10/26/2014 Make in India vs.

Make in China - The Hindu

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The Hindu
Sunday Anchor
Make in India vs. Make in China
Puja Mehra
Illustration by Prathap Ravishankar
Markets across Indian towns and cities that are flooded with Chinese products, more so around festivals such as Diwali, are grim
reminders of how Made-in-China has come to dominate our offices and homes.
Last Tuesday, Tata Motors Jaguar Land Rover (JLR) opened its first plant in Changshu, China. The luxury car-makers
$1.78-billion Make-in-China push has come a little over a month after Tata Group chairman Cyrus Mistry confessed to
be greatly encouraged under Prime Minister Narendra Modis leadership to join the Make In India programme that,
he said, brings together industry and government for crafting a new future.
This was at the glittery launch of Make in India in Delhi where a galaxy of global corporate leaders ranging from
Mukesh Ambani of Reliance Industries Ltd. to Lockheed Martin India CEO Phil Shaw in response to Mr. Modis call
had pledged to invest and manufacture in India.
The pitch had its origin in the Prime Ministers Independence Day speech when he invited global companies to pick
India to locate factories, promising to replace red tape with red-carpet welcomes.
The jobs and incomes for Indians these factories would generate, he said, would in turn create the market for their
output.
The goal the Modi government has set is to make India break into the top 50 in the World Banks ease of business index
ranking from the current 134th position.
When companies such as Tata Motors choose where to locate a new factory, they consider a range of factors. But India
fares badly on most of the counts. For instance, contract enforcement takes 1,420 days and going through the 12
procedures for starting business typically takes 27 days.
Indias chronic infrastructure and logistics deficit with inefficient transport networks makes it tough for manufacturing
companies to achieve just-in-time production.
The Modi government has said it wants to radically de-bureaucratise, deregulate, change officers mindsets, cut
paperwork and remove the notorious legal and infrastructure hurdles to starting and doing business in India. This is
not the first time India is focussing on its manufacturing sector. In 2006, the UPA government put out a national
strategy for manufacturing. It even dubbed 2006-15 as the decade of manufacturing in India. The five-year period of
2005-06 to 2009-10 was one of a smart 10 per cent plus growth for the manufacturing sector when several advantages
engineering skills, a growing domestic market, a raw material base and a large pool of skilled labour trumped the
vast barriers to doing business in India.
JLRs China launch has set alarm bells ringing for the Modi government: Make in India will have to go quickly from
being a statement of intent to real action on the ground. Markets across Indian towns and cities that are flooded with
Chinese products, more so around festivals such as Deepavali, are grim reminders of how Made-in-China has come to
dominate homes and offices. From furniture and gadgets to industrial equipment, India is importing almost all
products from its neighbour, even yarn for saris. It is estimated that over 99 per cent of Bangalore silk saris are being
made with Chinese silk yarn.
As a result, the rapidly growing bilateral trade between the two neighbours is tilting heavily in Chinas favour, at a rate
that India has termed unsustainable. Bilateral trade crossed $65 billion in 2013, but while India exported $15 billion
worth of goods to China, but imported $51 bn. The quality of trade also goes against India. India exports raw materials
such as iron ore but imports manufactured goods.
In pursuit of its reforms agenda of 1979, China has followed a more-exports-at-any-cost policy to boost its economy.
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The Chinese governments support to manufacturing in the form of affordable cost of funds, cheap inputs and world-
class infrastructure gives it an advantage over Indian manufacturers. The Confederation of Indian Industry estimates
that Chinese manufacturing as a result enjoys a cost advantage of about 10 per cent over Indian manufacturing.
A fallout of which is dumping of products on big markets like India. To protect domestic manufacturers, India has been
imposing an anti-dumping duty on 159 products ranging from chemicals, petrochemicals, pharmaceutical, steel,
fibres and consumer goods imported from China since 1992.
The spurt in factory imports from China has coincided with a sharp slide in Indias manufacturing sector despite the
UPA governments efforts to push the sector.
Manufacturing output grew barely 1 per cent in 2012-13. In 2013-14, factory output contracted (-) 0.7 per cent. The
share of the jobs-creating sector in the GDP has declined to 14.9 per cent in 2013-14 from the peak level of 16.2 per cent
in 2009-10.
Indias advantage
But there is hope still. A new index of manufacturing costs, including productivity-adjusted wages, electricity, natural
gas and currency movements, created by the Boston Consulting Group (BCG) of the worlds 25 biggest exporters shows
Chinas traditional cost advantage is now under pressure denting its attractiveness. Under pressure from the U.S.,
China has had to appreciate its currency by 30 per cent since 2006, which is eroding its exports cost competitiveness.
Just-in data from the International Monetary Fund show that China is no longer the largest trade surplus economy in
the world.
Therein lies an opportunity Make in India must tap. Indias labour costs are among the lowest in the world.
According to the U.S. Bureau of Labor Statistics, average labour compensation (including pay, benefits, social
insurance, and taxes) in Indias organised manufacturing sector increased only marginally, from $0.68 an hour in 1999
to $1.50 an hour currently. The average compensation in Chinas manufacturing sector in contrast rose 20 percent
year-on-year in the same period to $3 an hour.
Besides, the cost competitiveness, India boasts a nearly 500-million-strong labour force comprising unskilled workers
and English-speaking scientists, researchers, and engineers, making it a potential destination for cost-effective
research and development-oriented manufacturing.
Recent sporadic instances of the odd Chinese manufacturer setting up shop in India and a few Indian companies
moving production bases back home from China are encouraging. Havells, Godrej, Micromax and auto-components
maker Bosch are amongst a handful of companies that have recently moved back to India some part of their
manufacturing or outsourcing in China owing to currency, labour and other cost advantages.
As Chinese factories move up the value-chain to hi-tech manufacturing, opportunities would open up for Indian
entrepreneurs but they are up against stiff competition. On the BCG ranking, however, several countries, including the
U.S. and Mexico, are better poised and ranked above India as of now to take gain from Chinas loss of competitiveness.
The coming together of smart entrepreneurs, employees, infrastructure and know-how could overtime become a
durable advantage, as had happened in Chinas case.
Keywords: Make in India, Make in China, Chinese manufacturer, BCG ranking, Tata Motors Jaguar Land Rover