Anand gave me Harvard Business Review’s December, 2007 issue that he brought. It has an article by Tarun Khanna– ‘China+India: The Power of Two’. Tarun Khanna has been writing on these two Asian countries for long. He says in the paper, ‘Like it or not, the world’s future is tied to China and India… They have too much to lose by not working together.’ Khanna has three success stories- Mahindra’s tractor company in China, Huawei’s Indian company, and China’s Sinopec and China National Petroleum Corporation and India’s Oil and Natural Gas Corporation to prove his thesis. I don’t know if HBR published the article keeping the forthcoming visit of India’s Prime Minister to China. Manmohan Singh has emphasized the bilateral relation of the two countries to grow on Khanna’s line.

Beijing certainly provided a warm red carpet welcome to the Indian Prime Minister and his delegation that constitutes the who’s who of India Inc. even in sub-zero temperatures, but will it be warm enough to meet the Indian requirements and aspirations?

No doubt, China has jumped to second position from the ninth position as India’s trading partner since 2001 and is destined to overtake the US. India’s trade with China went through a dramatic increase from $2.5 billion in 2000-01 to a whopping $25 billion in 2006-07. However, the rising trade deficit in favour of China is worrisome for India. India’s trade deficit with China climbed to $9.2 billion in 2006-07. Surprisingly with US India had a surplus of $7.1 billion. The trade deficit with China during the first six months of this financial year has already mounted to $8.7 billion that may end up with a $12 to $14 billion deficit by the end of the financial year. Equally worrying is the near-monopoly of Chinese exports to India in certain critical sectors.

The share of Chinese imports in India’s global import has risen from 4 per cent in 2001-02 to 9.4 percent in 2006-07. China’s industrial goods exports to India today amount to 10 per cent of India’s entire industrial GDP. From a mere 0.7 per cent in 2001-02, today the imports of tubes and pipes from China account for 74.7 per cent. Similarly, in the area of transmission apparatus for radio and telephony, imports from China have jumped from 11.5 to 49.4 per cent in a few years. In the case of automatic data processing machines, China’s share in India’s imports has risen from 12.4 per cent to 35 per cent.” Chinese goods are flooding the Indian market with all kinds of products, be it kites for Makar Sankranti, or Ganesh Lakshmi for Diwali or room heaters or electric meters in every home. The manufacturing sectors are finding it difficult to compete.

On the other hand, India occupies a minuscule 1.3 per cent of China’s global imports. New Delhi is concerned over ever-burgeoning trade deficit in Beijing’s favour. It will further accentuate with the new target of trade of $60 billion by 2010 unless China agrees to import additional nontraditional items such as fruits and vegetables or provides the access to Indian software and pharmaceutical companies. Manmohan Singh and his team wishes to get those concessions against China’s aggressive mercantile practices such as removal of non-tariff barriers. It is interesting that India is exporting iron ores to China at an export duty realization of only 1%, whereas China decided to levy a huge cess of 25% on coking coal that India imports that was not there even in 2005. I am sure China will yield to certain extent. Manmohan Singh and Kamalnath must try to allure the Chinese companies to come and set up plants in India. Indian manufacturers must not depend on the government’s tax subsidy for facing competition and must come out with business models and products to compete. With extraordinary talents in design and marketing management, India must try to excel over China by its strength.

India must learn China’s trick of cost innovation. Indian manufacturers must emulate the three faces of cost innovation as mentioned in ‘ Dragons at your door’ by Ming Zeng and Peter J Williamson:

1. Chinese companies are starting to offer customers high technology at low cost. Computer maker Dawning has put supercomputer technology into the low-cost servers that are the every day workhorses of the world’s IT networks. This novel strategy is demolishing the conventional wisdom that high technology is restricted to high-end products and segments. And it interrupting the game whereby established global competitors maximize their profits along the product life cycle by only slowly migrating new technology from high-priced segments toward the mass market.

2. The emerging Chinese competitors are presenting customers with an unmatched choice of products in what used be considered standardized, mass-market segments. Goodbaby offers a product line of over sixteen hundred type of strollers, car seats, bassinets, and playpens- four times the range of its nearest competitor- all at mass-market prices, thus challenging the idea that if customers want variety and customization, they have to pay a price premium.

3. Chinese companies are using their low costs to offer specialty products at dramatically lower prices, turning them into volume businesses. Consumer appliance maker Haier has transformed the market for wine-storage refrigerators from the preserve of a few wine connoisseurs into a mainstream category sold through America’s Sam’s Club at less than half the then-prevailing price. The end result: Haier has a 60% market share, while yesterday’s niche players have been left floundering. This new Chinese competition is challenging the notion that specialty products must forever remain low-volume and high-priced.

Indian manufacturers must have a change in its mindset to face the Chinese challenge of cost innovations. Ratan Tata with Nano (Lakhtakia car) has made the beginning. Others must follow. As predicted, Nano will be trendsetter in manufacturing sector in India. HCL Infosystems has launched with laptops, MiLeap sporting a starting price tag of Rs 13,990. Tatas are planning an Rs 250 water filter. Many must follow. IITs and other institutes of excellence must help this brand of innovations.