Vellayan Subbiah, Chairman, Cholamandalam Investment and Finance Co Ltd & Executive Vice Chairman of Tube Investments of India Ltd
Building a resilient India requires us to consider both: What India needs to do and how we need to do it.
India accounts for 2% of global goods trade and 4% of global services trade out of a total of 32 trillion. It’s important to acknowledge that a significant portion of our focus remains on the domestic economy. If India aims to be truly resilient, a greater emphasis on exports is crucial. Second, what we export matters significantly.
The Product vs. Service Paradigm
Consider this: on one hand, we have product-based companies like Apple, Nvidia, and Microsoft, and on the other, successful service-based companies from India. A key difference lies in their market capitalisation. Product companies generally command significantly higher valuations.
Why is this important? India excels at building service companies, accounting for 4% of global services trade. We’ve become a hub for Global Capability Centres (GCCs). Essentially, we’re exporting our people and their services at a certain markup, perhaps 20% or 25%. Now, what about the markup on something like Nvidia’s GPUs? They can be as high as 70% or even more! This highlights a critical challenge: we’re often selling our services at a 10-25% markup, while buying back products with markups exceeding 70%.
Think about email. Most of us use Gmail or Microsoft at our companies. Where were those products largely developed? Hyderabad and Bangalore! What did India receive in return? Primarily salaries and perhaps some taxes. Yet, when negotiating pricing with Microsoft or Google, we’re essentially buying back our own intellectual property at a huge premium. Is this a sustainable model for long-term economic resilience?
The Semiconductor Story
The same pattern repeats itself in the semiconductor industry. 60% of the value in that chain lies in design. Every major semiconductor company – NXP, Broadcom, Infineon, Texas Instruments, Qualcomm – has a substantial GCC in India, employing eight to ten thousand engineers designing chips. But again, what do we earn on that design work? A fraction of what we pay when we import those chips back, often at margins of 75% or 80%.
To address this, we’re attempting to shift the paradigm. We recently acquired the radio frequency division of a Japanese chipmaker, Renesas. Interestingly, 60% of that division’s employees are in Bangalore, with another 30% in the US – of whom 80% are of Indian origin! So, we had to buy back our own talent, paying in dollars to an international company. This illustrates the core issue: we must rethink how we leverage and retain our intellectual property.
China’s Different Approach
China’s approach to global trade dominance needs a comparison. Their strategy has been much more structured and deliberate. I’m consistently impressed and also concerned at how effectively they’ve marked up their value.
They progressed through three distinct phases:
Becoming the World’s Factory: Even at this stage, India is still in its early phases. While there has been impressive work in the electronics sector, we still import a significant percentage of components.
Climbing the Value Chain: This shift saw a substantial increase in China’s share of world output.
Developing Indigenous Technology: They are now focused on creating deeply indigenous technology.
| We must transition from a service-based economy to a product-based economy. Without this shift, achieving true resilience will be impossible. |
BYD is selling high-quality, technologically advanced cars in India, with a 25% duty, and still undercutting domestic prices. What will happen to the Indian auto industry if we remove those barriers? It would be devastating. Protectionism isn’t the answer. We need to compete by investing in innovation and developing our own advanced technologies. The profit pool in automobiles has shifted from metals to electronics, and China’s dominance stems from their ability to produce these components much more cheaply.
Currently, we’re making electric vehicles in India, but importing most of the critical electronics. We must transition from a service-based economy to a product-based economy. Without this shift, achieving true resilience will be impossible. This requires a collective effort. It starts with each of us. What will you do within your companies to drive this change? Continuing with the status quo will not lead to resilience.
Leveraging India’s Unique Advantage
If India aims to compete and win globally, we cannot simply replicate the Western model. India possesses a unique “technology” that we haven’t fully leveraged. It is our spiritual wisdom. Consider this on an individual level. What is your objective in life? What benefits are you seeking? Are happiness, joyfulness, and a positive state of mind important? If so, we must realise that there are multiple paths to achieving these. One path involves earning money through our work. However, we might remember the thrill of our first pay check. The subsequent pay checks, most likely brought diminishing returns in terms of happiness. This is because the pursuit of material wealth often follows a curve of diminishing returns. Material pursuit is a typical Western view.
However, the path of evolution, of self-improvement and spiritual growth, follows an exponential curve. Investing in personal and spiritual growth, alongside professional development, can lead to greater fulfilment and ultimately contribute to a more resilient India. We need to change ourselves first, if we are going to change the organisations we work with or the country we live in. Only in India, we have the mechanisms and tools to change ourselves in a fundamental way.
