Paying the China Price

Manufacturing that adapts to new technologies and conditions shapes societies and economies. The challenge for India and other countries is competing with China’s low costs. Nayan Chanda, YaleGlobal’s editor in his column for Businessworld, describes how business people place manufacturing orders with China and then reap the profits by re-selling readymade goods or assembling components with big markups. China can supply low-cost components because of efficiency, scale of production and cheap labor – thus huge trade imbalances emerge. Chanda points out, “Of course, efficient large-scale industry has been enabled by high investment in ports, roads, and rail infrastructure and by rising engineering and technical skills.” China is also automating factories, installing robots, and investing in low-wage nations like Vietnam. Other nations could learn from Chinese manufacturing by investing in infrastructure, reforming regulations and updating technology at all levels – which would reduce trade deficits and provide employment. Otherwise, notes Chanda, “Failure to absorb the surge of youthful jobseekers could pose an enormous social problem no matter which party or parties come to power.” – YaleGlobal

Paying the China Price

India can offset the influx of cheap Chinese products by attracting Chinese investment in manufacturing
Nayan Chanda
Friday, November 15, 2013

Govind Agarwal (not his real name) has seen the El Dorado. I met this 30-something young businessman in Kunming airport on his way back home from the Canton trade fair. Agarwal was giddy from his first trip to China. “Just imagine, simply by reselling ten such carry-on bags I can cover the cost of my travel,” he pointed to his fancy artificial leather roller bag. This was just for starters. The container full of semi-assembled components for making optical mouse that he had ordered will give him a two hundred per cent profit. “Why should I go into manufacturing,” he asks, adding that China offers unbeatable prices. And therein lies one of India’s challenges in trying to provide employment to tens of millions of people coming every year into the job market. 

Failure to absorb the surge of youthful jobseekers could pose an enormous social problem no matter which party or parties come to power. From Agarwal’s point of view, the issue is simple. An optical mouse on average costs Rs 180 or more whereas a kit to make the same can be bought from China for Rs 30. He has bought the mould to make the plastic casing and ordered 6,000 kits. He would need to employ just eight workers to assemble the mouse and will reap a nifty profit. The reason China can supply the components at such a low cost, he found out, was because of efficiency, scale of production and cheap labour. Of course, efficient large-scale industry has been enabled by high investment in ports, roads, and rail infrastructure and by rising engineering and technical skills. India’s restrictive labour laws and shoddy infrastructure rule out such manufacturing.

India’s business houses have found the allure of ‘China Price’ (as its rock bottom price tag has come to be known in the world) long before Agarwal made his discovery. A study by the Ministry of Commerce and Industry last year found that imports of 268 industrial components from China soared from 26.3 per cent of the total imports in 2005-06 to 41.3 per cent in 2010-11, contributing substantially to India’s trade deficit with China. Deficit of $19.2 billion in 2009-10 rose to $39 billion in 2012-13. Prime Minister Manmohan Singh’s recent plea to China to correct the “unsustainable trade imbalance” could not return with a filled order book as India has few industrial goods that China would want. Its appetite for raw material — India’s main export — too is waning.

Still, there is a silver lining for India in China’s industrial transformation. With a steady rise in wages amid a greying population and waning labour supply, Chinese manufacturers are beginning to automate production using robots and are looking to take their manufacturing to low wage countries. Already some investors have moved to low-cost Vietnam, even to India. 

India, with its huge internal market and plentiful workers could be an attractive place for Chinese manufacturing, provided, of course, labour laws are reformed and infrastructural bottlenecks — from power supply to transport — are cleared. 

India is wary of allowing Chinese telecom giants Huawei and ZTE to supply network equipment for security reasons but more than 60 per cent of such equipment currently being used in India is manufactured in China. However , there are plenty of sectors where China could bring both technology and investment. During his visit in May, Chinese premier Li Keqiang, who came with a huge Chinese business delegation, discussed the possibility of setting up Chinese industrial parks in India. 

Even the neophyte Agarwal is aware that his Chinese suppliers might even move to India one day. But he would rather make hay while the China Price sun shines. 

 

The author is editor-in-chief of YaleGlobal Online, published by the MacMillan Center, Yale University.

Copyright © 2013

Add new comment

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
CAPTCHA
This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.