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.
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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.
“
“
POSRI Chindia Quarterly�Win te r 2012
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
Winter 2012�POSRI Chindia Quarterly
009
:: Luxury markets in Chindia
Cho Jun-HyeonProfessor of Economics, Pusan National University
POSRI Chindia Quarterly�Win te r 2012
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.
Winter 2012�POSRI Chindia Quarterly
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:: Luxury markets in Chindia
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
POSRI Chindia Quarterly�Win te r 2012
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.
Winter 2012�POSRI Chindia Quarterly
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:: Luxury markets in Chindia
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.
Winter 2012�POSRI Chindia Quarterly
015
China’s craze for luxury goods
:: Luxury markets in Chindia
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
POSRI Chindia Quarterly�Win te r 2012
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
Winter 2012�POSRI Chindia Quarterly
017
:: Luxury markets in Chindia
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)
POSRI Chindia Quarterly�Win te r 2012
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)
Winter 2012�POSRI Chindia Quarterly
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:: Luxury markets in Chindia
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.
POSRI Chindia Quarterly�Win te r 2012
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
Winter 2012�POSRI Chindia Quarterly
021
:: Luxury markets in Chindia
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.
Winter 2012�POSRI Chindia Quarterly
023
China’s great cause:“Create Chinese brands”
:: Luxury markets in Chindia
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
POSRI Chindia Quarterly�Win te r 2012
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-
Winter 2012�POSRI Chindia Quarterly
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:: Luxury markets in Chindia
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
POSRI Chindia Quarterly�Win te r 2012
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.
Winter 2012�POSRI Chindia Quarterly
027
:: Luxury markets in Chindia
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.
Winter 2012�POSRI Chindia Quarterly
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
:: Luxury markets in Chindia
POSRI Chindia Quarterly�Win te r 2012
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
Winter 2012�POSRI Chindia Quarterly
031
:: Luxury markets in Chindia
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: %)
POSRI Chindia Quarterly�Win te r 2012
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
Winter 2012�POSRI Chindia Quarterly
033
:: Luxury markets in Chindia
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.
POSRI Chindia Quarterly�Win te r 2012
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.
Winter 2012�POSRI Chindia Quarterly
035
Korean companies in India,bolstering premium strategies
:: Luxury markets in Chindia
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.
POSRI Chindia Quarterly�Win te r 2012
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
Winter 2012�POSRI Chindia Quarterly
037
:: Luxury markets in Chindia
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
POSRI Chindia Quarterly�Win te r 2012
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.
Winter 2012�POSRI Chindia Quarterly
039
:: Luxury markets in Chindia
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.
IInnddiiaa:: BBeeyyoonndd
aannttii--ccoorrrruuppttiioonn
�Indian corruption: characteristics and responses
�Eradicating corruption, a new missionfor economic growth
�Mounting demand for ethical corporatemanagement
Winter 2012�POSRI Chindia Quarterly
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
POSRI Chindia Quarterly�Win te r 2012
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
Winter 2012�POSRI Chindia Quarterly
045
:: India: Beyond anti-corruption
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.
POSRI Chindia Quarterly�Win te r 2012
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.
Winter 2012�POSRI Chindia Quarterly
047
:: India: Beyond anti-corruption
○● 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.
POSRI Chindia Quarterly�Win te r 2012
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
Winter 2012�POSRI Chindia Quarterly
049
:: India: Beyond anti-corruption
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.
POSRI Chindia Quarterly�Win te r 2012
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○● 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.
Winter 2012�POSRI Chindia Quarterly
051
Eradicating corruption, a newmission for economic growth
:: India: Beyond anti-corruption
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
POSRI Chindia Quarterly�Win te r 2012
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,
Winter 2012�POSRI Chindia Quarterly
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:: India: Beyond anti-corruption
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
POSRI Chindia Quarterly�Win te r 2012
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.
Winter 2012�POSRI Chindia Quarterly
055
:: India: Beyond anti-corruption
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
POSRI Chindia Quarterly�Win te r 2012
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.
Winter 2012�POSRI Chindia Quarterly
057
Mounting demand for ethicalcorporate management
:: India: Beyond anti-corruption
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,
POSRI Chindia Quarterly�Win te r 2012
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
Winter 2012�POSRI Chindia Quarterly
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:: India: Beyond anti-corruption
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.
POSRI Chindia Quarterly�Win te r 2012
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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
Winter 2012�POSRI Chindia Quarterly
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:: India: Beyond anti-corruption
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
POSRI Chindia Quarterly�Win te r 2012
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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
Winter 2012�POSRI Chindia Quarterly
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:: India: Beyond anti-corruption
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
Winter 2012�POSRI Chindia Quarterly
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.
POSRI Chindia Quarterly�Win te r 2012
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○● 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
Winter 2012�POSRI Chindia Quarterly
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:: 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.)
POSRI Chindia Quarterly�Win te r 2012
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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.
Winter 2012�POSRI Chindia Quarterly
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:: 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
POSRI Chindia Quarterly�Win te r 2012
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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.
Winter 2012�POSRI Chindia Quarterly
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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
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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.)
Winter 2012�POSRI Chindia Quarterly
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:: 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
POSRI Chindia Quarterly�Win te r 2012
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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,
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:: 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
POSRI Chindia Quarterly�Win te r 2012
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○● 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
Winter 2012�POSRI Chindia Quarterly
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:: 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.
Winter 2012�POSRI Chindia Quarterly
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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
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:: 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
POSRI Chindia Quarterly�Win te r 2012
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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.
Winter 2012�POSRI Chindia Quarterly
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:: 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.
POSRI Chindia Quarterly�Win te r 2012
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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.
Winter 2012�POSRI Chindia Quarterly
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:: 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
POSRI Chindia Quarterly�Win te r 2012
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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
Winter 2012�POSRI Chindia Quarterly
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:: 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.)
POSRI Chindia Quarterly�Win te r 2012
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
Winter 2012�POSRI Chindia Quarterly
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:: 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.
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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)
Winter 2012�POSRI Chindia Quarterly
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:: 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
Winter 2012�POSRI Chindia Quarterly
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:: 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.
POSRI Chindia Quarterly�Win te r 2012
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○● 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
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:: 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.
POSRI Chindia Quarterly�Win te r 2012
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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
Winter 2012�POSRI Chindia Quarterly
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:: 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
POSRI Chindia Quarterly�Win te r 2012
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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,
Winter 2012�POSRI Chindia Quarterly
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:: 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.
Winter 2012�POSRI Chindia Quarterly
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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.
POSRI Chindia Quarterly�Win te r 2012
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○● 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
Winter 2012�POSRI Chindia Quarterly
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:: 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,
POSRI Chindia Quarterly�Win te r 2012
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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
Winter 2012�POSRI Chindia Quarterly
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:: 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
POSRI Chindia Quarterly�Win te r 2012
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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.
Winter 2012�POSRI Chindia Quarterly
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:: 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
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:: 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
POSRI Chindia Quarterly�Win te r 2012
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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.
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:: 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.
POSRI Chindia Quarterly�Win te r 2012
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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.
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:: 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.
POSRI Chindia Quarterly�Win te r 2012
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.
Winter 2012�POSRI Chindia Quarterly
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?
POSRI Chindia Quarterly�Win te r 2012
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
Winter 2012�POSRI Chindia Quarterly
121
:: 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.
POSRI Chindia Quarterly�Win te r 2012
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
Winter 2012�POSRI Chindia Quarterly
123
:: 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 &
POSRI Chindia Quarterly�Win te r 2012
124
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.
POSRI Chindia Quarterly�Win te r 2012
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,
Winter 2012�POSRI Chindia Quarterly
127
:: 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
POSRI Chindia Quarterly�Win te r 2012
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,
Winter 2012�POSRI Chindia Quarterly
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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.
POSRI Chindia Quarterly�Win te r 2012
130
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
Winter 2012�POSRI Chindia Quarterly
131
:: 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.)
POSRI Chindia Quarterly�Win te r 2012
132
○● 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
Winter 2012�POSRI Chindia Quarterly
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:: Culture
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.
POSCO Research Institute prepares enterprises and society for the future business environment
by identifying changes while providing creative and future-oriented research solutions. To this
end, POSCO Research Institute is conducting in-depth research into the steel industry and
forward and backward linkage industries including energy and environment, as well as analyzing
domestic and international economic issues. Moreover, we are expanding our research activities
to little-researched areas as well as China and India.
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