Er. VIPIN MITTAL INDIA vs.

CHINA
JIND HARYANA

Walk into any major retail outlets like Wal-Mart, Kmart, Sears, Ikea, Sogo, Carefour or any
other major retail chain anywhere in the world, chances are that more than 30% to 40% of the
merchandise on display will be from China. Chinese toys, garments, shoes, cutlery, consumer
electronics, PCs and accessories, sports equipment etc. are making waves.

Even in India, many industries are feeling the heat of Chinese products becoming available at
substantially lower prices. The Indian consumer, so far used to high prices is having a great time
buying these products of reasonably good quality, 30-40% cheaper than their Indian equivalents.

The initial success in penetrating the Indian markets in product categories like batteries, toys,
bulbs, consumer electronics is slowly being replicated in other industries like pharmaceuticals,
engineering, machinery and even sophisticated industries like computers hardware and mobile
phones.

Ten years back, nobody could have imagined such a dominance of Chinese products on the
world scene. Many are bewildered by the sudden transformation i such a short time. Indian
industry appears to be completely at a loss to respond to such aggressive competition from
China. Most of them are running to government from help in the form of protection and
antidumping measures. Such steps may give them breathing space in the short run - but in the
long run, they will completely isolate themselves from the world scene. We will examine what
makes China tick; and consider strategic options from the Indian government and business.

The process of liberalization in China was started in late 70s. The Chinese leadership has a
vision to make China an industrial giant. It opened the gates from foreign investors by giving
them sops. The overseas chinese who had settled all over the worked took advantage of this by
bringing in capital and starting manufacturing activities. The produce had ready markets in their
respective countries where large Chinese population was concentrated.

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Er. VIPIN MITTAL INDIA vs. CHINA
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This process of opening up on Pear River delta (Guangdong province) became an example for
other provinces to follow. They started as copycats in products like toys, garments, consumer
electronics etc., producing at one tenth of prevailing prices and making these available under
original equipment manufacturers brand names. Once the reputation for value was established,
they wooed the likes of Sears, Wal-Mart, Kmart etc, to offer these products under their private
labels.

The presence of Hong-kong helped China to market the products not only to the ASEAN
countries but also to other countries in Africa, South America and the Middle East. This
geographical spread helped them to expand capacity and reduce costs.

In the second phase, China allowed multinational companies to set up bases in China's economic
free zones to take advantage of government incentives, cheap labor and presence of large
domestic market. This helped them to create employment opportunities, gain technical
knowledge and improve infrastructure in terms of power, roads, ports etc. (Today China can
boast of infrastructure comparable to that of any developed country.)

Most computer electronics majors such as Panasonic, Sony, LG, Toshiba, Nokia etc. have set up
manufacturing plants in China. Many transnational companies like GE, Siemens, Electrolux etc,
feed exports all over the world from plants located in China. Favorable economic policies have
contributed to China becoming the largest Foreign Direct Investment (FDI) destination. The
country attracts $40bn FDI p.a. compared to India's $4bn.

The Chinese government helped local industry to flourish alongside the multinationals by letting
them compete on equal terms. Government support to local industry was in the form of access to
capital at low interest rates and better infrastructure. This ensured the international

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competitiveness of Chinese business. Chinese brands became well known in the domestic
markets. Having proven on domestic soil, they are now moving over to markets worldwide.
Companies like Haier, Konka, TCL, Xoxeco have been exporting to Europe, India and South
Africa to be part of the growing markets in the world.

International expansion of Chinese firms should be a logical sequel to the virtual international
sweep of Chinese products. This third phase of opening up has led to Chinese companies setting
foot abroad. Many Chinese companies are in line to become world-beaters.

It is time, however, to recognize that China is also very likely to be one of the world's major
investors in the coming decade. Chinese companies are becoming ambitious enough to shed their
role as cheap, anonymous exporters and get identity on the world stage. Added to the advantage
of foreign reserves of US$ 160 bn, is the existence of the Chinese Diaspora, whose commonality
of culture and commitment stretches across Asia-Pacific.

The rationale behind Chinese pursuing investment abroad is a desire to take advantage of
growing export markets, to ensure that Chinese firms compete internationally, secure markets
and through this achieve technological excellence; as part of Chinese leadership policy of active
engagement in globalization. The promotion of investment out of China is as much a priority as
the promotion of FDI in China.

As a result of the above phases of opening up of the Chinese economy, the Chinese have
developed a substantially large manufacturing base in almost every product, be it a commodity
like steel or consumer goods like toys, batteries, watches, etc. Chinese industry has the benefit of
a large production base, flexible capacity and a sort of integrated structure of supporting
industries in many sectors. In many sectors, China is still adding capacity in anticipation of
emerging global opportunities. Besides, China has a well-developed infrastructure. A very

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significant aspect of its competitiveness is perhaps the mind set that makes business strategies -
the way they think and the way they operate.

A split unit air conditioner for less than $350, a 29-inch television for $200, a mobile phone for
$20, a cotton shirt for $2, the product most in demand like toy scooters at $15, toys for $1, and
ceramics for less than a dollar - these are some of examples of prices of Chinese goods.

How are the Chinese able to produce at such a low cost - sometimes, as per many experts, at cost
lower than the theoretical cost of the material used? This question is repeatedly asked by many
people who do not have in depth knowledge about how the Chinese economy works. The
following are the key reasons for China's cost leadership:

Government vision and leadership to make China an industrial power along with favorable
economic policies with respect to taxation, foreign exchange, low interest rates, etc., mind set of
catering to global markets and deep understanding of consumer trends and building economies of
scale to bring down cost.

Providing better infrastructure in terms of power, roads and ports and removal of any
infrastructure related bottlenecks. Creation of support industries such as steel making,
machinery, telecommunication and transportation etc. to facilitate trade and lower the cost of
input. Most of the input material is produced within the country. Low inflation and stable
exchange rate, low dependence on oil import as 75% of the country's requirement is met by
indigenous production. This also helps in lowering cost of raw material and transportation.
Cheap labor - the average labor cost in China is below $30 per month, compared to that of India
where the wages are more than $60-100 per month. Access to low cost capital. Spread of modern
means of education to larger population totally supported by the government. Presence of large
chinese population overseas who not only became the first to set up industries by providing the

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Er. VIPIN MITTAL INDIA vs. CHINA
JIND HARYANA

much needed capital but also act as customers in their respective countries for Chinese-made
products. Each city in USA boasts of a China town where most of the traditional Chinese
products are sold. Once successful, they become available to other ethnic groups through retail
chains like Wal-Mart and Kmart.

Due to these reasons China is able to produce items at such a low cost. This is what has
contributed to China's emergence as the most favored FDI destination for transnational
companies. The Chinese concentrate on mass markets based on mass production and
consumption. They seemed to be focused on selling at prices that will create markets and enable
the consumer to buy. What really matters, when technologically you do not have the cutting
edge, are factors like affordability and customer convenience. This is where the Chinese seem
extremely focused and dominating the global markets.

We firmly believe that in times to come, Indian industry will face tough competition from China
in terms of cost, quality and economies of scale. Indian companies need to take serious view of
domination of Chinese manufacturing based on coast leadership while looking into the future. it
can spell doom or end of the road for manufacturing sector in India - more so in open trade
regime of WTO, which China is going to be part of.

Indian industry needs to learn to take cognizance of this factor, not by asking government's help
in terms of protection, but by creating world class organizations in terms of cost, quality and
product innovations. Indian industry is still reeling under the handover of protected regime but
now it is time to get up from deep slumber and act before it is too late, as has happened in many
industries especially in the consumer products, which were reserved for the small industry.
Competition from Chinese products have given rise to anxiety in many countries but not many
countries are complaining and responding the way we are. On the contrary, most of them are
taking this as an opportunity and building strategies to take advantage out of it.

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JIND HARYANA

Rather than resorting to anti-dumping and non-tariff measures, which will be retrograde steps in
the long run, our government should allow free competition and create a favorable economic
environment. The government has to modernize labor laws and bankruptcy laws. De-reservation
of products that are currently reserved for the SSI, removal of infrastructure bottlenecks by
allowing free flow of foreign capital into roads, power, ports, and tele-communication, allowing
local players to compete by providing level playing field in terms of availability of capital at low
interest rates and lowering the excise and other duties and lower taxes, allowing foreign
companies in all major sectors of economy to improve the efficiency - these are some of the
strategic options our government can choose from and help companies survive in the long run in
the world market.

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