unlikely boomtowns

The last half-century was the age of the megacity. The next will belong to their smaller, humbler urban relations.

By Rana Foroohar

Newsweek International

July 3-10, 2006 issue - Great cities like London, New York and Tokyo loom large in our imaginations. They are the places people still associate with fortune, fame and the future. They can dominate national economies, and politics. The last half century has been their era, as the number of cities with more than 10 million people grew from two to 20, as now famous names like Rio, Mexico City and Mumbai joined the list. But with all respect to the many science-fiction novelists who have envisioned a future of increasingly dominant urban giants, their day is over. The typical growth rate of the population within a megacity has slowed from more than 8 percent in the '80s to less than half that over the last five years, and their number is expected to stagnate in the next quarter century. Instead, the coming years will belong to a smaller, far humbler relation—the Second City.

Within a year or so, more people will live in cities than in the countryside for the first time in human history: the 21st century will be an urban one. But increasingly, the urban core itself is downsizing. Already, half the city dwellers in the world live in metropolises with

less than half-a-million residents. Second Cities—from exurbs to regional hubs, resort towns to provincial capitals—are booming. Between 2000 and 2015, the world's smallest cities (with under 500,000 people) will grow by 23 percent, while the next smallest (1 million to 5 million people) will grow by 27 percent. This trend is the result of seismic shifts, including the global real-estate bubble; increasing international migration; cheaper transport; new technologies, and the fact that the baby-boom generation is reaching retirement age.

This rise of Second Cities is dramatically illustrated by our top-10 list, which encompasses the fastest-growing cities in each of the world's 10 most important economies (following stories). Based on an advance copy of the latest U.N. forecasts for all cities with populations greater than 750,000, the list includes only two major capitals—Moscow and London, which continue to outpace smaller rivals for unique national reasons. All the rest are aspiring middleweights like Toulouse, Munich and Las Vegas, or former unknowns like Florianópolis (Brazil), Ghaziabad (India), Goyang (South Korea) and Fukuoka (Japan), which may not remain unknown for much longer. Boomtowns breed ambitious city fathers, so it's hardly surprising that Toulouse is competing with Paris to host the 2016 Summer Olympics, or that Fukuoka is challenging Tokyo for the same honor.

There are several megatrends that get lost on a top-10 list, however. One is the concentration of fast-growing cities in emerging economies: of the top 150 fastest-growing cities in this size class, the most by far, 55, are in China, followed by an intense boomlet of 12 in Indonesia, and 10 in India. In the developed world, while none make the top 150, metropolises in the United States are growing much faster than those of Europe and Japan. This is due in part to the fact that overall population is declining in those places, but it drives home the relative dynamism of the Asian and American superpowers. The growth cities of the United States and China are growing faster than 2 percent, leading a pack of small cities, while those in Europe are growing at maybe half a percent, and are typically the rare exceptions in nations where most cities are shrinking.

In a way, the emergence of Second Cities has flowed naturally (if unexpectedly) from the earlier success of the megacities. In the 1990s, megalopolises boomed as global markets did. This was particularly true in metropolitan areas with high-tech or "knowledge based" industries like finance—witness the renaissance of New York and London, and the explosion of growth in Shanghai or Hong Kong. Bonuses got bigger, bankers got richer and real-estate prices in the world's most-sought-after cities soared. The result has been the creation of what demographer William Frey of the Washington-based Brookings Institution calls "gated regions"—places like New York, London, Tokyo—in which both the city and many of the surrounding suburbs have become unaffordable for all but the very wealthy.

One reaction to this phenomenon is further sprawl—high prices in the urban core and traditional suburbs drive people to distant exurbs with extreme commutes into big cities. As Frey notes, in the major U.S. metropolitan areas, average commuting times have doubled to about 90 minutes over the last 15 years, making once rural places like Pike County, Pennsylvania, viable dormitories for workers employed in New York. "It's hard to believe, but a place like Las Vegas is now actually a kind of suburb of Los Angeles," says Frey, noting that there are plenty of people who make the six-hour one-way drive a few times a week. And while the extreme commute is a longstanding tradition in Japan, it is spreading to Europe. Brighton, a once seedy beach resort about an hour by train from the capital, is now "London by the Sea," populated by arts and media types. House prices have boomed lately, and the city is now on its way to getting the requisite Frank Gehry landmark building (a futuristic residential tower and sports complex) to herald its success.

Why does one town become a booming Second City while another fails? The answer hinges on whether a community has the wherewithal to exploit the forces pushing people and businesses out of the megacities. One key is excellent transport links, especially to the biggest commercial hubs. Though barely a decade old, Goyang is South Korea's fastest-growing city in part because it is 30 minutes by subway from Seoul. Burgeoning IT hubs outside Delhi like Gurgaon and Noida, for which Ghaziabad serves as a new bedroom community, all sit on good roads into the capital.

Europe's cheap airlines have given new life to any number of provincial capitals, from Glasgow to Bologna. Estate agents estimate that a new Ryanair or easyJet link to a given city can immediately raise property prices in the area by 30 percent or more. In Asia, the number of cheap, short flights between cities is also growing.

Another growth driver for Second Cities is the decentralization of work, driven in large part by new technologies. While more financial deals are done now in big capitals like New York and London than ever before, it's also clear that plenty of jobs in booming service industries like banking, entertainment and high tech are flowing to places like Dubai, Las Vegas, Tallinn, Dalian and Cape Town, all of which international real-estate services firm Jones Lang LaSalle names as "Rising Urban Stars." These places have not only improved their Internet backbones, but often have tech parks and universities that turn out the kinds of talent that populates growth industries.

Consider Montpellier, France, a case study in urban decentralization. Until the 1980s, it was a big Mediterranean village, but one with a strong university, many lovely villas and an IBM manufacturing base. Once the high-speed trains were built, Parisians began pouring in for weekend breaks. Some bought houses, creating a critical mass of middle-class professionals who began taking advantage of flexible working arrangements to do three days in Paris, and two down south. Soon, big companies began looking at the area; a number of medical-technology and electronics firms came to town, and IBM put more investment into service businesses there. To cater to the incoming professionals, the city began building amenities: an opera, a tram line to discourage cars in the city center. The result, says French urban-planning expert Nacima Baron, is that "the city is now full of cosmopolitan businessmen. It's an entirely new town, a new society."

Today it's easier for Second Cities to build self-sustaining economies, independent of megacities, as firms and workers look to avoid the problems of major urban centers. "Economically, after a city reaches a certain size, its productivity starts to fall," notes Mario Pezzini, head of the regional-competitiveness division of the OECD in Paris. He puts the tipping point at about 6 million people, after which real estate costs, travel times, and the occasional chaos (witness the recent Paris riots) "create a situation in which the center of the city may be a great place, but only for the rich, and the outlying areas become harder to live and work in."

Meanwhile, the democratization of the good life—even small towns now have good sourdough bread, international newspapers—means that people no longer have to choose between the culture and chaos of the big city, or the ease and boredom of everything else. Pseudo-European-style café culture is cropping up in American towns like West Palm Beach, and European minicities like Groningen, in the Netherlands, draw millions of tourists with Philippe Starck-designed museums and renovated downtowns. Retiring baby boomers are giving new life (and money) to a host of sun-belt cities in the United States, as well as many Provençal and Tuscan towns.

Immigrants play a big role, too. In places like Las Vegas, they're morphing from cheap labor to a new middle class reshaping the character of the city. In the U.K., hundreds of thousands of Eastern European immigrants have helped galvanize the capital and smaller northern and coastal cities, where workers in agriculture, construction and lower-level service jobs are sorely needed. Ultimately, they are expected to take their earnings home, where they are likely to seek property not in Prague or Warsaw, but in less-expensive Brno or Cracow. That's a big reason Jones Lang LaSalle expects the 60 Central and Eastern European cities with 500,000 or more people to be among the hottest places for corporate relocation in the next few years.

All this means, of course, that second cities won't stay small. Indeed, some countries are actively promoting their growth. China's Go West campaign encourages investment in smaller inland cities. Italy is trying to create tourist hubs of towns close to each other with different yet complementary cultural activities. "The worst-case scenario is that we end up with some national version of New Jersey—an inefficient sprawl with no center," says Frey of Brookings. Already, one has to wonder if all the marketing pressure for Second Cities to pay for iconic buildings or to re-create mock versions of New York's SoHo is a productive use of capital. If one of the biggest drawing cards for Second Cities is unique local flavor, why ape the best-known megacities? Devolution of policymaking power is leaving many lesser cities more free than ever to shape their destinies. To Vegas, Toulouse and company: this is your era. Don't blow it.

With Jason Overdorf in New Delhi

© 2006 Newsweek, Inc.

india's maoists step up rebellion

By JASON OVERDORF
Thursday, June 8, 2006 Page A16
Special to The Globe and Mail

DORNAPAL, INDIA -- Madkam Devi, a pretty 19-year-old in a sari printed with pink flowers, shifted the thin-limbed infant on her hip and gazed into space as she described how she narrowly escaped being hacked to death by Maoist revolutionaries a month ago.

She and 51 other villagers of Manikonta, a village in the central Indian state of Chhattisgarh, had returned to their homes from a government relief camp on April 25 to collect cooking pots, plastic buckets and other household items they had left behind when they made their hurried departure for police protection from the guerrillas. Finding the village deserted, they quickly gathered their belongings and started back to the relief camp. They didn't get far before the Maoists ambushed them.

"Some people panicked and tried to run, but some of the Maoists were wearing uniforms and shouted to us that they were the police, and we shouldn't be afraid," Ms. Devi said.

The Maoists, including about 50 gunmen in uniforms and another 150 irregulars armed with axes and wooden staves, killed two villagers and captured the others, Ms. Devi said. Some were badly beaten, a taste of the treatment the prisoners would receive over the next four days. But the worst was to come. As an example of the fate that awaits villagers who participate in a government-aided people's movement against their rebellion, the Maoists executed 13 of the villagers.

The Maoists -- sometimes called Naxalites, in reference to an armed uprising in the village of Naxalbari in West Bengal, from which the movement began in 1967 -- have maintained a low-level insurrection in India for nearly 40 years, organizing uprisings among landless workers, hijacking trains, mounting frequent attacks on police posts and industrial facilities, and murdering their political opponents. Their rebellion is gaining ground, expanding across 14 eastern and central Indian states, running all the way from the Nepal border in the north to the southern coast, and becoming a major Communist force intent on winning control of the Indian state through military means.

And the war is growing ever more deadly. More than 700 people, 500 of them civilians, were killed in raids, land-mine blasts and other incidents in 2005. Provisional data from the past four months suggest the death toll will be higher in 2006.

The rapid increase in violence has prompted some experts, such as Ajai Sahni of the New Delhi-based Institute for Conflict Management, to warn that the Naxalite insurrection has surpassed separatist terrorists in Kashmir as the largest internal threat to India's ability to govern its vast territory.

India's national and state governments have long refused to acknowledge the seriousness of the problem, because of what it says about their administrations, Mr. Sahni said. "Unlike the Kashmir issue, which we could blame on somebody else, this was entirely indigenous. It pointed to state failures."

The Maoist movement is rooted in the deep impoverishment of rural India. Although India's economy is growing at close to 8 per cent a year, nearly three-quarters of its people live in rural areas that continue to lag far behind the cities, especially in the problem states of north and central India. Just 20 per cent of rural people have access to basic amenities such as running water, compared with 70 per cent in urban areas. And poor nutrition and lack of health care mean that the infant-mortality rate for rural India is nearly 40 per cent higher than in urban areas.

In Chhattisgarh, the lack of local economic progress is obvious despite a huge influx of investment to develop the state's mineral resources. "Mining has been going on for three decades, but the only industry to flourish in the area is prostitution," a spokesman for the Maoists recently told local reporters.

In recent months, the rebel attacks have become more daring. In November, hundreds of Maoists stormed a jail in Bihar, freeing a captured Maoist leader and about half of the facility's 650 inmates. In February, the rebels raided a state-owned mining company in Chhattisgarh, stealing tonnes of explosives for the manufacture of crude bombs.

The violent attack on the villagers of Manikonta signalled a shift in strategy by the guerrillas, who previously had focused attacks on organs of the state. By brutalizing ordinary villagers, the Maoists are taking a dangerous gamble. Historically, they have embraced local causes and won respect, and sometimes support, through hard work and a dogged battle against social injustice and government corruption.

In Chhattisgarh, local observers say that years ago the Maoists forced contractors to pay tribal labourers the wages mandated by the state, rather than skimming from the payroll. They thrashed corrupt officials of the forest department, and forced truant government teachers to show up for their classes in the deep jungle, instead of merely drawing their salaries.

However, Chhattisgarh officials now say that the Maoists more often work to stop projects that would benefit the local poor.

"Contrary to what they [the Maoists] say, Naxalism is not growing, because there is no development in the state," said Chhattisgarh Home Secretary B. K. S. Ray. "Basically, this is a terrorist movement to gain political power through violence. Initially, they may have wanted land reform and equality, but now it's a gang of extortionists, gangsters and killers."

The tribal people of rural India need roads, schools and jobs. But the Maoists are committed to a full-scale Communist upheaval and radical redistribution of wealth, and believe that these incremental gains will never erase the gross inequalities of what they term India's "bourgeois comprador democracy."

"There is no dilution in the ideology," said Mr. Sahni of the Institute of Conflict Management. "There is absolutely no set of economic initiatives on the horizon that can give prosperity, dignity et cetera to 810 million people in rural India."

shrinking flocks of vultures spoil ancient culture's funeral rituals

By Jason Overdorf
Special to The Globe and Mail

MUMBAI -- Smack in the middle of the thicket of ultramodern high-rises that make up Malabar Hill, one of Mumbai's most exclusive neighbourhoods, followers of an ancient religion are fighting to preserve funeral rites that go back thousands of years.

The Parsis -- so called because their ancestors immigrated from Fars, or Persepolis, in Iran -- are Zoroastrians, who believe that earth, water, air and fire are sacred elements. For that reason, their religion forbids them from burying or cremating their dead.

Instead, in a ceremony that no outsider is allowed to witness, pallbearers followed by a procession of mourners in flowing white robes carry the body to one of five tremendous stone structures, evocatively named the Towers of Silence, where the corpse is laid out on a marble slab to be dried up by the sun and devoured by carrion birds.

A great flock of white-backed vultures used to strip the bodies of the dead in less than an hour. But today, India's vultures are nearly extinct due to accidental poisoning, and the flock that once served the Towers of Silence is no more.

"When I was young, there were so many birds that they used to swoop down at you," says Minoo Shroff, the white-haired chairman of the city's Parsi Punchayet, the charitable trust charged with maintaining the funeral grounds, or doongerwadi. "There used to be 50 to 70 vultures on a well. Now, other birds like kites and crows are there, but seeing a vulture is very, very rare."

According to the United Kingdom's Royal Society for the Protection of Birds, the near extinction of South Asia's vultures happened faster than any other on record. Between 1988 and 1999, the region's eight vulture species declined by as much as 95 per cent -- the birds dying out so rapidly that millions were reduced to a few thousand in little more than a decade.

"The speed and scale of the vulture declines across South Asia has been totally unprecedented," says Chris Bowden, director of the RSPB's vulture program, who visited India recently. "For such formerly abundant birds in the space of just 10 years to be facing the real possibility of extinction is almost unbelievable."

For many years, the reason for the vultures' disappearance was a scientific mystery, with researchers blindly looking for an unknown contagious disease. But in 2004, scientists of the U.S.-based Peregrine Fund discovered that the vultures were being poisoned by an anti-inflammatory drug called diclofenac, which local farmers use to treat sick cattle. One feeding from a tainted cattle carcass is enough to cause fatal renal failure in the birds.

The culprit identified, Indian Prime Minister Manmohan Singh called for a universal ban of diclofenac in 2005. But so far the Ministry of Agriculture has been dragging its feet even though scientists have identified a harmless substitute, conservationists say. "For well over a year, the Ministry of Agriculture has done nothing," says Rishad Naoroji, a Parsi naturalist.

A handful of state governments have banned diclofenac, but only a national effort will be effective, according to Asad Rahmani, director of the Bombay Natural History Society.

That leaves the Parsi community in a dire situation. Without the aid of the vultures, the sun alone can take months to reduce the bodies laid out in the Towers of Silence to desiccated skeletons, a worrying problem as the mushrooming city encroaches on the funeral grounds. Already, the Punchayet has been compelled to stop using one of the towers, located in proximity to the high-rise Paradise Apartments, when residents complained about the sight and smell of the decaying corpses.

More crucially, many Parsis themselves have begun to doubt whether months of putrefaction amount to a death with dignity.

The search for a solution has opened a rift between the traditionalists and pragmatists of the community, which was already divided over the issue of intermarriage. The Parsis played a vital role in the development of Mumbai, formerly Bombay, and spawned three of India's largest business houses -- the Tata, Godrej and Wadia groups. But in recent years they have seen their population plunge some 40 per cent to about 40,000 people, as younger members of the community delay marriage, marry outside the community and have fewer children in favour of successful careers.

Its ties already weakened, the last thing the community needs is more people moving away from tradition, conservatives believe.

To stop that from happening, some conservative Parsis back a proposal to build a giant aviary and breed a captive population of vultures to serve the towers. But reservations about the cost of the project -- which would have run to several million dollars -- as well as doubts about whether it would work, have put the plan on hold.

Instead, the Punchayet has adopted a pragmatic solution developed by Homi Dhalla, president of the World Zarathushti Cultural Foundation, a group that sponsors various efforts to preserve Parsi traditions.

Dr. Dhalla, 60, developed a plan to focus powerful solar concentrators at the working area of three of the five towers, amplifying the heat of the sun and thus speeding the desiccation of the bodies. With these devices, the sun can reduce a corpse to a dry husk within three to five days.

Because they harness the power of the sun, Dr. Dhalla believes the solar concentrators, though an innovation, suit the tenets of the Zoroastrian religion. "It was quite difficult for me to find a solution within our theological limitations," he says.

But many conservatives don't believe he has. Khojeste Mistree, a conservative leader with a sizable following, argues that Dr. Dhalla's solution is little more than a solar-powered crematorium.

Parsi theologians like Dr. Firoze M. Kotwal, a former high priest, agree. "From a religious point of view," he says, "this method is not very proper."

the perfect score

Student cheating is reaching new levels, forcing an overhaul of standardized tests.

By Emily Flynn Vencat

Newsweek International

March 27, 2006 issue - Chris doesn't consider himself a cheater. Yet for the past four years, the 21-year-old senior at one of California's most prestigious universities (which he doesn't want identified) has used an arsenal of tricks to pass his classes. He's plagiarized, taken illegal prescription drugs to improve his focus, obtained exam questions in advance and text-messaged his friends via cell phone to find quick answers to tough questions. Still, he doesn't see any of that as out of the ordinary. "Sure, I've used test banks, study drugs, text buddies, cyberessays and picture messaging," he says. "But so does everyone."

That may be an exaggeration—but not as big of one as you might think. From Beijing to Bristol, the rates of academic cheating have skyrocketed during the past decade. In a huge study of 50,000 college and 18,000 high-school

students in the United States by Duke University's Center for Academic Integrity, more than 70 percent admitted to having cheated. That's up from about 56 percent in 1993 and just 26 percent in 1963. Internet plagiarism has quadrupled in the past six years, according to the same study. In Britain, a recent government-sponsored report found such rampant cheating in the state-run GCSE and A-level exams that Secretary of Education Ruth Kelly called for a total revamp of the coursework system before 2008. Hundreds of Asian universities' Web-based bulletin boards are dumping grounds for the memorized answers to Test of English as a Foreign Language questions—the basis of most U.S. colleges' admittance of foreign students.

Nearly all of India's ultracompetitive entrance exams have been stolen and sold to students at least once during the past five years. In 2004 students paid up to $15,000 apiece for access to answers to India's Pre-Medical Test—and the perpetrators pocketed $1 million. In China, where the number of university students has almost tripled since 1998 to 16 million, police last year cracked one of the biggest qiangshou (hired gun) gangs—Web-based agencies where students can hire expert look-alikes to take any of a host of national exams for them. The gang had already taken in $212,000 from nearly 1,000 students in 19 provinces across the country. Also in 2005, South Korea faced the biggest exam-cheating scandal in its history when officials realized that the previous fall's national college-entrance exam, the CSAT, had been infiltrated by more than 20 cheating rings across the country; they had text-messaged exam answers to paying students taking the test. "We've passed the tipping point, where cheating is so common that it's an accepted social norm," says David Callahan, author of "The Cheating Culture."

What's turning students into crooks? First and foremost, technological advances have made cheating easier than ever. From purchasing "original" essays from Web sites like Gradesaver.com to "outsourcing" computer-programming homework to experts in India via sites like Rentacoder.com, students can now buy A's for the price of a school lunch. At the same time, mobile phones and MP3 players have given test takers new tools: picture messaging lets them contact friends outside the classroom with photographed copies of whole exams. SparkMobile, a new service from SparkNotes (Barnes & Noble's take on Cliffs Notes), will text students themes to use for surprise in-class essays or beam them iPod-friendly audio summaries of classic novels.

Competition, though, is the real culprit. As the work force becomes ever more crowded and the number of college grads skyrockets, top educational credentials are increasingly seen as the only sure vehicle to success. Thirty-five years ago, just 11 percent of Americans had a college degree; now nearly a third do. In the European Union, the number of university graduates has shot up by 30 percent in the past five years alone. In hypercompetitive Asia, where most academic achievement is measured by standardized tests, that can lead to excruciating pressure. "Your exams are so closely connected to your admission to college that a 0.1 percent difference can determine whether you get admitted or not," says Sudha Ravi, vice principal at a prestigious New Delhi secondary school.

Sociologists argue that the upsurge in school dishonesty also reflects attitudes in the culture at large, where cheating has become acceptable and even admired. International tycoons make enviable fortunes through market manipulation and fraud: think Enron, WorldCom and Martha Stewart. Scientists like South Korea's once revered stem-cell research pioneer, Hwang Woo Suk, fake lab results. In a recent poll of 25,000 high-schoolers by the California-based Josephson Institute of Ethics, nearly half agreed with the statement "A person has to lie or cheat sometimes in order to succeed." In Australia, a new study from Griffith University of students at four major campuses revealed that 40 percent believe faking research results is a "minor" offense. "Students feel like it's just no longer a big deal to cheat," says Don McCabe, the founder of Duke University's Center for Academic Integrity.

The problem is so pervasive that it's reshaping the face of academic admissions. In the future, exams from the SAT to the MCAT to the A-levels will be administered in secure rooms equipped with metal detectors, radio-frequency locators to check if students are receiving text-messaged answers on their mobile phones and, in China and South Korea at least, the threat of up to seven-year prison sentences for cheats. This year the world's most respected graduate entrance test, the GRE, which is taken by half a million students annually, is undergoing the biggest face-lift in its 55-year history. Starting this October, exam questions will be changed from test to test. Start times will be staggered across the globe so students in Los Angeles can't post memorized or photographed test sheets on the Web for students in Hong Kong. "We've basically revolutionized the way we're administering our high-stakes tests," says Ray Nicosia, director of security for the world's largest test administrator, the Princeton, New Jersey-based Educational Testing Service, which runs 25,000 test centers in 192 countries. "We're changing to combat this problem."

America's med-school en-trance exam, the MCAT, is stepping up security measures using biometrics. As of next year, would-be doctors will have to give electronic fingerprints and submit to digital photographs, making it easier for exam boards to catch cheaters who pay others to take the tests for them. The SAT last year added a writing section which, says Nicosia, provides a "substantive handwriting exemplar" to authenticate test takers. South Korea's Ministry of Education has introduced metal detectors for bathroom visits. In India, testing bodies have limited the number of administrators with early access to the exams.

European exams like Britain's GCSE and A-levels and France's baccalaureate are arming themselves with plagiarism-spotting software, like TurnItIn.com and MyDropBox.com, which compare student papers with everything available on the Internet and highlight copied sections in bright red. Some top institutions in the United States and Europe have even "legalized cheating." They now allow students to surf the Web on PDAs and laptops during "open Internet" exams. Proponents argue that this helps students learn research skills more applicable to real-life work situations, where information is freely available.

At the same time, a growing number of top universities are reducing their emphasis on standardized tests. Many are even beginning to throw them out altogether in favor of interviews and recommendations—markers of aptitude that can't be faked. The rising incidence of scoring errors has only heightened their concerns; just two weeks ago the U.S. College Board revealed that some 4,000 scores from last October's SAT had been miscalculated—some by as much as 400 points. "I do see a rise in alternative ways to augment the scores," says Gary Natriello, an education professor at Columbia University's Teachers College. "People are looking for those other signs that a student has a lot of potential."

Will standardized tests ever become obsolete? According to the Massachusetts-based National Center for Fair & Open Testing, some 730 American colleges no longer require undergrad applicants to take either the SAT or the ACT. In Britain, Oxford and Cambridge used to interview top candidates once; now final decisions are made after two interviews. Marlyn McGrath Lewis, the director of admissions for Harvard College, says more and more universities are adopting a "holistic approach to admissions"—and that's essential. "The quality of [the class] depends on it." Not to mention the quality of the education.

With Jason Overdorf in Delhi and Jonathan Adams in Taipei

© 2006 Newsweek, Inc.

real estate: remaking mumbai

(This article appeared in Newsweek International on March 27, 2006)

The latest quiet reform undertaken by India's government deals with one of its oldest problems—land reform. Across the country, thousands of acres of land are tied up in disputes over decrepit edifices. But last week, a landmark Supreme Court judgment removed restrictions on the sale of land owned by Mumbai's defunct textile mills, freeing up hundreds of acres in the city center for development. Is this a turning point? On the surface, certainly. Six hundred acres of valuable land in the heart of the city are now slated for massive projects including office buildings, high-rise apartments and shopping malls. However, environmentalists and representatives of Mumbai's millions of slum dwellers argue that unfettered development of the mill lands will do nothing to solve the housing crisis facing the city's poor, as well as exacerbate water and power shortages. An equally pressing question is whether the ruling will speed the conversion of agricultural land on the edge of India's cities into much-needed residential and industrial developments—a transition to modernity that until now has been hopelessly slowed by red tape.

—Jason Overdorf

money shortage

Financial Services: More capital is needed, but reform is slow.

Newsweek International

Nov. 25, 2005 issue - American Treasury Secretary John Snow was in New Delhi two weeks ago, calling for India to speed up the liberalization of its financial-services sector. He argued that looser rules for foreign investment in banks, insurance companies and pension funds would hasten India's economic rise, "add capital to the banking sys-tem, spread credit availability, bring in additional managerial expertise and [enhance] technology."

According to a report by McKinsey & Co., India's financial system is an often-overlooked reason the nation's economic growth hasn't matched China's. India has $1.1 trillion in financial assets—one fifth of China's. The country's financial depth, a measure that compares the total financial stock in the economy to GDP, is 175 percent, compared with China's 311 percent. Although India's banks have fewer nonperforming loans and have achieved a higher return on their assets than their Chinese counterparts, the report notes, "The bottom line is that India has a lot less money circulating in the financial system than one would expect, given the size of its economy." Unless the country loosens up, it will never be able to match its Asian rival as an FDI destination.

Prime Minister Manmohan Singh understands the stakes. He's been trying to eliminate a 10 percent cap on foreign shareholders' voting rights in private banks. He has also been seeking to raise the limit on FDI in the insurance industry from 26 percent to 49 percent—but as with other reforms, Singh's leftist political allies have stymied efforts to get new investment rules implemented.

Right now, foreign banks can open branches and wholly-owned subsidiaries, and can also acquire up to 74 percent of a domestic bank. But because their voting rights on domestic acquisitions are limited, they have little management control. Still, Citibank, Standard Chartered and HSBC are opening branches and selling credit cards. On the insurance side, global players like U.S.-based MetLife, Prudential and AIG and Germany's Allianz are selling policies and pension plans. Company officials say that pension funds can be an important source of financing for the infrastructure that India desperately needs.

In both sectors, foreign players are counting on rising demand to chip away at resistance in New Delhi. As Subir Gokarn, chief economist for the ratings agency Crisil, notes, India needs new insurance and pension products "to make it easier for people to save and give them security in old age." And the government stands to gain, too, because a liberalized financial sector will push money into investments that will broaden India's growth. True reforms may be just a matter of time.

—Jason Overdorf

© 2005 Newsweek, Inc.

spend less, get more

One thing India does better than China is high-tech research and development.

By Jason Overdorf and Sudip Mazumdar
Newsweek International

Nov. 28, 2005 issue - The office of Dr. D. Yogeswara Rao, head of business development at India's Council of Scientific and Industrial Research, doesn't exactly look like a nerve center of cutting-edge research and development. Cluttered with stacks of documents and crammed with the tattered furniture common to New Delhi's government offices, Rao's domain looks like part of the landscape of old India.

But the humble surroundings can be deceptive. Despite a lack of funding and facilities—the government's entire R&D budget is a fraction of the annual research expenditure by a single multi-national company like Pfizer—India's researchers have shown the world they can innovate without breaking the bank. And that's attracting a great deal of interest. "Not a week goes by without some foreign delegation visiting us to discuss research collaborations," Rao says. Over the past six months, Rao's visitors have included representatives of Procter Gamble, Colgate, Johnson & Johnson and Alcoa, to name a few. The reason is simple. "Per dollar, the output of innovations is significant, so overall you may spend less, but you get more," says Rao.

Over the last five years more than 100 companies, including General Motors, Boeing and Mobil, have chosen India as an R&D hub, some of them citing local scientists' facility in English, as well as the country's superior track record in intellectual-property protection, as advantages over China. Prominent among them is General Electric, which has its largest research-and-development center outside the United States in Bangalore, India. Though GE also has an R&D center in China, its state-of-the-art John F. Welch Technology Center in Bangalore employs about 2,300 scientists, researchers and engineers, double the number in Shanghai.

GE's $80 million Bangalore center does groundbreaking work in areas such as aerospace engineering, electronic systems, ceramics, metallurgy, advanced chemistry, chemicals, polymers and new synthetic materials. The center uses the latest technology and e-engineering tools to facilitate real-time global interaction with the company's affiliates, tech centers, customers and suppliers. "I have immense faith in the intellectual capital of India and the amount it can contribute to GE's success," says Scott R. Bayman, president and chief executive officer of GE India. "India is rich with bright, young talent."

GE's Indian researchers have applied for 260 U.S. patents on products such as synthetic materials and ceramics, with 37 approved by the U.S. Patent and Trademark Office, according to the company's spokeswoman in India. Motorola, which employs more than 1,700 Indian engineers and researchers, says Indian programmers develop about 40 percent of the software in its mobile handsets. The Internet browser and multimedia messaging system for the company's 3G and GSM phones were conceived, engineered and delivered by its India operations.

India's software industry was first out of the gate in R&D, and increasingly important tasks were outsourced as India's so-called cybercoolies demonstrated their prowess. But today, a host of industries—including the automotive, chip-design, pharmaceutical and aerospace sectors—are taking advantage of India's giant pool of scientists and engineers, and not only to write program code. According to a recent study by PricewaterhouseCoopers, India is rapidly moving up from relatively routine tasks like converting schematics from one computer-aided design system to another, to sophisticated and critical functions like plant engineering and redesigning products for a better cost-performance ratio. Global automakers, in particular, which spend 3 to 5 percent of their annual revenue on R&D activities, are turning increasingly to India, the consultancy says.

The main reason for the shift is manpower—the oft-cited 300,000 engineers and 150,000 computer experts who graduate from India's many universities and technical institutes each year. But that's not where the country has the biggest advantage over China, which produces 400,000 engineers of its own annually. According to Indian business experts, local graduates have greater cultural affinity with Westerners (not to mention English-language skills) than their Chinese counterparts. Like that of the United States, India's growth has been driven by entrepreneurs and market forces rather than the government, so foreign business leaders perceive India managers as more market-savvy.

That affinity has also helped India gain an edge in intellectual-property protection. In a sector like chip de-sign, for instance, large companies will outsource R&D activities only if they believe they can protect the intellectual property they are letting out the door. "The way you grow is by having contracts with bigger companies," says S. R. Dinesh, program manager of Frost & Sullivan's Asia Pacific electronics and semiconductors practice. "Intellectual-property law is a big issue. Even if multinationals outsource [to China], it will be at the lower end of the value chain."

The intellectual-property issue is also crucial to the global pharmaceutical sector, which spends about $40 billion a year on drug development. Drug companies rise and fall on the strength of their patents for new blockbuster medicines. India's move to implement international patent laws earlier this year—despite the pain caused to domestic pharmaceutical giants like Ranbaxy, Cipla and Dr. Reddy's Laboratories, which had built their businesses by making generic copies of drugs protected by patents in the West—was roundly criticized by aid agencies worried about providing affordable retrovirals for HIV sufferers in Africa. But the decision sent a message that India was committed to playing by global rules, whatever the political cost.

India already has a well-developed pharmaceutical industry. With turnover of about $7 billion—$2.5 billion from export sales—the Indian pharma sector ranks fourth in the world in terms of sales volume and 13th by value. The Chinese pharmaceutical industry, at $8 billion in 2004 and growing fast, is about the same size. But the new commitment to patent protection may help India beat China in the race up the value-chain ladder in pharmaceutical research, says Vivek Mehra, executive director for PricewaterhouseCoopers in Delhi. Multinationals like AstraZeneca, Novartis, GlaxoSmithKline, Bayer, Pfizer and Roche set up modest research centers in India in the mid-1990s, and they've since grown substantially.

The fastest-growing pharmaceutical segment in India is so-called contract research, or the outsourcing of research-and-development activities. More than a dozen foreign contract-research companies—including Quintiles, ClinTec and PharmaNet—have set up operations in India, not only because it's inexpensive but also because India offers a large patient pool, trained doctors, good clinical diagnosis and a genetically diverse population for clinical research. Indian pharma giant Biocon, which set up a unit called Clinigene to conduct clinical trials for multinationals in 2000, has seen its contract-research revenue grow 45 percent over the past six months.

In spite of the gains, Chinese firms still apply for more patents annually than Indian firms, and some experts say India is weak in the area of fundamental research. The ties between academia and industry—needed to commercialize breakthroughs—must be strengthened if India is ever going to produce its own version of Silicon Valley. In the meantime, investment continues to roll in, and the demand for top graduates in technical fields is high. "The world has realized that if you don't have an India address [in R&D], you are in trouble," says R. A. Mashelkar, head of the government's Council of Scientific and Industrial Research. That's a boast, but one that's hard to argue with.
© 2005 Newsweek, Inc.

© 2005 MSNBC.com

URL: http://msnbc.msn.com/id/10114269/site/newsweek/

'a great shift'

India has leveraged its engineering and design skills to become a hot spot for auto parts.

By Jason Overdorf
Newsweek International

Nov. 28, 2005 issue - With a wandlike wave of his mouse, 27-year-old Saurabh Rawat displays a 3-D model of a new precision gearbox for Porsche's Boxster on his computer screen. Rawat works in the quiet 14th-floor office of Hi-Tech Gears in Gurgaon, Haryana, on the outskirts of New Delhi. On the street below, flashy new Hyun-dais vie for space with battered scooters, overloaded bicycle rickshaws and rawboned cattle. All around them a satellite town mushrooms out of the desert, growing on the strength of the IT-services outsourcing boom.

Rawat—and hundreds of thousands of workers like him—is part of another kind of revolution. Once considered incapable of making quality products and meeting shipment deadlines, India is leveraging its skill in engineering and design to emerge as a hot spot for auto-parts manufacturing. The sector has grown more than 20 percent a year over the past three years, while export growth has topped 40 percent. A host of local entrepreneurs are reaping the benefits. Hi-Tech Gears, for example, has become a global supplier for the German firm Robert Bosch International, while other Indian firms like Bharat Forge—now the second largest forging company in the world—have begun acquiring companies in the United States and Europe.

As some big global players begin to rethink their exposure to China, India is starting to attract some of the foreign investment once directed toward the dragon to the east. A recent study by McKinsey Co. suggests India's auto-components market could grow from roughly $9 billion in sales now to as much as $40 billion by 2015—including $20 billion to $25 billion in exports—as the parts business shifts from the West to low-cost nations like China, India, Thailand and Turkey. Struggling carmakers are under great pressure to chop their production costs, and parts suppliers in these big, developing markets are increasingly reliable.

To reach its goals, India's auto-parts industry will require lots of investment—as much as $20 billion over the next decade—and the capital inflow has already started. Last year, for example, the Bosch Group announced plans to invest about $225 million to build manufacturing capacity in India. Goetze India, in which U.S.-based Federal Mogul holds a 30 percent stake, says it plans $45 million in capital expenditures. And Sona Koyo Steering Systems, a joint venture with Japan's Koyo Seiko Co., has said it will invest about $30 million."There's a great shift underway," says Hi-Tech Gears chairman and managing director Deep Kapuria, a two-term president of the Automotive Component Manufacturers Association of India.

Kapuria says that some U.S., Japanese and European automakers and their first-tier parts suppliers have admitted to him that they're now overexposed in China. Volkswagen entered China aggressively in 1985, and quickly grabbed 60 percent of the embryonic auto market. But since then, even as China's car sales have exploded, the German automaker's market share has dwindled steadily, reaching just 18 percent in the first half of this year. The falloff prompted the company to announce last month that it will stop investing to expand production capacity in China, and will scale back its 2003- 2006 investment plans in the country by 40 percent. VW and other global car companies have suggested to Kapuria that Indian parts companies would be getting more business.

India's auto market is attractive for two reasons. First, though still only about a third the size of China's, it's growing faster than its eastern neighbor. Car sales in India last year grew by 24 percent, compared with 14 percent in China. Beyond that, unlike China, India has demonstrated its willingness to comply with intellectual-property rules and the global patent regime. That commitment is essential, because it's allowed India to build on its strength in engineering and to achieve a competitive advantage making advanced components such as exhaust manifolds and machined gears.

There are potential potholes for the industry, to be sure. The Chinese have a huge advantage when it comes to making products that depend on economies of scale. And the infrastructure problems and bureaucratic impediments for which India is notorious continue to discourage foreign investors. "India has a three- to five-year window to get its act [together]," says Kapuria. Carmakers are betting that it will.
© 2005 Newsweek, Inc.

© 2005 MSNBC.com

URL: http://msnbc.msn.com/id/10114266/site/newsweek/

‘lion of the chambal’ does last deadly dance

India’s police traced notorious bandit via cell phone signals, then shot him.

By Jason Overdorf/NEW DELHI

(This article appeared in the Globe and Mail on November 10, 2005).

For 25 years, he terrorized the villagers of central Indian and outsmarted police. In the end, though, notorious bandit Nirbhay Singh Gujjar was brought down by his penchant for publicity, as police were able to use cell phones through which he boasted to reporters to trace him to his forest hideout. They killed him this week in a shootout.

“It was an embarrassment for the police, because he was talking to the media,” said Yashpal Singh, director-general of the police force in the north Indian state of Uttar Pradesh. “So we were under pressure from people who were asking why journalists could locate him and the police could not.”

After determining Mr. Gujjar’s location by tracing the signals from the two phones he used, authorities crawled through thick scrub to creep up on a ravine where the bandit was drinking with half a dozen members of his gang.

Alerted by a sentry, Mr. Gujjar’s band opened fire, but police scattered the gang, trapping the bandit and a lieutenant in a canyon.

When police called for him to surrender, Mr. Gujjar tried to fool them into thinking he had been killed, but opened fire again when officers advanced to investigate, said Deputy Superintendent Rajesh Dwivedi of the Uttar Pradesh Special Task Force. In the ensuing shootout, Mr. Gujjar was shot in the head.

“This sends a clear signal that we are going after them,” Mr. Singh said. “It will certainly send a frightening message [to other bandits].”

Mr. Gujjar, whose name means “fearless,” was known as “the last lion of the Chambal,” an unmappable labyrinth of ravines in the border area between the modern states of Madhya Pradesh and Uttar Pradesh. The area is famous for marauding outlaws, called dacoits, and is portrayed in hundreds of Bollywood films.

Married three times and cuckolded as many times by rival bandits, Mr. Gujjar went berserk when his third wife ran away with a man he had kidnapped as a boy and raised as his foster son. Vowing to track the lovers down and exact his revenge, he announced a hefty reward for information about the couple.

He then told reporters he wanted to lay down his arms. All he asked was that a political party from one of the states he terrorized grant him a role in government as a member of the legislative assembly.

But even though politicians with long charge sheets are common in central India, Mr. Gujjar misread the way the political wind was blowing, according to police.

“He didn’t have any connections,” Supt. Dwivedi said.

Copyright 2005 by the Globe and Mail

red-hot market

Growing wealth at home fuels an Indian art boom.

By Jason Overdorf

Newsweek International

Oct. 17, 2005 issue - Looking for a good investment? Try contemporary Indian art. In back-to-back auctions held by Christie's and Sotheby's in New York last month, four different works topped the previous auction-price record of $317,500, set by Tyeb Mehta's "Celebration" in 2002. And, according to experts, that's just the beginning. "Because of the strength of the market and the strength of the Indian economy, we're seeing that many of the paintings exceeded estimates, some tripling or quadrupling our expectations," says Yamini Mehta, who oversees modern and contemporary Indian art at Christie's. At separate auctions at both houses on Sept. 20 and 21, 16 works by contemporary Indian artists sold for more than $200,000 apiece; even more impressive, Christie's brought the hammer down on Mehta's painting "Mahisasura" for a whopping $1.6 million—five times the previous auction record. "It [was] an amazing week," says Robin Dean, director of the Indian and Southeast Asian department at Sotheby's.

Not coincidentally, nearly all the artworks that broke $200,000 were by artists belonging to the Progressive Group. Founded around India's struggle for independence in the late 1940s, the group includes artists like Mehta, Ram Kumar, Maqbool Fida Husain, Syed Haider Raza and Francis Newton Souza, who rejected the colonial British academic style and began the modernist movement in India. "Today we paint with absolute freedom for content and technique," reads the group's 1948 manifesto.

The market for their works took off in 1995, when Sotheby's auctioned off paintings from the extensive private collection of the Chester and Davida Herwitz Charitable Trust. At that time, according to Neville Tuli, who started India's first domestic auction house, Osian's, the entire Indian art market amounted to about $1 million. Today the same market is valued at close to $180 million.

At first the Indian diaspora drove demand, but now growing wealth in India itself is fueling the market. In the mid-1990s, most buyers were scions of India's industrial dynasties, who favored the realistic, conservative artists of the Bengal school. In the late 1990s, nonresident Indians, or NRIs, who preferred the bolder, more colorful and less traditional work of the Progressives, began dominating the market. Today, domestic buyers—buoyed by India's skyrocketing stock and real-estate markets and fast-growing economy—are helping drive prices higher. While an overseas Indian bought Mehta's "Mahisasura," private collectors living in India accounted for four of Christie's biggest sales last month, paying $486,400 for Husain's "Trial," $385,600 and $262,400 for two untitled paintings by Kumar and $284,800 for Souza's "Girl With Hairpin and Girdle." "The biggest change is the increase in activity from India itself," says Dean. And there's more to come: "For every work that sells, there are two or three new very wealthy people that come into the market."

Meanwhile, the big players in India's domestic art market—Osian's, Dinesh Vazirani's Saffronart.com and Geetha Mehra and Pravin Gandhi's Sakshi Art Gallery, among others—are aggressively pushing the field in new directions. Osian's Tuli has published art books, built the world's largest archive of Indian art and developed a historical record of prices. Saffronart.com pioneered online auctions, introducing a new level of transparency to a market long characterized by backroom, cash-only deals that left would-be buyers uncertain of the real market value of the works up for sale.

Now Tuli, Mehra and Gandhi are developing new ventures for the domestic art market: competing art-investment funds. In August, Mehra and Gandhi, backed by Edelweiss Capital, launched the Yatra fund. So far they have raised at least $2.3 million from high-net-worth investors—each of whom committed a minimum of $45,000 for four years—interested in tapping the art market. Osian's has a similar fund slated for launch in November; Tuli—never less than bold—expects to bankroll his fund with $25 million. In this market, he says, raising that amount is "a two-day job." Indeed, he has a good pitch: starting with about $3.5 million in 2000, Osian's is now worth more than 10 times that amount. You just can't beat that kind of a return.

© 2005 Newsweek, Inc.

conflicted commies

The force that could determine India's capitalist future is one of the world's strongest communist parties.

By Jason Overdorf

Newsweek International

Oct. 10, 2005 issue - As its name implies, the Communist Party of India-Marxist still employs the dated rhetoric of the left, down to calling its ruling body the Politburo, in old Soviet style. So it came as a surprise this summer when the national leadership endorsed "all the actions" of its maverick chief minister for West Bengal, a state of 100 million people and long a bastion of communist power. That came shortly after Buddhadeb Bhattacharjee wooed foreign investors in Singapore by saying Indian communists had to "reform or perish," and invited these capitalists to help build new infrastructure in West Bengal. The moment cemented Bhattacharjee's reputation as the Deng Xiaoping of India: a pragmatic communist reformer.

That doesn't mean, however, that India's communists have gone the way of comrades from Russia and China, tilting toward robber-baron capitalism. Just last Thursday the party's traditional allies in India's left-wing trade unions brought the country to a standstill with a daylong national strike that shut down railroads, airports and banks. In New Delhi, where the communists are critical partners in the coalition government, they have diluted free-market reforms and are hotly debating their proper role in a capitalist economy. The outcome of that debate is crucial: it could help determine whether India accelerates to China-style growth rates or stumbles yet again.

The Indian communists have more influence than all but one kindred party in a capitalist democracy, behind President Hugo Chavez's Movement for a Fifth Republic in Venezuela. (Third on the list: Portugal, where communists hold 12 of 230 seats in Parliament.) The CPM and two much smaller communist parties together control 60 of India's 545 parliamentary seats. Since the United Progressive Alliance led by Prime Minister Manmohan Singh's Congress party is 51 seats short of a majority, it depends on communists to stay in power. The CPM has used that clout to block or temper policies from the sale of state-owned companies to the liberalization of labor laws in special economic zones.

In Western Europe, the leading communists for much of the cold-war period were found in Italy, where their focus was internal: their big idea was worker ownership of factories in an otherwise capitalist market. Given the vast expansion in international trade since then, the Indian communists' focus is more global. Indeed, the country's population and growing economy make the party one of the world's most influential opponents of excessive globalization. Experts debate whether India's communists are emulating Chinese reformers or European social democrats. Bhattacharjee says neither: "We are debating among ourselves. What is reform? Reform means what? For whom?" Sitaram Yechury, a member of the CPM Politburo, says the party's overriding ambition is to shift the goal of market reform from promoting corporate profit to people's welfare.

The differences with China are stark. The Indians still cling to socialist ideals like worker protection and land reform, while China's leveling impulses seem to have been spent during the land reforms of the Mao era, when the rural bourgeoisie was all but destroyed. India, meanwhile, never made good on post-independence promises to wipe out a feudal caste system. That said, the Indian communists' ideas about economic sovereignty take a page from China's book, and mirror the Congress Party view of the early 1990s.

The CPM sets three rules for foreign investors: they must increase India's production capacity—build factories, rather than simply buying assets—help upgrade Indian technology, and create jobs. While Congress is now inclined to open doors further, the communists are more wary. Where Congress leaders praise a domestic automaker like Tata for rising to the challenge of foreign competition, the communists decry how Japanese giant Suzuki ultimately gained control of its Indian joint venture, Maruti Udyog. "It would be wrong for anybody to characterize us and say we have been opponents of capital flows into India," says Yechury. "We qualify those flows, rather than opposing them."

On battles over how India should comply with its obligations to the World Trade Organization, the CPM has prevented the government from giving away too much on issues like drug patents, which could have harmed consumers. And in some market reforms, the left has taken the lead. Bhattacharjee's Finance minister in West Bengal spearheaded the introduction of a value-added tax, as a way of eliminating tax evasion and replenishing government coffers, which some experts call the single most important economic advance in India in the last five years. "You can't just paint the left as anti-reform," says Ramesh Venkataraman, a partner with McKinsey & Co. in Mumbai. "The left is selective."

The CPM has been criticized in the Indian media as hypocritical for resisting a Congress plan to increase national limits on foreign investment in the telecommunications sector, while aggressively pursuing foreign investment for West Bengal. Once scorned for its obstructive policies and constant strikes, the state has been attracting investment from companies like IBM and Microsoft since Bhattacharjee took office in 1990, and now draws more investment from Japan than any other Indian state, including Karnataka, home to Bangalore's massive outsourcing industry. But the communists say the devil is in the details: the party opposed Congress's telecom plan because it would have allowed foreigners to provide phone service—making big profits but providing no new technology or manufacturing capacity in return. Yechury says the party has done nothing in West Bengal that it has rejected on the national level.

Still, the party remains conflicted about its most progressive members. When Bhattacharjee recently signed a deal with the Salim Group of Indonesia to build a 2,000-hectare commercial and housing development, party members accused him of favoring a company close to the former Suharto regime, which took power in an anti-communist coup. Soft-spoken and white-haired, he wears the large-framed spectacles typical of Bengali intellectuals, and embraces the word "capitalism" only with protections for workers and the poor. Yet he is pushing labor market reform to attract more outsourcing companies to West Bengal. He says workers must "share a concern" for productivity with management.

The CPM, in fact, reacted quietly to last week's union-led strikes, citing them as a warning to Singh not to push too hard on reform. Tellingly, the strikes hit hardest in West Bengal, where workers took complete control of the capital, Kolkata. They defied measures Bhattacharjee took to allow IT workers to get to work through blockaded streets. Only when Bhattacharjee personally confronted them did they meekly step aside. It remains to be seen whether his detractors in a party that still values its labor roots will ultimately do the same.

© 2005 Newsweek, Inc.

ahead of the pack

South Korean firms have invested smartly in India, targeting its middle class and export-platform potential.

By Jason Overdorf and George Wehrfritz
Newsweek International

Sept. 19, 2005 issue - In one whopping megadeal, South Korea has become the largest foreign investor in Asia's second emerging giant, India. On Aug. 31, Korean steelmaker Posco established a local subsidiary in the eastern Indian state of Orissa, paving the way for a controversial mill and mining complex that will cost the world's fifth largest steelmaker $12 billion and employ some 40,000 workers once it's fully operational in 2010. The behemoth dwarfs India's previous foreign-investment centerpiece, a $3 billion power plant launched by Enron in 1993. Yet even before shovels hit soil, Posco's arrival has triggered an outcry among anti-globalization activists and opposition politicians, who see a scheme to snatch, then export, Orissa's vast iron-ore reserves.

Their clamor—and the global buzz over China's emergence as an economic superpower—mask a deeply significant trend in Asian business: Korea Inc.'s rise to prominence on the Indian Subcontinent. By the numbers, Korea now tops the list of countries investing in India since New Delhi launched economic reforms back in 1991—at more than $14 billion. South Korean firms like Hyundai, LG and SK Group have carved out a notable presence in the country—the world's second largest and a potentially huge market for products like refrigerators, washing machines and television sets.

In just a few years, South Korean brand appeal has eclipsed Japanese rivals like Sony and Honda, and even the nation's biggest cricket stars have become known as Team Samsung, thanks to a successful sponsorship campaign. "South Korean firms have become household names in India," says Rakesh Shukla, an economist at the National Council for Applied Economic —Research in New Delhi. "[And] India has become an investment hot spot for the South Korean companies."

Confucian Korea, multiethnic India: it's not, on the surface, a natural match. Why the pairing works is a study in global commerce that offers lessons that non-Korean investors have already begun to heed. Though their strategies differ in nuance, each of Korea's chaebol (conglomerates) follows the same general game plan in India: intensively research the market, hit the ground running and localize, localize, localize. Thus Hyundai developed a new car, the Santro, especially for the Indian market and achieved near-complete localization of its supply chain within its first year of production. They target specific markets, create new (sometimes, state-of-the-art) products to serve them and usually beat their competitors to the store shelves—the exact opposite of the one-size-fits-all strategy still common among other multinationals in India. "We learned to treat Indian consumers with far greater respect than, for instance, a Japanese company was going to do earlier," says B.V.R. Subbu, head of Hyundai's Indian autoworks. " 'Good enough for India' is the kind of approach they have had."

In bilateral terms, Seoul and New Delhi have become key economic partners. Korean ventures have helped to establish India's vast potential as an alternative to China—both as a market and as an export platform for products like cars and white goods. Korean businesses now pursue a two-pronged "China plus one," or "Chindia," strategy as a matter of course, partly to hedge against a currency shock, recession or political unrest in the Middle Kingdom. India is LG Electronics' No. 3 strategic market after the United States and China, for example. "Korean companies rely too much on China. India has a great potential to [help us] reduce that risk," says Park Bun Soon, a strategist at the Samsung Economic Research Institute in Seoul. "You can't put all your eggs in one basket."

Arguably, Korea Inc.'s best weapon in the battle for Indian market share could be empathy. Unlike Japanese, British or American rivals, Korea is a newcomer to the club of industrial powers. Just 40 years ago, in fact, it was written off as a "basket case" economy incapable of advancement, a tag sometimes still attached to India. Attuned to their own history, Koreans sensed a latent energy in India others initially missed. So rather than stake out small premium segments by catering to India's tiny elite (as Sony sought to do with its high prices and products designed in Japan), the chaebol set their sights on a vast—yet, by Seoul's standards, still poor—Indian middle class. "Korean companies gauged the potential of the country very differently," says Samsung India's deputy general manager Ravinder Zutshi.

One case study is LG Electronics. Since arriving in India in 1997, it has become the country's leading manufacturer of televisions, washing machines, refrigerators, microwave ovens and air conditioners. Last year LG's India sales hit $1.7 billion; its 2010 target is $10 billion. At its factories in Pune and Noida, all but about 20 of the 2,700 employees are Indians, and the company has introduced many India-specific product designs, including refrigerators with smaller freezers and power sources bolstered to handle voltage spikes. LG's Indian operation chief, Kim Kwang Ro, strives for "complete localization and product differentiation." Adds LG spokesman Park Hyung Il: "India is a country with diverse subcultures. You cannot succeed there without becoming a local company."

A new study by McKinsey Co. forecasts huge rewards for companies that target India's middle-income earners. Published last week, "Winning the Indian Consumer" projects $400 billion in demand by 2010, which would make India the fourth largest consumer-goods market in the world. Most growth, the report argues, will come in a category called "aspiring India," comprising 40 million middle-income households, "a geographically immense market of consumers —who demand high value at low prices." Korea Inc. reached the same conclusion in the late 1990s. The study singles out LG for creating a distribution system that begins with flagship stores in big cities "and encouraged local entrepreneurs to set up stores in smaller towns to serve sizable rural populations."

Even in marketing, localization is Korea Inc.'s recurring theme. All its top brands strive to identify themselves as "Indian-friendly" rather than "foreign and therefore better," as outsiders sometimes do to generate snob appeal in emerging markets. Korean brands want to be seen responding to the needs of Indians with a more humble attitude, so as not to offend national pride. And who would be better sensitized to the issue than flag-waving Koreans?

Hyundai motor india typifies Korea's strategy of conceiving products specifically for the Indian consumer market. Until Hyundai arrived in 1998, foreign automakers were selling recycled models; Toyota, for example, marketed a "new" van in India that had already been discontinued in Indonesia. Hyundai's goal was to challenge Maruti Udyog Ltd., the government of India's joint venture with Japanese rival Suzuki, which had so dominated the market that to many Indians, "Maruti" had become synonymous with "car." Worse, Hyundai's own research indicated that Indian consumers ranked Korea far below Germany, Japan, the United States and even Malaysia for its automaking prowess.

No matter: Hyundai Motor launched a full line of cars, from a small hatchback to a luxury sedan, and the new choices caught on with the public. Some of the models are identical to those sold in Seoul showrooms, but are made in India. Today, less than six years later, Hyundai is India's second largest automaker. In 2004 the company sold roughly 150,000 cars within India—a jump of 40 percent over the previous year. Rivals Ford, General Motors and Honda sold 25,000 to 30,000 cars each. "Both the Japanese and the Americans have taken much longer to understand the real depth of the Indian market and its real size," said Hyundai's Subbu, a career industry executive Hyundai poached from domestic car- and truckmaker Tata Motors to run its Indian subsidiary.

Perhaps more important, Hyundai last year became India's largest auto exporter, selling about 75,000 passenger cars to Europe, Africa, Mexico and other countries. Rivals like Toyota and Honda instead bet on Thailand, which is now recognized as a less promising market, and less promising export platform. The reasons for the latter are complex; among them, Southeast Asia's free-trade zone has been painfully slow to materialize, and the region doesn't have the strong engineering tradition India does. Also, China and India are simply growing faster than Southeast Asia, and rapidly eclipsing it in terms of export competitiveness.

Korean firms have shown that India is extremely competitive in high-end manufacturing. Subbu has said that the quality of workmanship in India is as good or better than in Korea. In China, where most of the auto plants are joint ventures, technology theft is a constant fear. That's not a worry in India, because Hyundai owns the whole show. In contrast to other foreign automakers, Hyundai has localized production aggressively, a major cost-saving strategy. "The Koreans had zero name recognition, so they had no delusions about trying to get premium prices," says Saumitra Chaudhuri, an economic adviser at the credit-ratings agency ICRA Ltd. They realized that "Indian customers are more price-conscious and willing to experiment with newer products if the price is right."

Posco could take Korea Inc.'s success to another level. If India's manufacturing sector meets robust growth forecasts—and the company can sidestep nationalist critics—Posco's Orissa facility will open just in time to meet a surge in demand for steel. Today, India consumes just 30 kilograms of steel per capita each year, a mere eighth of China's annual intake. Its biggest customers are expected to be Korean auto- and white-goods makers in India.

Importantly, Korean companies have helped India gain self-confidence as a manufacturing nation and an exporter with the potential to rival China in certain industrial sectors. That confidence, in turn, puts new pressures on New Delhi to streamline foreign direct investment and open the door for more multinationals. This virtuous cycle has the potential to erode India's reputation for inefficiency, protected markets and red tape.

Though many would deny it, multi-nationals from Japan, Europe and the United States are cribbing from the Korean success story. After failing with the Escort, Ford swiftly developed a car especially for the Indian market, and has begun exporting it to several other countries. Maruti is embracing hipper designs. Sony has slashed its prices to get back in the game against Samsung and LG. Yet for now, at least, Korea Inc. is where it wants to be on the Subcontinent: firmly ahead of the pack.

With B. J. Lee in Seoul and Sumeet Chatterjee in Mumbai
© 2005 Newsweek, Inc.

'the death of reform'

In India these days, don't believe everything you read.

By Jason Overdorf

Newsweek International

Sept. 5, 2005 issue - Prime Minister Manmohan Singh's yearlong reign has been a balancing act, as he endeavors to live up to his reputation as the father of India's economic reforms without alienating the left-wing parties that his coalition government needs to survive. But lately, as his Congress party wrangles with the communists, the balance has been tipping. One by one, bold reforms are getting killed or shelved. These days Singh talks of the need for politicians to compromise in order to survive in office.

The question is whether Singh has fallen from compromise to capitulation on reform, as the opposition Bharatiya Janata Party claims. Labor, pension and banking reforms are going nowhere. A new law creating special economic zones for foreign investors was so watered down by the left, it won't have much impact. The commission set up to do away with monopolies and restrictive trade practices is moribund. Last week Finance Minister Shri P. Chidambaram, widely seen as Singh's right-hand man in the reform cause, announced that the government was scrapping plans to sell its stakes in 13 state companies, including an oil refiner, an aluminum maker and a shipping firm. This latest move "is another nail in the coffin of reform," says Arun Shourie, BJP Disinvestment minister in the previous coalition government.

Certainly the story dominating headlines in India is the Death of Reform. But despite all the evidence, the declaration may be premature. The prognosis of most investors is much more optimistic: the Bombay Stock Exchange showed no reaction to Chidambaram's announcement on privatization. The following day the benchmark Sensex index closed at a record high on buying by foreign funds. Investors had expected the shelving of privatization, which was foreshadowed in a common platform released by the ruling coalition partners last year. Meanwhile, the government has achieved progress on other fronts, lifting a rule that limited the ability of foreign joint-venture partners to expand inside India, as well as a cap on foreign direct investment in telecommunications. "Arun Shourie is just being a politician," says Saumitra Chaudhuri, an economic adviser at Indian credit-rating agency ICRA Ltd. "Privatization is not all there is to reforms."

This is about the politics, not economics. Chidambaram's announcement came shortly after every major Indian news outlet carried graphic photographs of striking Honda workers being beaten by police in Gurgaon, Haryanaone of the hotbeds of outsourcing and foreign investment. It also comes a few months before state elections in Bihar, as well as Kerala and West Bengal, where communists have dominated the polls. When the elections are done, many analysts say, the reform effort will resume. "This is only a minor hiccup," says S. A. Chari, executive director of the credit-rating agency Onicra Ltd. "Everybody is seeing the results of the reforms. Even in places like Calcutta [in West Bengal] you can see things changing very dramatically."

The danger, however, is that by positioning itself for these state elections, Congress could be creating expectations that will be hard to live down. In southern states like West Bengal, the communists are so well entrenched that they can throw open the door to foreign investors even as they spout Marxist slogans on the national stage, in order to solidify their one base in the north: trade unions at state-owned companies. Meanwhile, Congress must make good on populist election promises to gain ground in the south if it is to restore itself as a dominant national party.

That explains why, rather than pushing free-market reform, Congress party legislators recently passed a bill that guarantees every rural household in India at least 100 days of paid employment each year. Though they are still bullish now, the markets eagerly expect Congress to lift the many barriers to foreign direct investment: India attracts less than 1 percent of global FDI, while China attracts 10 percent. "It's a generous interpretation to say that reforms are on hold for elections," says Chaudhuri. "If you wait for elections to be over, thinking you will have a little more freedom, then those political positions become written in stone." And that stone could mark the real death of reform.

© 2005 Newsweek, Inc.

grand theft identity

Be careful, we've been told, or you may become a fraud victim. But now it seems that corporations are failing to protect our secrets. How bad is the problem, and how can we fix it?

By Steven Levy and Brad Stone

Newsweek

Sept. 5, 2005 issue - Millions of people now have a new reason to dread the mailbox. In addition to the tried-and-true collection of Letters You Never Want to See—the tax audit, the high cholesterol reading, the college-rejection letter—there is now the missive that reveals you are on the fast track to becoming a victim of identity theft. Someone may have taken possession of your credit-card info, bank account or other personal data that would enable him or her to go on a permanent shopping spree—leaving you to deal with the financial, legal and psychic bills. Deborah Platt Majoras got the pain letter recently, from DSW Shoe Warehouse. Hers was among more than a million credit-card numbers that the merchant stored in an ill-protected database. So when hackers busted in, they got the information to buy stuff in her name—and 1.4 million other people's names. "It's scary," she says. "Part of it is the uncertainty that comes with it, not knowing whether sometime in the next year my credit-card number will be abused." Now she must take steps to protect herself, including re-examining charges closely, requesting a credit report and contacting the U.S. Federal Trade Commission to put her complaint into its ID-theft database. The latter step should be easy for her, since Majoras is the FTC chairman.

Somewhere, Willie Sutton is smiling. Sutton was the sly swindler who, when asked why he robbed banks, was said to reply, "Because that's where the money is." Today the easy money is still in banks—databanks: vast electronic caches in computers, hard disks and backup tapes that store our names, ID numbers, credit-card records, financial files and other records. That information can be turned into cash; thieves can quickly sell it to "fraudsters" who will use it to impersonate others. They visit porn sites, buy stereo systems, purchase cars, take out mortgages and generally destroy the credit ratings of innocent victims, who may be unable to get new jobs, buy houses or even get passports until the matter is painstakingly resolved. And since the crime is all done remotely, modern ID thieves suffer little of the risk that Sutton shouldered a half century ago when he robbed banks with a machine gun.

We've become accustomed to the digital grease that smooths transactions, loans and eBay bids, even as worries about identity theft quietly shadow us, often leading us to restrict our activities and be extra careful with our credit cards and personal information. In recent months, though, there's been something different, a cascade of reports about big break-ins and bungles where the booty is our secrets. Suddenly things seem out of control: instead of losing our identities one by one, we're seeing criminals grabbing them in massive chunks—literally millions at a time. Just last week security firm Sunbelt Software discovered a U.S.-based server storing passwords for online accounts from 50 banks, eBay and PayPal log-ins, and credit-card numbers stolen by a Trojan virus. In June lax security at an Atlanta-based company called CardSystems exposed a possible 40 million Discover, Visa, MasterCard and American Express numbers to hackers, who have already begun turning the digits into cash and prizes. "It only makes sense that criminals would go where information is collected," says Martha Stansell-Gamm, head of the computer-crime division in the U.S. Justice Department.

"Over the last nine years, criminals have gotten a better understanding of the power of information," says Rob Douglas of PrivacyToday, a security consulting firm. "Instead of selling drugs, so much can be made so quickly with identity theft, and the likelihood of getting caught is almost nil." Avivah Litan of research firm Gartner Group speculates that fewer than 1 in 700 identity crimes leads to a conviction. This goes a long way toward explaining why it's the fastest-growing crime of this century. Crooks rack up $53 billion a year in ID theft in the United States alone. Consumers get stuck with $5 billion directly; and the rest is paid by retailers and businesses—which pass it on in higher prices.

Losing your credit card can be a huge hassle, but laws usually limit losses. In more distressing forms of ID theft, someone —swipes not just your card but also your entire financial persona. Judy McDonough, a 56-year-old occupational psychologist from the north of England, has been living a nightmare since last year, when she found that someone—she suspects a relative—racked up 33,000 pounds sterling of debt over three years, which included two credit cards, three bank loans and 2,300 pounds sterling of catalog orders. She reported the crime six times before taking it to her member of Parliament. Most banks, says McDonough, "just hope you'll go away."

For years, the primary cause of ID theft has been good old-fashioned analog crime. Thieves rifle mailboxes, snatch purses and dive into the garbage for discarded bank statements or credit-card receipts. More recently, we've seen a plague of "phishing"—sending bogus e-mails that look as if they come from legitimate companies, asking us to supply personal information. After the CardSystems heist, phishers, trying to capitalize on the news, sent out e-mails sup-posedly from MasterCard, asking people to update their information. "They played on the fear that consumers had when the announcement was made," says Susan Larson of SurfControl, an Internet-security firm.

Savvy computer users know the requisite defense against a phishing attack: never respond to a request for personal information. This wisdom is part of the standard tool kit of protections against ID theft. Check your credit-card bills with an eagle eye. Request your credit report. Shred your information. This regime makes perfect sense for individuals. But when it comes to companies charged with safeguarding millions, sometimes even billions, of records, what do they do?

They leave it unencrypted on computers, where malicious hackers get hold of it. The DSW Shoe Warehouse is far from the only hacked database owner. According to a U.S. government consent order, BJ's Wholesale Club, a Massachusetts-based firm operating big-box stores and gas stations, not only failed to encrypt, but stored records in violation of bank-security rules, didn't use a firewall to prevent wireless intrusions and protected the information with the easy-to-guess default passwords that came with the system. Result: credit cards ripped off in early 2004 were used to charge millions in goods.

They inadvertently allow employees to sell it. This June, a 24-year-old Indian man named Karan Bahree, who at the time worked for Gurgaon-based online marketing firm Infinity eSearch, allegedly sold information on 1,000 bank accounts to an undercover journalist working for The Sun, a British tabloid, for 2,750 pounds sterling, according to a Sun article. Bahree has since claimed that he was only a middleman and that he did not sell data his employer had collected (he's since been fired, according to a statement by Infinity eSearch). Infinity eSearch has said the company doesn't handle any data for the banks named in the Sun report, and that Bahree didn't have access to confidential data of any kind through his employment with the company, according to press reports. But the case has raised fears of an anti-outsourcing backlash if Indian firms are seen to be careless with the data they handle.

They pack it in boxes and put it in a mail truck. That's what CitiFinancial, a unit of Citigroup, did with the financial secrets of 3.9 million customers last May. The box never arrived at its destination, and now CitiFinancial is telling customers that their identities are at risk.

They leave it on laptops that get stolen. Last March at UC Berkeley someone made away with a computer holding personal information of almost 100,000 grad students and applicants.

They don't monitor what insiders may do with it. In April, more than a dozen people, including employees of an MphasiS call center in Pune, India, were charged with cheating Citibank customers out of $350,000. Citibank had outsourced some of its customer-service operations to MphasiS.

They just plain lose it. Bank of America is still looking for backup tapes with information on 1.2 million government workers, discovered lost in December.

They don't do what they say. CardSystems, a privately held company, processes an es-timated $15 billion in credit-card trans-actions a year (between the merchant and the bank). In direct violation of its agreement with MasterCard and Visa, CardSystems retained 40 million credit-card numbers "for research purposes," as its CEO John Perry initially told the press. These were sucked out of the system by digital invaders. CardSystems' clients admit that protection was lax: "Obviously there were deficiencies and other issues," says Josh Peirez, head of government affairs for MasterCard. Since the break-in, CardSystems has reportedly installed a new "intrusion-prevention product" (hey, thanks).

An elaborate infrastructure of crime has emerged to collect and distribute stolen records. When it comes to attacking databases, malicious hackers either use automated software "bots" to methodically probe the Internet for vulnerable databases or target companies that are likely to harbor honey pots. Most often, they enter systems through preventable security flaws, like guessable passwords (example: "Dave" or the default password that came with the program) or known vulnerabilities in software.

Once records are stolen, they are passed on or sold in fleeting digital dark alleys—chat rooms or instant-messaging sessions where transactions are quickly, stealthily enacted. Sometimes the crooks are sufficiently brazen to post their offerings on Web sites that are sort of fraudster eBays. At one site posted by a member of the Shadowcrew organization (which was shut down by the U.S. government last year), $200 gets 300 credit cards without the security codes printed on the back of the card. If you want card numbers with the code, it will cost you $200 for 50 of them.

After fraudsters buy the purloined numbers, they commonly use them to grab goodies as fast as possible. It's kind of a high-tech form of supermarket sweepstakes, where the crook keeps stealing until the fraud-management software of the credit-card companies kicks in. "The method is smash-and-grab," says Bryan Sartin, VP for in-formation-security firm Cybertrust. "The turnaround time is amazing."

As bad as the recent exposures have been, they may well wind up helping spur some very long-needed reform. Though identity theft is a devilishly difficult crime to combat, the key to fighting these huge cyber-raids is making the databases that hold private records more secure. Indian outsourcing firms have been quick to beef up internal security, and local police departments—like the one in Pune, which solved the Citibank case—have been starting cybercrime units. The best solution would make the companies that collect the data liable for their failings. The U.S. Congress may slap fines on companies that lose records. Anything that increases the cost of losing information to the company, as opposed to the consumer, would give firms an incentive to protect consumer secrets.

Each time we hear of another huge data breach, the pressure increases to tighten up security and fight the ID crooks. But change, if it comes, will come too late for Daniel Bulley, who's spent months trying to distance himself from a home he never owned, a job he never held and a portfolio of credit cards and accounts he never opened. Bulley is angry—at the crooks, at the cops (no one would investigate his case) and at the corporations that let his information fall into evil hands. He's especially steamed at the billion-dollar industry that has emerged to sell people protection against data theft—run by parts of the same industry that fails to protect the information in the first place. Corporations, says Bulley, need to be tighter with the data they hold: "Why should we pay them to do their job right?"

Reported by William Lee Adams, Holly Bailey, Jennifer Barrett, Juliet Chung, Temma Ehrenfeld, Charles Gasparino, Andrew Horesh, Nicole Joseph, Susannah Meadows, Ben Whitford, Kathryn Williams, Jason Overdorf and Mary Acoymo

© 2005 Newsweek, Inc.