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 equiptment 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 oversease chinese who had settled all over the workd 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.

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 quipment manufacturers brand names. Once the reputation for value was established, they wooed the likes of Sears, Wal-Mart, Kmart etc, to offer these roducts under their private labels.

The presence of Hongkong 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 goverment incentives, cheap labour 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 competitiveness of Chinese business. Chinese brands becaqme 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 oppurtunities. Besides, China has a well-developed infrastructure. A very 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 indepth 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 productoin. This also helps in lowering cost of raw material and transportation. Cheap labour - the average labour 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 eductaion 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 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 concentrage on mass markets based on mass production and consumption. They seemed to be focussed 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 organisations 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.

Rather than resorting to anti-dumping and non-tariff measures, which will be retrograde steps in teh long run, our government should allow free competition and create a favorable economic environment. The government has to modernize labour 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.
Hi,

This is waaayy too long for us to want to read through, but from a quick look at the first few paragraphs I don't think you have any real problems.
can you give some examples of how chinese raw materialbenefit indian industries and how import of cheap products from china affect india????