month since last December.

○● India’s anti-business policies Currently in India, anti-business policies are standing in the way of economic growth and the inflow of foreign capital. In early March of this

120 POSRI Chindia Quarterly�Autumn 2012 :: Issue Analyses

year, India, the world’s second largest cotton producer, announced a ban on all cotton exports from the country, because of rising domestic consumption of cotton, but it reversed the ban just a week after the announcement. China, India’s largest cotton importer, strongly complained of this policy. India’s Ministry of Agriculture also denounced the Ministry of Commerce and Industry for imposing the ban without any consultation. The ban was repealed when Prime Minister Manmohan Singh ordered the Cabinet to review the cotton export ban. Ironically, the ban served only to push the price of cotton in India even higher. In November of 2011, India announced the opening up of its USD 450 billion retail market to global supermarket chains, such as Carrefour and Walmart, but it scrapped the plan within two weeks. Because of a potential fall in supply prices, the closure of shops, and a loss of jobs, many farmers and small businessmen strongly opposed the plan. Until public consensus is reached, the government has deferred decisions to allow 100% foreign direct investment in single-brand retail, and 51% foreign ownership in multi-brand retail. On February 2, India’s Supreme Court cancelled 122 telecommunications licenses awarded to companies associated with the 2G spectrum scam of 2008, and imposed fines on them. This ruling greatly hurt Norwegian telecom company Telenor, which has established Uninor, a joint venture with an Indian company, and other domestic and foreign companies in India. Out of all of these policies, what scared off the most foreign investors was the Indian government’s legislative proposal for retroactive taxation of foreign firms that have invested in India. British telecom giant Vodafone will have to pay INR 198 billion for its USD 10.7 billion takeover of Hutchison Telecom Hong Kong in 2007. At that time, the Indian government imposed taxes on the acquisition, but India’s Supreme Court ruled that Vodafone was not liable to pay taxes and penalties on its acquisition of the Indian telecom company on the grounds that the transaction was made in the tax haven of

121 Autumn 2012�POSRI Chindia Quarterly the Cayman Islands. If the tax code is amended, all foreign firms that have acquired Foreign companies and their home countries are Indian firms since 1962 will be taxable. raising their voices over the According to the Indian government, the Indian government’s anti- amendment will be applicable to transactions business measures. that took place in the last six years. In fact, it seems a retaliatory measure to impose taxes on Vodafone. The Indian government expects that the amendment to the tax code will impose taxes on 15% of foreign investment. It is applicable not only to Vodafone, but also to many foreign companies, including GE, SABMiller, Kraft Foods, AT&T, Sanofi-Aventis, and Vedanta. However, above all else, the Indian government should verify whether various investment transactions are taxable, and set proper standards for taxation.

○● Return to License Raj Recently, about 25,000 foreign companies doing business in India sent a letter to Prime Minister Manmohan Singh saying that the proposed retroactive tax plan for Vodafone may hurt investment in India, and that it should be repealed. Considering the possibility of strong retaliation, India deferred the General Anti Avoidance Rules (GAAR) for a year and gave affected companies time to prepare for it. Foreign companies and their home countries are raising their voices over the Indian government’s anti-business measures. Some foreign companies have even denounced the recent amendment as a return to the License Raj era. India’s abrupt and inconsistent decision on the anti-investment policy is a major deterrent to foreign investment. What is problematic is that this series of measures is aimed at reducing India’s fiscal deficits. Currently, India must cut its public debt-to-GDP ratio from 5.9% to 5.1% in order to reduce its ever-growing sovereign debt. For this reason, India is trying to

122 POSRI Chindia Quarterly�Autumn 2012 :: Issue Analyses

India’s recent anti-business policies

Date Details

Suspension of a plan to open up the country’s retail sector within two Nov. 2011 weeks of announcement (100% foreign direct investment in single-brand retail, and 51% foreign ownership in multi-brand retail)

Cancelation of 122 telecommunications licenses awarded to companies Feb. 2012 associated with the 2G spectrum scam of 2008 and imposition of taxes

Reversal of a ban on cotton exports within one week of implementation (Prime Minister Manmohan Singh repeals the ban when the domestic cotton price surges.)

Mar. 2012 Announcement of an amendment to the tax code to impose taxes on offshore takeovers retroactively to 1962. (The amendment is to impose taxes on Vodafone’s USD 10.7 billion takeover of an Indian telecom company, but it will be applied to transactions that took place in the last six years.)

Taken from various sources impose new taxes in order to increase its fiscal revenue. Moreover, incompetent political leadership is aggravating the government’s inconsistency. Despite all the criticisms, some people argue that the government is in the right to impose taxes on capital gains incurred in India. They claim that raising tax revenue is a natural way to reduce fiscal deficits. They say that taxation is the price that the public has to pay for securing social stability and creating a free and prosperous business environment, emphasizing that it is a sovereign right. Even though the stock market gained some confidence due to the one- year postponement of GAAR, the Indian government is taking a firm stance.

123 Autumn 2012�POSRI Chindia Quarterly The government has clearly stated that, after one year, it will impose taxes on foreign firms that have invested in India via Mauritius, Singapore, Cyprus, and other tax havens, for the purpose of tax reduction. Moreover, India plans to renegotiate the Double Tax Avoidance Agreement and an agreement for a tax payment grace period, if necessary, in order to impose taxes on all asset transactions made in India. Under the circumstances, India is expected to receive less investment of financial assets, especially by private equity funds, from its tax treaty countries. Claiming that investment in India under the current measures is nothing but giving the Indian government a chance to collect taxes, some foreign investors have unveiled a plan to delay their investment in India until the Indian government comes up with more concrete measures.

○● Paying constant attention to India’s economic policies India’s anti-business policies can take a different form at any time. If the Indian economy grows more slowly than expected, the government will likely increase taxation of foreign companies and expand the definition of tax evasion. It will become more difficult for the recently weakened political leadership of the Indian government to take business-friendly measures due to mounting opposition from the public and opposition parties. Therefore, one should pay keen attention to India’s policies relating to taxation and investment, until the country proposes reasonable policies.

124 POSRI Chindia Quarterly�Autumn 2012 Corporate

�Asia Seed, filling Indian dining tables with Korean vegetables

�Samsung finds a future in China :: Corporate

Asia Seed, filling Indian dining tables with Korean vegetables

Kim Yeung-ki ([email protected]) Managing Director of BTN Ltd.

hy did you choose cabbage?” This is the first “ question I asked President Ryu Kyoung-ou of Asia Seed. To my simple question, he gave a wise W answer. “Because our cabbage is of the world’s best quality.” I asked this question because I wanted to confirm the fact that only better goods and differentiated services can survive in India, even in the agricultural sector. In about ten years, the Indian population is expected to reach 1.5 billion, surpassing the Chinese population. This means that demand for agricultural products will rise in India, and agriculture will become more important than ever before. India’s agricultural sector is anticipated to seek highly productive, high quality farming. Asia Seed established its offices in Bangalore in June of 2011 to make inroads into the Indian seed market with seeds developed in Korea, in particular vegetable seeds. Long before the establishment of the branch

127 Autumn 2012�POSRI Chindia Quarterly office, Asia Seed entered the Indian market. Since then, it has actively developed its vegetable seeds, including cabbage seed, and promoted the sale of its seeds in India. As a result, since three years ago, Asia Seed has been exporting a significant amount of seed to India. Last year, the company had USD 1.01 million in exports to India just for cabbage seed. This year, the figure is expected to reach USD 2 million.

○● No pain no gain Asia Seed’s entry into the Indian market was not an overnight success. This was due to the unique characteristics of the seed business. In order to export seeds suitable for a country’s climate and environment, experts with more than 15 years of experience in vegetable breeding have to develop proper seeds after much trial and error. Asia Seed’s entry into the Indian market was no exception. In 2004, the company set out to enter the Indian market. In 2009, after five years, its efforts started to pay off. In 2010, Asia Seed exported a substantial amount of seed to India. With strong determination and meticulous preparation, Asia Seed bore fruits of USD 1.01 million in exports in 2011. In India, there are dry and monsoon seasons each year. Hot climate, vast land, and insufficient distribution of infrastructure stand in the way of long distance transportation of agricultural products. Therefore, long-term seed preservation is necessary in India. Without relentless efforts to develop localized products, in this case, seeds, success in the vast Indian market would be unthinkable. This basic strategy for entering the Indian market applies to every sector.

○● Bold investment to expand the seed market India’s cabbage seed market, the first target of Asia Seed, was not an easy market. The cabbage seed market has long been dominated by an indigenous Indian company with the largest market share, and by Japanese companies

128 POSRI Chindia Quarterly�Autumn 2012 :: Corporate

with the second and third largest market shares. Under such circumstances, it was not easy for Asia Seed to take its first step into India. Asia Seed, first invited sales persons from an Indian seed company to Korea to give them hands-on experience with Korea’s excellent farming, giving them confidence in Korean seeds. With such perseverance, Asia Seed took one step further in India’s cabbage seed market, which is worth USD 20 million a year. Currently, Asia Seed’s two Korean researchers and four Indian researchers are actively developing seeds at its experimental farm in Bangalore. The experimental farm is on leased farmland at the moment; however, the company plans to buy an additional 200,000 square meters this year to relocate its experimental farm. Given that it takes four to five years after the initial adjustment period for one kind of seed to grow stably in a new place, it is very important to secure the stability of farms. Although foreigners are not allowed to buy farmland in India, experimental farms are an exception. Asia Seed will be able to pursue various kinds of research on breeding in a stable manner in India. For a small company, with USD 14.5 billion in annual revenue, it is surely burdensome to buy an overseas farm. However, Asia Seed took this decisive action because it targeted not only the Indian market, but also networks of Non-Resident Indians (NRI) that span Southeast Asia, the Middle East, and Africa.

○● India as a market and an R&D center India is one of the world’s largest agricultural producers─the largest bean producer and the second largest producer of rice, wheat, and vegetables. India has huge markets for agricultural goods and services, including seeds, agrochemicals and fertilizers, and farming machinery. Due to increasing consumption of agricultural products resulting from India’s rapid economic development, the Indian agricultural market is changing from self-sufficient agriculture to for-profit agriculture. India has become a

129 Autumn 2012�POSRI Chindia Quarterly huge buyer of new varieties of seed with higher yield and higher quality than those used in traditional agriculture. In particular, the hybrid seed market is expanding rapidly. Due to rising demand from farms for high yield, high quality seed, sales of hybrid seeds totaled USD 1.6 billion in 2010, a 76% increase year-on-year. India is a huge agricultural market, and at the same time, an R&D base important to seed developing countries. Due to Korea’s climate, research can be conducted only during one growing period each year; however, in India, research is possible during two or three growing periods. During the period from September to March, when no research is possible in Korea, Asia Seed is conducting research in India, employing excellent researchers at low labor costs.

○● Indian farmers’ experience with Korean farming In addition to Asia Seed, another Korean company, Nongwoo Bio, also has a presence in India’s seed market. Korean small and medium-sized companies are busy expanding agricultural exports; unfortunately, there is too little government policy support. Government support tailored to each country is necessary for SME’s that have insufficient funding and manpower. Three years ago, 100 farmers from the southwestern state of Karnataka visited China to experience advanced farming there, surprising me greatly. This event clearly shows a shortcoming in Korea’s economic diplomacy, caused by a lack of information on the needs of India’s agricultural sector. In order to allow more Korean companies to advance into the ever-growing Indian agricultural market, the Korean government must provide Indian farmers with policy support for experiencing Korean farming. It should also examine measures to support agricultural exchanges between the two countries in order to promote the entry of Korean agricultural companies into the Indian market. Now, the Korean agricultural sector is in desperate need of reasonable policy support by the Korean government.

130 POSRI Chindia Quarterly�Autumn 2012 :: Corporate

Samsung finds a future in China

Kim Dong-ha Professor, Department of China Area and Commerce Busan University of Foreign Studies

amsung Group entered China after it established its regional head office for Chinese operations in Hong Kong, seven years before formal diplomatic relations between Korea and China S were established. In September of 1985, a Samsung Group subsidiary, Samsung C&T, established an office in Beijing. After Korea and China officially forged diplomatic relations in 1992, Samsung Group started to invest in China in earnest. Samsung established holding company Samsung China in 1995, and subsidiaries in cities including Tianjin and Shenzhen between 1996 and 1998. In 2001, Samsung entered the mobile phone, LCD, and laptop markets. Since 2005, it has actively invested in the financial and insurance markets, which opened their doors wide to the world after China’s accession to the World Trade Organization (WTO).

○● Achieving synergy through regional bases Samsung Group’s 23 affiliates have established 155 units in China,

131 Autumn 2012�POSRI Chindia Quarterly Samsung's major bases in China

Shenyang

Sales center Beijing

Production base Tianjin R&D center Mobile phone, TV, Weihai Printer monitor, camera Shanghai Nanjing Xi'an Suzhou Chengdu NAND flash Hangzhou LCD, semiconductor (packaging), laptop, home appliance

Huizhou Mobile phone Guangzhou

Shenzhen Mobile phone

including 39 production centers, 39 sales centers, 7 research and development centers, and 70 regional offices, with about 102,000 local employees. Most of the affiliates are electrical and electronics related, including Samsung Electronics, Samsung Electro-Mechanics, and SDI. With determination to build a second Samsung in China, Samsung Group has invested heavily in China, and entered almost every sector, including semiconductors, mobile phones, home appliances, heavy industry, construction, and securities. Its efforts have paid off. In 2011, Samsung Group’s sales in China reached USD 51 billion, five times its investment. Samsung Electronics’s sales in China, which account for the lion’s share of the Group’s total sales in China, were USD 20 billion, 14% of the company’s total global sales. Samsung Electronics has 41,000 employees in China, which is 18.6% of its workforce. Samsung Electronics’s entry strategy hinges on strategic placement of

132 POSRI Chindia Quarterly�Autumn 2012 :: Corporate

its bases. Samsung Electronics aims to achieve synergy by systemizing operation of production, distribution, and finance by region. Between 1993 and 1998, Samsung Electronics established three major bases, in Tianjin in North China, Suzhou in East China, and Shenzhen in South China. Production affiliates for printers, televisions, mobile phones, monitors, cameras, LCD panels, laptops, and home appliances were established in these areas. After China’s accession to the WTO, Samsung focused on East China, which accounts for a third of China’s domestic and distribution markets.

○● Shifting from general goods to advanced products In the 1990s, Samsung Electronics’s investments in China focused on color televisions, mobile phones, digital videos, cameras, and home appliances. When Samsung initially entered China, it utilized China as a base for exports to third countries, taking advantage of China’s low wages. As China’s domestic market expanded, China became a base for the production and sale of low- to medium-priced goods. Since China became a member of the WTO, things have changed. A case in point is the Samsung Suzhou LCD plant, construction of which began in May of 2011. Samsung Suzhou LCD (SSL) is building a USD 3 billion plant, covering an area of 140 acres in the Suzhou Industrial Park, which will produce 7.5-generation LCD panels when it is completed in early 2013. In April of 2012, the company received approval from the Chinese government to change its 7.5-generation line to a 8-generation line. The plant aims to localize the fabrication process, utilize the infrastructure of the IT hub at the Suzhou Industrial Park, and boost synergy through cooperation with local television maker TCL. The plant, which is scheduled to begin operation in early 2013, will be capable of producing 100,000 units of glass substrate per month. Samsung Electronics aims to take the upper hand in China’s display panel market by establishing an integrated LCD panel production system

133 Autumn 2012�POSRI Chindia Quarterly between the new plant and the existing LCD module production line in Suzhou.

○● Regional bases expected to move to the West Samsung Electronics is turning its eye to West China. In April of 2012, Samsung Electronics signed an MOU with the government of Shanxi Province to invest USD 2.3 billion to build a NAND flash plant in Xi’an, Shanxi Province. If all goes as scheduled, Samsung will produce 10- nanometer class NAND flash chips from the end of 2013. Samsung Electronics has selected Xi’an as the site of its NAND flash plant, mainly because the city leads China Western Development, part of the Chinese government’s national project. Moreover, Xi’an has favorable conditions for building a semiconductor plant in terms of water, logistics, and space, even though the city is located in inland West China. With the anticipated support of the Chinese government, the plant will play a major role in building a second Samsung in China. Samsung Group plans to relocate its plants for NAND flash chips and display panels to West China, a departure from the past, when it resisted relocating these plants overseas for fear of core technology leaks.

○● Utilizing China to overcome crisis China is a panacea for Samsung Electronics in overcoming the eurozone crisis. Samsung Electronics invested USD 10.5 billion in China in 2011, up USD 1.5 billion from 2010. Samsung Electronics is the first foreign company with more than USD 10 billion in accumulated investment in China. After investing USD 2.3 billion in the Xi’an semiconductor line, Samsung Electronics plans to increase investment to as much as USD 7 billion. This is the company’s largest investment in foreign semiconductor production lines. After the completion of the Suzhou LCD plant at the end of 2013, Samsung Electronics’s investment in China is expected to surpass

134 POSRI Chindia Quarterly�Autumn 2012 :: Corporate

USD 20 billion. Samsung China is a driving force for the growth of Samsung Group, accounting for 25% of the Group’s total sales. Samsung China’s workforce accounts for 25% of the Group’s global workforce. Samsung China produces more than half of the products the company sells to the world. Samsung China’s goal is to build an integrated, self-sufficient system in China to cover R&D, design, production, and sales. Samsung China has 24 R&D centers with 4,800 employees, including 7 independent research centers and 12 research centers within affiliated production centers. It plans to increase its R&D workforce to 7,000 and increase investment to USD 300 million by 2015. In the China Brand Power Index (C-BPI) released in 2012, Samsung ranked first in categories including mobile phones, color televisions, and monitors. However, local Chinese brands, such as Lenovo and Haier, ranked first in the other 104 categories, including laptops, desk tops, refrigerators, and washing machines. The results show what is standing in the way of Samsung in China.

135 Autumn 2012�POSRI Chindia Quarterly Culture

�Jiang Taigong, the founder of China’s management philosophy

�A false accusation against Muslims in Indian history Jiang Taigong, the founder of China’s management philosophy

Kim Chang-do Senior Business Analyst of POSCO Research Institute

here were two major historical events that changed the course of Chinese history. One was the unification of China by Qin Shi Huang in 221 BCE, and the other was the Opium War that T started in 1840. King Zheng (later Qin Shi Huang) conquered six states to unify China for the first time in history, and standardized currency, units of measurement, and the Chinese script. From then, China was the leader of Asia for about 2000 years. However, China was forced by the Western Powers to open its doors following the Opium War, and spent 100 years of humiliation. Ironically, what lay behind China’s fall from being the leader of Asia was its management philosophy, which was established in ancient times. China’s management philosophy, which dates back to democratic leadership in the ancient period, evolved into the strong state management philosophy of the Zhou Dynasty, which was based on Jiang Taigong’s (姜 太公) military strategy, continued to evolve through the Hundred Schools

138 POSRI Chindia Quarterly�Autumn 2012 :: Culture

of Thought in the Spring and Autumn Period, and blossomed after Emperor Qin unified China. However, in later feudal society, China’s management philosophy fell out of step with the times due to its controlling and closed nature. China’s management philosophy formed and developed over thousands of years, and played various roles in the leadership, strategies, and organization that influenced the rise and fall of dynasties. Its historical significance is well documented in classical literature.

○● Management meant state governance in classical literature Let us take a look at several meanings of the term (經營), which translates to management in English, as it appears in Chinese classics. First, refers to the design and construction of buildings. The word appears in The Book of Poetry (詩經): “He measured out and commenced his marvelous tower; He measured it out and planned it (經始靈 臺，經之營之).” Second, was used to mean state management. is found in The Biography of Xiang Yu (項羽本紀) of The Records of the Grand Historian (史記): “Xiang Yu did not follow the examples of tradition and became self-conceited. He wished to achieve a feat as a king by managing the whole land, but only with power, he failed within five years (奮其私智而不師古，謂 王之業，欲以力征經營天下，五年卒亡其國).” Third, means managing something. The Farming Family (田家), a poem written by Liu Zongyuan (柳宗元) of the Tang Dynasty, includes the lines, “Working hard to manage paddy fields, So severe to clear and soft skin (努力愼經營, 肌膚眞可惜).” This meaning is the closest to what corporate management means today. Additionally, has meanings of artistic composition, good offices, and come-and-go. The main meaning of in Chinese classics is to build and manage a nation, which is all about the leadership, strategies, and

139 Autumn 2012�POSRI Chindia Quarterly organization necessary to plan and control manpower and resources in order to achieve target goals. China’s management philosophy originated from administrative, economic, and military management, which were required to establish and maintain ancient dynasties. In other words, maintaining dynasties was the starting point and the goal of China’s management philosophy. In particular, a king’s leadership was crucial to maintaining his absolute power, and to the continuation of a dynasty in ancient China. In this sense, the need for leadership was the beginning of the first management philosophy. Yao (堯), Shun (舜), and Yu (禹) are household names of legendary sage kings from the ancient period. They were regarded as ideal monarchs, and their leadership was a model for successive kings. In ancient China, leaders were elected through a democratic process based on ability and integrity. Democratically elected leaders exercised leadership to create harmony between people and nature. Harmony was the goal of leadership in ancient China. This leadership became the foundation of China’s management philosophy.

○● Clan rules and social classes: major components of ancient management philosophy Following the death of Yu the Great in 2000 BCE, his son Qi (啓) succeeded to the throne and built the Xia Dynasty. The democratic process for electing leaders ended, and a hereditary succession of power began. The Xia Dynasty’s state management philosophy was based on control of social classes. Control intensified over time, until the country was devastated by the oppression of King Jie (桀), the last ruler of the Xia Dynasty. Jie was defeated by Shang Tang (湯), bringing to an end to the Xia Dynasty and beginning the Shang Dynasty (商), or the Yin (殷) Dynasty. The governance philosophy of the Shang Dynasty had a religious tinge. The spirits of dead people, or ghosts, were objects of worship and a pillar of faith. Shang’s rulers declared themselves the

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manifestation of spirits, and reigned over the people. The Shang Dynasty’s clan rules, combined with the social class system of the Xia Dynasty, became an important component of the management philosophy of ancient China. King Zhou (紂王), the last king of the Shang Dynasty, was also a tyrant. He was defeated in a rebellion against his ruthless reign by the country of Zhou. With the fall of the Xia and Shang Dynasties due to tyranny, the disparity between leadership and state management begins to appear clearly in Chinese history. In order to address the disparity, a systematic management philosophy was necessary. This was when the strong state management philosophy based on Jiang Taigong’s military strategy was formed. Jiang Taigong aided the country of Zhou in overthrowing the Shang Dynasty in 1000 BCE. According to historical investigations, Jiang left three books related to state management: Six Secret Strategic Teachings (六 韜), Three Strategies (三略), and Hidden Talisman Classic (陰符經). In The House of Duke Tai of Qi (齊太公世家) in The Records of the Grand Historian (史記), it is written that Jiang had various military strategies, and many unique methodologies for building and managing a state.

○● The formation of management philosophy Jiang regarded political corruption as a cause of war and rebellion. When heroes are dissatisfied with the current situation and take actions to start a new world order, the result is rebellion─what is often called revolution. In order to overturn a corrupt government, one must first gain power. To this end, the public must be shown the severity of the current situation and the significance of a collective destiny. Leadership is very important in this. The ideals and morals espoused by leaders must match the expectations of the public and the heroes among them. Jiang Taigong suggested three ways to strengthen leadership. First, leaders should boost their authority through a system of rewards and

141 Autumn 2012�POSRI Chindia Quarterly punishments. Leaders should keep their word, and their rewards and punishments should be fair and open. Second, leaders should win the hearts of their subordinates and the public. Without dignity and high morality, a king cannot control his country. With a lack of authority, a king cannot make his people obedient; with excessive authority, a king becomes a tyrant and loses his followers. Third, leaders should pay close attention to public sentiment and motivation. Jiang Taigong emphasized the importance of strategy in state management. All commanders must have tacticians (謀士) and men of authority (權士) to help them devise strategies and tactics. Jiang also suggested five characters related to the tactics of maneuvering troops: yi (一), duan (斷), ji (疾), lie (烈), and huo (活). Yi, which literally means agreement, refers to the concentration of troops. Duan refers to making a bold decision at a favorable time. Ji means speed, while lie means ruthless offensive. Huo means to maneuver troops with mobility and flexibility. In order to create a rich country with a strong army, Jiang recommended that the people should be war-ready in their everyday lives, learn to use everyday tools as implements of war, and convert livelihood organizations to combat organizations. With excessive punishments and taxes, a country is likely to collapse; with fraudulence and deception, society is beset by a horde of thieves; when public officials make alliances and abuse their power, riots are inevitable. Therefore, a country must promote stability and the well-being of its people through ceaseless administration and enlightenment. In other words, a country must educate and change its people through benevolent governance. Jiang Taigong’s state management philosophy evolved as a result of the leadership of sages in ancient China, the fall of the Xia and Shang Dynasties, and the establishment of the Zhou Dynasty. Jiang’s books have

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greatly influenced politics, military strategy, and state management of later generations. They have laid a foundation for China’s management philosophy.

143 Autumn 2012�POSRI Chindia Quarterly A false accusation against Muslims in Indian history

Lee Kwang-su Professor, Division of Russian and Indian Business Studies Busan University of Foreign Studies

ultan Mahmud of Ghazni in South Central Afghanistan was a Muslim monarch who ruled vast territories in South and Central Asia. In the early 11th century, he turned his focus to the S northern and western areas of the Indian subcontinent to loot and plunder affluent temples. He targeted temples because, at that time, temples were not only places of worship, but also repositories of great wealth.

○● Mahmud’s invasion: a milestone in history As history shows, looters destroy the places they loot. There is no exception. Among the many attacks carried out by Mahmud of Ghazni, one attack has emerged as a hot-button issue in Indian politics: the attack against a temple in Somanath of Gujarat in 1026. According to historical records, Mahmud plundered the Somanath Temple and other temples in its vicinity. Historically, invaders have bragged about and exaggerated what they have done. A recorder of this invasion wrote, “His enemies were shocked by the

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prowess of Mahmud’s army, and were permanently traumatized.” Furthermore, he boasted of the attack against the temple to be an act of iconoclasm, rather than a simple act of looting. The recorder of this event claimed the attackers to be faithful iconoclasts, magnifying and altering what they had done to be in praise of Allah. This document remains as a chronicle of a Muslim Dynasty and a record of Turko-Persian culture, which is the primary basis of the cultures of present-day Iran and Central Asia. However, no historical documents written in the ancient Indian language of Sanskrit, or other regional languages, mention the attack by Mahmud. Naturally, there is no proof that the Hindus suffered trauma due to the invasion. Over time, this event has had a great impact on the reinterpretation and writing of Indian history. A problem arose when colonial historians divided Indian history into a Hindu period in ancient times and a Muslim period in the middle ages. They needed a historical turning point that would herald the start of Muslim civilization, and the attack by Mahmud of Ghazni suited their purpose. Without thorough investigation of historical records, colonial historians rewrote history. The event was, in fact, the looting of temples in West India, but it was exaggerated to be an important milestone in Indian history.

○● Reinterpretation of history becomes a religious battle Due to historical interpretation and rewriting by colonial historians, Mahmud’s attacks have become a seed of antagonism immanent in Hindus and Muslims. In addition, British colonialists deemed Indians not to be of one race in a cynical attempt to rule India more easily. They described Indian society as being divided into two different religions: Hinduism and Islam. They asserted that everything started from the invasion and plunder of India by Muslims. Their assertion gave a rise to a theory that the invasion brought severe trauma to Hindu society, and that this trauma has become a

145 Autumn 2012�POSRI Chindia Quarterly cause of conflicts between Hindu and Muslim communities. As a result, Hindu and Muslim societies formed separate religious communities, which had never existed before. Conflicts between the two intensified, resulting in the tragic partitioning of India and Pakistan. Since then, the two countries have experienced endless oppression of the minority by the majority. Since the 1990s, Hindu nationalists in India have massacred innocent Muslims in the name of religious communalism, and in turn, Muslims have indiscriminately conducted terrorist attacks on Hindus. Improper interpretation by some colonial historians has created a false history, and this has become a real historical trauma. However, it is not right to place all the blame on colonial historians. Indian nationalists should be faulted for blindly accepting the inaccurate interpretation of colonial historians. Indian nationalists under British colonial rule emphasized “Hindu” as a common ground for everyone in order to boost the national consciousness. In the process, nationalism became intertwined with religious communalism. As this process advanced, however, voices against the mainstream were forcefully silenced.

○● History: an ideological weapon After India’s independence, Hindu nationalists sided with the nationalists who had contributed the most to independence, and demanded that the Somanath Temple be rebuilt. However, nationalists at that time wanted to make a certain distinction between nationalism and religious communalism, because religious communalism was the reason that India and Pakistan had been tragically partitioned. Making the Independent Republic of India into a secular state was the primary nation-building goal of Jawaharlal Nehru, the first Prime Minister of India. For this reason, he did not advance the cause of rebuilding the Somanath Temple. As time went by, the power of the secular nationalist state weakened, and the power of the Hindu nationalists grew. The Somanath Temple reappeared at the

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forefront of politics. Hindu communalists insisted that they must restore Ayodhya, the presumed birthplace of the ideal king, Rama, of Hindu mythology. To this end, they demanded the destruction of Muslim mosques at that location. To achieve their goal, they organized a mass movement and set out on a grand tour from Somanath to Ayodhya. The Somanath Temple destroyed by the Muslim Mahmud became a symbol of the revival of Hindu nationalism. Today, India seems disinterested in true historical facts about the invasion of Muslims and the plundering of Hindu temples. Indian politicians utilize history to wage political battles. A war over history among religious communal groups cannot be eased only by the study of historical facts. There is nothing new about the role of history as a catalyst for wars. History is no longer an independent academic subject that describes or discloses the facts of the past. It has long been an ideological weapon utilized at the forefront of politics. It functions as a political weapon, justifying the hegemony of the present with the “power of the past.” Therefore, power struggles in the present naturally lead to conflicts between those who stick to the existing perspective on history and those who try to change that perspective.

147 Autumn 2012�POSRI Chindia Quarterly About POSCO Research Institute

POSCO Research Institute was established in 1994 as a think tank of POSCO and its affiliates. POSCO Research Institute is endeavoring to develop a new management paradigm for the 21st century based on practical knowledge.

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