China Presents New Opportunity for Indian Manufacturing Sector

The Economist recently published a report, The problem with Made in China‘, that details why the manufactures are switching over to a strategy of ‘China plus’ in Asia. India may be candidate of that China plus destination. But it will have to work hard to remove some of the hurdles fast.

China has rapidly become a global economic force, doubling its share of global manufacturing output for both domestic as well as export market.

The perception is that every factory closing in America or Europe is destined to reopen in China. And a majority of the export from China is in real term is an American or European company’s export. However, as reported, the western entrepreneurs who made China’s manufacturing a unique story of success with their investment are gradually becoming skeptical about their future business in China.

Some of the concerns are genuine too. The most important concern is about the internal problems because of inequity. Even the official figures record 87,000 incidences of rioting and social disturbance in 2005. Civil unrest may come a speed breaker in China economy.

Many grumble about the urgent need of reform in the banking sector, the capital market, and the financial-reporting standards. Many are concerned that the Chinese economy may be overheating. Many predict yuan’s revaluation making Chinese manufacturing loose the present advantages. The value of the Chinese currency, as per some assessment, may continue to rise by around 5% in the year ahead that will certainly affect the export-based manufacturing adversely. China also has earned bad publicity about the lack of protection for intellectual property rights.

But perhaps the most significant of all are rocketing wages and the shortage of the managers, versed in international production techniques such as “six sigma” and “lean manufacturing”. Poaching is rampant. “China is definitely not the cheapest place to produce any more, Average wages for a factory worker, combined with social security costs, came to almost $350 a month in Shanghai in 2005 and almost $250 a month in Shenzhen. By comparison, monthly wages were less than $200 in Manila, around $150 in Bangkok and just over $100 in Batam in Indonesia. No doubt, the productivity of Chinese workers is better and rising. But it is not keeping pace with wages. To overcome the higher wages, the Chinese government has been inducing companies to move inland since 2000, but the entrepreneurs are neither convinced nor ready. Many firms are reluctant to put any more of their eggs in the same basket.

A research report of the Japan External Trade Organisation concluded: “Due to the country’s increasing business risks and rising labour costs…Japanese firms employing a ‘China-plus-one’ strategy-in which they invest in China and another country, namely in ASEAN-should consider placing more emphasis on the ‘plus one’ country.” Managers from other countries now share such nervousness.

Starting early 2006 Intel, the American chipmaker had committed as much money to Vietnam as it had to China in the previous ten years. Another global firm, Flextronics, has fired up the production lines of a new M$400m ($110m) factory to make computer printers for another American firm, Hewlett-Packard in Malaysia. One of the largest contract electronics manufacturers, Flextronics with vast facilities in China has chosen Malaysia as the site for its latest investment.

India has 1.1 billion people, an emerging middle class of its own and will grow at around 8% this year. To date, foreign investment in manufacturing has been limited-total investment inflows in 2005 amounted to a meagre $7 billion, compared with more than $70 billion for China Even with hugely inadequate infrastructure and infamously corrupt and lethargic bureaucracy, more foreign companies are starting to open factories in India.

Indian technicians could re-engineer some of the West’s highly automated car-production lines to make them more labour-intensive for the Indian market. Firms making specialty chemicals are keen to combine technical expertise with low costs and a growing market. Even low-technology industries are interested: Yue Yuen is close to building its first shoe factory in India.

Most observers reckon India’s manufacturing evolution is ten years behind China’s, but progress is unlikely to be as swift or as smooth. A country that puts a higher value than China does on democracy and the rights of the individual will inevitably find it harder to push through infrastructure projects and reform to sensitive areas such as the rigid labour market.

Why can’t Indian manufacturing sector take advantage of the opportunity? Why can’t the team of the National Investment Commission and National Manufacturing Competitiveness Commission take up the task to contact all the manufacturers with ‘China plus’ strategy and allure them to India?

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