Friendly side of the dragon

At first, they came as unbranded toys, stuff that is the dream of every child and the child in every man. Battery-powered racing cars, miniature trains that ran on tracks, bears that sang Macarena, telescopes-and all at throwaway prices that middle class Indians could afford, but had never even seen in their neighbourhood shop. Then they came as a tide of freebies like cameras that FMCG majors give away with their products, and even as Diwali lights and furniture.

Cheap. Capacities. Magnets that drew the Big Boys to the party. In the ensuing rush from Chandni Chowk to China, every business worth its margins headed north to build up sourcing lines for everything from motorcycle and shoe parts to giant boilers for power projects.

China became the largest source of Indian imports, overtaking the US, and bilateral trade grew 33 per cent in 2008 over the previous year, to nearly $52 billion, despite the economic slowdown. Imports from China almost doubled to $24.16 billion in April-December 2008-09 over the comparable period of 2006-07, and now account for a little over 10 per cent of India's total.

So, will the Chinese deluge leave a trail of destruction in its path? Are the business linkages being created bad for India's strategic interests? Officially, the heads of India's trade lobbies fuelled the China bogey, even as many of them as entrepreneurs rushed off to find Chinese suppliers. And why not? The ground realities indicate that Indian industry is a big beneficiary.

Consider this: Almost half of India's imports from China consist of capital goods crucial for the manufacturing and infrastructure sectors. There is robust demand from user industries such as power, automobiles and electronics (which account for more than half of India's imports)-and cost is not the only consideration.

The Chinese are gaining a name in quality and sophistication. Says Haiyan Wang, Managing Partner, China India Institute: "If we look at China's own evolution-imported capital goods and intermediate goods from Japan, Germany, South Korea and Taiwan played an extremely important role in helping it become a manufacturing and export powerhouse. I believe the same logic is relevant for India."

Who's Buying from China
The power sector is a prime example. Over the last couple of years, Chinese suppliers have made deep inroads into the power plant equipment market in India, riding on the back of India's huge requirements for power generation and inability of local companies to meet the growing demand. In India, power generation companies face regulatory pressure to keep tariffs low. Most companies pursue a dual strategy to achieve this.

First: Faster execution of projects to prevent cost over runs, which can only be done with timely delivery by the equipment maker. Second: Reducing the cost of setting up the power plant itself. On both counts, Chinese companies score over their Indian counterparts. Chinese suppliers like Dongfang Electric Corporation, Shanghai Electric Corporation and Harbein Electric Corporation don't just offer lower costs, but have shorter delivery periods.

On quality parameters, too, Chinese companies set high standards. Says S.L. Rao, Director, Reliance Power: "With private sector entry into infrastructure in India, there is a demand for cheaper and good quality plant and equipment, especially because their bids are based on competitive tariffs. China can give them supplies, low prices and quality."

For instance, Chinese suppliers specialise in producing highly-efficient supercritical equipment. Reliance Power's Ultra Mega Power Project (UMPP) in Sasan is committed to delivering power at Rs 1.20 per unit only because it will have supercritical boilers. Using such Chinese products, which require less coal to produce electricity, is helping power companies such as Reliance Power and Adani Power bolster their performance.

The auto industry, too, has been a major importer of Chinese products. Imports of original equipment manufacturer (OEM) components from China have grown at a CAGR of 100 per cent over the past three years. In fact, imports from China now constitute more than 10 per cent of the total components imported, up from 1.5 per cent in 2003-04.

Several leading manufacturers, such as Tata Motors, Bajaj Auto, Ashok Leyland, Mahindra & Mahindra, TVS Motor and Ford Motor India, are already sourcing important components from China. That's not all. Indian companies are now setting up purchase offices in China and are sourcing tyres, wheel rims and shafts in bulk from Chinese firms.

India's imports from China of automotive components have jumped exponentially from Rs 100 crore in 2003-04 to Rs 2,200 crore in 2007-08. Cost is certainly an important driver of this surge in imports. The landed price of Chinese components is, on an average, 30 per cent less than components sourced locally, according to Automotive Component Manufacturers Association of India (ACMA) estimates. But there's more to it, according to industry experts.

Says Dilip Chenoy, Director General, Society of Indian Automobile Manufacturers (SIAM): "The increased presence of Chinese auto products in the domestic automobile sector has been largely attributed to better technology and superior quality. Moreover, Chinese auto parts manufacturers are producing specialised components, which are not available in the Indian markets."

Consumer electronics and durables majors in India have also begun to source from China. Components such as resistors, capacitors, fly back transformers and rotary compressors along with end-user products like plasma TVs, LCDs, high-end refrigerators, microwaves and split air conditioners are all being imported from China. And almost all the major players are doing it-Philips, Onida, Voltas, Whirlpool and others.

This surge in imports is an outcome of several factors. An important reason is the capacity constraints among domestic suppliers. In some instances, companies have their own manufacturing units as well, but still have to depend on imports. Voltas, for instance, has a plant in Pantnagar, Uttarakhand, which manufactures 300,000 units of ACs. The company, though, is targeting sales of 500,000 this fiscal and will import the shortfall from China.

Says Pradeep Bakshi, VP (Marketing), Voltas: "We get a wide range of models in China. The domestic suppliers just don't have the capacity to meet our requirements." On quality and cost parameters, too, Chinese products stand out, say industry sources. Arvind Uppal, Region Head (Asia South) and MD (India), Whirlpool, says: "We have found that Chinese companies do meet the specifications we set."

Areas of Concern
However, there still remains a widespread mistrust among a section of Indian policymakers and industry about Chinese intentions. Concerns abound that the surge in Chinese imports could be detrimental for the Indian industry, particularly the small and medium enterprises (SMEs). Recently, a FICCI survey on Chinese imports stirred a hornet's nest. The survey reports a surge in imports from China in categories like food items, light and heavy engineering goods, chemicals and metal products.

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It claims that Chinese products are cheaper by 10-70 per cent compared to similar Indian products. Says Amit Mitra, Secretary General, FICCI: "Chinese exporters are looking to diversify into new markets. India would look to them as an obvious destination as their economy is still expanding at a brisk pace despite the slowdown." FICCI says these imports have dealt a body blow to the Indian SME industry, which was already grappling with weakening domestic demand.

However, Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small & Medium Enterprises (FISME), says that Chinese imports have also added to the might of Indian SMEs in several sectors. In fact, there are industries that have used Chinese inputs to improve their products and then compete better with the Chinese products in the Indian market."

India, so far, has steadfastly refused to accord the "market economy status" (MES) to China. This allows it to take punitive measures against Chinese companies, if required, without falling foul of the WTO regulations. Like the European Union and some other important trading partners of China, India, too, feels that state interference in the economy through industrial policy and pricing restrictions, uneven compliance with corporate governance and accounting standards are strong grounds for denying China MES.

However, experts point out that it's too simplistic to attribute the success story of Chinese manufacturing to tax credits and subsidies alone. Says Tarun Khanna, Jorge Paulo Lemann Professor, Harvard Business School: "Chinese companies also have access to better hard infrastructure and a broad labour force with basic education that enhances productivity."

Indeed, the clamour from industry bodies like FICCI and ACMA for restricting Chinese imports has forced the government to repeatedly intervene with measures to shield the domestic industry. In the last one year, the government has restricted the import of Chinese toys, radial truck and bus tyres and mobile phones. It has also resorted to safeguard and anti-dumping measures on items like fabrics, yarns and certain high-end stainless steel products.

Analysts are also unanimous that Indian industry has not taken maximum advantage of growing trade with China-a reason why exports have languished even as imports have surged. At present, the data for Indian exports to China indicates that it's dominated by a few primary products. For the nine months ending December 2008, exports of two items-iron ore and cotton- accounted for 59 per cent of India's exports to China.

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The Way Forward
If bilateral trade has to flourish in the years to come, clearly, the Indian export basket has to be diversified. Despite the inadequate development of the Indian manufacturing sector, experts believe it's achievable. Says P.N. Ramachandran, Executive Director, India China Chamber of Commerce & Industry (ICCCI): "There is a huge market in China waiting to be tapped. There is a pent-up demand for products in the organic and inorganic chemicals, leather, man-made fibre and textiles space."

Adds Bhardwaj: "Except for the last 2-3 years, China has not even been on the radar of the exporters' community in India, who have preferred to focus on American and European markets."

While the domestic industry has to be protected from unfair competition, most analysts also concur that protectionism cannot be the solution to India's inherent problem-how to make the country's manufacturing sector (including SMEs and large corporates) globally competitive.

Says Wang: "The main task facing the Indian economy is to become a manufacturing powerhouse. This cannot happen without sustained investment in infrastructure and advanced manufacturing technology and equipment. Chinese imports can help accelerate India's infrastructure and manufacturing revolution." The long-term solution then lies in improving the business climate in India.