In China to cover Prime Minister Narendra Modi’s visit to the country, CNBC-TV18’s Shereen Bhan caught up with Shane Tedjarati, global high growth regions president, Honeywell, to get his understanding of the company’s relation with China and India and what the latter can learn from the former’s growth story.
Below is the transcript of the interview on CNBC-TV18.
Q: China and India equally important to Honeywell as far as your global strategy is concerned. China of course contributes 6 percent to global sales in 2014, India about 2 percent or so. What has been the big difference while you operate in both these key markets? A: China and India to me are like the two rocket boosters on the big engine of Honeywell because together it is not what percent of sales they have, but what they contribution to growth they have. Together they are nearly 30 percent of the growth contribution of the company. So, all the goodness and the performance of Honeywell over the past ten years more than half of it is coming from India, China and the rest that were built on top of that foundation. Almost four years ago I ran China and India without regard to the rest because our philosophy was if you cannot get China and India right, it didn’t matter if you got the rest of the world, you wouldn’t be able to get the rest of the world right. And for us it has never been the one or the other. It is never a question of which one do we do more or less. We have equal number of people in China and India and they take equal amount of share of concerns and priority for me and they have different strengths and a little bit different business models but I would say by and large they occupy the same sphere for me. Q: The Prime Minister is now talking about “Make in India”. Made in China of course has been around for past 30 years or so or more. The government at this point in time in India is looking at putting together a “Make inIndia” policy. What do you think should be the pillars of that policy? You are already invested in India but to draw-in incremental investments from people like yourself and to draw-in fresh investments what should this policy entail and what are the lessons perhaps that India can learn from China? A: I have been in China for 23 years. So I was here when people were making cheap toys, bad quality, cheap and cheerful stuff and they never were very serious about it. China made a lot of very smart moves because they knew that they need to continuously come up the ladder in manufacturing excellence, even up till now they continue to try to be better and beat themselves in coming up to a higher value added manufacturing. A few big things, obviously they had to focus and I worked very closely with the Chinese government on this- logistics. When you want to manufacture, at the end of the day it is not going to in ether, it will happen on terra firma. You are going to need to get supplies, you are going to get it from suppliers, you have to bring it together and you are going to have to put it together, test them, make them work and you are going to have to take it to customers. This needs to happen quickly and India’s speed needs to be like China’s speed.
Logistics is not just about physical logistics, it is everything, it is financial logistics, it is taxation policies, it is customs, it is all the paperwork, it is the bureaucracy coming out of it, you need land but you need also to be able to operate on that land. India has a long way to go there, it is not there. India does manufacture, I am not blind to it, we ourselves have a lot of manufacturing in India but there is a vast difference. For example you don’t have a transparent inter-state ability to move goods and services around without the bureaucracy, it just kills India. Q: Hopefully the Goods and Services Tax (GST) will come into effect in 2016 and address that problem. A: Exactly. What comes before and after, it’s kind of a chicken-and-egg thing. People say unless you have all of that you cannot actually put the infrastructure together. You need to do both, you need to all of that.
China incessantly built infrastructure. At that time people were saying they were overbuilding, they are they are overbuilding all these highways and sea ports and all that, well look what happened. If you didn’t have them you would never have the China you have. China does have an advantage over India in the physical infrastructure. A lot of people haven’t done the thinking about what happened to China, why did they grow so rapidly whereas India just grew a bit and continued on? The reality was China had access to land use. Q: That continues to be a constraint for India. A: Yes and it has now become a constraint for China because they have allocated most of the land they could but they had access to land use. Land use rights in terms of how to you plan a city, how do you actually carve out this is an economic zone, this is a hi-tech zone, this is a chemical plant, there is going to be a highway here, if you can actually appropriate all those things and execute on it, I totally know that it is sometimes sacrilegious in India to say here are 10000 people just tell them to move, you can’t do that. It is the curse of democracy which I love so much but it is what it is.
Q: Often times, democracy is a drag on development because you can’t raise buildings overnight as you can here.
A: However this I think people tend to kind of either not understand as much, China had one big card in its hand and it was able to appropriate land and then investors said you are going to be able to do this, you really are able to do this and in the early 90s when I was here, people didn’t quite believe that they could. However, when they said I will appropriate this land, I will look at these farmers and these people. I was here when going to Pudong was an act of God, from Puxi side of Shanghai it would take half a day and you had to take malaria tablets and that is Pudong today, it is just like five Manhattans put together.
_PAGEBREAK_ Q: What about the cost of this kind of transition and this kind of urbanisation? The environmental cost of course we are well aware of and that is part of your strategy as well so breathing in Delhi and breathing in Beijing perhaps I don’t know which one is worse at this point in time. A: I think both are bad for different reasons; China because the economy grew incessantly and inefficiently and India because they can’t drive. They are all stuck. Some people say why is China having much more accidents on the road than India? Are they better drivers in India? I said no, it is because Indians can’t move; cars are always stuck. In China they have big highways, they drive around. They killed over 150,000 people in the roads in China last year. So, that is an indication of what happens when you grow without balance. Q: Which is surely not the path that we ought to take in India. A: You can’t take that path. I was one time in India and some officials somewhere in one of the cities -- I won’t talk about -- which says in five years time this city will surpass Shanghai in every bit of human index and all that – it is obvious it is not going to happen. However, that is not the point, the point is India has to take its own path and it has to be the Indian way. India never took off until Gandhiji came and said we have to do it our own way. We have got to figure out our own way. The same thing needs to happen now.
You can’t impose the China model but you can take a few pages and say what is the Indian way and that is the genius of the way Chinese did it. They never said I am going to do this the American way or the German way but they have studied all of these things and said okay I still need to do it my own way and here is how I do it.
Now, everybody is talking about the China model. In the Middle East, a lot of the countries say I like it because you can keep one party and you can still grow but none of them have been able to do it because the China way is a unique way too. Q: What are the important lessons that India can learn from and equitable growth is key to sustainable development in a country like ours, so, what are the key lessons from a manufacturing standpoint, from an infrastructure standpoint you believe that we can adopt? A: I think first of all it starts with policies. Getting this taxation thing going is very important. Q: Tax is not such an issue or challenge in China – predictability, certainty? A: Compared to India it is a walk in the park. You have the armies of tax thinkers. It is complicated in India. I think they can solve it. They have solved the tax problems in the US from India, some of the best tax thinkers. I used to work for Deloitte before this and some of the best thinkers in the world are right there in India. They solve the problems of the rest of the world, why couldn’t they do it for India. So, solve tax, solve the whole end-to-end bureaucracy around logistics. The customs, taxation – you need to create fluidity. Manufacturing likes to move, manufacturing can’t be stopped. If you stop a line, they are bleeding. Then we need to get infrastructure going. Sea ports are important. India has a lot of waterways; that is the way you are going to have to get things out of India because to the north you don’t have much to penetrate through – you have got all the bad, to the east you got bad, to the west you got bad – you have to get through the waterways. Q: This business then of making India an export hub for other emerging markets, do you really believe that it will take another 10-15 years before that can really be a reality? A: Yes. I don't think it is going to be a five year thing. I could be wrong but I will stand on record saying it is not going to happen in five years. Things will happen and what we need to do is make sure we take progress, take step at a time, we don't stop and continue on. The good thing that India has got going for it which a lot of people here in China also don't understand, they have a lot of private entrepreneurs that are just phenomenal. Actually what they are doing, if they were in China their businesses would be 10x larger because they are doing it despite all of these problems. They are dong inspite of the logistics problem, infrastructure, all of this stuff, how do they do it? They find ways to get this thing done and it is not just the software companies because they are all our friends. Look at what Tata is doing, Mahindra's of this world and others. I think if it gets a little bit better those entrepreneurs will mushroom and you will also give birth to other global entrepreneurs. The other big thing with India is whether you like it or not people have a soft spot for Indians. Globally the brand of India in terms of the Indian people - people love Indian power, they watch the soap operas, they laugh together with them, there is a soft spot. There is no such soft spot for Chinese. In fact a lot of the image in America, there is a lot of China bashing in America. You never here about India bashing around the world. Q: It is only when you talk about outsourcing. A: That is just a tiny political thing.
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Q: Prime Minister Modi is here in China wooing Chinese investors to come invest in India and make in India. Do you think that he is going to be able to convince them, do you think we are going to see significant Chinese investment outside of infrastructure-infrastructure is of course going to be one of the big areas of opportunity I would imagine because of excess capacity here and the deficit in India but outside of infrastructure do you really see significant Chinese investment coming in into India? A: I am sure you want an honest and frank answer. Q: Yes, of course I want an honest answer. I wouldn’t expect anything short of that. A: It was a rhetorical question. When it comes to state to state investment and state-owned enterprise type of investments, yes you will get them because it is going to happen, it is going to be strategic as well as the state sector has a different way of looking at these geographies than the private sector.
In the next five years private sector investment is going to be slow, I don’t think there is the stomach among the Chinese private investors because they are scared, they don’t understand a market that they don’t understand. For them, building products and shipping it to India, hoping it sells is a different story than saying hmm, I am going to go to India, become an Indian company, set up shop, sweat it all out literally and then making an Indian business for myself, not a lot of them have the stomach for it yet.
Some of them aren’t as big a believer for the good reasons because why they became successful is because of why I was just telling you. Land use, government incentives, ability to move fast and execute fast and quick, they believe they are going to be at a disadvantage there in India and obviously they are not worldly to begin with. As I said, they don’t have Cartesian logic in their 3000 years of education, they are uniquely non-Cartesian.
Their Confucius system of processing knowledge has made them because of the middle kingdom mentality that has been here for thousands of years, it’s made them much less worldly. So, the way they have become worldly is through trade, it is either selling Chinese goods or buying foreign goods.
That becoming worldly in terms of going somewhere and sticking it out and actually making a business, not just for benefit of China but for the benefit of building a business is not a Chinese phenomena yet. Give me three Chinese companies that have a globally recognisable brand? Just don’t exist and are globally admired, maybe there is one and a half but it will happen but if you tell me, would one visit or in the next two three years will get the private Chinese enterprises? I don’t think so.
Eventually they will but the big bet would be on state sector, infrastructure, energy, cooperation between the nations, Chinareally wants to make that happen. Q: Let me end by asking you about the current slowdown that we are seeing in China and we just talked about it a little bit but this is the big concern. The world is watching what is going on in China, is it going to be sub six percent, if it is sub-six percent, what is it going to mean as far as global growth is concerned. How worried are you about the current economic situation, the debt trap that China has found its way into, are they likely to be able to continue to spend their way out of trouble which seems to be the belief at this point of time, what is your consensus on what is going on within China at this point? A: Of course there is a lot of dynamics to the analysis of that question but the short answer is we were the outliers among the industrial companies when everybody was dissing China and bashing China and Dave, myself and the management team, we were very clear that the answer is not so black and white. Everybody was saying China is building all these ghost towns, you remember these articles in Fortune and others and few other articles around all of these empty towns, reality is none of those were the total picture.
At the same time as that was happening, our commercial, residential and industrial buildings business was booming through all the years of China bashing because we were in second tier, third tier cities, we were in east for east in the mid segment, in the lower segment, there is still 200 million people that need to urbanise, China needs to urbanise.
Remember it is the only place worse than India in terms of precarious situation with the environment that they found themselves. 22 percent of the population of the world living on 7 percent of the arable land, surrounded by the Tibetan Plateau and the Gobi desert. I sometimes joke and say China was built on Saturday night before God retired on Sunday. He had nothing else in his hands, just had people.
Put all the people with no resources-it is one of the least resource rich countries and is becoming rapidly rich, it can’t do it with people n0t urbanising and living in efficient cities and efficiently using technology, efficiently using energy, you just can’t. It is a matter of survival because if they don’t do it, they won’t be able to be a nation because people have tasted prosperity, they can’t just stop.
You can’t just tell people you got rich until here but that is it, you stop. So, it is an inevitability, unless there is a total collapse, the inevitable thing is going to continue to urbanise. That urbanisation and the ability of the Chinese -- they are very entrepreneurial people -- is going to do them well.
Can they go below the 7 percent that is thereabouts right now? Yes it can, it might get to 6, it might get to maybe even a little bit sub-6 but the government is going to be a little careful about sub-6 because there is still quite a bit of potential unemployment problem if it gets below sub-6 and you can see that from why they haven’t taken all the actions that they have with the state-owned enterprises but the urbanisation an the continued focus on infrastructure and upping the education system, upping the manufacturing prowess of China to higher levels of manufacturing, the RNDF that they have been focusing on -- over the long term I am pretty bullish about what is going to happen.
In fact even in the medium-term we are doing very well in China despite all the dissing that other people do, we never called it-we were the outliers, I am glad we were because they pointed us out and said aren’t you really worried, all the analysts asking me I said I can get back to down to the bottom of it and tell you exactly what we are worried and what we are not. Overall our business is doing well because we executed well. Q: You continue to be bullish about China, how bullish do you feel about India today? A: In the years that I have been working in India, the first time I went to India was 1972, my sister was living there. So, I have been going in and out of India for well over 40 years. The first time in at least in 10 years that I have been going back and forthIndia, I haven't seen the kind of excitement that I saw last year. That excitement around the business community in India and all that could potentially vain down if the Prime Minister is not able to execute his plans. You have a golden opportunity, you have a population and a business community that is excited, a Prime Minister who is very capable and we know him well. He has proven that he is actually a man of execution, he actually can go forward and people that are tired of non-execution, they are just tired of the morass. If the bureaucracy and the system doesn't catch up with him and he can catch up with them and plough through it especially on significant initiatives that he has, I think India can do marvels; it will be on a good take off path. It doesn't need 10 percent growth, it doesn't need China type growth but it does need to get back up to good levels of 8 percent or plus. Something like good percentage growth so that you can keep up because India has a younger population. It needs to stay north of 6 percent for it to make sense for all of this. I do believe it can get there but more than belief I do hope it can get there because it so crucial to our business and to the world.
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