CK Prahalad on the Indian economic miracle

Indian born CK Prahalad is the Harvey C Fruehauf chair of Business Administration at the Ross School of Business, at the University of Michigan in the US. He was ranked third in the recent Thinkers 50 global ranking of management gurus.

After a ten year hiatus, following the bestsellingCompeting for the Future (1994) co-authored with fellow management guru Gary Hamel, Prahalad recently produced two new thought provoking books.

In The Future of Competition (2004), written with Venkat Ramaswamy, Prahalad argues that for companies to compete successfully they must engage with consumers to co-create value from products and services.

He has also been wrestling with the issue of poverty. The result: The Fortune at the Bottom of the Pyramid (2004) in which he identifies the world's poor as a potential untapped market worth anything up to $13 trillion a year.

Prahalad recently spoke to Des Dearlove when his thoughts returned to his homeland and the prospects for one of the fastest growing economies in the world.

There is an old Indian saying: it's like five blind men touching an elephant, and having different perspectives. India is very similar.

Is India an emerged country already? If you look at companies like Infosys or Wipro, then the answer has to be yes. Their technology, governance principles, global reach, ability to attract talent, and capacity for innovation, makes them as good as any company in the world.

At the other extreme, with 150 million people living in deprivation and poverty, it looks like the worst part of the world. So, if you take all of India and stick just one label on it, it is likely to be wrong, irrespective of what that label is.

In the last ten years, India has done three things very well. It has built some global capabilities, first locally and then leveraging it globally. That is where you find the IT industry, the pharmaceutical industry, the automobile components industry, the diamond cutting industry, and so on.

Second, it has created an extremely high level of aspiration for both the poor and the rich. The rich and the educated can aspire to be world class, and the poor can aspire to have an education for their children to allow them to escape poverty.

And the third thing is that the government fundamentally accepts, even though it's very hard to implement, that India has to become an integral part of global trade. It cannot be isolationist like it is today. So those three, I think, are going to put India on the right trajectory

Cost arbitrage will be an integral part of India's success for a long time. Costs are not going to reach American and European levels for a long time. But India has built extremely high levels of quality. TQM is an integral part of software development. There are new methodologies and tools, and innovation in work processes and in the tools themselves

This adds up to four or five layers of advantage, including speed, worldwide project management, common platforms around the world, and expatriate management. To continue to believe that cost is the only building block misses the point.

From low level testing and maintenance, increasingly companies are moving very, very rapidly into engineering, to design, to the development of whole components and sub-systems. This trend will continue.

I do not rule out India emerging as a major manufacturing centre. People assume it is all going to be just software, and knowledge-based, but I believe that India will invent a different kind of manufacturing -- very high quality, design-centred and software embedded. It is more you design, you develop, you manufacture, you ship. It is still in its infancy, but I expect it to grow as rapidly as the software side.

Even in IT and IT services, you have at least three or four companies which are already known around the world -- Infosys obviously, Wipro, Tata Consulting Services, and Sapient. Infosys grew from $1 to $2 billion in about two years. If it gets to be $4 or $5 billion, it is a global sized company, not only a global brand name, and with a global reach because it operates in 50 countries. And it will happen.

I see the emergence of ICICI as a bank with the same characteristics. I expect to see acquisitions by companies in manufacturing. Tata's first big acquisition was Tetley and now Tata Tetley is a global player. Taj Hotels is making acquisitions abroad. Both Tisco and Tata Motors are making acquisitions.

You are going to find Indian companies sharpening their competitive skills, demonstrating world class quality, becoming very profitable, building market cap, and using it as currency to make acquisitions, and expand rapidly overseas. I expect to see 20 to 25 companies in the next two to three years spreading their wings and getting out of India.

The domestic markets in China and India are reaching world scale. Look at the two wheeler industry in India, there are three companies which are world scale domestically. They make a million plus two wheelers. You can very rapidly achieve scale in India and, if you get the right quality of management, you can also become global.

Already both China's and India's finance ministers are invited for lunch or dinner at G8 meetings. That's a good sign. I believe that China and India will be the second and the third largest economies next to the United States within my lifetime, certainly by 2015.

Will some of the pain of globalisation be felt by Europe, Japan and the United States? The answer is yes. That is the essential game of globalisation.

Yes but protectionism is not the answer. Re-thinking how to get competitive advantage compared to the new players. That is the game.

We have to re-frame the question. It's not exporting good jobs. It's importing competitiveness, and the companies which know how to leverage global talent and import competitiveness are the innovators. They are going to be ahead of the curve.