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T Mukherjee: Can India dare export to China?

Source : BUSINESS_STANDARD
Last Updated: Fri, Jan 04, 2013 19:50 hrs

The white goods of many well-known Indian brands are made in China. It does not matter what the product is, India has beaten a retreat in the war of competitiveness in white goods manufacture.

One common complaint from senior executives of many manufacturing industries is that Chinese products are unbelievably cheap. Some cannot understand China’s costing system. In extreme cases, they wonder how the Chinese sell at a price lower than the cost of raw materials. Under the World Trade Organisation regime, India cannot impose unreasonable tariff barriers to discourage imports, so it is easier to import Chinese goods and brand them. (In the context of this article, “China” is a generic name and refers to a dozen or so emerging countries that compete internationally in manufactured goods.)

It is true that many rich countries have similarly abdicated to China’s manufacturing prowess and rationalised this by announcing that they have strategically vacated this space to allow their entrepreneurs to work on high-tech areas. But this is not an acceptable situation for India, given the urgent need to create jobs.

One of Ratan Tata’s favourite axioms was “question the unquestionable”. By the same token, it is well within the reach of Indian manufacturing companies to profitably export white goods to China. It is possible that the total cost of production and the expected price of Chinese goods are comparatively low. Exports generally attract a profit penalty but are justified on the basis of the overall impact on the company. This is an accepted practice in all countries. The Chinese cannot be interested in subsidising the world. So, what is the truth behind the myth of the China price?

Although much has been written about South Korean and Japanese companies, we hardly hear anything about Midea, Galanz and many other white goods producers of China’s white goods capital, Shunde, in the Guangdong district. A first-hand insight into the region’s competitiveness during a recent visit suggests that Indian manufacturers can match them.

The prevailing belief is that China’s competitiveness mainly stems from cheaper raw materials, lower cost of capital and lower labour cost. Certainly, there are other reasons, but these three are cited most often.

Consider raw materials first. Chinese industries pay more or less the same for basic raw materials as we do in India. The basic difference is their scale of operation. The magnitude of what they produce is much larger than what the Indian companies do. One company produces 18 million refrigerators — in one location. This humongous scale justifies investment in the production of components, be it plastic moulds or electronic control boards. It is, therefore, in the component cost that China scores over others.

An assembly line manager may be more tolerant of some laxity in the quality of components produced by different wings of the same company. In the case of any defective component finding its way to exported white goods and noticed in India, an inventory of three months in the total supply chain will come under a cloud. Many Chinese companies and their Indian importers carry this risk.

What is more significant is that, often, these plants are part of an industrial cluster. For example, Shenzhen has a network of firms with sophisticated supply chains, multiple design and engineering skills, intimate knowledge of their production processes and willingness to leap into action if asked to scale up production. This can cut down their product development cycle time and reduce total logistics costs.

Next, consider the cost of capital. Chinese interest rates are low and their currency is stable and appreciating infuriatingly slowly. Chinese entrepreneurs have taken full advantage of this situation. Low interest rates have encouraged them to invest heavily in essential infrastructure. Chinese manufacturers enjoy world-class roads and ports and high-quality uninterrupted electricity and water.

Chinese white goods plants install several assembly lines on different floors of the same building, thus making good use of vertical space. The lines have designed flexibility such that they can assemble altogether different products on the same line.

Then again, Chinese plants run full-out, 24x7. They have to, to produce the volume. So, capital productivity is very high. Therefore, the impact of fixed cost per unit of production is low.

Third, let’s consider labour cost. With increasing prosperity in China Chinese workers expect higher pay. Their wages are steadily going up. So, Chinese labour costs are no longer low. As a result, some production is moving back to the rich world. With the introduction of basic automation by the manufacturing industry in general, and with improvements in design and manufacturing processes, labour represents a small part of the overall cost of many white goods.

Generally, the productivity of the Chinese assembly lines is not higher than what obtains in India. Companies also exercise great flexibility with such “temporary workers”, who are often provided dormitory accommodation.

Labour cost, the quality of the Chinese workers or their emotional attachment are not competitive advantages for Chinese companies compared to those of their Indian counterparts.

Overall, Chinese white goods manufacturers appear to have leads in two areas: component cost, arising out of own manufacture; and fixed cost per unit of production, resulting from high capital productivity. Indian companies competing with imported white goods should enjoy advantages in the following areas:

  • Logistics cost and the response time to customers’ wants; 
     
  • Inventory and, therefore, inventory carrying cost; 
     
  • A high potential for increasing capital productivity and, thereby, reducing the fixed cost component per piece; 
     
  • Rapid demand growth in India, which means new ideas and models can be introduced at short notice.

As the number of white goods of any category goes up, companies could start producing components or having specialists set up shop in close proximity. As the scale goes up, it will stand to reason that many components, which are being imported now, will be indigenised, adding to competitiveness. Once that happens, India can compete with China and export not just to neighbouring countries or emerging economies, but to discerning customers in Europe. And finally, we should look forward to profitably exporting to China too.


The writer is Director of Bharat Forge, TIL, IFB and other manufacturing companies



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