Chinese imports hitting Indian small manufacturers hard

Rajiv Gupta, proprietor of Delhi-based Roxy Gifts and Novelties, is going on vacation for a few days. He says he needs a break from the bad business run he's had lately. Gupta makes gift items such as wall clocks, pen stands, photo frames, diaries, calendars and wrist watches - and sales have been slow the past few years because of a flood of cheap Chinese imports in the market. But once he's back, the Delhi businessman is hoping to change his fortunes: he is thinking of sourcing from China and trading himself. "My friends tell me Chinese goods can easily fetch me 20 to 30 per cent margins, instead of about seven that I make with my products," he says.

Gupta is not alone. After dealing a blow to small-scale industries such as toys and crackers, Chinese imports have now hit hundreds of small manufacturers making a range of products from diesel engines to ceramics and bicycle parts. Many have either shut shop altogether or are turning into traders themselves. To add to their woes, many small manufacturers say they are also grappling with rising production costs, high taxes, duty-free imports and lack of scale in manufacturing. "A lot of people, like me, are thinking of becoming traders," says Gupta.

The numbers are telling. According to government figures, Chinese imports leapt from $32.45 billion (Rs 146,005 crore) in 2008/09 to $52.25 billion (Rs 3,13,500 crore) in 2012/13. A 2009 report by industry body FICCI based on a survey of over 100 small and medium companies listed 22 product categories imported from China which were 10 to 70 per cent cheaper. Industry organisations also complain about government apathy, saying their Chinese counterparts have an edge because of cheaper land, regular electricity, cheap finance and good roads. "A lot of factors add up to give them an efficiency gain of 20 to 40 per cent," says Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small & Medium Enterprises (FISME). "In recent years, imports from China have changed from low-value, low-cost products like toys and crackers to high-value items like electronics and machinery. The import portfolio has also expanded across product categories like gift sets, glasses, bathroom fittings, builder hardware, furniture and ceramics."

Machinery imports such as textile machinery are one of the biggest threats to small domestic manufacturers. India has about 1,500 manufacturers whose range extends from spinning and weaving machines to knitting or processing machines. According to the Textile Machinery Manufacturers Association (TMMA), imports of low-cost and low-tech textile machines from China have increased in the past few years because they are between 30 and 50 per cent cheaper. The value of textile machinery imports from China grew from Rs 1,636 crore in 2007/08 to Rs 4,300 crore in 2012/13. "The only hope for companies is to upgrade to high-tech machinery and command a better price so as to compete with China," says S. Chakraborty, Secretary General, TMMA.

Diesel engine pump makers are also struggling in the face of cheaper Chinese products. Sardhara Engine Manufacturers from Rajkot, Gujarat, has seen profit margins fall by at least five to seven per cent in the past three to four years. His diesel engine brand, Chetak, priced between Rs 15, 000 to Rs 17,000 is about 50 per cent more expensive than those from China. But he can't reduce prices because the cost of major raw materials such as cast iron and pig iron has escalated by 14 per cent in the last few years. "Low-cost pumps are popular with farmers, who cannot afford quality products," says Kishan Sardhara, proprietor of the firm. He adds he does not plan to cut his manufacturing capacity for now.

Companies like K. Rasik Lal & Sons and Anil Manufacturers shut down some years ago because of multiple problems. "We were working on very low margins and finally could not continue anymore," says Manubhai Patel, owner of Anil Manufacturers. "There is no support from the government. Earlier we used to get subsidies, but then they stopped, so did loans and advances from banks." According to the Rajkot Engineering Association, the number of diesel engine manufacturers in the area has fallen from about 400 to 500 to around 70. Another 500 units make parts of diesel engines. "Demand has been affected due to some farmers shifting to power-run submersible pumps, but China is the biggest reason so many have gone out of business," says Dheeraj S. Bhatt, Executive Secretary of the association.

The condition of small ceramic tiles manufacturers in Morbi in Gujarat is a classic case of a small industry struggling for survival in the face of Chinese imports. The removal of anti-dumping duties on many ceramic products has added to the problems of the industry, which accounts for about eight per cent of the world's ceramic demand. K.C. Patel, Director of Angel Ceramics, says he may be forced to lock up his factory for a second time because of the pressure of rising natural gas prices as well as high VAT (value added tax) and excise duties. "Our cost of production is at least 15 to 20 per cent higher than China's which shows up in market prices also," says Patel. "The industry is breaking. It's better to buy from China and start trading."

Several small manufacturers in the LED industry have also shut shop with most components coming duty-free from China. Some have started importing parts and then assembling for the local market. Ramana Rao, President of the LED products Manufacturers Association (LEDMA), says 20 to 30 such companies have shut down in the past few years. Sumant Sharma, proprietor of Chennai-based Sangeetha Enterprises, who used to make LED displays, shut shop about seven years ago. "We used to source our raw material (LED chips) from China, the price of which was equal to our selling price of finished displays in India. Adding raw material costs to labour, power and other overheads, our products cost 20 to 30 per cent more than Chinese displays," he says.

The sharp price difference is the reason many import instead of manufacturing on their own. "The LED components industry in India has been waning ever since free import of components like diodes, drivers, and components of drives was allowed since 2005 under a WTO free trade agreement," says Vijay Kumar Gupta, Managing Director at Kwality Photonics, one of a few Indian companies that make diodes for LED lights. Others agree. "What is the fun in making a fixture for Rs 350 if the same you can import from China at Rs 80," says Venkat Nagesh S., Senior Manager at Hyderabad-based Sujana Energy. The story, however, is different for large manufacturers.

Bicycle part imports from China have also shot up in the past few years, dealing a huge blow to local small industry. The city of Ludhiana in Punjab, the hub of the country's Rs 7,000-crore bicycle manufacturing industry, has seen a reversal in fortunes in the past few years. "Five to six years ago, the total volume of exports from Ludhiana was about Rs 1,500 crore. Now it is the reverse. Export volume has been replaced by imports which range from Rs 1,500 to Rs 2,000 crore now," says Charanjit Singh Vishkarma, President, United Cycle and Parts Manufacturers Association.

Industry officials say parts such as hand levers, spokes, hub cones and chain wheels from China are 10 to 15 per cent cheaper because of China's manufacturing scale and lower production costs. Indian industry cannot compete despite a 20 per cent import duty on parts and 30 per cent on bicycles from China. Rising competition, acute labour shortage and rising raw material prices have forced about 100 units to shut in the last few years. "The local cottage industry is on a ventilator," says Vishkarma.

While India has an edge in handcrafted products, small and medium-sized companies are losing out in areas where the Chinese use better machinery. India's sports goods industry is an example. Companies that specialise in hand-made products like cricket bats and footballs are relatively unscathed. But imports of machine-made items such as skating boards, swimming accessories and badminton racquets have increased. As a result, many companies have cut their manufacturing to sell Chinese products instead. Jajandhar-based Kumar Sports, which retails sports products under its brand Kamachi, has cut its badminton racquet production and imports swimming accessories, basket balls, tennis racquets and cricket accessories.

Many companies are also importing high quality fitness and gym equipment from China. "Mid-range Chinese badminton racquets priced between Rs 700 to Rs 800 or those between Rs 10,000 to Rs 12,000 for professional use are very popular. Companies in Jalandhar cannot compete with their finish and quality," says Gaurav Gupta, Managing Partner, of Meerut-based Greenland Enterprises which makes carom boards, cricket bats and footballs.

Small Indian electronic component makers are also on edge because of the deluge of cheap Chinese imports. Umesh Anandani, Additional Secretary at the ELCINA Electronic Industries Association of India, says the component industry has suffered since duty-free imports of about 217 categories of electronic components like capacitors, resistors and transformers were allowed from 2005 under an information technology agreement with the World Trade Organisation (WTO-ITA1). Many of India's more than 1,000 small companies manufacturing electronic components have shut operations.

No doubt, many in the industry are also taking steps to revive manufacturing. The ELCINA Electronic Industries Association of India is trying to promote manufacturing in electronics by setting up electronics manufacturing clusters under the National Electronics Policy, 2012. The first such cluster is coming up in Bhiwadi, Rajasthan, and will provide tax concessions and incentives such as cheaper land and electricity. "We really need to check, if we need manufacturing at the small level. If we do, there should be incentives in place," says H.R. Vaish, Managing Director at Gurgaon-based Instapower, an LED manufacturer.

Experts say manufacturing has several instances of dumping but small industries are too unorganised to build a case against dumping. Government officials say their hands are tied. "We can act only when we have data and proof, which we don't have. Industry associations should update us on a timely basis," says Madhav Lal, Secretary at the Micro, Small and Medium Enterprises (MSME) Ministry.