India's uncertainties at present and its optimism for the future

India’s uncertainties at presentand its optimism for the future

Luxury markets in Chindia India: Beyond anti-corruption

ISSN : 2233-5609

The views expressed here are those of the authors and do not necessarilyrepresent the official views of POSCO Research Institute.Not for sale.

Copyright © 2011POSCO Research Institute All rights reserved.Production in whole or in part without written permission is strictly prohibited.

Registration number: 강남바 00092Registration date: December 16, 2010

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Publisher: Kim Joon-Han Published by POSCO Research Institute

Editing Director: Kim Chang-Do Editor-in-Chief: Yoon So-Jin

Printed by Jeong-Moon Printing Co., Ltd.Date of lssue: January 25, 2012

Contents Winter l 2012 l Vol. 05

ColumnIndia’s uncertainties at present and its optimism for the future

Kim Kwang-Ro

Luxury markets in ChindiaChina, a strong hand in the premium market 009

Cho Jun-Hyeon

China’s craze for luxury goods 015

Hong Sun-Young

China’s great cause: “Create Chinese brands” 023

Shim Sang-Hyung

India, no longer a low-end market 029

Cho Choong-Jae

Korean companies in India, bolstering premium strategies 035

Imm Jeong-Seong

India: Beyond anti-corruptionIndian corruption: characteristics and responses 043

Santosh Kumar

Eradicating corruption, a new mission for economic growth 051

Kim Mi-Su

Mounting demand for ethical corporate management 057

Imm Jeong-Seong

04

07

41

Issue analysesWill China be a lifesaver in the eurozone crisis? 067Pyo Han-Hyung

Resurfacing China-Brazil conflicts 073Oh Jung-Hoon

India’s quiet diplomacy seeking a permanent UN Security Council seat 081Kim Chan-Wahn

Chinese private enterprises: advances and drawbacks 087Shim Sang-Hyung

The Bohai Bay oil spill and China’s environmental risks 095Heo Jae-Yong

The heated Indian nuclear energy market 103Ji Yeon-Jung

CorporationsAfter a series of successes, BYD faces risks 113Li Wan-Yong

Interviews: India’s STAR CJ Network and Lock & Lock 119Shin Woo-Kyun, Ham Tae-Wook, Yoo Sung-Won

CultureCultural aspects of parks 126Jang Soo-Hyun

Indians’ synthesizing mindset 130Lee Yong-Hwa

65

111

124

POSRI Chindia Quarterly�Win te r 2012

004

India’s uncertainties at presentand its optimism for the future

Kim Kwang-RoVice Chairman of ONICRA

Recently, the hottest political issues in India include the

amendments to the Indian Expropriation Act and the

eradication of corruption. Land expropriation has always been

a stumbling block for industrial projects in India, and clashes

between residents and public power occur often. However, the Indian

government does not see land expropriation as a security issue, but

basically an issue of changing the minds of local residents. The Indian

Parliament deems that the absolute majority of people protesting land

expropriation are residents whose livelihoods are being threatened.

The problem is the stark difference between the amount the government

pays residents for their land and the market price. Some people argue that

farmers should be able to sell their land directly at market prices. Besides the

economic issue, farmers are fundamentally opposed to land expropriation on

the grounds that they would lose their livelihood. It is easy to think the

residents can be persuaded if expropriation is decided lawfully, but one must

CO

LU

MN

Winter 2012�POSRI Chindia Quarterly

005

remember that the residents have been

living on the land since before there

was law. They are fighting against the

laws of the government with the law of

nature. The government cannot turn a

blind eye to their outcries because they

will be judged with votes.

Korean companies should not focus solely on their negotiations with the

Indian government; they must also have a good grasp of the needs of local

residents, the actual land owners. These companies must first try to understand

why local residents might not cooperate despite government agreement. They

should try to win support from local non-governmental organizations, and

create an environment favorable to the coexistence of residents and

companies, offering various programs through the establishment, operation,

and employment of schools or hospitals. Contributing only a building is not

enough; it is important to take charge of the continued operation. The

operating cost for the hospitals one Korean company built when it entered the

Indian market was less than USD 2,000 per month per hospital. In pursuing a

large project, a little sincerity can go a long way.

Corruption in India is not as bad as it looks in general media coverage.

Certain foreign media, including the Wall Street Journal, have deemed that

corruption in India is not too serious, except for mega projects involving the

Indian government. For example, in order to tackle corruption in India, one

high court has recently proposed legalizing fees that would replace bribes.

This was based on the notion that small bribes often help cover expenses

incurred at public offices.

Regardless of the level of corruption in India, corruption is regarded

The current situation in India

may seem chaotic. However,

I believe that India is moving

toward a bright future.

“

“


006

both in India and overseas as an obstacle to the economic growth of India.

Indian people are showing enthusiastic support for Anna Hazare, who has

gone on hunger strikes for the enactment of the anti-corruption law. Hazare

is revered as the “next Gandhi.”

In order to do good business in India, where bribery is rampant, Korean

companies should handle everything in a lawful and transparent manner.

They should comply with environmental protection regulations as well as

accounting regulations, for instance, and pay taxes responsibly. There

should be no secrets. Korean companies should make no mistakes, as if

there are revenue officers and public officials from the environmental

department among their employees. That way, they will have nothing to

hide from the scrutiny of revenue officers and environmental officers.

The current situation in India may seem chaotic. However, I believe that

India is moving toward a bright future. Paradoxically, Bihar, one of the

poorest states, and Gujarat, whose chief minister has been denied a US visa

due to religious conflicts, stand on the frontline of land expropriation reform

and corruption eradication. The chief ministers of these two Indian states

have been described by Fortune magazine and the Wall Street Journal as

ideal chief ministers for India’s future. More and more politicians will

follow in their footsteps. In addition, bolstered by public opinion against

corruption, Tamil Nadu and West Bengal have elected female chief

ministers. Foreign media are praising India’s democracy wherein the

political powers are judged by public votes.

With only one law enacted, India will not change overnight. Given the

public support for anti-corruption, however, India seems to have a bright future.

I have an optimistic view that India will advance greatly over the next thirty

years, though the pace of advancement may be slower than that of China.

LLuuxxuurryy mmaarrkkeettss

iinn CChhiinnddiiaa

�China, a strong hand in the premiummarket

�China’s craze for luxury goods

�China’s great cause: “Create Chinese brands”

�India, no longer a low-end market

�Korean companies in India, bolstering premium strategies

As liquor reddens a person’s face, gold blackens an official’s

heart. (白酒紅人面黃金墨吏心) - Chinese Epigrams and

Aphorisms (推句集)

Gold has been a symbol of wealth and treasure throughout the ages all

over the world. Few people would refuse gold. This saying applies not only

to public officials or people with black hearts. The fewer the number of

people privileged to own a treasure, the more precious it becomes. This is

the way of the world.

○● China and India’s premium market growing by 20-30%

“Crouching Tiger”and “Hidden Dragon”loom large in the global

premium and luxury markets. The terms refer not to the movie starring Yun-

Fat Chow (周潤發), but to China and India, which are evolving from the

China, a strong handin the premium market


009

:: Luxury markets in Chindia

Cho Jun-HyeonProfessor of Economics, Pusan National University


010

“factories of the world”to

the “markets of the world”.

China and India have had a

significant impact on the

world economy for quite

some time. However, their

predominant image has

been one of countries that

manufacture cheap products

at low labor costs.

Things are changing rapidly now. Amidst widespread slowdown in the

global economy, China and India are leading the global consumer market.

This does not mean that their markets are simply big in size. It means that

the two Asian countries are emerging as strong hands not only in the low-

end market, but also in the premium and luxury markets.

In 2010, the global premium market totaled USD 254 billion, showing

an approximately 12% increase year-on-year; however, China’s premium

market is showing an average annual growth rate of 30%, far exceeding the

global average. China is the world’s second largest premium market after

Japan, and it is expected to become the largest in 2014. India’s premium

market has been increasing by 20% annually, and its size is expected to

match that of advanced countries by 2015. Simply put, China and India will

take the lead in the world’s premium and luxury markets in the near future.

○● Low per capita income, high consumption by the rich

Changes happening in China and India are attributed mainly to the rapid

economic growth and rising incomes. However, the more important reason

for the new consumption trend in these countries is changes in income

distribution and demographics.

China and India both have low per capita incomes, but they have large

With more aggressive marketing

strategies and systematic support

from the government and research

institutes, the Korean economy has

much to gain from the premium

markets in China and India.


011


populations of luxury consumers. In China, the number of people with more

than RMB 10 million (USD 1.57 million) is around 960,000, and this

number is increasing by 10% each year. The number of people that can

afford premium and luxury goods in China stands at around 160 million, or

12% of the total population. In India, the number of households with an

annual income of over USD 100,000 totals 1.6 million, and their income is

increasing by 14% each year.

The traditional upper-class still constitutes a large proportion of

premium consumers in China and India. This is truer in India, where the

caste system of the past still remains a factor, than it is in China, whose

economy has shifted from the socialist system. However, what is drawing

attention to the new consumption trend in China and India is the nouveau

rich, who have benefited from the economic growth and prefer name brand

and luxury goods to show off their social standing. In the USA and Europe,

luxury goods are consumed mainly by middle-aged and older people, while

in China young adults account for more than 70% of total luxury

consumption. As a result of China’s one child policy, many of the young

generation who were pampered in childhood have higher consumption

tendencies than young people in other countries; they also have a strong

preference for luxury goods. The popular term “moonlight clan”(月光族)

was coined recently to describe people who live from paycheck to paycheck

or spend all of their monthly income. Together with increasing consumption

by young people, women’s rising purchasing power is stimulating luxury

consumption. In about half of Chinese households, income is managed by

the woman of the house.

The emergence of new types of transactions, mainly online, is another

catalyst for the increase in luxury consumption in China and India. In China,

online luxury consumption totaled RMB 3.4 billion in the second quarter of

2011, a 19% increase from the previous quarter. This trend is expected to

continue in the second half of 2011, reaching RMB 16 billion by the end of


012

2011. A Rapid increase in overseas travel has also bolstered luxury

consumption, as purchasing name brand luxury products overseas can be up

to 30% cheaper than buying them in China.

○● A sharp contrast to contracted luxury markets in the

USA and Europe

The emergence of China and India is changing the landscape of the

global premium market. Japan is still the world’s largest premium market,

with about 40% market share. However, Japan’s luxury market is decreasing

by 5% each year due to economic slowdown. American and European

luxury markets are showing slowing growth trends. The global financial

crisis originated in the USA, and the EU-led sovereign debt crisis is causing

further contraction of the premium market. Under these circumstances, the

growth of the global premium market is being led by emerging economic

powers, including China and India. Although China and India’s premium

markets have shown sharp growth in recent years, they are still quite new

and have remarkable potential to grow further.

Global luxury brands are rushing into China and India. Seven out of the

ten largest shopping centers in the world are located in China. One out of ten

Bentleys, a major luxury car brand, is sold in China. Bentley Motors has

successfully entered the Indian market, and Mercedez-Benz and Rolls-

Royce are following suit. India’s largest luxury brand shop is owned by

Ermenegildo Zegna, a men’s luxury clothing brand. Chanel and Louis

Vuitton, well known luxury brands of high end women’s apparel and

designer products, have large shops in New Delhi, Mumbai, and other big

cities in India.

With global brands rushing in, competition is mounting in China and

India. Complacency, thinking that one pencil for each of the 1.3 billion

people in China equals 1.3 billion pencils sold, is doomed to fail.


013


Fortunately for Korea, Chinese and Indian consumers show a strong

preference for Korean products. Korean products are popular and widely

known in China; in India, Korean companies such as Samsung, LG, and

POSCO are perceived as leading premium brands. With more aggressive

marketing strategies and systematic support from the government and

research institutes, the Korean economy has much to gain from the premium

markets in China and India.


015

China’s craze for luxury goods


Hong Sun-YoungSenior Researcher of Samsung Economic Research Institute (SERI)

China has undisputedly emerged as one of the world’s largest

consumer markets for luxury goods. China’s luxury market

was merely RMB 5 billion in 1998, but grew almost 11-fold to

RMB 55 billion by 2008. The market has been growing

rapidly, by more than 20% each year since 2008. According to the World

Luxury Association (WLA), China is the second biggest luxury goods

market, with a 27% market share of global luxury goods consumption in

2011, slightly lower than Japan at 29%, and higher than the United States at

14% and Europe at 18%. The WLA also stated that China will overtake

Japan as the world’s top consumer of luxury goods by 2012.

Just as Chinese tourists on shopping sprees have caught everyone’s

attention in Korea, Chinese tourists are now showing off their high

purchasing power in the UK, emerging as major consumers in the UK

luxury market. British media coined the term “the Gucci generation”for


016

wealthy Chinese tourists who readily buy luxury houses in London,

expensive artwork, and premium wine. Chinese tourists spent roughly GBP

1 billion (USD 1.57 billion) on luxury goods during the 2010 Christmas sale

season in the UK. In the UK, Chinese expenditures accounted for a third of

luxury brand sales, including Louis Vuitton, Gucci, and Burberry. For this

reason, countries such as the USA, the UK, and Japan are doing their best to

attract Chinese travelers through various measures, easing strict visa

restrictions and developing tour programs. The Chinese are now the main

pillar of the global luxury market. The buying power of China’s rich not

only increases profits of luxury brands, but also influences whole economies

and industries.

○● High consumption by women and the younger

generation

The reason the world should pay attention to wealthy Chinese is that the

Chinese premium market is large and growing rapidly. According to World

Bank reports, the top 1% of Chinese households holds 41.4% of national

wealth. Ji Baocheng (紀寶成), President of Renmin University of China,

stated in the National People’s Congress that the richest 10% of Chinese

people own 80% of the country’s collective wealth. In other words, wealth

Source: McKinsey Insights China, Deutsche Bank

Increasing luxury consumption in China

Sales (RMB 100 mil.)

1998 2008 2009 2010 2015

50

550640

800

1,800


017


in China is more highly concentrated in the high-income bracket than it is in

other countries. Therefore, the rich have high purchasing power out of

proportion to their share of the total population. With China’s economic

growth rate remaining high, the upper class in China is expected to expand

significantly. The number of Chinese people with incomes over USD

10,000 is currently 160 million, 12% of the total population. This is a

threefold increase from 2005. The higher the people’s income, the faster

consumption grows. The average household spending of the wealthiest 10%

increased 4.8-fold from RMB 6,000 in 2005 to RMB 29,000 in 2009 the

highest rate of increase in a four-year time span.

One of the distinctive characteristics of Chinese high income earners is

their young age. Chinese between the ages 25 and 34 have the highest

income, unlike in other countries where the highest income earners are in

their forties. The average age of Chinese billionaires is 39 years old, far

lower than the global average of 54. The reason is presumably that young

Chinese people possess high levels of education and skills. For the same

reason, they are different from other age groups in terms of their preferred

Source: Euromonitor

Changes in income distribution

$0~2,500 $2,501~5,000 $5,001~10,000 $10,000+

600

500

400

300

200

100

0

(I Mil. people)

525

167

285

52

161

368

301 302

20052010

(Income)


018

brands and brand exposure paths. While middle-aged and older people learn

about luxury goods through acquaintances and conventional media, the

younger generations get information on the Internet and buy luxury goods

through overseas sites or purchasing agency services. The motivation for

buying luxury goods varies from desire to display wealth to the quality and

utility of the product itself to self-satisfaction.

Another characteristic of China’s rich is a high proportion of women.

Women are given the same opportunities in education and society as men,

hence Chinese women’s income level is higher than that of women in other

countries. The Hurun Research Institute (胡潤) released a report showing

that China has over 875,000 multimillionaires, up 6.1% from the previous

year, and one third of them are women. Female consumers show high

purchasing power in the premium market. According to a McKinsey & Co.

survey, women accounted for more than half of the USD 15 billion in

Chinese luxury goods sales in 2010, an increase from 45% in 2008. The

average female luxury consumer in China also spent 22% more in 2010 than

in 2008, while men spent only 10% more.

Source: Euromonitor

Spending increase by income level

Lowest Low Medium-low Medium Medium-high High Highest(0~10%) (10~20%) (20~40%) (40~60%) (60~80%) (80~90%) (90~100%)

30,000

25,000

20,000

15,000

10,000

5,000

0

(RMB)

2,0614,901

2,516

6,743

2,334

8,739

3,446

11,320

4,046

14,964

4,666

19,264

6,033

29,00419952009

(Income)


019


Wealthy Chinese women

have an impact on male-

dominated markets, such as

cars and high-end spirits, as

well as cosmetics and

designer clothing. Maserati,

a well-known Italian luxury

sports car manufacturer, sold

400 cars in China last year, 50% more than the previous year. Women

account for 30% of Maserati’s sales in China, compared to less than 10% in

Europe. Ferrari and Lamborghini also reported that the percentage of

women buying their cars in China is more than double the global average.

More women buy whisky in China than in the West. Companies in the

related industries are modifying their marketing strategies, developing

products tailored to women, for example.

○● The preference for luxury brands spreading to small

and medium-sized cities

The number of rich people has been growing in tier 2 and tier 3 cities. In

the decade starting in 2000, the urbanization rate in China surged from

34.8% to 46.6%. In tier 2 and tier 3 cities, opportunities for economic

growth and employment have expanded due to government investment in

infrastructure, such as the Rise of Central China Plan and China Western

Development, combined with the relocation of plants looking for cheap

labor costs. Approximately 30% of the well-to-do in China currently live in

big cities, including Beijing, Shanghai, Guangzhou, and Shenzhen, but by

2015, about 75% are expected to live in tier 2 or tier 3 cities.

Luxury brands are actively entering tier 2 and tier 3 cities in response to

changing consumer demographics. Louis Vuitton and Gucci are expanding

into cities like Chengdu, Chongqing, and Changsha, while Volkswagen and

With the premium market in

advanced countries at a plateau due

to economic slowdown, China’s

luxury market will attract more

attention.


020

BMW are planning to open new dealerships mainly in tier 2 and tier 3 cities.

With the expansion of transportation and distribution infrastructure,

including highways and high-speed trains, wider consumption districts, with

a big city at the center and tier 2 or tier 3 cities on the periphery, are being

created. As going shopping in big cities becomes easier, as information on

new products is more readily available, and as fashion cycles become faster,

consumption by the rich in tier 2 and tier 3 cities is expected to surge.

○● Luxury brands tailored to China’s needs

With the premium market in advanced countries at a plateau due to

economic slowdown, China’s luxury market will attract more attention. The

competition to win Chinese hearts will be fierce among luxury goods

companies.

More products tailored to China’s needs will hit the market. French

fashion label Hermes worked with a famous Chinese designer to launch a

distinctive new brand, Shang Xia. The list of “Made for China”products

Source: Euromonitor

Changes in gross income by age

0 5,000 10,000 15,000 20,000 .25,000 30,000

(Ages)

50~54

45~49

40~44

35~39

30~34

25~29

20~24

15~19

(RMB)

22,44811,957

12,28422,687

12,362

12,99123,632

24,735

24,486

20,283

12,524

13,700

13,522

11,483

7,134

22,371

2010

2005


021


goes on: dENiZEN by Levi’s was designed to fit the slim Chinese body

type, and the new long-wheelbase BMW 5 Series Sedan was designed to

cater to the Chinese preference for big sedans.

These products will play a major role in the companies’ entry into

regions outside of China as well. A US-based manufacturer of sanitary ware

released Numi, a smart toilet, targeting Chinese consumers. Because

bathrooms in China are typically cold, Numi issues warm air from a floor-

level vent to heat the floor and warm the user’s feet. It is also equipped with

a touch screen to control various functions, including music, video games,

and e-books, in order to satisfy the Chinese taste for entertainment. Milan-

based Yoox.com, which sells discount designer fashion online, has selected

China as a test market for its standby service, a system Yoox has arranged

with FedEx where the deliverer waits at the door in case the customer is

dissatisfied with the delivered product and decides to return the item to

Yoox. If this service is successful in China, Yoox’s largest market, the

company will expand the service to other countries.

Currently, there are many companies differentiating themselves with

products tailored to the Chinese. However, after some time, the products

themselves become insufficient to make a company stand out. At that point,

the most important asset might be the differentiated brand image the

company has come to own. Recently, South Korean fashion retailer E-Land

Group, which has been growing by approximately 50% each year, recorded

KRW 1.2 trillion in sales in China alone. In order to boost its brand image in

the Chinese market, E-Land acquired Mandarina Duck, an Italian-based

brand that offers luxury luggage and travel accessories, and established a

joint venture partnership with Kate Spade, an American fashion label. The

Chinese consumer market has great potential, and, therefore, companies

should focus on brand management centered on the Chinese premium

market, in addition to developing products tailored for the Chinese

market.


023

China’s great cause:“Create Chinese brands”


Shim Sang-HyungSenior Business Analyst of POSCO Research Institute

Transformers is an American film franchise that depicts the

showdown between the Autobots, who try to save the Earth

and Humanity, and the Decepticons, who try to control

Humanity. The third film in the series, with sports cars

transforming into sleek robots and other eye-catching visual effects, hit the

box office last summer and drew 7.4 million viewers in Korea alone.

Something caught my attention in the scenes that take place at the

company where Sam, the main protagonist, is employed. Various notebook

computer models bearing the Lenovo logo appear throughout the scenes.

Lenovo pursued an indirect advertising strategy for maximum publicity

effect by becoming one of the official sponsors of the movie. As former

installments of the series have become mega hits, the competition for and

costs of being a sponsor must have been enormous. At the entrances of

theaters in Korea, images of Lenovo products were displayed with the line


024

“transformable and innovative like Transformers”. Demand for Lenovo

products among Korean consumers has reportedly increased since the

movie’s release. Lenovo has been extremely successful in exposing

consumers to the company and creating a brand image.

○● Desire to become a multinational brand

Chinese PC manufacturer Lianxiang (�想) acquired IBM’s Personal

Computing Division in 2004 and changed its name to “Lenovo”, a name

derived from the “Le-”from “legend”and “novo”, the pseudo-Latin for

“new”. For a while, Lenovo had a difficult time with post-merger

integration and saw its margins declining. However, with its sales for the

second quarter of 2011 up 23.1% year-on-year, Lenovo became the world’s

third largest PC vendor, boasting the highest growth rate in the global PC

industry in the last seven years.

Lenovo has something to worry about, though. While 80% of sales in its

PC operation, which accounts for 60% of the company’s business, comes

from China, only about 6% comes from the USA. This means that the

dramatic development over the last two years is only attributed to the robust

Chinese domestic market; this blurs the iconic “China Power”image of

Lenovo, which leapfrogged into a global technology brand with the

acquisition of IBM, the leader of the PC industry. In May of 2011, Lenovo

decided to build a new plant through a joint venture with Japanese

electronics company NEC. In addition, by acquiring German computer and

consumer electronics maker Medion, Lenovo strengthened production and

distribution bases in advanced countries and set out to promote the company

and its brand. These efforts have a single reason. Lenovo is driven by a

strong desire to become a multinational company with a world-class brand.

The Chinese government is offering active policy support to aid brand

strategies of Chinese companies. This support came from the idea that it is

imperative to build independent, innovative capabilities and to create world-


025


class brands in order to elevate China’s position from the low-to-middle

levels of the global manufacturing value chain, boosting its international

competitiveness. It is very common for global brands to produce parts and

materials in China and finish processing and assembling there, but China

possesses few products with their own brand power.

The Chinese government added to its 12th Five-Year Plan the goals of

establishing a global sales network and nurturing Chinese brands to a global

level, showing its commitment to becoming a “brand power nation”. Earlier

this year, China’s Ministry of Industry and Information Technology

announced policies to support overseas trademark registration and patent

applications for Chinese brands in order to solidify the footing of Chinese

electronics brands, and to encourage Chinese electronics companies to

Ranking Brand IndustryBrand value

(RMB 100 Mil.)

1 Industrial and Commercial Bank of China Bank 2162.85

2 State Grid ( ) Power 1876.96

3 China Mobile ( ) Telecommunications 1829.67

4 CCTV Broadcasting 1261.29

5 China Life ( ) Insurance 1035.51

6 China National Petroleum Petroleum 1006.23

7 Sinochem Petroleum 958.57

8 Huawei Telecommunications 867.46

9 First Automobile Works (FAW) Automotive 842.66

10 Lenovo Electronics 825.91

Source: china.org.cn (June 30, 2011)

Top 10 of China’s 500 most valuable brands in 2011


026

participate in overseas exhibitions and take part in M&A’s and joint ventures

with foreign companies.

○● Global brands dominating China’s premium market

The 2011 list of China’s 500 most valuable brands, released in June of

2011, shows that most of the highest ranked companies are large, state-

owned infrastructure enterprises (banks, power, petroleum, etc.), including

the Industrial Commercial Bank of China, which ranked first. The only

consumer goods companies on

the list are First Automobile

Works (FAW) (中一汽) at 9th

and Lenovo, which ranked 10th.

On the other hand, the average

market share of the top ten

brands in the Chinese consumer

goods market was 69.9%,

according to the 2010 statistics

of the National Bureau of

Statistics of China. This figure shows that brand consumption has taken root

with Chinese consumers. In terms of home appliances, the market share of

the top 10 brands was 81.3%, showing the strong influence of brands on

consumption. The market share of food brands was approximately 70%,

while that of cultural and office product brands was about 80%.

With few high-end Chinese brands, global luxury brands, such as

Burberry, Hugo Boss, and Armani, had the highest growth in sales in the

women’s apparel market, which grew by almost 30% last year. As wealthy

Chinese come to prefer high-end goods in line with their increasing incomes

and standard of living, their consumption of luxury goods also increases─

a big windfall for foreign companies.

The changing consumption pattern of the Chinese is also well reflected

It is imperative to create world-

class brands in order to elevate

China’s position from the low-to-

middle levels of the global

manufacturing value chain.


027


in their consumption of automobiles, a good example of durable goods with

rising sales. Thanks to Chinese government policies that nurture local

automakers, Chinese automakers, including Chery Motors and Geely

Motors, seemed to make modest progress in the mid-2000s. Later, Chinese

consumers with growing buying power chose cars manufactured by foreign-

invested joint ventures, such as Volkswagen, GM, and Hyundai Motors.

Having been nudged aside in the areas of quality, design, and brand power,

Chinese carmakers have been pursuing strategies to acquire technologies

and brands quickly through M&A’s with companies from advanced

countries. Following Geely’s acquisition of Volvo in 2010, Zhejiang

Youngman Lotus Automobile (浙江靑年) bought shares of SAAB in June

of 2011. Chinese firms’ M&A’s of advanced companies in the consumer

goods sector will increase in the future. In particular, companies in Europe

are expected to be potential target companies, rather than those in the USA,

which has strict M&A regulations for companies having strategic products

or advanced technologies.

○● A brand power nation─a long and treacherous way to go

In the early stage of a brand lifecycle, the brand becomes a guarantee of

quality. In the next stage, the individuality and preferences of the consumer

are well reflected in the brand. Going one stage further, the brand ownership

creates personal identities, and brands create social values and hierarchy. In

the final stage, the values of the brand are extended beyond the product and

become the encompassing image of the company (Tan & Ming, 2003). Only

when companies pursue a range of carefully planned brand strategies over a

long time will they be able to reach a level of brand power as high as that of

Apple. This is why expectations come hand in hand with worries about the

haste of Chinese companies and of the government to satisfy their craving

for brand power.


029

India, no longer a low-end market

Cho Choong-JaeTeam Leader of South Asia TeamKorea Institute for International Economic Policy (KIEP)

Whenever I go to India for business, I make some time to

drop by the shopping malls, where I can feel the

changes happening in India, directly or indirectly,

especially changes in consumption trends and

corporate response strategies.

Some time ago, the look of appliance stores changed completely. First of

all, the television sets on display have changed. CRT TV’s with their

bulging backs are hard to find; instead, an array of flat panel TV’s is on

display. Screen sizes have become much larger, and home theater systems

are shown. In terms of televisions, stores in India look not that different

from those in Korea.

What about food and beverage stores? Coffee products are now on sale

in India, a country of tea; coffee mixes with creamer and sugar have hit the

market. Various types of coffee are displayed according to flavor and area of

origin, including Brazil, Columbia, and Kilimanjaro. Teas with special



030

functions are found on tea selves: tea that is good for health, tea that is good

for the brain and weight-loss, and tea that can be steeped in cold water. In

the dried noodle section, many types of cup noodles are displayed along

with other types of instant noodles.

Liquor stores were once barely noticeable in India, a sober country.

Things have changed now. Many different types of beer can be found in

various containers and volumes. At some stores, wine accounts for more

than half the products on display. There seem to be six to eight types of wine

which are all made in India. Almost all shopping centers have multiplex

cinemas with elegant cafes and cozy rest areas.

Scenery has changed on the road, too. In the past, taxis in Delhi were

mostly Ambassadors made by Hindustan Motors. Now the street is a much

more diversified and upscale scene with various types of taxis, such as Tata

Indica and Indigo, and Hyundai Santro. For passenger cars, Suzuki Maruti

800 was ubiquitous on Indian streets in the past; now there are other types of

vehicles, with a rising number of luxury cars.

○● Craze for luxury goods

In a nutshell, India’s consumption market trend that is identifiable at

shopping malls and on the street is high quality, high-functionality, and high

price. This trend is called “premiumization”. The increasing market demand

for premium brands is called “premiumization of the market”or “trading-up”;

these kinds of products are called “premium products”or “trade-up products”.

By taking the sales of premium products into consideration, it is easy to

recognize how high and strong India’s passion for premium products is. In

the Indian automotive market, passenger vehicles are classified into four to

six types according to engine displacement: mini, compact, mid-size,

executive, luxury, etc. Among them, compact cars have the largest market

share, followed by mid-size cars. Mid-size cars are much higher-end and

more expensive than compact cars. However, the share of compact cars has


031


recently decreased, while that of mid-size cars has noticeably increased. The

market share of compact cars was 75% for January to August of 2009, and

74.1% for the entire year of 2009, but this figure dropped to 72.9% for

January to July of 2010, and to 70.9% year-on-year. It dropped by four

percentage points over the past two years. For the same period, the share of

mid-size cars rose by 1.9 percentage points, from 18.1% to 20.0%.

The same is true for two-wheeled vehicles. Up until 2001, motorcycles

made up 68.7% of the two-wheeled vehicle market, but in 2010, this figure

increased to 76.5%. By contrast, the share of scooters and mopeds (a

combination of motorcycle and bicycle) has dropped from 31.3% to 23.5%

in the same period. Motorcycles are more luxurious than scooters or mopeds

in terms of price, performance, and engine size.

○● A 30% increase in sales of flat panel TV’s and double-

door refrigerators

“Premiumization”in sales trends is well reflected in Diwali, India’s

biggest festival and shopping occasion. According to the Retailers

Source: CEIC

Changing shares of two-wheeled vehicles in India

9080706050403020100

68.7

31.324.2 22.3 20.0 17.6 16.8 20.4 21.6 21.7 23.5

75.8 77.7 80.0 82.4 83.2 79.6 78.4 78.3 76.5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Motorcycles Scooters and mopeds

(Unit: %)


032

Association of India (RAI), the 2010 Diwali season resulted in big gains for

retailers, with sales rising by 50-80% compared to 2010. The rise was

attributed to surges in the price of gold and premium product sales. Also, the

Diwali season saw an increase of 25-30% in sales per retailer for premium

consumer products like flat panel TV’s and double-door refrigerators.

DisplaySearch, a global leader in display market research, predicts that

between 2012 and 2013, the sales of flat panel plasma displays will surpass

that of bulky CRT’s, whose current market share is 75%.

In biscuits and cooking oil, premium products that emphasize health and

convenience are gaining ground. Parle Products, India’s leading

manufacturer of biscuits and confections, had only 15% of the market share

of premium products four years ago, but this figure currently stands at

almost 50%. With respect to household items, consumer spending on

premium household products has recently surged. According to IMRB’s

market research on household consumption in the top eight metropolitan

areas, consumption of premium shampoos in India jumped to 83.1% in the

shampoo category between September 2009 and August 2010, from 68.3%

Source: Image, Retail Report 2009

The share of premium goods in India’s household products market (2008)

(Unit: %)

Laundrydetergent

Toothpaste Shampoo Hair dye formula Soap Skin cream Body cleanser

5015

58

2754

15

32 29

8

64

24

24

52

49

33

18

30

42

28

10

40

Mass products Popular products Premium products


033


between September

2008 and August 2009.

The share of premium

skin creams rose to

13.9% from 6.5% in

the same period, and

that of premium talcum

powders rose to 7.9%

from 6.2%.

According to India’s retail and distribution institution, in 2008 premium

shampoos and hair dye formulas accounted for more than half of total sales

in their categories, and premium laundry detergents and skin creams

accounted for more than 40% of total sales. Premiumization in men’s shoes,

which seemed slow to react to latest trends and premium products, is

happening rapidly. India’s footwear market grows by about 9% annually, but

the growth rate of premium brands such as Bata and Reebok reaches 20%.

Premium footwear accounts for half of total footwear sales in India.

○● Premiumization, faster than expected

Indian consumers prefer premium products for the same reasons as

consumers in other countries and regions. What is distinctive here is that the

rate of premiumization in India is faster and more widespread than

expected. As the middle class has broadened and their consumption pattern

has changed from “saving”to “satisfaction”or “value”, premiumization is

increasing. When consumers are willing to pay extra money for superior

products, the phenomenon of premiumization, or trading-up, begins.

Premiumization accelerates further when people earn more and their desire

for a better life and more convenience becomes stronger, and when

corporate competition becomes fiercer and product lifecycles become

shorter.

A company’s share in the Indian

premium market has become a

determinant for not only short-term

results but also for its long-term

growth.


034

Due to India’s high growth rates since 2003, household income has

increased astronomically. Statistics of Global Insight, a leading provider of

global economic outlook, show that India’s per capita income surpassed

USD 400 in 1996, and took seven years to reach USD 500 in 2003.

However, per capita income has grown by more than USD 100 every year

since 2003, to a record of about USD 1,350 in 2010. With household

income rising, the middle class and their purchasing power are also

expanding. A McKinsey report predicted that the number of Indian middle

class with an annual household income of USD 4,500-11,300 will reach 250

million in 2015, a 450% increase from 45 million in 2005. Indian

consumption patterns are bound to change.

When income increases, consumption naturally increases, resulting in

conspicuous consumption. Consumers are willing to pay a much higher

price for essentially the same product; this is called the Veblen effect. In

addition, the bandwagon effect arises when consumer demand concentrates

on commodities that reflect higher preference. This is a snapshot of the

Indian market. Companies never miss such an opportunity. They rush to

release products with new functions, high quality, and convenience,

accelerating the premiumization even further. A company’s share in the

Indian premium market has become a determinant for not only short-term

results but also for its long-term growth.


035

Korean companies in India,bolstering premium strategies


Imm Jeong-SeongSenior Business Analyst of POSCO Research Institute

○● Home appliance makers─early entry, belated returns

In July 2010, LG Electronics announced that it would shift its business

strategy in India to premium marketing─trimming the number of models in

its CRT range of color TV’s from 54 to 32, and focusing more on LCD and

PDP flat screen TV’s. It also plans to increase production of premium home

appliances, including double-door refrigerators, drum laundry machines,

and stand-alone air-conditioners. LG Electronics noted the reason for the

change to its business strategy: “Our market share is going to fall in the

short term, but in the long term, the Indian consumer market is going

premium.”In India, LG Electronics currently has the largest market share in

refrigerators, laundry machines, air-conditioners, and microwaves, but with

its profits deteriorating, it was forced to make this decision in order to

survive in the fast-paced, ever-changing Indian market.


036

Meanwhile, after some ups and downs since entering the Indian

premium market in 2005, Samsung Electronics is finally smiling. In 2006,

Samsung stopped manufacturing CRT TV’s and shifted its focus to

premium models such as flat screen TV’s─a move criticized in and out of

the company for many years. However, its bold move, removing or reducing

low-technology and low value-added product lines, and changing its product

portfolio to include premium and high value-added products, is now bearing

positive results in its sales, profits, and brand image. In the mobile phone

market in particular, where expansion was twofold that of the general home

electronics market, Samsung was able to surpass LG in sales of 2010 as a

result of its premium strategy.

However, the situation does not allow Samsung to remain complacent.

Japanese companies, such as Sony, Panasonic, and Daikin, which have been

waiting for the Indian premium market to open, are stepping up the

offensive by building large plants in India, localizing products, expanding

distribution channels, and bolstering their brand images. Retreating is not an

option, since India’s low-end market is already dominated by domestic

companies, including Videocon and Onida, and Chinese makers such as

Haier.

○● Auto makers with expanded portfolios

The pattern of changes in India’s automotive market is more

complicated. Just when the market dominated by compact cars was replaced

by one dominated by mid-size cars, India’s Tata Motors rolled out the Tata

Nano, the world’s cheapest car at INR 100,000. Global car makers followed

suit, starting to sell compact cars or mini cars: Toyota (Etios, 1,200cc, INR

400,000), Nissan (mini cars priced at INR 130,000), GM, Ford and others.

Under the circumstances, Hyundai Motors, the second largest car maker in

India, was forced to strengthen its ultra low-cost product line. Hyundai

Motors plans to complete the development of a new 800cc car model priced


037


at INR 200,000. “Hyundai produces high-quality cars. Hyundai has strong

dealer networks and more than 80% brand awareness, so it will continue to

grow in India based on its strong compact car business,”said Park Han-

Woo, the head of Hyundai Motors India (HMI). Meanwhile, in response to

the premiumization of the Indian market, Hyundai plans to manufacture

Santa Fe, Avante, and Sonata in India, becoming the first automaker to offer

a complete lineup in India.

The recent situation, wherein the Indian government’s consistent

increase of interest rates has led to falling demand for vehicles, will be a

good opportunity for Hyundai to strengthen its internal system. Hyundai

plans to unveil new types of cars and focus on promoting its brand

awareness, instead of building new plants. Therefore, Hyundai has a

competitive edge on its competitors, which have to build new plants or

expand existing facilities amidst an economic downturn.

○● High-end and low-end markets─catching two birds at

once

Not all companies should focus on India’s increasing demand for

premium products as the three large Korean companies have done. The

market share of some low-end products accounts for 70-90% of the total

market. Companies should decide their target markets after analyzing

market size, competition structure, and their own competitive edge.

Bain & Co., a consulting firm, advises companies doing business in

India to target both high-end and mass markets. Companies need to pursue

economies of scale in production, distribution, and brand-building. To this

end, it is advantageous for companies to focus not only on the luxury market

but also on the mass market, dealing with a multitude of consumers.

This advice may seem unrealistic for many Korean companies.

However, interpreting the premium strategy might change their minds about

the advice. One Samsung employee in India said that Samsung’s premium


038

strategy is to set the price of its

products at least one dollar

higher than that of its

competitors’. For example,

Samsung sells cheap twin tub

washing machines, but with its

silver nanotechnology, the

product sells for five to six dollars more than its competing products. This is

a strategy of adopting distinct functions (or localization of products), or

employing new technologies, and making use of superior design and good

brand image, thus leading consumers to open their purses.

Identifying Indian consumers’ distinctive characteristics is a good way

to survive in an Indian market with more premium products and stronger

emphasis on brand power. When Indians buy products, they put more

weight on value than price. This is true for all Indians, from the lower class

to the upper class. Indians buy products only when they feel the value of

the product they are paying for. Good function and quality is a must, and

price should be low or reasonable. Due to this attitude of Indians, big

Korean companies, such as LG Electronics, Samsung Electronics, and

Hyundai Motors, which sell almost the same products in India as they sell

in Korea, have been hailed in India for the past decade. Therefore, Korean

small-sized enterprises with inferior brand power to Japanese or Western

companies should roll out products of good quality that enable Indian

consumers to feel the value beyond price, at a cheaper price than their

competitors. Also, they should provide quality customer service. By doing

so, small-sized enterprises will be able to win consumer trust and promote

their brand image.

Indians are talkative and like to collect information. Because India is a

community-based society, recommendations by family and friends are the

largest factor in making purchasing decisions. In other words, word of

After some ups and downs since

entering the Indian premium market

in 2005, Samsung Electronics is

finally smiling.


039


mouth works better than expensive product campaigns, advertisements, or

promotions. To this end, media such as the Internet or social network

services (SNS) are useful. Korean SME’s must seek a strategy of first

targeting consumer groups with great influence, including opinion leaders or

industry leaders, whose words will spread far and wide.

It was reported that what puzzled the employees of Samsung the most

when they launched a premium strategy in India was that they could not

distinguish consumers who would shop premium goods. If Korean

companies want to advance in the Indian market, which still seems to be in

fog, they must study the Indian market thoroughly, including Indian

consumers, competing companies, and distribution structure, as well as

monitor changes in the Indian market meticulously.

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�Indian corruption: characteristics and responses

�Eradicating corruption, a new missionfor economic growth

�Mounting demand for ethical corporatemanagement


043

Indian corruption: characteristics and responses

:: India: Beyond anti-corruption

Santosh KumarBusiness Analyst of POSCO Research Institute, Delhi Office

Transparency International ranked India 87th out of 178

countries, along with countries like Albania, Jamaica, and

Liberia, in the Corruption Perception Index 2010. Corruption is

ubiquitous in India. Corruption, which largely means bribery, is

intertwined with inefficiency, unaccountability, and the feudal mindset of

public administrators. Bribery makes the decision-making process very slow

and sluggish, and the whole system very insensitive. Corruption in the public

sector─bureaucracy, judiciary, and legislature─is so rampant that an aam

admi (common man) believes that corruption is a normal part of governance.

Once, bribes were paid only to do wrong things, but now bribes are paid not

only to do wrong things but also to do right things on time. Corruption exists

at every level of public administration. Private sector corruption is equally

high in India. The Satyam case was a massive private sector fraud.

○● Corruption from lower to higher bureaucracy

Corruption is extremely high in the lower bureaucracy. No application


044

moves without high denomination currency notes attached to it. If an aam

admi has to get a driver’s license, passport, birth certificate, death certificate,

ration card, gas connection, electricity connection, water connection, PAN

card, etc., he normally has to bribe the officials who are in charge of issuing

these documents. For these documents, the bribe amount ranges from INR

100 to 10,000 under normal circumstances. If one pays four to five times

more, he can get a driver’s license on the same day and a passport in 10 days.

There are a number of touts working for the government officials. The

corruption in the lower bureaucracy may sound petty but the instances are

numerous. This is the corruption that hits the aam aadmi directly.

Corruption has become so ingrained and institutionalized in the Indian

system that it looks very normal. Corruption is accepted and tolerated by

saying ‘chalta hai’ (it is OK). If government officers demand bribes, people

think ‘chalta hai’ so long as they do the work. When government officers

demand bribes, it is rare that an aam admi protests. Corruption is not just one

way, but two ways. People are also eager to give bribes to get things done.

In the higher bureaucracy, corruption is camouflaged but much larger in

scale than in the lower bureaucracy. Most of the bigger scams are committed

in the higher bureaucracy. Though the higher bureaucracy corruption does

not directly hit the aam aadmi, it causes loss to the government’s exchequer.

The 2G spectrum scam is the latest example of higher bureaucracy scams.

Unlike corruption in the lower bureaucracy, corruption is not so open and

direct here. The ministers and senior bureaucrats use lobbyists and brokers

to crack deals with interested parties. Companies in the private sector are

often confronted with this kind of corruption when they are looking for

government tenders, approvals, and clearances.

○● Public sector corruption

The popular presumption is that everyone ‘from peons to the PM’ is

corrupt in India. Congress Prime Minister Narsimha Rao was found guilty


045


of scams in the 1990s. Some ministers and bureaucrats of the current UPA

government are in jail for being involved in scams. Certain public

institutions are extremely corrupt.

Civic bodies like panchayats and municipalities are the centers of

corruption at the grassroot level. Ironically, these institutions were built and

strengthened to reduce local corruption and red-tapism. Today, panchayats

get lots of funds from the government for development works in rural areas,

but most of the funds are siphoned off by panchayat officials and

middlemen. City municipalities have the power to grant a number of petty

approvals and clearances, such as approving the design of a house, water

connections, and ration cards. This gives enough scope to the municipal

officials to demand bribes. The Municipal Corporation of Delhi is one of the

most corrupt civic institutions in India.

The police department, which is responsible for protecting people and

enforcing the law, is one of the most corrupt institutions in India. It is very

common that when an aggrieved person goes to the police station to file a

criminal complaint, the police officer refuses to file the complaint unless a

bribe is paid to him. The transport department is another very corrupt

institution. The officials of the transport department make a lot of extra

money from vehicle registrations and from issuing driver’s licenses. Traffic

police in India are equally corrupt. It is very common on Indian roads for a

traffic policeman to stop a vehicle and demand unreasonable documents to

elicit a bribe.

Corruption is very high in the lower judiciary compared to the higher

ones. It is very easy to influence the judges in the lower judiciary, especially

in the countryside. Court clerks are very corrupt. There is a very strong

nexus between the criminals, lawyers and court officers. While I was

working in the Delhi courts, I met a person whose wife, while having an

illicit relationship with a policeman, got her living husband declared dead by

the court.


046

Rural financial institutions, which disburse loans to farmers, are very

corrupt. For example, if the government has sanctioned a INR 50,000 loan

to a farmer, the financial institution will grant him only INR 40,000 and

keep the remaining INR 10,000. The farmers are not less clever. They

happily take INR 40,000 and do not mind giving INR 10,000 to the officer

of the financial institution because they never take a loan with the intention

of repaying it. They will wait for the next election, before which the

government usually waives off farmers’ loans to attract the farmers’ votes. It

is a vicious cycle.

India, rich with mineral resources, has a very lucrative mining business.

There is a very strong mining lobby in Indian politics. The mining

department has the power to grant and renew mining leases to the

companies that dig out the minerals. Usually, there is large-scale corruption

in granting and renewing mining leases. After paying bribes, mining is

allowed by the mining department even after mining leases expire. The

Madhu Koda Case in Jharkhand and the Reddy Brothers’ Case in Karnataka

are burning examples of massive corruption in the mining department.

India’s real estate sector is another corrupt area. There is an extremely

strong nexus between the housing department and private builders. The

private builders bribe the housing department to get approvals and

clearances to develop housing complexes. Sometimes, the builders start

booking flats for a location which actually does not exist. Recently, leading

private builders booked flats and collected millions of rupees from desperate

middle class buyers by selling flats in the NOIDA (New Okhla Industrial

Development Authority) extension. Later it was revealed that there was no

such place as the NOIDA extension. Whenever the housing department

allocates flats to middle class buyers, there are large scale unfair practices of

distributing the flats to influential people or to those who pay bribes. The

Delhi Development Authority (DDA), Delhi’s housing department, is often

blamed for malpractice in allotment.


047


○● Private sector corruption

When public sector institutions are corrupt, it is not possible for private

sector organizations to remain immune to corruption. The Indian private

sector also has massive corruption. There are two aspects of private sector

corruption. Firstly, the private sector pays bribes to government ministers

and bureaucrats to get approvals and licences. The 2G spectrum scam,

wherein the private sector

bribed telecom minister A.

Raja and senior telecom

bureaucrats of the central

government, is the most

perfect recent example of this.

There is a collusive nexus

among politicians, lobbyists,

and businesses. The infamous Radia Tape has exposed how businessmen

like Ratan Tata influenced the appointment of A. Raja as telecom minister

for a second time in the UPA government. Political ties of big business

houses to politicians such as Ambani and Jindal are well known. Secondly,

there is another aspect that shows that there is corruption within private

companies. There are a number of instances like the Satyam Fraud Case and

the Citibank Fraud Case. There are a number of benami (fake) companies

doing business in India. Tax evasion and CEOs inflating the costs of

purchase orders are very common. However, internal corruption within

private companies usually gets suppressed so long as it does not involve the

interests of aam admi.

○● Regional Variation

Corruption is more or less everywhere in India but it is usually higher in

less developed regions like East India and North India than in West India

and South India. Poorer states, such as Jharkhand, Bihar, Orissa, West

The issue of corruption is very

complex and deep-rooted in the

Indian system. It is not easy to

reduce or eliminate corruption all

of a sudden. It will take time, as

reform is needed in many areas.


048

Bengal, and Uttar Pradesh, are comparatively more affected by corruption

than prosperous states, such as Gujarat, Tamil Nadu, and Kerala. High

poverty and high illiteracy may be responsible for higher corruption in the

eastern and northern states. However, there are also exceptions. Prosperous

states like Punjab, Haryana, Delhi, Maharashtra, and Karnataka are also

corrupt.

○● Reasons for corruption

Firstly, one of the main reasons for corruption in India is the supply-

demand mismatch. Supply is lower than demand. This supply-demand

mismatch is mostly artificial. For example, nowadays more and more

Indians are travelling abroad. So, there is more and more demand for

passports. However, the passport counters in the passport office are not

proportionate to the demand. There is a very long queue in the passport

office. In order to avoid the long queue, people pay bribes. Secondly,

political leaders are elected, but elections themselves are full of corruption.

Almost all political parties issue tickets to candidates after taking huge

money. How can these candidates be expected not to be corrupt once they

become ministers? And where the ministers are corrupt, the bureaucrats will

follow suit. Thirdly, Indian people not only tolerate but also promote

corruption. It is rare that people protest against corruption. They accept it as

a normal part of affairs. People also willingly offer bribes to government

officials as a sign of gratitude. Fourthly, in the rush for development, the

Indian education system has become technical and job-oriented. Moral

education has significantly declined in schools and colleges. Family does

not play an important role in urban areas. Values and ethics are not so

emphasized by family or schools anymore. Money-making has become the

goal of life. Fifthly, laws and procedures are very complex in India. It is not

easy for an aam admi to understand laws and procedures. This necessitates

middlemen. Sixthly, the salary of government officials is comparatively low


049


in India. They do not feel satisfied with their incomes and are tempted to

resort to corruption. Finally, illiteracy is also one of the main reasons for

corruption. It is easy to cajole illiterate people into paying bribes by scaring

them with the law.

○● Responses of people

In India, the response of the people towards corruption has been largely

one of tolerance and acceptance. Whenever corruption has been exposed in

the government, the people have voted out that government. Otherwise, the

people have accepted corruption as part of their lives. Though there are laws

such as the Prevention of Corruption Act, 1988, they have been largely

ineffective in tackling corruption due to the number of loopholes. Petty

government officials are punished under the law, but not all of the big fishes

are targeted. However, recent exposure of a number of big scams in the

central government, such as the 2G spectrum scam, Commonwealth Games

scam, and cash-for-vote scam, has awakened the public and raised the issue

of corruption within society.

An NGO called India Against Corruption (IAC), led by Anna Hazare,

Arvind Kejriwal, Kiran Bedi, and others, has sparked a people’s movement

against corruption. The IAC is demanding the central government and

Parliament to pass the Jan Lokpal Bill, 2011 (People’s Ombudsman Bill,

2011) to tackle corruption from peons to the PM level. Anna Hazare

conducted hunger strikes twice (in April and August) to force the central

government to adopt the Bill. The hunger strikes of Anna Hazare got

massive support across India, from people of all walks of life. The Anna

Hazare movement has awakened people to the truth that enough is enough

and now is the time to fight corruption. Parliament is now considering

making a strong anti-corruption law. This time, the people’s response to the

anti-corruption movement has been enormous. However, corruption

continues, especially at the lower levels.


050

○● Implications

The issue of corruption is very complex and deep-rooted in the Indian

system. It is not easy to reduce or eliminate corruption all of a sudden. It will

take time, as reform is needed in many areas. The first good thing that has

happened against corruption is that the people, who used to consider it normal,

have become aware that corruption is problematic. They now understand that

not paying bribes to get things done on time is their basic right.

Corruption is a major political issue, and it impacts voting patterns. It

impacted the voting pattern of people in the elections in Bihar (2010) where

people voted back the corruption-free government of Nitish Kumar. As a

result, Nitish Kumar has gifted Bihar India’s first law that provides time-

bound services to the people, the Right to Services Act, 2011. It also

impacted the assembly elections in Tamil Nadu and West Bengal (2011).

Corruption is going to be a major political issue in the forthcoming

assembly elections in Uttar Pradesh and Gujarat in 2012. Corruption will

dominate the Lok Sabha elections, though they are far off in 2014. Recent

media surveys show that due to corruption the popularity of the congress-led

UPA government has gone down significantly, whereas that of the BJP has

increased significantly.


051

Eradicating corruption, a newmission for economic growth


Kim Mi-SuBusiness Analyst of POSCO Research Institute

Before I went to India to study, people who had lived in India

recommended that I bring small presents like chocolates or

candies. They said that if I gave them to the school

administrative staff, everything would go smoothly. After

living in India for four years, I understand the necessity of such presents. It

is an Indian custom to give a token of appreciation, even for public affairs.

Each year, the World Economic Forum (WEF) publishes the Global

Competitiveness Index (GCI). India ranked 42th in 2006 according to the

GCI, but slid to the 56th position in 2011. Competitiveness is determined by

various pillars, including infrastructure, institutions, macroeconomic

environment, higher education, and training. The institutions pillar measures

the extent of bribery and corruption, and corporate ethics among other

elements. India ranked 83rd on the irregular payments and bribes indicator

in 2010, the first year that category was included, but plunged far below


052

average to 95th place in 2011. India’s corporate ethics ranking dropped from

61st place in 2008 to 86th in 2011. India’s fall in these rankings is largely

attributed to a series of big scandals in the government and major companies

that became apparent at the end of the last decade.

○● A further drop in the corruption rankings

In a country like India, with rampant bureaucracy, large-scale projects

involve lengthy and complex procedures for acquiring approvals and

licenses. Therefore, many companies pay bribes, under the name of

“express fees,”to public officials in order to run business smoothly and

effectively. In the short term, this kind of bribe might work as lubricant and

have a positive impact on business activities and the economy. In the long

term, however, it harms India’s business environment.

In a survey of Indian businessmen conducted by KPMG Consulting in

2011, nearly 99% of respondents said corruption impedes India’s economic

growth. Comparing the 2011 survey results from China and India, China’s

corruption and bureaucracy scored 8.5 and 10.9 points, respectively, while

those of India scored 16.7 and 13.5 points, respectively.

In India, where bribery has already become a regular practice in doing

business, selecting players through fair competition involves much hassle.

This has been especially true in tenders for massive real estate projects,

including infrastructure construction, and the controversial 2G spectrum

allocation. According to the KPMG report mentioned above, many Indian

businessmen believe that the real estate and construction sectors are most

prone to corruption. This implies that bribery is rampant in massive

construction projects.

The winner of a bid, after bribing public officials, is apt to do

substandard work in order to make up for the unexpected increase in costs,

using inferior construction materials, for instance. Also, businesses that fear

cost increases are often reluctant to invest in infrastructure. In this way,


053


bribery hinders the improvement of India’s infrastructure and slows

economic growth.

○● A huge sum in secret slush funds in Swiss banks

It was such events that led to the 2G spectrum scandal, which involved

Tata Group and Manmohan Singh, whose public image had always been

clean. In 2008, the Indian government issued licenses to inexperienced

companies, bypassing fair competition for 2G spectrum allocation. This

fraudulent practice came to public attention in the process of 3G spectrum

auctions. Key figures involved in this scandal, including the prime minister,

were denounced by the Indian public for damaging the national image and

incurring huge financial losses.

Had the auction process for 2G spectrum been fair, the Indian

government would have raised approximately USD 40 billion in additional

tax revenues. This scam cancels out all significant efforts made by the

Indian government to secure tax revenue and overcome chronic fiscal

deficit.

Indian slush funds hidden in Swiss banks have also brought up endless

Year Infrastructure Corruption Bureaucracy

2008 25.5 10.1 14.6

2009 24.6 11.0 14.0

2010 18.5 17.3 14.4

2011 17.0 16.7 13.5

Note: From a list of 15 factors, respondents were asked to select the five most problematic and rank themfrom 1 (most problematic) to 5. The results were then tabulated and weighted according to theranking assigned by respondents.

Source: The Global Competitiveness Report, WEF

The most problematic factors for doing business in India


054

debates. The exact amount of

money held in Swiss banks and

the identities of accountholders

have been strictly unknown until

recently. However, while

discussions were taking place on

revision of the Double Taxation

Avoidance Agreement (DTAA)

between India and Switzerland,

it was disclosed that Indians owned the largest number of foreigner-owned

secret accounts in Switzerland. Suspicion is building that the leaders of

society, including high ranking public officials and business leaders, have

sent money overseas to evade taxes and form slush funds.

Reportedly, USD 1.45 trillion of Indian money is deposited in Swiss

banks, which is six times the external debt of India, or 90% of Indian GDP.

This huge sum of money, if it were to return and circulate within the Indian

economy, could help external debt redemption and increase investment,

giving positive impetus to economic growth.

○● Triggering macroeconomic instability

Corruption, which is closely related to increased investment costs and

uncertainty in decision-making, eventually results in a decrease in

investment. Bribes that investors pay to get approvals and licenses for

projects lead to a rise in project costs and eventually to falling profitability.

As it is hard to predict the size and outcome of bribes, uncertainty in

decision-making also mounts.

With its rapidly growing economy, India came to be recognized as one

of the most attractive FDI destinations, along with China. Since then, FDI

inflow into India has increased profoundly. In India, FDI inflow stood at

USD 4.03 billion in 2000, but increased 10-fold to USD 37.84 billion in

In order to eradicate corruption,

transparency in administrative

processes needs to be maximized,

and fundamental measures must

be taken to eliminate bureaucratic

red tape.


055


2008. However, recorded FDI inflow was USD 30.3 billion in the fiscal year

2010, a 25% reduction year-on-year. External factors such as the global

economic slowdown played a role in shrinking FDI inflow, but internal

factors also had a part: the Satyam accounting scandal and the

Commonwealth Games scandal injured the confidence of foreign investors,

who feared uncertainty in the investment process.

Over time, the number of people participating in demonstrations

supporting the anti-corruption bill has grown. Media at home and abroad

have highlighted the significance of this bill. The government finally

accepted public opinion and agreed to introduce the anti-corruption law, but

foreign companies and investors have learned that social and political

instability in India can influence investment as well as the overall economy

of the country. With Indian corruption cases making headlines, the Indian

government’s failure to prove its determination to eradicate corruption will

have detrimental effects.

○● Barriers to poverty eradication

Corruption is also standing in the way of addressing economic

inequality and poverty. Even though the Indian government implements

various policies to solve the problems of inequality and poverty, corruption

among the public officials who implement these policies reduces what

rightfully belongs to the people.

The Indian government is currently carrying out policies to provide the

underprivileged with food in an effort to address the poverty issue.

However, it turns out that 80% of the food provided by the government does

not reach the people in Bihar, one of the poorest states in India. The same

failure occurs with the National Rural Employment Guarantee Act

(NREGA), which guarantees by law one hundred days of employment to

adult members of any rural household willing to do public work-related

unskilled manual labor at the statutory minimum wage. One hundred days


056

of employment is not assured, nor are wages duly provided for work already

done.

In addition, government expenditure tends to be concentrated in projects

prone to bribery and corruption (e.g. weapons procurement and

infrastructure construction), rather than in policies that address economic

inequality (e.g. social welfare and education). The loop of corruption not

only impedes economic growth by creating mayhem out of government

policies, but it also magnifies political and social instability.

As the Indian public has become actively involved in the anti-corruption

movement led by social activist Anna Hazare, the severity of Indian

corruption has come to light. Even though the government has pledged to

introduce the anti-corruption law, India has a long way to go to rid itself of

rampant corruption. If the government, the public, and corporations,

recognizing the problem, can work together, there is room for slow and

gradual improvement.

In order to eradicate corruption, transparency in administrative processes

needs to be maximized, and fundamental measures must be taken to

eliminate bureaucratic red tape. Consequently, companies will be able to do

business and compete with one another in a fair environment, and increased

efficiency of the overall economy will result in more investment, leading to

economic growth. This will provide a foundation for reduced economic

inequality, creating a virtuous cycle of economic growth. The Indian

government has set a target of 9% economic growth in its 12th Five-Year

Plan. There is growing consensus that achieving this target will be difficult

without eradicating corruption.


057

Mounting demand for ethicalcorporate management


Imm Jeong-SeongSenior Business Analyst of POSCO Research Institute

Anti-corruption is a hot topic now in India. Corruption has

been a universal problem across all ages. China, Russia, and

Brazil are mulling over ways to address corruption, while

advanced Western countries, including the UK, the USA,

France, Spain, and Italy, are facing a series of corruption scandals.

Corruption has become such a global problem that the United Nations has

made the Anti-Corruption Accord.

In May of 2010, India ratified the UN’s Anti-Corruption Accord. India

also signed the G20 Anti-Corruption Action Plan in 2010 in an effort to

boost its status as a major power.

After a series of major accounting scandals, such as those of Enron,

WorldCom, and Tyco, broke out in the 2000s, advanced countries have

enacted laws to curb unethical behavior and bribery in the private sector. In

2010, shortly after the enactment of the US Foreign Corrupt Practices Act,


058

the UK enacted the Bribery Act. These are both measures for strengthening

the monitoring of fraudulent practices in the private sector rather than the

public sector, and making the business environment fairer and more

transparent.

The Indian government has recently announced that it is considering the

introduction of an anti-corruption law for foreigners. If this law is

introduced, foreigners who are caught giving bribes in the process of

forming a business contract in India will be punished by up to seven years in

prison. India’s Ministry of Finance also set out to renegotiate the Double

Taxation Avoidance Agreements (DTAA) with foreign governments in

order to prevent illegal money laundering and strengthen the taxation

system; foreign companies should be aware of this.

○● The business world: “Deregulation will eradicate

corruption”

In fact, India’s corruption level has declined significantly since the

economic reform of 1991, because regulations on foreign currency,

monopoly and oligopoly, industry permission, and import approvals have

been lifted. However, unnecessary regulations are still ubiquitous in India.

People are raising their voices, saying that corruption will lessen when the

red-tape disappears.

K. M. Birla, the chairman of Aditya Birla Group, the fourth largest

company in India, said that India seemed to have returned to the “licence

raj”of the past, because large-scale projects required a plethora of approvals

from various government agencies and institutions. He also stated,

“Government policies and rules of the game are unclear and changing too

frequently, and it takes years for them to be amended, so the government

should speed up reforms.”

B. Muthuraman, Vice Chairman of Tata Steel and President of the

Confederation of Indian Industry (CII), proposed adopting Single Window


059


Clearance and improving

the distribution and

pricing mechanisms of

natural resources such as

iron ore and coal. He

made it clear that India

will be able to improve its

competitiveness as a

global manufacturing base only when the government makes laws and

regulations simple and transparent.

S. P. Hinduja, the chairman of Hinduja Group, a non-resident Indian

(NRI) company, believes that corruption influences corporate governance,

and also has a negative impact on social engagement, inclusive economic

growth, FDI inflow into India, and domestic security. For this reason, he

argues vehemently that efforts should be made to break collusion among

politicians, public officials, and businessmen, who have been the only ones

to benefit from India’s rapid growth so far. He has proposed practical

alternatives to corruption: for example, that the construction of social

infrastructure, including education, public health, and water management

infrastructure, should be a prerequisite of granting approval for mega-sized

industrial projects.

Indian business leaders hope that the nation-wide interest in anti-

corruption efforts triggered by Indian activist Anna Hazare create an

opportunity to reduce red-tape and make policies and decision-making

processes more transparent.

According to the global credit rating agency Fitch, India is not as corrupt

as China or Russia, but it suffers from excessive regulation and tax laws.

○● Companies require ethical management

According to a survey conducted by KPMG Consulting in 2011, 68% of

Indian business leaders hope that

the nation-wide interest in anti-

corruption efforts create an

opportunity to reduce red-tape and

make policies and decision-making

processes more transparent.


060

respondents believed corruption exists in the private sector, and 42% of

respondents indicated that bribery is considered an acceptable behavior in

industry. Thirty-two percent of respondents were of the opinion that the real

estate and construction sectors are most prone to corruption; 17% of

respondents said that the telecom sector is the most corrupt. In all three of

these sectors, government and political intervention is high, and with large

capital investments, multi-level approvals, and complex processes, there is

much room for corruption.

What is interesting here is that the social development sector, which is

supposed to implement plans for education of the poor and poverty

eradication, ranked third. This suggests that non-governmental organizations

(NGO’s), whose purpose is to achieve social justice, are not free from

corruption in India.

KPMG suggested preventive mechanisms that organizations could adopt

in order to curb corruption: a comprehensive and strictly enforced code of

conduct, communicating zero tolerance for corruption; a structured whistle

blowing mechanism for reporting potential bribery and corruption issues; a

comprehensive and periodic risk assessment mechanism, including third

party audits with specific reference to corruption related risks; a regular

monitoring mechanism to address issues arising from bribery and corruption.

Note: * - Education, poverty eradication, ** - Bank, insurance, mutual funds, etc.Source: KPMG, Survey on briverty and corruption, 2011

Real

estate &

Constru-

ction

Telecom

muni-

cations

Social

developm

ent*

Financial

services**Defense

IT/ITeS/

BPO

Energy

and powerOthers Total

32% 17% 13% 10% 9% 6% 5% 9% 100%

A survey on the most corrupt sectors in India


061


KPMG believes that social control is the best way to prevent any form

of unethical practice, including bribery and corruption. Following are key

examples of social control: adequate training for employees who enumerate

unacceptable practices; strong communication mechanisms that enable

bottom-to-top feedback and voicing of concerns; and promotion of an

ethical culture in the organization.

CII has recently unveiled an eight-point Code of Business Ethics and

urged its 8,000 member companies to comply. CII views that all business

practices and conducts should have served the national interest as their

foremost objective. The Code of Business Ethics includes the following: do

not use official position to influence any person or body for any personal

gain or favor; perform due diligence specific to anti-bribery and corruption

when evaluating mergers and acquisitions and joint ventures; no employee

or company representative shall pay, or offer to pay, a bribe, or provide any

other object of value to any third party, public or private, with whom the

company is doing business for the purpose of obtaining benefit; whistle-

blowing should be encouraged and competition should be promoted.

○● The most ethical companies in India

Generally, Tata Group’s representative subsidiaries, including Tata Steel,

Tata Motors, and TCS, and major IT software companies, including Infosys

and Wipro, are regarded the most respected companies in India. On the

other hand, Satyam Computer Services, which was caught in an accounting

fraud scandal in 2009, is considered one of the most unethical companies in

India. Among conglomerates, Reliance Group has a negative corporate

image because it has been known to have enjoyed various benefits from

long-held collusive ties with political powers.

Multinational companies, including KFC and Coca Cola, have been

aggressively targeted by India’s NGO’s, and their unethical business

practices, using harmful substances and causing pollution, have been


062

reported by the media. NRI enterprise Vedanta lost permission to mine

bauxite in Orissa after NGO’s revealed to the international community that

Vedanta had tried to forcibly evict an indigenous tribe from their centuries-

old homeland.

One American institution has been selecting World’s Most Ethical

Companies since 2007 in order to promote corporate ethics, corporate social

responsibility, and sustainable management. The selection process involves

review of approximately 3,000 companies from over 100 countries and 36

industries.

In 2007, the first year of the designation, the companies that made the

final cut included Hindustan Lever and Tata Group, which have active

corporate social responsibility practices. However, Ratan N. Tata, the

chairman of Tata Group, recently fell from grace after his company was

involved in the 2G telecom scandal. No Indian companies were included on

the list from 2008 to 2010, but the Housing Development Finance

Corporation Limited (HDFC) was selected in 2011. (No Korean companies

have been included on the list so far.)

HDFC, though unfamiliar to Koreans, is India’s leading housing finance

company, providing a range of loans to Indians. This non-banking financing

company is now 100% privately owned. HDFC had good marks in

transparent corporate governance, ethicality, and transparent transaction

practices. HDFC is also actively engaged in social responsibility programs.

Close to 190 social and developmental initiatives, including medical

services, were supported during FY 2010-11, allocating funds amounting to

INR 88.8 million.

○● Korean companies’ need for increased transparency

Indians are ideological and idealistic. Therefore, in many cases, the

direction of the Indian government’s policies, laws, and regulations are

comparable to those of the most advanced countries. It is natural that the


063


Indian government and the people ask private companies to pursue ethical

management and social responsibility, and it is highly likely that this will be

legally mandated. Generally, higher standards are imposed on foreign

companies than on Indian companies. That is why the Indian government

recently conducted a stringent tax investigation of and collected a great sum

of taxes from foreign companies doing business in India.

In this regard, it is advisable for Korean corporations doing business in

India to be more transparent in internal accounting and tax payment. They

should also be fair and unbiased in their relationships with suppliers,

customers, and employees; and in dealings with competitive relations and

environmental issues.

When Korean companies begin a relationship with the Indian

government, it is desirable to receive approvals and licenses in a fair

manner, even though it might take more time than it would through

excessive lobbying. As corporate citizens, Korean companies should

actively practice corporate social responsibility, and prepare a code of ethics

tailored to their companies, taking the lead in ethical corporate practices.

IIssssuuee aannaallyysseess

�Will China be a lifesaver in the eurozonecrisis?

�Resurfacing China-Brazil conflicts

�India’s quiet diplomacy seeking apermanent UN Security Council seat

�Chinese private enterprises: advances and drawbacks

�The Bohai Bay oil spill and China’senvironmental risks

�The heated Indian nuclear energy market


067

Will China be a lifesaver in the eurozone crisis?

:: Issue analyses

Pyo Han-HyungBusiness Analyst of the Department of Finance and Tax ResearchKorea Small Business Institute

The European sovereign debt crisis, which began with Greece’s

request for a rescue package in May 2010, became more

severe with rescue plans for Ireland in November 2010 and

Portugal in April 2011, and the fall of the sovereign credit

ratings of Spain and Italy. There are now threats of a decline in the French

sovereign credit rating.

Since the European crisis spilled over to private-sector financial

institutions in the middle of August, financial institutions have set out to

secure short-term funds in order to minimize the impact of the liquidity risks

in the international financial markets. Under these circumstances, the

uncertainty surrounding the global markets following the 2008 global

financial crisis is being amplified. What is worse, with a high chance of

Greece defaulting and leaving the eurozone, there is a possibility of a

eurozone break-up, which could create chaos in the global economy.


068

○● Eurozone facing vast challenges

Some measures for overcoming the eurozone financial crisis are being

implemented or discussed: the Covered Bond Purchase Programme (CBPP)

of the European Central Bank (ECB), expansion of the European Financial

Stability Facility (EFSF), and the issuance of eurobonds. However, drawing

a consensus on these measures within the eurozone is difficult, thus they are

of little help in overcoming the European financial crisis.

Upon formation of the eurozone, Article 123 of the EU Treaty forbade

the European Central Bank (ECB) to directly purchase public debts. This

was a measure to uphold morality among member states, keeping them from

expecting bailouts to support loosely-managed national finances. However,

after the Greek crisis in May of 2010, the ECB bought about EUR 40 billion

of Greek debt. As interest rates on Spanish and Italian bonds reached 6%

amidst the rising possibility of a decline in their sovereign credit ratings, the

ECB was forced to buy about EUR 110 billion of sovereign bonds issued by

Spain and Italy. The ECB has reportedly purchased approximately EUR

140-150 billion in sovereign bonds issued by eurozone countries.

BNP Paribas, France’s largest bank, estimated that the ECB would have

to purchase roughly EUR 3 trillion of government debt to ensure the

stability of the eurozone, but the maximum amount the ECB could purchase

was only EUR 500 billion.

With the ban on direct purchase of debt instruments by the ECB, the

eurozone cannot depend on the ECB’s sovereign bond purchases to

overcome the eurozone financial crisis. Hyun-Song Shin, a professor at

Princeton University, stated that unless the ECB introduces measures of

quantitative easing, as the US Federal Reserve Board did through a massive

sovereign bond purchase, it is only a matter of time until the eurozone

breaks up.

In May of 2010, the eurozone established the European Financial

Stability Facility (EFSF), a risk management body, in order to prevent


069

:: Issue analyses

sovereign bankruptcy of some member states from spreading to other

member states. The EFSF started with a EUR 250 billion emergency rescue

fund for vulnerable countries, but the fund has recently been increased to

EUR 440 billion. Its use has expanded to include the purchase of sovereign

bonds from financially distressed countries within the eurozone, and the

injection of capital into financial institutions in the private sector. However,

it takes much time to increase the size of the fund and to expand the use of

the fund, because approval of the 17 member states is required for the EFSF

to issue bonds to financially troubled countries in the eurozone. The

approval of Germany, the largest contributor, is especially important. At the

end of September, global stock markets fluctuated violently, awaiting a

German parliamentary vote on the eurozone rescue package.

Creditor

Debtor

Greece Portugal Spain Italy Total

Greece - 1 2 4 7

Portugal 76 - 194 21 291

Spain 7 632 - 233 873

Italy 31 30 222 - 282

France 424 201 1,050 2,933 4,608

Germany 254 272 1,359 1,212 3,097

UK 105 182 800 496 1,583

Total 1,018 1,454 4,722 5,855 13,050

Source: BIS

Risk exposure of heavily indebted eurozone nation (by the end of 2010)

(Unit: EUR 100 Mil.)


070

JP Morgan and Citigroup

have determined that if the

ECB cannot buy sovereign

bonds, the EFSF must

provide more than EUR 2

trillion to ensure the stability

of the eurozone. Some have

suggested expanding the EFSF by taking out loans with the EFSF’s credit

rating (so-called “leveraging”) if each country cannot increase its

contribution. However, some people predict that with the EFSF’s credibility

being called into question, issuing enough bonds, even with the guaranteed

commitments of eurozone member states, will be challenging.

Since the end of 2010, there has been a growing consensus that issuing

eurobonds is the best way to prevent the eurozone crisis from spreading.

Eurobonds are bonds jointly issued by the countries that use the euro. If

eurobonds are issued, Greece will be able to replace its sovereign bonds

with eurobonds, and finance its debt at much lower interest rates. Greece

will then be able to reduce borrowing costs, and eventually escape

sovereign default.

However, many people agree that the issuance of eurobonds will not be

easily realized in the near future, because financially sound countries such

as Germany are highly likely to oppose the issuance of eurobonds. In other

words, the issuance of eurobonds is not a very feasible quick-fix, and will

not be possible without an integrated treasury department of eurozone

countries.

○● China could come to the rescue, but with demands

The ECB’s increased purchase of sovereign bonds, the expansion of the

EFSF, and the issuance of eurobonds are unlikely solutions for the short term.

Under these circumstances, if Greece defaults and leaves the eurozone, the

There is a rising call for China, which

has as much as USD 3.2 trillion in

foreign reserves, to intervene to save

the eurozone.


071

:: Issue analyses

possibility of panic in the global financial market cannot be ruled out.

Jacques Sapir, a professor at the Ecole des Hautes Etudes en Sciences

Sociales in Paris insisted that “We should accept the eurozone break-up as an

established fact, and prepare the eurozone for this inevitability.”

In the meantime, there is a rising call for China, which has as much as

USD 3.2 trillion in foreign reserves, to intervene to save the eurozone. The

rescue packages for Greece, Ireland, and Portugal total EUR 319.5 billion

(or USD 439.9 billion), so China has enough power to fund the rescue plan.

On October 28, the Financial Times quoted a source saying that “China

could be willing to contribute USD 50-100 billion to the EFSF; if conditions

are right, then something a bit over USD 100 billion is not inconceivable.”

This means that if China set out to become the lifesaver of the eurozone,

how much China would support the EU would depend on whether the EU

accepted China’s conditions. Many people are skeptical that the eurozone

would be able to provide what China would ask for in return. Most likely,

China would request the opening of the European market at higher-levels,

and the lifting of the embargo on state-of-the-art technology; the eurozone

would be hard pressed to accept such requests.

Now that the eurozone has agreed on an orderly default with a 50%

write-off of Greek debt in order to overcome the Greek crisis, the possibility

that China would suffer a loss and come to rescue seems slim.

○● Instability in domestic markets keeps China from

stepping in

There is the opinion that China is not in a position to offer help due to its

domestic economic conditions: the insolvency of its financial institutions

and the possibility of a real estate bubble burst. Due to growing distrust of

China’s financial system, the stock prices of China’s four major banks

dropped by about 35% since the beginning of the year, and by 25% since

September. On October 10, Central Huijin Investment, the domestic arm of


072

China Investment Corporation (CIC), bought 3.51 million shares of Bank of

China (BOC), 14.58 million shares of Industrial Commercial Bank of China

(ICBC), 7.38 million shares of China Construction Bank, and 39.07 million

shares of Agricultural Bank. Although Central Huijin Investment has not

disclosed further plans, it has shown a commitment to continue buying

shares in the open market. Since the global financial crisis of 2008, ICBC,

China Construction Bank, and Agricultural Bank have recorded higher

market values than that of Citigroup. The operating profit of ICBC in 2010

was double that of HSBC. However, the possibility of the insolvency of

these financial institutions is growing amidst the rising threat of China’s real

estate bubble bursting. China might have to use its reserve funds to save its

domestic market first.

It is highly probable that China will use the difficulties facing private

financial institutions in the eurozone as an opportunity to enter Europe: it

will try to buy financial institutions in the eurozone at low prices. CIC

invested in ABN AMRO, Citibank, and Blackstone around 2007, only to

suffer huge losses caused by the subprime mortgage crisis. Therefore,

Chinese financial institutions are not expected to invest in the eurozone

aggressively, but they will be sure to find ways to turn risk into

opportunity.


073

Resurfacing China-Brazil conflicts

:: Issue analyses

Oh Jung-HoonSenior Business Analyst of POSCO Research Institute

In November 2011, the Brazilian government announced that it

would raise by 30% the tax on vehicles that use less than 65%

locally produced auto parts. Brazilian Finance Minister Guido

Mantega explained the tax hike as a necessary control measure in

response to the great impact of imported cars on the domestic automotive

and auto parts industries. The market share of imported cars, which stood at

5% in 2005, has risen to 25% in 2011. Chinese automakers strongly oppose

such a move. They contend that Brazil is aiming directly at the import of

complete vehicles and auto parts from China, which have increased due to

the strong Brazilian real. Finding that using 65% locally produced auto

parts would be difficult, China's JAC and Chery Motors, which are

building factories in Brazil, have requested that the Brazilian government

delay implementation of 30% tariff on imported cars. However, the

Brazilian government seems unlikely to change their plans. Conflicts


074

between China and Brazil are spreading to the automotive industry from

the steel and textile industries.

○● A 20-fold increase in bilateral trade over the past decade

No bilateral trade relations are of greater mutual interest than those

between China and Brazil. Brazil has what China does not have, and vice

versa. Brazil provides China with what it needs the most: iron ore and

crops. In turn, China is the largest provider of manufactured goods and

capital to Brazil.

As recently as ten years ago, the economic relationship between China

and Brazil was barely worth noting. Since President Lula began actively

seeking to improve relations with China in order to reduce Brazil’s

dependence on the USA, bilateral trade between the two countries has

dramatically improved. Brazil-China trade was only USD 2.3 billion in

2000, but surged to USD 56 billion in 2010. China surpassed the USA to

become Brazil’s largest trade partner in 2009, and Brazil became China’s

10th largest trade partner.

China-Brazil bilateral relations stand out in investment, too. In 2010,

China became the largest investor in Brazil for the first time. Out of the

USD 48 billion of investment in Brazil, China’s investment totaled USD 17

Source: The Korea International Trade Association (KITA)

China’s exports to Brazil

300

200

100

012 14 15 21 37 48

74114

188141

245

2000 2002 2004 2006 2008 2010

(Unit: USD 100 Mil.)


075

:: Issue analyses

billion. A good example of Chinese investment in Brazil is Chinese refiner

Sinopec’s purchase of a 40% stake in the Brazilian unit of Spainish oil

company Repsol for USD 7.1 billion. Experts have estimated that China’s

actual investment in Brazil would be larger if investments through tax

havens such as Luxembourg were considered.

○● Brazil fears dying manufacturing

China and Brazil seem to comply sincerely with the principles of

international division of labor, based on the law of comparative advantage.

They are both members of BRICS, and share the responsibility of

representing the interests of emerging countries in the G20. The two

nations have formed a common front on many issues so far, from economic

cooperation to the issues of the Middle East, the financial crisis, and

climate change.

However, it is a widespread perception that the close relationship

between Brazil and China is slowly coming to an end. Grumbling voices

are mainly coming from Brazil.

Brazil is one of the few countries creating a trade surplus from its trade

with China. In 2010, 84% of Brazil’s exports to China were raw materials,

including iron ore and soybeans, while 98% of China’s exports to Brazil

were manufactured goods. Bolstered by skyrocketing raw materials prices,

Brazil’s trade surplus with China has continued to grow. On the other hand,

Brazil is complaining that its manufacturing industry is on the verge of

demise because of increasing imports of Chinese manufactured goods. In

the manufacturing sector alone, Brazil’s trade deficit with China rose from

USD 600 million in 2003 to USD 23.5 billion in 2010.

In March of 2011, the Brazilian Textile and Apparel Industry Association

(ABIT) stated that most of the traditional costumes and masks used for the

Samba Carnival 2011 were made in China. The announcement sent shock

waves across the nation. Only five years ago, all of the products used for the


076

carnival were made in Brazil. Even Brazilian flags are now mostly

manufactured in China. Traditionally, the manufacturing of Brazilian flags

was one of the larger businesses in Brazil, but most local manufacturers have

shut down in the face of China’s low price rush.

The steel industry is also alert to risk. At a conference held in June last

year in Sao Paulo, Marco Polo de Mello Lopes, chief executive of the Brazil

Steel Institute, asked the government to impose import tariffs on Chinese

steel materials, citing the adversities of the domestic steel industry. In 2010,

Brazil’s imports of Chinese steel materials reached over 10 million tons,

greater than the nine million tons of annual production of Usiminas, Brazil’s

largest steel company.

○● Brazil wary of China’s direct investment

Brazil is cautious of China’s direct investment. According to Sao Paulo

Newspapers, China’s direct investment in Latin America in 2010 was

estimated at USD 29.5 billion. This figure is two times bigger than China’s

direct investment in Africa, which was USD 14.9 billion. The majority of

China’s investment in Latin America is concentrated in Brazil, and most of

that is in primary products, including oil and iron ore. With a lack of

domestic assets and technology, attracting foreign capital is very important

for Brazil’s economic growth. However, experts in Brazil think that China’s

investment in Brazil is not helpful in developing local industries or easing

trade imbalance, because it is mainly concentrated in primary products.

Since China’s recent purchase of a large tract of land in Brazil, people

have been increasingly wary of the Chinazation of Brazilian land and of

environmental damage. China’s purchase of Brazilian land is concentrated

in six states, including Goias and Bahia; investment contracts worth BRL 16

billion (or USD 8.9 billion) have been concluded so far. In June, the

Brazilian government sent a bill to Congress that requires government

approval for foreign purchases of more than 5 hectares of land. However,


077

:: Issue analyses

China is expected to

continue securing Brazilian

farmlands by employing

diverse strategies, including

purchasing land under the

names of local residents,

collaborating with local

enterprises, and securing

long-term leases. It seems the conflict over Brazilian farmlands will

continue.

○● Much lip service at the China-Brazil Summit

The China-Brazil Summit held in Beijing in April last year drew keen

attention because it began amidst mounting conflicts between the two

nations. On the surface, the two countries seemed to focus on cooperation

rather than conflicts. Brazil’s new president, Dilma Rousseff, and Chinese

President Hu Jintao agreed on further economic cooperation to boost

bilateral trade and investment.

At the summit, some of Brazil’s requests were accepted, and other

practical achievements were made. China pledged to increase imports of

various Brazilian products, including raw materials. During Rousseff’s visit

to China, Brazilian aircraft manufacturer Embraer received orders worth up

to USD 1.5 billion from Chinese airlines. A promise to relocate Foxconn’s

Apple iPad manufacturing facility from Shenzhen to Brazil has been kept,

and a new plant has been in operation since September of last year.

However, Brazil suspects that China is only interested in Brazil’s natural

resources and lacks the determination to resolve their fundamental trade

imbalance. In fact, the issue with the yuan, which is at the heart of the trade

imbalance, was not even on the summit agenda. Brazil thinks that China’s

pledge to ease import restrictions on some items was nothing but lip service.

Despite the continuous conflicts,

bilateral relations between China

and Brazil will not be frozen quickly.

The two nations have room to

cooperate with each other


078

○● Brazil encourages local companies to invest in

manufacturing

Confronted with China’s aggression, Brazil brought two counter-

measures. The first was to solidify trade barriers. From the end of 2010 to

the first half of 2011, Brazilian authorities launched 144 anti-dumping

investigations, 50 of which were against China. After the Summit, the anti-

dumping investigations seemed to ease, but on September 6, Brazil imposed

a five-year anti-dumping tariff of USD 743 per metric ton on steel pipes,

triggering a trade conflict between the two emerging countries.

Second, Brazil adopted large-scale measures for nurturing its

manufacturing industry. The Brazilian government’s strategy is to

strengthen the competitiveness of the manufacturing industry before the

natural resources boom ends, and to lay the foundation for long-term

growth. In August, President Rousseff announced the launch of a new

industrial policy, Plano Brasil Maior (Bigger Brazil Plan). It aims to provide

the manufacturing industry with USD 16 billion in tax breaks. The Plan

supports the production of clothing, shoes, software, furniture, and vehicles,

and the supported areas will be expanded. Through the “Buy Brazil”policy,

the government will pay as much as 25% more for local products than for

competing foreign products, especially in health, defense, communications,

and high-tech industries.

The Bigger Brazil Plan includes an array of policies that obviously show

Brazil’s intention to restrain China. For example, Brazil plans to scrutinize

the round-about exports of Chinese products through Mercosur (the

Common Market of the South), which includes Argentina and Paraguay.

In addition to these supportive measures, the Brazilian government is

encouraging local companies to invest more in manufacturing. After

pressuring Vale, Brazil’s largest mining company, to increase the export of

steel products rather than iron ore, the Brazilian government, which holds

direct and indirect stakes in the company, eventually made the aggressive


079

:: Issue analyses

move of firing Chairman Roger Agnelli, who had been passive in

responding to the demands of the government.

Despite the Brazilian government’s efforts, addressing the trade

imbalance seems difficult. Brazil accuses China of insincerity and

uncooperativeness, but the fundamental reason behind the trade imbalance

is the different economic structures of the two nations.

○● Ongoing cooperation amidst trade conflicts

Despite the continuous conflicts, bilateral relations between China and

Brazil will not be frozen quickly. The two nations have room to cooperate

with each other, not only on the economic front, but also in the international

community. Since the global financial crisis, the roles of the USA and

international organizations are getting smaller, and power is shifting to

emerging economies. Under these circumstances, the partnership between

China and Brazil is playing an important role in the formation of the future

international order.

Brazil is desperate for China’s support in its attempt to attain a

permanent UN Security Council seat. China needs Brazil’s cooperation in

order to solidify its standing in the market economy. For these reasons,

China and Brazil will continue to cooperate with each other, despite their

strained relations.

Korea needs to take full advantage of the recently changing relations

between these two countries. In order to do so, Korean companies entering

the Brazilian market must demonstrate sincerity in economic cooperation,

promote advanced quality and brand name products, and adopt strategies of

differentiation.


081

India’s quiet diplomacy seeking a permanent UN SecurityCouncil seat

:: Issue analyses

Kim Chan-WahnProfessor of Graduate School of International and Area StudiesHankuk University of Foreign Studies

One of my acquaintances who works in the diplomatic security

field recently asked me why India is so quiet lately. He said

that he expected a big country like India to raise its voice

over conflicts with neighboring countries and global issues,

but India seems to keep silent for the most part. India’s silence is most likely

calculated. A crouching tiger awaiting an opportunity to catch a rabbit might

be an appropriate analogy for India. India’s quarry is a permanent seat on

the UN Security Council.

At the end of 2010, after a wait of nearly 20 years, India was elected a

non-permanent member of the UN Security Council (UNSC) for a two-year

term. From 2011 to 2012, India will make every diplomatic effort in

campaigning for the reorganization of the UNSC.

India has already garnered support from the five permanent members in

its attempt to get a permanent seat on the UN Security Council. Russia has

pledged to actively cooperate with India during the period of 2011-2012,

while India is a non-permanent member. Such support was won as a result

of India’s long and strenuous efforts. What lies ahead for India is

maintaining the status quo until it becomes a permanent member. This is

why India is keeping silent in diplomatic matters.

○● India biding its time instead of confronting China

India seems to be trying its best to not displease China especially. India’s

stance is well represented in its responses to China, which is trying to secure

power in the Indian Ocean and the South China Sea. In order to restrain

India and to assume hegemony in the Indian Ocean and the Bay of Bengal,

China supported the construction of the Port of Gwadar in Pakistan and the

Port of Chittagong in Bangladesh, and finally the Port of Hambantota in Sri

Lanka, which was completed last year.

The fact that China supported the construction of ports in three South

Asian countries surrounding India, and secured its rights to use them, brings

detrimental changes to the security environment surrounding India.

However, India did not condemn China’s actions or voice any grievances

against China’s expansion policies. India just prepared itself to curtail and

block China’s influence. As soon as the first phase of the construction of the

Port of Hambantota in Sri Lanka was completed, India set up a consulate in

Hambantota. Instead of making an issue of or publicly criticizing China’s

expansion policies in the international arena, India chose to find out China’s

intentions and to block China’s influence through its consulate.

Even when an Indian naval ship was harassed by the Chinese navy in

open waters, India did not publicly raise an objection or insist on making an

issue of the matter. India’s INS Airavat, an amphibious assault vessel, sailed

from the Vietnamese port of Nha Trang, and a Chinese warship demanded

that the Indian ship identify itself and explain its presence in international

waters. If China had been in India’s shoes, China would have strongly

POSRI Chindia Quarterly�Winter 2012

082


083

:: Issue analyses

denounced India.

India, the traditional leading power of South Asia, naturally feels uneasy

about China’s influence expanding to the Indian Ocean and the Bay of

Bengal. Nevertheless, India chose quiet diplomacy over confrontation with

China. India determined that nothing good would come from provoking

China, after China has expressed its support for India’s candidacy for

permanent membership on the UNSC. Even if China’s endorsement of India

was “lip-service diplomacy”, India intends to make China’s support a

settled matter, and not to lose China’s endorsement. This kind of diplomacy

toward China is expected to last until India’s term as a non-permanent

member ends in 2012.

○● Quiet diplomacy with Pakistan

Quiet diplomacy is also seen in India’s relations with Pakistan. Pakistan

has invaded India as many as four times. It has directly or indirectly

supported militant groups that constantly conduct terrorist activities against

India, primarily in Kashmir. A series of terrorist attacks in Mumbai were

allegedly conducted by Pakistan-based terrorist groups. India took a harsh

stance immediately after the attacks, but returned to its usual soft stance

over time. India’s primary reasons for maintaining appeasement policies

toward Pakistan are national security and peace-building in South Asia, but

The UNSC is comprised of fifteen members, including five

permanent members and ten elected non-permanent members with

two-year terms. The five permanent members are the main victorious

powers of World War II: the United States, the United Kingdom,

Russia, France, and China.

The UN Security Council


084

Pakistan’s continuing opposition

to India’s bid for a permanent

seat on the UNSC was another

reason. In order to ease

Pakistan’s opposition, India tried

to address issues quietly rather

than amplifying conflicts with

Pakistan.

Quiet diplomacy can be interpreted as preventive diplomacy, but its

major goal is to ease conflicts and create an environment for conversation.

After a prolonged hiatus following the 2008 Mumbai terrorist attacks, India

and Pakistan created a mood of reconciliation through “cricket diplomacy”

at the end of March 2011. Pakistani Prime Minister Yousuf Raza Gilani

accepted the invitation of Manmohan Singh, Indian Prime Minister, to

watch the Cricket World Cup semi-final between the two countries in

Mohali, India. Since then, the two nations have released each other’s

prisoners and have continued working toward amicable reconciliation.

India has superior military power to Pakistan. Still, India has only

defended against Pakistan’s invasions and terrorist attacks, and has never

invaded or attacked Pakistan first. Whenever India has had any conflict with

Pakistan, India has taken a short cool-down period, and then returned to

engagement policies to improve its relations with Pakistan. India’s efforts

have paid off at the end of 2010, when Pakistan back India for a non-

permanent UNSC seat.

○● Limits to quiet diplomacy

With a permanent UNSC seat as the highest priority of its foreign policy,

India has lobbied in every direction. However, whether India will achieve its

goal is unclear. Even though India has been endorsed by all five permanent

members, daunting tasks still remain. Not all of the G4, an alliance of India,

With a permanent UNSC seat as the

highest priority of its foreign policy,

India has lobbied in every direction.

However, whether India will achieve

its goal is unclear.


085

:: Issue analyses

Japan, Germany, and Brazil, wishing for accession to permanent member

status, has garnered support from the five permanent members as India has.

In particular, China is strongly opposed to Japan’s accession; therefore, all

of the G4 nations becoming permanent members seems doubtful. India’s

sole accession to a permanent seat will be even more difficult.

In May of 2011, the G4 countries attempted to run for permanent seats

for the first time in six years, but they resigned in the face of opposition

from anti-G4 countries, including South Korea, China, and Italy.

With unfavorable international opinion, the G4 nations delayed their

plan to table a draft resolution at the UN general assembly. Only 70-80 of

the 192 UN members reportedly pledged to support the G4 countries. This

is far below the 128 affirmative votes needed for the necessary two-thirds

majority; therefore, the G4 countries’ dream of becoming permanent UNSC

members will not come true easily. The G4 has been failing to overcome

opposition from Uniting for Consensus (UfC), a movement comprised of

over forty countries, led by the G4’s rival countries.

○● 2013─Foreign policies at a crossroads

The USA has demanded that India participate in international issues

more actively if it wants to be recognized as a responsible major power in

the international community. In particular, the USA wants India to raise its

voice on issues of democracy and human rights. However, India believes

that to do so would be premature, and that provoking China by discussing

democracy and human rights would be disadvantageous.

Still, India cannot afford to sit on its hands on international issues

indefinitely. The world will begin to doubt whether India has the will to

contribute to achieving peace and order in the international community. In

fact, India was criticized for its neutral stance on the unrest in Libya. The

longer India keeps silent on democracy and human rights issues, the weaker

India’s reputation as the world’s largest democracy will become.


086

There is a possibility that India will soon face the dilemma of whether to

continue or abandon its quiet diplomacy. For India to be recognized as a

responsible major power, it must express opinions on international issues. If

India fails to comply with the demands of the international community, there

will be little need or justification for India becoming a permanent member

of the UNSC. With rebel groups controlling Libya, India finds itself in a

position where it will soon have to abandon its neutral stance for its own

interests.

If India deems that its election to a permanent UNSC seat will continue

to be delayed and challenged for a long time, it might shift from quiet

diplomacy to active diplomacy. India cannot afford to keep being pushed

around by China in South Asia. Beginning in 2013, when India’s term as a

non-permanent UNSC member ends, India is expected to participate

actively in expanding the security belt that was formed to contain China,

connecting the USA, Japan, Australia, South Korea, Singapore, Indonesia,

and Vietnam.


087

:: Issue analyses

Chinese private enterprises:advances and drawbacks

Shim Sang-HyungSenior Business Analyst of POSCO Research Institute

In 1987, at the age of 43, Ren Zhengfei (任正非) founded Huawei

Technologies Co., a telecommunications equipment and services

company, in Shenzhen of Guangdong Province. The growth of this

firm, with an initial capital investment of only RMB 20,000, has

been mirroring China’s economic growth, which began in earnest after

China’s reform and opening-up. Last year, Huawei became the largest

private company in China, with revenue of RMB 185.2 billion. Huawei

Technologies Co. is now the world’s second largest networking and

telecommunications equipment provider, after Ericsson.

○● Noticeable growth of consumer goods and services

companies

On the list of China’s Top 500 Private Enterprises, released by All-

China Federation of Industry and Commerce (ACFIC) last August, Huawei


088

stood out the most. It ranked first in 2010 in terms of revenue, a great leap

up from 44th in 2008 and 39th in 2009. Huawei was followed by China’s

largest private steel manufacturer Jiangsu Shagang Group. Suning

Appliance, a leading consumer electronics company, ranked third.

Total sales revenue of the top 500 private companies rose by 47.5% year-

on-year. The total number of employees also went up by 24%, to 5.61 million,

in the same period. This clearly shows that private companies are contributing

more and more to China’s economic growth. In 2010, the lowest-ranked

company on the list had operating revenue of more than RMB 5 billion.

The annual list of China’s Top 500 Private Enterprises reflects the

direction of China’s economic development. In 2007, six of the top ten

companies provided fuels and raw materials for steel and metal production,

but this number dropped to three in 2009, and to just one in 2010. On the

other hand, consumer goods and services companies, especially those in

telecommunications, electronics, automotive, and various retail and

wholesale sectors, made a breakthrough. With the government tightening

regulations on industries with high energy-consumption and pollution, and

companies with obsolete production capacities falling behind, growth is

slowing down in related sectors. However, consumer goods and services

industries have been growing rapidly due to increasing domestic demand and

implementation of policies supporting tertiary industries. Due to government

policies regarding consolidation and other forms of restructuring, and

intensified market competition, companies in the steel, metal, and cement

industries have made a strategic choice to super-size. Good examples are

Zhongtien Steel (中天), which came in 14th on the list, and Beijing Jianlong

Heavy Industry Group (北京建龍), which took 15th place.

Although 388 of the 500 companies on the list are located in East China,

constituting an absolute majority, this is 17 fewer companies than the

previous year. On the other hand, the number of firms located in West China

has risen by 18, to 52. West China companies’ shares have increased by 10.6


089

:: Issue analyses

Top 10 list of China’s top 500 Private Enterprises

2007

Company Industry Revenues

1 Lenovo (�想) Telecommunications, electronics 1,466

2 Jiangsu Shagang Group (沙鋼) Steel 1,155

3 Suning (蘇寧) Home appliance retail 855

4 Guangsha (廣廈) Construction 409

5 Fosun Group (復星)Steel, Department stores,

380Medicines, etc.

6 Yurin (雨潤) Food and beverage 310

7 Jintian Copper Group (金田) Copper 305

8 East Hope Group (東方希望) Colored metal 295

9 China Oriental Group (中國東方) Steel, insurance, securities 290

10 Rongcheng (榮程) Steel 285

Source: All-China Federation of Industry and Commerce (www.acfic.com.cn)

2010

Company Industry Revenues

1 Huawei (華爲) Telecommunications, electronics 1,852

2Jiangsu Shagang Group

Steel 1,786(沙鋼)

3 Suning (蘇寧) Home appliance retail and wholesale 1,562

4 Lenovo (�想) Telecommunications, electronics 1,467

5 Dalian Wanda (萬達) Real estate development 772

6 Geely (吉利) Automotives 683

7 Haihang (海航) Shipping, logistics 649

8 Xinjian Guanghui (廣匯) Retail and wholesale logistics 648

9 Yurin (雨潤) Food and beverage processing 648

10 Guangsha (廣廈) Construction 604

(Unit: USD 100 Mil.)


090

percentage points in the combined revenue, and 11.9 percentage points in

the combined assets of the top 500 private companies. As progress spreads

to inland China, more and more companies in West China are writing their

own success stories.

○● Government’s equal treatment of private and public firms

It is noteworthy that private companies began entering strategic

industries such as the advanced materials and new energy industries, and

expanding investment in earnest, in line with government policies. The

Chinese media reported that 62.8% of the top 500 private companies have

either joined new strategic industries

such as environmental protection,

energy saving, advanced materials,

new energy, new energy vehicles, and

state-of-the-art information and

telecommunications, or have expanded

existing related strategic business.

Last July, China’s National

Development and Reform Commission

(NDRC) released a document, titled Opinions on the Implementation of

Encouraging and Guiding Private Enterprises to Develop Strategic Emerging

Industries, and expressed its commitment to providing private sectors with

various industrial policies and financial support for their development in

strategic emerging industries. The document states the Commission’s plan to

make public funds for strategic emerging industries equally available to both

private and public enterprises. Chinese Premier Wen Jiabao toured the Binhai

New Area of Tianjin in October. He visited high-tech venture companies and

held talks with entrepreneurs in the state-of-the-art equipment manufacturing,

biotechnology, telecommunications technology, and other emerging industries

to learn about their problems and difficulties. He stressed that in facing a

If China wants to reduce inefficiency

arising from government and public

sector-oriented investments, China

must encourage entrepreneurship by

providing motivation, and distribute

resources effectively


091

:: Issue analyses

crisis, a country can survive only with a well-developed real economy led by

innovation and high-tech industries, and that private enterprises should pursue

development and progress in strategic emerging industries.

The first time the Chinese government publicly announced equal

treatment of both private and public sectors was through provisions on non-

public economy released in 2005, also known as the Non-public 36 Articles.

This law prohibits the government or public agencies from interfering with a

private sector’s access to industries other than those prohibited to private

investment. This was, at the same time, an admission of the fact that the

public sector had been favorably treated.

In May of 2010, the Chinese State Council released a new set of

guidelines to promote domestic private investment: the New 36 Articles. The

measures are aimed at lowering entry barriers for private companies in

infrastructure, public services, and other public works. They also allow

private enterprises to participate in M&A’s or other restructuring processes

with state-owned enterprises, and include them in the government’s industrial

upgrade processes, including indigenous innovation and globalization.

However, private enterprises still feel discriminated against when obtaining

licenses or approvals, because the new measures are not well implemented in

practice. What is worse, various fee increases, financial difficulties, and

economic slowdown have driven many small and medium enterprises to

bankruptcy, creating a hot-button issue for the Chinese economy.

○● Higher efficiency in private enterprises than in public

enterprises

The 2011 list of China’s Top 500 Enterprises includes 184 private

enterprises. However, their total profits are only half that of the top 10 state-

owned enterprises. This is because state-owned enterprises, spread across

the petrochemical, information and telecommunications, and banking

sectors, hold monopolies in the market.


092

While the average profit margin and return on assets of the 316 public

companies on the list of China’s Top 500 Enterprises were 5.7% and 1.8%,

respectively, those of the 184 private companies were 6.1% and 3.6%,

respectively. The R&D to sales ratio of private companies was 1.8%, higher

than that of public companies at 1.4%. With large-scale public investment

projects dominated by public companies, and bank loans and restructuring

subsidies concentrated on public companies, private companies showing

Huawei, the world’s second largest networking and telecommunications

equipment provider after Ericsson, is showing unprecedented success in

globalization. It has most of the world’s 50 largest telecommunications service

providers as its clients. More than 75% of its sales are generated overseas.

Huawei ranked first on the 2011 list of China’s Top 500 Private Enterprises.

Huawei also took first place on the list of top 100 Chinese electronics and

information technology companies, overtaking Haier, a state-owned company.

The key to Huawei’s success is bold global marketing and high R&D

investment. As many as 42% of its more than 100,000 employees are working

in R&D; more than 10% of its annual revenue is spent on R&D. Huawei also

files more than 1,000 patent applications each year, and it ranked 4th in

international patent application filings in 2010.

The founder and president, Ren Zhengfei, ranked 5th on the list of Asia’s

Top Business Executives released by Fortune magazine, after Lee Kun-hee, the

chairman of Samsung Electronics, who ranked 4th. He is dubbed a “solider

CEO”or “wolf CEO”because of his company’s strict military-style corporate

culture, and his merciless discharge of the bottom 5% of the workforce in

performance reviews. That said, he is revered by the Chinese public for turning

his company into a global company with world-class competitiveness in the

high-tech industry.

Huawei Technologies and its founder, Ren Zhengfei (任正非)


093

:: Issue analyses

higher efficiency than public companies is significant.

If China wants to reduce inefficiency arising from government and

public sector-oriented investments, such as insolvencies and overinvestment

caused by financial adhesion, and be reborn as a technology-based industrial

powerhouse, China must encourage entrepreneurship by providing

motivation, and distribute resources effectively. This is why both public and

private sectors must compete on a level playing field.

According to a survey conducted by the All-China Federation of Industry and

Commerce (ACFIC), the disadvantages of private enterprises include

discrimination in approvals and authorization, falling cost competitiveness due to

rising labor costs and increasing investment burdens for environmental facilities,

and difficulty in securing workforce. (ACFIC is a non-public economic chamber

with 3,200 regional bodies and 1.97 million members as of August 2011.)

This year, the production costs of companies located in the Pearl River

Delta and the Yangtze River Delta have risen by 15% due to rising raw material

prices, and their labor costs have risen by 20%. As the government has

continued to tighten policies in order to control commodity prices, SME’s have

found it difficult to borrow money from banks, and have turned to private loans

at 30-40% annual interest rates. Since August, many have gone bankrupt and

taken to moonlight flitting.

By mid-September, approximately 20% of the 360,000 SME’s located in

Wenzhou of Zhejiang Province were suspended or closed down. If financial

stress continues, this figure is expected to surge to 40%. On October 12, the

State Council finalized emergency financial policies to support SME’s and

began preparing their implementation. These financial and fiscal policies

include: halving the income tax on SME’s; raising the threshold of value-added

tax and business tax; and rationalizing financial support.

The “Wave of Bankruptcy (倒閉潮)” of SME’s in the Pearl River Delta


095

:: Issue analyses

The Bohai Bay oil spill andChina’s environmental risks

Heo Jae-YongBusiness Analyst of POSCO Research Institute

The Gulf of Mexico oil spill in April of 2010 was followed by

another massive environmental disaster. On June 4, 2011,

leaked oil was detected near Platform B, one of five platforms

in Penglai (PL) 19-3 oilfield in Bohai Bay, Northeast China.

After another leak was observed near Platform C on June 17, China ordered

a halt to production in Penglai 19-3 oilfield and set out to clean up the spill.

Bohai Bay is home to the largest offshore oil and gas field in China, PL

19-3, producing 57% of China’s total oil output and 12% of its total natural

gas output. PL 19-3 is a large-scale oil field, with 7.4 billion barrels of oil

reserves, producing 150,000 barrels per day (bpd). China National Offshore

Oil Corporation (CNOOC) holds a 51% share of PL 19-3, and

ConocoPhillips holds the remaining 49%. PL 19-3 is operated by

ConocoPhillips China (COPC), a Chinese subsidiary of the US oil giant

ConocoPhillips.


096

○● Suspicion of a government cover-up

The interested parties in this accident speculate that the Chinese

government may have tried to cover up some information about the

accident. After the incident on June 4, CNOOC reported the accident

immediately, but the Chinese government delayed a public announcement.

The accident was first made public by a Chinese Internet user through

Weibo (微博), a social networking site akin to Twitter. Chinese media later

rushed to cover the Penglai oil spill. The government and CNOOC have

been trying to play down the size of the Bohai Bay oil spill, saying that the

damage covered only 200㎡, and that fewer than 10 tons of oil were spilled.

The State Oceanic Administration (SOA) did not publicly report the oil

spill until July 5, one month after the accident. The SOA stated that the spill

area was close to 850㎢, far larger than it had first insisted; the SOA did not

disclose the amount of oil spilled. Putting all publicly available data

together, the polluted area is estimated to be around 5,500㎢, approximately

nine times bigger than the city of Seoul. Around 3,200 barrels (440 tons) of

oil have been released into Bohai Bay, and the water quality of 3,400㎢ of

adjacent seawater has been downgraded from Grade 1 to Grade 3.

Some might think that the Bohai Bay oil spill is less serious than the oil

spill in the Gulf of Mexico. However, the Chinese Research Academy of

Environmental Sciences (CRAES) claims otherwise. For three months to

date since the accident, environmental authorities, as well as CNOOC and

COPC, have withheld the exact amount of oil spilled. CRAES estimates that

at least 50,000 tons of oil has been spilled into the sea based on data

disclosed so far on the extent of the polluted areas and pollution

concentration. This figure is in stark contrast to the number publicly

announced by CNOOC and COPC.

The damage in the Gulf of Mexico might be greater than that in Bohai

Bay in terms of the area polluted. When it comes to damage per unit

volume, however, the Bohai Bay oil spill could be more serious. The


097

:: Issue analyses

average water depth in

the Gulf of Mexico is

about 1,000m, but the

depth of Bohai Bay’s

deepest water is only

85m. Because the water

of Bohai Bay is shallow,

the environmental impact of the oil spill in Bohai Bay is thought to be

greater than that of the spill in the deep Gulf of Mexico. The total volume of

water in the Gulf of Mexico, where 4.9 million barrels (670,000 tons) of oil

was spilled into the sea, is 230,000㎦. The total volume of water in Bohai

Bay is 1,730㎦. Let us assume that the amount oil spilled in Bohai Bay was

50,000 tons (370,000 barrels). Calculating pollution per unit volume (1㎦),

the result is 2.9 tons for the Gulf of Mexico, and 28.9 tons for Bohai Bay.

Simple math shows that the pollution level in Bohai Bay is ten times greater

than that in the Gulf of Mexico.

There are many cases showing the gravity of the Bohai Bay oil spill.

Since the end of June, residents in Fenglai of Shandong Province have not

dared to eat fish and shellfish that reek of petroleum, which were caught

near the waters affected by the oil spill. Tons of fish died in a fish farm 89

kilometers southeast of the source of the oil spill. If the oil spill has spread

to the coast, contrary to the announcement by the government, secondary

damage to fish and shellfish is to be expected. This means that the seafood

exported to Korea could also be affected.

When crude oil was spilled into the sea near the South Korean coast of

Taean in 2007, the South Korean government notified China of the accident

and publicly announced the extent of the affected area and the amount of oil

spilled. When the South Korean government requested verification of the

recent spill, however, China refused. It was one month after the incident

when the Chinese government publicly announced the Bohai Bay oil spill.

“Money first, environment later” is not a

wise strategy in this day and age.

Investors care about environmental

issues concerning corporations.


098

The Chinese government’s belated and insincere response caused distrust

among stakeholders in the Chinese government and CNOOC, damaging the

credibility of the government’s announcement. Between April and May of

2009, oil was spilled into the waters near Hainan, but a public

announcement of the incident was never made.

Such responses by the Chinese government and CNOOC to

environmental accidents are likely to become a stumbling block to the

sustainable development of China. While some people predict that China

will become an economic power surpassing the USA, others predict that

China will experience a sudden rise and fall in its status. Environmental

issues, along with the gap between the rich and poor, are often pointed out

as the main reasons for negative projections.

○● Risk management must include suppliers and partners

Due to challenges in quantitative analysis, environmental risk has not

been regarded as a major business risk by companies. However, as the case

CategoryThe oil spill in the Gulf

The oil spill in Bohai Bayof Mexico

Comparison between the Bohai Bay and Gulf of Mexico oil spills

Period

Polluted area

Amount of leakage

Release point

Compensation

Property damage

Death toll

Apr. 20-Sep. 19, 2010

At least 6,500km2

(11 timers bigger than Seoul)

4.9mil. barrels(670,000 tons)

1,500m under the sea

USD 20 bil.

USD 3 bil.

Eleven

Jun. 4, 2011-Present

At least 5,500km2

(9 timers bigger than Seoul)

3,200 barrels(440 tons)

27-28m under the sea

Unsettled

Unsettled

N/A


099

:: Issue analyses

Date Events

June 4 Oil sheen is found near Platform B of Penglai 19-3 oilfield.

June 12 The SOA identifies the oil spill through analyses of oil slicks and satellite images.

June 13 The SOA makes a request to COPC for a relief well.

June 17 Oil and gas bubbles are observed from Platform C.

June 30 News of the Bohai Bay oil spill is spread through Weibo, a social networking site akin to Twitter.

July 1 Chinese media covers the oil spill.

July 5 The SOA makes a public announcement of the oil spill, saying that the oil spill hadpolluted 850km2 of waters, but not disclosing the amount of oil spilled. The SOAblames the operator, COPC, for the accident.

July 13 The SOA orders ConocoPhillips to halt production at Platforms B and C. The SOAasks ConocoPhillips to completely seal off oil spill sources by August 31.

ConocoPhillips estimates 1,500-2,000 barrels of oil and oil-based mud were leakedinto the sea.

Aug 16 The SOA North China Sea branch selects lawyers to sue parties responsible forecological damage.

Aug 26 The SOA says the Bohai spill, which polluted 5,500km2 of water, is the most seriousmarine ecological incident in China, and ConocoPhillips will have to pay for it. TheSOA imposes fines of RMB 200,000 (USD 30,920) under China’s MaritimeEnvironmental Protection Law.

Aug 31 ConocoPhillips submits a report to the SOA showing it had already sealed off theleaks ahead of the Augut 31 deadline. The company estimates the total amount of oil and mud from oil leaks at around 3,200 barrels (440 tons), 700 barrels fromPlatform B on June 4, and 2,500 barrels from Platform C on June 17.

Sept 2 The SOA orders ConocoPhillips China to shut down all operations at Penglai 19-3oilfield, as it had failed to seal the leaks.

Sept 6 ConocoPhillips says shutdown of Penglai 19-3 oilfield has been completed.

Sept 7 ConocoPhillips says it will establish a fund to benefit Bohai Bay. Chinese PremierWen Jiabao says the government will strictly control new petrochemical projectsaround Bohai and establish a pre-warning mechanism for the Bay's marineenvironment.

Sept 18 ConocoPhillips says it will establish a second fund to benefit Bohai Bay.

Chronology of the Bohai Bay oil spill


100

of BP suggests, when a company causes an environmental accident,

damages are not limited to compensation for the damage. A company’s

brand image is compromised, and losses in credit and revenue are

enormous. Therefore, prevention is the best answer to environmental risks.

It is necessary to exercise preemptive risk management to minimize

recovery costs in the aftermath of an accident. Risk should be managed

comprehensively throughout the supply chain, including the involved

company, its suppliers and partners. Strictly speaking, the BP oil spill was

caused not by BP, but by BP Holding North America, Inc., a BP subsidiary.

BP could have held BP Holding North America responsible and gone

bankrupt. BP accused the rig operator, Transocean, and Halliburton, which

sealed BP’s oil well with cement. However, all stakeholders, including

government and non-governmental organizations, blamed the parent

company, BP. Within three months of the accident, BP’s stock price was cut

in half (down 48.3%). This case offers a lesson, that risk management at the

supply chain level is key, and that after an environmental accident, the

involved company must demonstrate its determination to solve the problem.

The Chinese government’s response to the Bohai Bay oil spill was rather

inappropriate, placing the blame on the operator, ConocoPhillips China,

rather than on CNOOC, a 51% share of which is owned by the state.

“Money first, environment later”is not a wise strategy in this day and

age. Investors care about environmental issues concerning corporations.

Investors will exclude a corporation with potential to cause environmental

problems from their investment priority list. This will ultimately lead to a

decline in corporate value. Investors must look carefully into corporate

environmental management performance in order to avoid future losses due

to environmental issues. SAM Dow Jones Sustainability Index (DJSI) and

FTSE4Good evaluate the environmental and social management

performance of companies for investors. Before making an investment,

global pension management institutions, which manage enormous funds,


101

:: Issue analyses

require companies to provide information on their environmental or

sustainable management strategies. For sustainable development, China and

its companies must consider environmental issues seriously, taking the

interests of stakeholders into account.


103

The heated Indian nuclearenergy market

:: Issue analyses

Ji Yeon-JungPh.D.c., South Asian Studies at Jawaharlal Nehru University

Last July, South Korea and India concluded a peaceful civil

nuclear energy cooperation agreement. South Korea became the

ninth country to sign a civil nuclear agreement with India. Seoul

believes that this agreement has paved the way for the export of

atomic power plants to India, and has high expectations for the booming

Asian giant. However, it is unclear to what extent India will consider Korea,

because the world is paying keen attention to India’s nuclear power market.

Korea was relatively late in initiating negotiations on nuclear power plants

with India, so it needs to take a closer look at the negotiation knowhow of

other countries that entered the Indian market sooner. Korea needs to

investigate India’s relations with countries with which it has already signed

agreements, and accumulate information and knowhow. In addition, Korea

must understand the national characteristics of India in order to continue and

expand cooperation with India in the long term.


104

○● India in its second stage of nuclear power industry

India’s nuclear power market is attracting global attention. Presently,

only 3% of India’s energy needs are met by nuclear power. However India’s

plans for nuclear power plants and international exchanges are continuously

expanding. Heralded by the US-India nuclear deal, the world’s interest in

the Indian nuclear power market is increasing rapidly. India claims that its

nuclear power industry has entered the second stage of development.

Following two rounds of nuclear experiments in 1974 and 1998, the

USA and other major economies imposed sanctions on India. India has also

been prohibited from exchanging nuclear technologies due to its continued

opposition to joining the Nuclear Non-Proliferation Treaty (NPT). For this

reason, the development of the Indian nuclear power industry has been

relatively slow, considering its enthusiasm.

With the surfacing emergence of various positive external variables, the

Indian government has taken an active stance on nuclear power policies.

The World Nuclear Association (WNA) estimates that India’s per capita

electricity consumption was only 700㎾ in 2011, but has increased by 6.3%

over the past year. India’s electricity output in 2008 was 830 million

kilowatts, three times that in 1990. The Indian government aims to supply

25% of India’s electricity through nuclear power by 2050, and generate

20,000㎽ of nuclear power by 2020. To accomplish these goals, the Nuclear

Power Corporation of India Limited (NPCIL) plans to construct

approximately 25-30 light water reactors by 2030.

If the Indian government intends to carry out its plan of balancing

supply and demand, certain conditions must be met. Internally, India needs

to increase the economic feasibility of uranium mining and production,

which it has pursued actively, and complete the construction and operation

of nuclear power plants as scheduled. Externally, foreign affairs regarding

nuclear energy exchanges are required to remain stable, without major

sanctions against India as in the past. Finally, the procedural ease and


105

:: Issue analyses

cooperation promised by the Indian government should be realized.

On the domestic front, India’s current policies on nuclear power plants

are cruising along, bolstered by an exponentially increasing demand for

power, the favorable attitude of the government toward the nuclear power

industry, and the need for diversification in the energy industry. On the

international front, India has been underpinned by the active cooperation of

great nuclear energy powers, including the USA, France, and Russia;

consent from the Nuclear Suppliers Group (NSG); and the exception made

for India in the Non-Proliferation Treaty. In January 2009, a US nuclear

trade mission visited India to discuss technology exchanges and their

feasibility. In October 2010, 285 representatives from the public and private

sectors participated in the India Nuclear Energy Summit 2010. These events

reflect the growing interest in the Indian nuclear energy industry.

○● France and Russia dominating the Indian nuclear

energy market

Following the nuclear energy cooperation agreement with the USA, and

the Fukushima nuclear accident in Japan, India is actively discussing

policies for the nuclear power industry and its national security. Not only

government officials, scientists, policy experts, and security strategists, but

also journalists and the general public are participating in the debates. In

particular, science groups and policy experts have a firm grip on decision-

making within India’s nuclear power industry. Science groups argue

strongly that India should maintain an independent and self-reliable stance.

For korea, there are a few disadvantageous conditions at work: Korea

has limited information and accessibility to Indian government’s policy-

making process; and India favors continuing exchanges with countries with

which it has already established reciprocal relations.

While India engages in few exchanges with China, it leans heavily on its

early exchange partners, including France, Russia, Canada, and the USA,


106

India’s nuclear deals in the pipeline and deals concluded so far

Country Progress Area of interest and details

Discussing uranium import and reactorconstruction

Showing interest in uranium export andimport

Discussing business; having interest in thesafety of India’s nuclear power plants

Kudankulam and Haripur projectsDiscussing uranium export and import, and

technology collaborationDiscussing technology exchanges and safetyDiscussing technologies in medical research

and Myrrha experimental fast reactorsShowing interest in uranium export and

importPlanning to replace India’s old reactors with

new onesShowing great interest in India due to Spain’s

saturated industryExchanges of nuclear technologies and

scientistsDiscussing exchanges between the public

and private sectors

Planning

Uranium export and import

Exchanges relating to nuclear power plantsby and large

Jaitapur project ongoing

Showing interest in technology exchangesand participating in business

Planning to discuss technologycooperation

Uranium export and import

Namibia Civil nuclear cooperation agreement

Niger Civil nuclear cooperation (ongoing)

Germany Civil nuclear cooperation (ongoing)

Russia Civil nuclear cooperation agreement

Mongolia Civil nuclear cooperation agreement

USA Civil nuclear cooperation agreement

Belgium Civil nuclear cooperation(ongoing)

Brazil Civil nuclear cooperation (ongoing)

Sweden Civil nuclear cooperation (ongoing)

Spain Civil nuclear cooperation (ongoing)

Argentina Civil nuclear cooperation agreement

UK Civil nuclear cooperation (ongoing)

Italy Civil nuclear cooperation (ongoing)

Kazakhstan Civil nuclear cooperation agreement

Canada Civil nuclear cooperation agreement

France Civil nuclear cooperation agreement

South Korea Civil nuclear cooperation agreement

Hungary Civil nuclear cooperation (ongoing)

Australia Civil nuclear cooperation (ongoing)

Source: DAE, Government of India, Sitakanta Mishra, India’s Civil Nuclear Network: A Reality Check, Journal of AirPower & Space Studies, 5(4): 107-132


107

:: Issue analyses

for discussions and consultations on nuclear power safety and technology

exchanges. The USA and Canada have offered experimental reactors to

India in the past, and France has provided India with technological

consultations and other necessary resources in the initial stages of India’s

nuclear energy industry. Maintaining an historical reciprocity, Russia has

continually provided India with nuclear fuel since the 1990s.

In particular, the cases of France and Russia are worth noting. After

France and India inked a civil nuclear cooperation pact, France provided

India with third generation pressurized reactors and nuclear fuel, making its

first major breakthrough in India with the Jaitapur Nuclear Power Project in

Maharashtra. India and the Soviet Union signed a civil nuclear cooperation

agreement on the Kudankulam Nuclear Power Project in Tamil Nadu in

1988. In 2008, an agreement for constructing additional reactors was signed

between India and Russia. Russia is also participating in nuclear projects in

Haripur, West Bengal. Based on their long, friendly relationships, France

and Russia are forming strong bonds with India. Naturally, they remain to be

both high priorities in India’s policy-making.

The fact that India is diversifying its cooperation channels to meet

surging energy needs is a positive sign for Korea. The Indian government

has never disclosed its criteria for project cooperation, but experts in nuclear

energy point out three major factors India considers in its selection process.

First, India is keen to look for countries that have formed a pact of

uranium trade with India as it puts a high priority on increasing the

economic feasibility of nuclear energy production. Second, India prefers

countries with advanced technology that are indifferent to the fact that India

has not joined the NPT.

○● Growing complexity in negotiations amidst local

opposition

Though favored, France and Russia have reasons not to become


108

complacent. In the past, nuclear

power projects were implemented

by the decisive role of the central

government or state-owned

enterprises. With a growing

number of foreign project entities

coming aboard, and state

governments paying closer

attention, delays can be expected in the completion of projects.

The Haripur nuclear power project was an ambitious project planned by

the central government. In February 2010, Russia joined the Haripur project

and agreed to build six nuclear power plants in Haripur, but it is presently

altering its plan admist local opposition. The state administration of West

Bengal, led since September of 2011 by Chief Minister Mamata Banerjee, is

demanding the project be moved to a different site, citing residents’

opinions and environmental issues. Close consultations are reportedly being

held between Russia’s Rosatom Nuclear Energy State Corporation

(Rosatom) and India’s Department of Atomic Energy to settle the matter.

The Jaitapur Nuclear Power Project, conducted in cooperation with

France, is in a similar situation. In particular, the ongoing project involving

the French firm Areva has become a symbol of opposition to the nuclear

power industry after a series of protests by local political parties and

environmental activists. The Department of Atomic Energy (DAE) and the

Atomic Energy Commission (AEC), under the Indian government, are on

the front line emphasizing the importance of the nuclear energy industry,

making efforts to call for new look in the public on nuclear safety.

Nevertheless, anti-nuclear protests, together with local voter support, are

expected to become a significant variable for future nuclear power projects.

Regarding the gravity of India’s concern on securing long-term energy

supply and national security, it is hard to consider cooperation with India’s

The market accessibility to India’s

nuclear industry will depend on

variables in politics and policies,

and how long the non-proliferation

regimes remain favorable to India.


109

:: Issue analyses

nuclear energy industry as mere business. France and Russia have taken

different approaches to break through the difficulties. France is closely

cooperating with India not only in business, but also on bills introduced in

the Parliament, emphasizing that India is a responsible country in dealing

with general nuclear issues. France’s Areva has expressed strong support for

India’s Nuclear Safety Regulatory Authority Bill. This Bill, proposed last

September, aims to create an independent nuclear regulatory body under the

Office of the Prime Minister to regulate and supervise the safety of nuclear

power development. On the other hand, Russia has underlined not to

intervene in India’s domestic law-making process, Moscow and India share

many interests regarding the defense and energy industries.

South Korea should be aware of the growing power of private entities in

India. Reliance Energy, Tata Power, and Larson & Toubro are companies

that keep eyeing for the nuclear sector following the US-India civil nuclear

deal. Therefore, Korea needs to seek exchanges and technology cooperation

with these companies.

Contouring the facts, the market accessibility to India’s nuclear industry

will depend on variables in politics and policies, and how long the non-

proliferation regimes remain favorable to India.

CCoorrppoorraattiioonnss

�After a series of successes, BYD faces risks

�Interviews: India’s STAR CJNetwork and Lock & Lock


113

:: Corporations

After a series of successes, BYD faces risks

Li Wan-YongBusiness Analyst of POSCO Research Institute

Chinese manufacturer BYD Auto’s third-quarter results for

2011 sent the market into shock. BYD’s net profits decreased

86% year-on-year. BYD sold 520,000 vehicles in 2010, far

below its target of 800,000. This is in stark contrast to the

increasing sales trend in China’s auto market in 2010.

In late August 2011, BYD shed 70% of its sales staff from its auto unit,

up to 1,800 layoffs out of 2,600 workers. There is a rumor going around that

BYD will lay off 7,000 employees in its manufacturing unit. In early August,

BYD’s vice president and general sales manager, Xia Zhibing (夏治氷), one

of the early members of the company, suddenly resigned.

Just two years ago, BYD was enjoying its heyday. Whatever happened

to the poster child of China’s new energy vehicle sector?

○● “BYD model” bolstered by the “Buffett effect”

BYD started as a battery manufacturer in Shenzhen in 1995. When it


114

acquired a Xi’an-based car manufacturer in 2005, BYD took its first step

into the car manufacturing industry. Up until 2009, BYD grew by over

100% each year. Only three years after getting involved in the car

manufacturing business, BYD became China’s number one company in the

low-end compact car sector. BYD Chairman Wang Chuanfu (王傳福)

announced bold plans to become the largest automaker in China by 2015,

and number one in the world by 2025.

Many things factored into the success of BYD. First, from 2005, when

BYD entered the automotive industry, China’s automotive market grew at

double-digit rates. The demand for small and medium-sized cars was

particularly high; BYD’s compact car and low-cost strategies worked.

BYD’s vertically integrated business model, once called the “BYD model”,

and a production method that relied more on workers than on machines

were effective for producing imitation models at lower prices. The “BYD

model”was considered a role model in China’s auto industry. In 2006, BYD

set out to expand the market with its F3 sedan, a copy of an older Toyota

model, and sold 100,000 units within two months after the new model was

released in the market. This was an unprecedented outcome in China’s

automotive history.

The “Buffett effect”also played an important role in the success. BYD

attracted global attention when an investment fund run by Berkshire

Hathaway bought 9.9% of Hong Kong-listed BYD’s shares for USD 230

million in September 2008. With Warren Buffett’s visit to BYD in Shenzhen

in September 2010, BYD showed off the trust it had received from the

legendary investor. There was, of course, an ulterior motive to the visit,

which came at a time when BYD was agonizing over its deteriorating

performance.

BYD also benefitted from the government’s support through policies for

the development of electric vehicles, which included subsidies for buyers of

electric cars.


115

:: Corporations

○● BYD’s failure to build its own brand

Government subsidies for consumers of small and medium-sized cars,

given to increase consumption of these products, provided a golden

opportunity for BYD. However, this opportunity did not last long. In mid-

2010, when the subsidies ended, BYD’s performance started to decline.

Factors that had led to BYD’s success ended up putting pressure on BYD.

With a lineup that consisted of copied small and medium-sized, low-cost

models, BYD failed to build its own brand. The Chinese carmaker never

rolled out a notable new model after the F3 sedan; it merely released models

with slightly altered engine displacement and exteriors.

While major global carmakers were setting their strategic priority on the

Chinese market and concentrating their resources, BYD sat on their hands.

In 2010, the F3 accounted for 51% of the 520,000 units sold. No carmaker

could survive five years with only one model.

The vertically integrated business model and the production method that

relied on workforce, the two representative characteristics of the “BYD

model”, also played a role in BYD’s poor performance. Relying on in-house

production for most of the parts, BYD could not benefit from economies of

scale. This led to poor quality and rising production costs. The labor costs in

Shenzhen, where BYD’s major production facilities are located, were the

highest and fastest growing in China, but BYD had a reputation for low-cost

vehicles at home and abroad. BYD had no way to improve its profitability.

○● Failure to build a mass production system for electric cars

BYD showed little sense of urgency in its changing environment. It only

focused on sales and profits, disregarding relationships with suppliers. With

sales deteriorating, BYD chose to consign its inventories to dealers in March

2010. However, dealers in Hunan, Zhejiang, Beijing, Chengdu, and

Zhengzhou responded by leaving the BYD sales network, and BYD sales

deteriorated further.


116

As BYD failed to build a mass production system for electric vehicles,

BYD’s future became bleaker. Since 2008, BYD has invested RMB 5

billion in research and development of electric cars (including fuel cells),

but it has invested little in traditional vehicles. So far, BYD has sold only

1,000 electric cars.

Another problem for BYD is its substandard technologies. BYD was

lagging far behind Korea and Japan in fuel cell technology, which is the

foundation of BYD’s business and the core technology of electric cars. BYD

has almost no patents related to electric vehicles in the USA, the largest

automotive market. With high prices and a lack of infrastructure, the

commercialization of electric cars has been delayed.

BYD’s management responded poorly to risks. About a year ago, when

a great number of dealers left the BYD sales network, the chairman of BYD

gave a vague explanation that reducing the number of dealers was meant to

improve the profitability of the remaining dealers. BYD management gave

an equally vague explanation for the laying off of its sales workforce: that

BYD’s excessive expansion strategy had led its sales division to become

disproportionately large. Other companies rushed to scout workers

discharged from BYD, which gives the impression that the BYD chairman’s

remarks were mere excuses.

When unfavorable public opinion did not seem to be recovering, BYD

opened its fuel cell plant to the public for the first time in order to improve

its image. However, this had the reverse effect, because BYD disallowed

press release of any news stories or photos.

The rumor of Buffett’s withdrawal of BYD shares also became a burden

on the company. Whenever BYD shows poor performance, Buffett’s

potential withdrawal of BYD shares becomes a hot issue. The price of BYD

shares once rose to HKD 85.5, but nosedived to HKD 15.36 as of the end of

October 2011, an 85% fall from the record price, giving more credence to

the rumor of Buffett’s withdrawal.


117

:: Corporations

○● Delayed commercialization of electric cars as the

greatest obstacle

Beleaguered BYD Auto debuted its E6 full-electric crossover on

October 26, 2011. BYD believes that the new model is better than any

existing electric car in terms of driving range and fuel economy.

The problem with the E6 is its price. The E6 is sold for RMB 370,000,

which is equivalent to the price of an imported midsize sedan. Even with

government subsidies, the price exceeds RMB 300,000. BYD claimed that

this price would be

offset by improved

mileage, but this claim

is questionable. For

every 100 kilometers,

the E6 costs RMB 14,

while a traditional

internal combustion

engine (ICT)-powered

automobile costs RMB 70. The E6 gets five times better mileage, but in

reality, it can save only RMB 56,000 after running 100,000 kilometers.

Because BYD has failed to equip itself with mass production facilities,

the price of its parts is also very high. The E6 also suffers from frequent

malfunctions because of its low technology readiness level. Considering

other problems, including insufficient infrastructure, and rising power

prices, the E6 has little hope of cost-competiveness. For this reason, some

claim that the E6 is a gamble for BYD, not a self-rescue measure.

JD Power and Associates, a global marketing information services

company in the USA, projected that sales of battery electric vehicles

(BEV’s) and plug-in hybrid electric vehicles (PHEV’s) will reach 5.2

million units by 2020, just 7.3% of the 70.9 million passenger vehicles. JD

Power asserted that the era of electric vehicles will not come within the next

BYD is at the end of its rope. For the

company to revive, it is imperative to

realize its commercialization policies

for electric vehicles and create a

profitable model.


118

decade without increased standards for tax systems and fuel economy, and

the support of public policies. Germany’s Bosche projected that it will not

be until 2020 that electric cars will become widespread in China, and that

sales will account for only 5-10% of the total vehicle sales.

The Chinese government has put all its efforts to nurturing battery

electric vehicles in order to make up for China’s disadvantage as a latecomer

in traditional ICT-powered vehicles. However, it has projected a change in

policies in the face of BYD’s delayed commercialization and export plans

for electric cars.

IHS Consulting, a consulting firm specializing in the auto industry, has

announced that the government will shift the focus of its goals for new-

generation vehicle technology from BEV’s to energy-saving technologies,

including plug-in hybrid electric vehicles.

BYD must repay debts of RMB 31 billion by the end of 2012. BYD is

highly likely to spend all of its RMB 6 billion in corporate bonds, which are

supposed to be issued to invest in the electric car sector, to repay its debts.

BYD is at the end of its rope. For the company to revive, it is imperative

to realize its commercialization policies for electric vehicles and create a

profitable model.


119

:: Corporations

Interviews: India’s STAR CJNetwork and Lock & Lock

STAR CJ Network: “If your products are sold on our

home shopping channel, your products are high-end.”

Shin Woo-Kyun ([email protected])

President & COO at STAR CJ Network India

Q: Please introduce STAR CJ Network.

A: STAR CJ Network is a 50:50 joint venture between CJ O Shopping, Asia’s

leading home shopping company, and STAR TV, a well-known

broadcasting company. In 2006, CJ surveyed the Indian market for home

shopping business after succeeding in China. After thorough market

research, we founded a joint venture in 2009. STAR CJ Network is

currently expanding to new cities, including Delhi, Mumbai, and Pune, and

new states, including Maharashtra Gujarat, Haryana, Punjab, and Uttar

Pradesh. India’s home shopping market is small in absolute size, but it is

growing at triple-digit rates each year.

Q: The concept of home shopping is unfamiliar in India, isn’t it? When

Indians buy products, they like to touch the products in person and

negotiate their prices. How did you start doing business in India?


120

A: That’s right. Generally, Indians want to touch a product and negotiate the price

before buying it. But it was the same in other countries. At first, in Korea and

China too, home shopping seemed unlikely to succeed, but it is very popular

now. The same was true for India. After thorough market research, CJ

determined that home shopping business would work in India. The key to

success was trust. We have earned customer trust by joining hands with STAR

TV, a company with high awareness in India. STAR CJ Network

differentiated itself from its competitors. It had name brand products as their

main offerings from the very beginning, improving its image.

Q: So, home shopping business is making money in India. I think

this means the consumer pattern in India is changing. What do

feel in the field?

A: When I first came to India in 2000, traditional markets were ubiquitous

across India, even in Mumbai and Pune. Organized retail, what Indians call

the organized sector, was very rare. According to the market research

institute, even in 2006, the share of the organized retail market was far below

3% of the entire market. But, now the share is increasing, especially in large

shopping malls. When the large shopping mall business first started, it was

doubted that consumers would open their purses. Indian families would go to

large shopping malls for entertainment, because shopping malls had a lot of

entertainment to enjoy, but it was unclear whether their visits would lead to

shopping. Things have changed now. Many Indian consumers are spending a

lot of money in large shopping malls. The center of consumption is gradually

shifting from traditional markets to organized retail.

Q: Ok, so if the consumer trend is changing, what are the reasons?

A: Increasing income is the biggest reason. White collar salaries are

increasing at double-digit rates. The salaries of high ranking officials in

India are often higher than those in Korea. And Indians’ income cannot be


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:: Corporations

determined only by their salaries. There is a possibility that Indians have

other earnings aside from their salaries. In many cases, they have wealth

inherited from their parents. Another reason is that Indians started to turn

their eyes toward the latest trends. Indians like to travel. For a long time,

they have traveled overseas a lot, and they came to know about brand

goods. Until recently, it was hard to buy such brand goods in India. But,

because organized retail is growing nowadays, Indian consumers are

increasingly exposed to high-end brands.

Q: What is STAR CJ’s strategy in response to changing consumer

trends?

A: First of all, we approached the Indian home shopping market differently from

the Korean one. In Korea, we first introduced the products of small and

medium-sized enterprises (SME’s) with low awareness, rather than those of big

companies. And products of big companies were tailored to home shopping. In

India, other home shopping companies mainly sell SME products and health

products. But STAR CJ is actively introducing trendy products and name brand

products. In India, home shopping has the image of selling low-quality

products. As we introduce name brand products, we are making up for the

drawbacks of home shopping. Companies of brand products are using our

home shopping service, because they can increase awareness of their brand by

exposing the brand to consumers through our home shopping service.

Q: What is STAR CJ’s goal in the Indian market?

A: Our goal is to become the largest independent home shopping company in

the world. Currently, 240 million households out of India’s population of 1.2

billion own televisions. This is the second highest TV viewership in the

world after China. And the figure is increasing meteorically. But India has

the open broadcasting market. It is easy to expand the region in broadcasting.

STAR CJ will make the most of the Indian market’s potential.


122

Lock & Lock: Expensive, but attractive

Ham Tae-Wook, M.D. of Lock & Lock India

Yoo Sung-Won, Manager of Lock & Lock India

Q: Please introduce Lock & Lock’s business in India.

A: Lock & Lock is a manufacturer of total houseware products. Our main

products in India include plastic airtight containers and glass containers.

In 2001, we started selling our products in India through importers. We

established a liaison office in 2006 and incorporated the office in 2008.

Twenty three employees, including Korean employees, are working in

India. Our business in India is growing by 80% every year.

Q: Usually Indians use stainless kitchenware, and refrigerators

are not widely used in India. I doubt that airtight containers

would not be able to become popular. How is the consumer

pattern in India?

A: Containers are not always related to refrigerators. For example, lunch

boxes are not necessarily related to refridgerators. What is important is

how airtight the containers are. If containers are very airtight, the food

in the containers is less likely to go bad. Indians store rice, chapatti

bread, side dishes, and other food in layered lunch box cases, but water

often leaks out. Lock & Lock lunch box cases are highly praised by

Indians, because they are 100% airtight. Also, Indians carry water

bottles to drink water outside. Water bottle products are also unrelated to

refrigerators.

As you know, Indians are very careful with money. If a container’s

handle breaks, a Korean consumer usually wants to replace the whole


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:: Corporations

product with a new one, but Indians want to replace only the handle. So,

in the case of pressure rice cookers, each part is separately packaged and

sold in India.

Q: Even in Korea, Lock & Lock containers are a little bit more

expensive than other products. I think Indians will regard your

products as very high end. The Indian market is still regarded

as a low-end market. What is your strategy?

A: Our containers might be unfamiliar to Indians. But what is important

here is once consumers use Lock & Lock containers, they purchase our

products again, even though they are more expensive. Our competitors

produce imitation products, but their products are inferior to ours in

terms of durability and airtightness. I think Indian consumers are well

aware of the gap in quality between our products and others. We also

have products tailored to the Indian market. A good example is the lunch

box case. It sells for KRW 20,000 in Korea, but this price is very high in

India. Considering the shape of lunch boxes in India, we introduced new

products with new designs and streamlined functions at cheaper prices.

The new products became popular. In order to portray the image as a

high-end brand, we sell our products through the STAR TV Network

home shopping channel, or online. We also use organized retail channels,

which have been growing recently.

Q: As the Indian economy develops, consumer patterns are

changing. Is this change perceptible? How so?

A: Lock & Lock entered the Indian market in 2001. At that time, we

wondered if our products would succeed in India. As the Indian economy

develops, consumer needs are becoming various and specific, and we

need new products to satisfy such consumer needs. Indians now want

new functions which stainless or plastic containers do not have. Lock &


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Lock found a niche market and realized its potential, so we advanced into

the Indian market earlier than our competitors.

Q: What is Lock & Lock’s goal in India?

A: We are using the regional block strategy. India is included in the Asian

block. India is close to China, and India has a similar culture to

neighboring countries. Our experiences in India will be greatly helpful

when we enter these markets in the future. The Indian market is growing

fast like the Chinese market. India is far behind China in terms of absolute

numbers, but India’s growth rate is higher than that of China. So, our

company thinks of India as a target market. Our goal is to open directly

owned stores in India, and establish franchises as we did in China.

CCuullttuurree

�Cultural aspects of parks

�Indians’synthesizing mindset


126

Cultural aspects of parks

Jang Soo-HyunProfessor of the Division of Northeast Asian Cultural Industries Kwangwoon University

Parks in China are a cultural mosaic where the past and present

coexist. This is what I thought at a park in Beijing a few years

ago when I saw people dancing blues or tango, young people

busy practicing salsa, the latest dance fashion at the time, people

singing Peking opera songs, accompanied by traditional musical

instruments, and laborers far away from their home towns singing songs of

the revolutionary period.

○● Parks demonstrating a generational spectrum

China’s parks are a place for the middle-aged and elderly. Parks are

always busy with people from all walks of life. Many families go for strolls

in parks on weekends and evenings. However, the middle-aged and elderly

are seen the most at parks. When I visited Shanghai last August, I dropped

by Lu Xun Park next to the Hongkou Soccer Stadium. As I entered the park,


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:: Culture

passing children on rides near the entrance, I found middle-aged and elderly

men and women all about. Many of them were enjoying their own time,

resting on benches, reading newspapers or books, writing, or playing

musical instruments, such as the saxophone.

Despite the hot weather, many people were dancing together or

exercising in small or large groups. Bright energy exuded from people

dancing a waltz in the middle of the park amidst the midsummer heat. It was

an interesting scene: people with glowing faces gracefully dancing to the

melody, mixed with envious beginners clumsily trying to dance.

In another part of the park, dozens of middle-aged or elderly people

were dancing sixteen steps (十六步) to a fast beat, reminding me of

aerobics. Small groups of people were also gathered here and there,

practicing dance or Tai Chi.

In a pavilion in a corner of the park, older men were talking loudly about

something. I could not understand at all because they spoke Shanghai

dialect. I asked an old man in his seventies who was sitting on a bench

nearby what they were doing. He told me that they were giving free vent to

their pent-up feelings by expressing complaints about society and family.

○● Parks demonstrating the issues of the time

These scenes, ubiquitous in urban parks, reflect the problems of seniors

and the unemployed in China.

How to take care of the aged is a serious social problem in China, which

has already become an aging society. China’s strict family policy,

implemented in the 1970s, has created “4-2-1 families”(families with one

child doted on by two parents and four grandparents) in urban cities, and “4-

2-2 families”(two children with two parents and four grandparents) in rural

areas. This means that the family burden of caring for the elderly will

become heavier.

According to the 2000 Census in China, the number of people over 60


128

years of age was 130 million. With the evident phenomenon of “getting old

before getting rich (未富先老)”, the Chinese government has realized the

gravity of senior welfare issues and introduced various policies. However,

China’s senior welfare policies are still substandard; much of the burden of

caring for the elderly falls on families.

Under the circumstances, the elderly naturally live with worries about

their unstable present and uncertain future. They spend as little money as

they can; they take care of their own health, participating in various cultural

and health programs offered by cultural centers of local governments, or in

dancing and Tai Chi classes offered by volunteers. By communicating with

people in the same situation, they ease anxiety and dissatisfaction in their

minds. In this regard, what the middle-aged and elderly do in Lu Xun Park

is a common cultural scene.

The unemployed constitute a large number of people that consider parks

their resting place, playground, or cultural and sports centers. The

unemployed issue hinders China from moving toward a harmonious society.

China’s official unemployment rate stood at 3-4% in the 2000s, however

many experts estimate that the real unemployment rate exceeds 10%.

Official statistics do not include workers in companies out of operation,

who are virtually unemployed, and Xiagang (下崗) or laid-off workers.

Xiagang workers are in a particularly bad situation. China’s state-owned

companies began laying off workers in the early 1990s following the

government’s full-fledged reform. Since then, the number of the

unemployed has grown rapidly, and the accumulated number reached tens

of millions by the early 2000s. Workers were laid off particularly in

traditional industries, including the spinning and weaving, mining, and

machinery industries, affecting regions in which these industries are located.

By age, the largest number of people laid off was those aged 31 to 50. By

gender, more women were laid-off than men. Xiagang is the Chinese style

of laying off workers, which provides laid-off workers with living expenses,


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:: Culture

pension, housing and medical benefits for a certain period. In reality,

however, they have little possibility of being reinstated, and they receive

little or nothing in living expenses. It is fair to say that Xiagang workers are

unemployed.

Xiangang workers are generally older and have much experience. This

means that they are due many benefits; hence it is more difficult for them to

find new jobs than for ordinary unemployed people. They find themselves

relying on their family’s support as the elderly do. This kind of urban

unemployed, whether they are out of work, laid off, or retired early, have

difficulty supporting themselves; therefore they have very limited places to

enjoy cultural events. Parks are among the few places open to them.

○● Parks as cultural plazas

Parks function as a comprehensive cultural space for the middle-aged

and elderly who are marginalized under the shadow of China’s reform and

opening-up policies. Parks are resting areas where they can spend time

without worrying about money, and playgrounds where activities suitable to

their interests or tastes take place. Moreover, parks are places where they

can communicate with one another. They ease their anxiety while

expressing their discontent with reality to people in a similar situation, and

take comfort in listening to others. Even today, you can hear their stories,

big or small, at Lu Xun Park in Shanghai.


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Jawaharlal Nehru, the first Prime Minister of India, summarized

India’s culture of diverse ethnicities, religions, languages, and

regions, and the caste system with the phrase, “unity in diversity.”

However, one sentence cannot possibly describe India fully. The

more one learns about India, the more one discovers how complex India and

its people are. Diversity is found in every aspect of India.

Indians are divided into castes, and they are divided by their place of

origin: South India or North India. Indians who come from different castes

and regions keep a distance from one another, and are wary of one another.

The reason for this can be found in the unifying elements underlying the

Indian mentality, such as hierarchical tendencies, preference for collectivism

and personalized relationships, and context sensitivity. Indians place a high

priority on self-interests and the interests of the groups to which they

belong.

This tendency might seem selfish and uncaring. However, Indians

Indians’ synthesizing mindset

Lee Yong-HwaManager, Institute of Global Management


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:: Culture

neither criticize one another nor show indifference to one another. For most

things, the Indian mentality is that “anything can happen.”This is the basis

of the Indian mentality of coexistence, which is essential to India’s diversity.

○● Anything can happen

It is the Indian way of life to accept the behaviors of others, thinking that

anything can happen. In India, religious events and family events, such as

wedding ceremonies, often involve blocking streets in the neighborhood and

making loud noises. Noise that comes out of large speakers drowns out all

other sound, so that no one in the neighborhood can watch television, listen

to music, or sleep. Still, people do not complain that the people who are

making the noise are being selfish or insensitive; instead they accept the fact

and deal with it, thinking that anything can happen. When a wedding parade

runs into a funeral parade, nobody in the wedding parade asks the funeral

parade to move out of the way. (In some cultures, funerals are considered a

sign of bad luck.) The bride and groom, who are starting a new life together,

humbly accept the end of another’s life. At work here is the mentality of

coexisting with every surrounding element.

The Indian mentality of coexistence goes hand in hand with a

synthesizing mindset. A synthesizing mindset is a disposition of accepting

everything without prejudice. If Indians encounter a new value, idea,

activity, religion, science, technology, or culture, and if this new thing is in

line with their own thoughts and values, they accept it as their own. If they

do not agree with the new thing, they do not reject or disregard it, but simply

allow it to coexist among others.

The Indian mindset of coexistence and synthesis is well reflected in the

sheer number of deities Indians believe in: there are hundreds of millions of

gods and goddess, and the number of avatars or incarnations of god is

growing. (In Hinduism, many great figures, including Albert Einstein,

Mother Teresa, and Bill Clinton, are considered incarnations of God.)


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○● The capacity to store different ideas in one place

The greatest advantage of the synthesizing mindset is its receptive

capacity of accepting everything as it is. Indians do this by

compartmentalizing their thoughts. As they accept and synthesize new

ideas, they compartmentalize and organize them in separate compartments

within the repository consciousness.

For example, Hindus, who account for more than 80% of the 1.2 billion

Indians, regard Buddha as the ninth incarnation of Vishnu, one of the three

Hindu Gods. Buddhism and Hinduism are fundamentally opposed to each

other; Hindus believe in the immortality of the soul, while Buddhists reject

immortality. The two religions have opposing ideologies, but rather than

denying or rejecting the differences, many Indians accept Buddhism as one

tributary among many ideologies.

In this sense, it is important to keep in mind that the synthesizing

mindset is one of “coexistence,”not “unity.”This mindset can be compared

to putting together puzzle pieces, each one different in shape, to create a

single image, as opposed to making all of the pieces uniform.

In India, it is quite natural for a doctor or scientist to go to work wearing

traditional costume and ornaments. This is in stark contrast to the

stereotypical, formulaic mindset found in Korea, where a doctor wearing

traditional Korean costume, hanbok, is automatically presumed to be a

practitioner of Eastern medicine.

○● Leniency or inconsistency?

Just as a coin has two sides, the synthesizing mindset also has

drawbacks. The synthesizing mindset of accepting things as they are makes

Indians seem lenient on the one hand. On the other hand, however, it makes

them appear vacillating, changing their words and actions out of

convenience. Confusion arises from differences between those who do not

accept what they do not agree with (non-Indians) and those who accept what


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they do not agree with (Indians).

Many foreigners have a common experience in India. When a foreigner

tells his Indian partner about a business plan, the Indian might say, “No

problem.”Later, however, the Indian partner might surprise the foreigner,

saying that he cannot join the plan. For foreigners, who do not accept what

they do not agree with, “No problem”means that everything is fine.

However, for Indians, who accept what they do not agree with, “No

problem”means, “I could think about it that way.”Similarly, if an Indians

says, “Let me think,”when asked to do a favor, it most likely means, “No.”

In many cases, what Indians say out loud might be different from what

they are actually thinking. In India, one is not supposed to pass judgment

based only on what they see or hear. Indians put a myriad of different pieces

of information in separate compartments in their repositories of

consciousness (synthesizing mindset) and use them as needs arise (context

sensitivity). This means that each of the 1.2 billion Indians has a unique

repository of consciousness based on his own experience, creating 1.2

billion behavior patterns. Thus there is little chance of uniformity.

One Indian has the capacity to embrace 1.2 billion different behavior

patterns, and this is the same for all 1.2 billion Indians. This very fact allows

for the integration of diversity, making Indians unique in their “unity in

diversity.”

POSCO Research Institute was established in 1994 as a thinktank of POSCO and its affiliates. POSCO Research Institute isendeavoring to develop a new management paradigm for the21st century based on practical knowledge.

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India's uncertainties at present and its optimism for the future

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