Over to You: Can India trump China as choice for US tech investment?

The two rising powers are competing for American favour

India and China: two global economic giants which between them make up over a third of the world’s population. The respective leaders of these vast nations were in the US recently and took time out en route to Washington and the UN to visit some of the world’s biggest technology companies. But while it was all smiles at the photo calls, who made the better impression – Modi or Xi?

India is increasingly coming to represent an important new market for US tech firms, but could it ever overshadow the Middle Kingdom?

As things stand at the moment, the world’s largest democracy certainly has a long way to go before it challenges the world’s most populous nation in its financial dealings with the US. China’s economy is over four times greater than India’s thanks to the tremendous growth it has seen over the past 25 years. What’s more, its trade with the US last year stood at something like $600 billion – dwarfing India’s $100bn.

China falling?

However, things are changing. Beijing has become increasingly frosty towards foreign technology investors – even the big players like Cisco, Qualcomm, Microsoft and others. Qualcomm was hit with a record antitrust fine close to $1 billion, and the Chinese government banned installations of then new OS Windows  8 on government computers last year in a move widely seen as retaliation for Microsoft’s decision to end XP support. Redmond has also been harangued by antitrust officials over recent months, despite having had a reasonably good relationship with the authorities up until now. And Cisco has had a “tough couple of years” in China according to CEO Chuck Robbins – especially as it faces fierce competition from local rival Huawei.

On this, perhaps China watcher Bill Bishop said it best in a comment on his widely read Sinocism blog:

“Cisco's rise and precipitous fall in China should be a sobering case study for a new generation of US tech execs who think they can find the right government relations team/strategy to successfully navigate China. They too will learn that in the end the CCP feels no gratitude and will bend eager execs to their will, all while trying to use their firms to help domestic competitors.”

This is not even to mention the rigorous local censorship laws which can either preclude Western firms from entering China (e.g. Facebook and Twitter) or add extra costs to their bottom line and generate bad publicity when it inevitably emerges that they’ve been complying with local laws (LinkedIn).

Then there’s the continued tension between the US and China over allegations of state-backed cyber espionage directly impacting private US enterprises. Despite a recent US-China deal claiming the two countries had reached a “common understanding” on curbing economically motivated cyber-attacks, I remain highly sceptical. This isn’t going to prevent US tech firms from tapping a market of approaching one billion internet users, but perhaps it will help India’s cause as it vies for direct investment.   

Anil Gupta, an expert on US-India-China relations and member of the faculty at the University of Maryland's Robert H. Smith School of Business, had this to say:

“US tech companies no longer trust the Chinese government ... seeing as it not willing to play a fair game. If I look at all the big tech companies, the one that went out of its way to embrace the Chinese government is Microsoft at the leading edge. And it’s found itself in trouble recently, so they are realizing the Chinese government doesn’t care if we do good things for China.”

On the other hand

Which brings us to India. Prime Minister Narendra Modi became the first leader from the sub-continent to visit Silicon Valley for over 30 years last month. And by all accounts he’s looking to appeal to the huge number of Indian Americans in the Bay area and the Indian-born heads of Google, Adobe, and Microsoft to spur investment back home.

There’s much to suggest he’ll succeed. After all, India is now officially the world’s fastest growing economy, and the country shares with the US a suspicion of China bordering on open hostility. Its political landscape is also helpful, according to Forrester research director, Ashutosh Sharma.

“The fact both US and India are democracies make them very similar in legislation-making, hence providing a similar [regulatory] climate for US companies. Compare that with China which has a tight noose around internet services and a regulatory regime which is not favourable to western firms,” he told me by email.

“Its young population is technically savvy, increasingly better educated and more informed and will have rising disposable income if the economy comes back on track. This combined with decades of neglect and underdevelopment is providing a plethora of opportunities to firms both local and multinational, start-ups and incumbents.”

In fact, India has already surpassed China in terms of investment in its tech start-ups, with a “huge amount” of money coming in from abroad – as much as $6 billion in the quarter ending September from private equity firms alone, he added.

Tempering this excitement are some notable caveats, however. Although the likes of Microsoft, Dell and IBM – and on the consumer side, Amazon, Google, Uber and others – have done very well in India, certain highly regulated sectors including retail, media, telecom, banking and financial services are less friendly to direct investment. Mobile networks are poor and even internet penetration is relatively low, with a majority of the touted 300 million users actually “accidental users through their use of smartphones”, Sharma explained.

“Beyond the socio-economically well off population there is a sizeable population which is digitally dark, does not know English and has limited disposable income,” he added. “This makes it difficult for marketers to justify huge investments in digital media.”

The regulatory climate is also complex and overly bureaucratic, despite Modi’s promise when he came into power 18 months back to change this. General Electric CEO Jeff Immelt told reporters in New Delhi last month that despite seeing “great opportunities for a market of this size” he wanted India “to be easier to do business with”.

This sums up the feelings of the business community at large. And it’s something Modi will have to get to grips with fast if he’s to translate the enormous goodwill shown to him on his recent visit into serious investment.