How to compete with China

Indian industrialists are terrified of competing with China. But fears are also evident in the once-miracle economies of south-east Asia.

East Asian countries like Korea and Taiwan have long graduated out of labour-intensive goods into high-tech ones, and do not really compete with China.

But Thailand, Indonesia and Malaysia compete head-on with China in many low-tech, labour-intensive industries, just as India does. After 1997, none has regained miracle status, and all worry about China.

Indian industrialists claim that China is dumping goods wholesale. Prima facie, this seems questionable.

Why should a country with a huge trade surplus and a huge capital inflow bother to subsidise some additional exports to a small market like India? It would be stupid, and nothing about Chinese performance suggests stupidity. Ours, on the other hand, often does.

If indeed China is dumping wholesale, the impact should be large on south-east Asian economies too. To check this out, I talked on a recent visit to Thailand to Mr Mahansaria, a retired head of Birla operations in the country.

Not all Indian readers know that the Birlas have a formidable industrial empire across south-east Asia. If Birla industries in Thailand can compete but not those in India, then clearly the fault lies in Indian policies rather than Chinese dumping.

Mr Mahansaria said that Thai industries, overall, respected China as a powerful, productive rival. But there was no question of Thailand being overwhelmed by fear, or ducking behind protectionism.

From the day his own plants came up in Thailand, he knew China would be a threat. But he saw no cause for fear provided he controlled price and quality.

Now, some industries in Thailand could indeed be killed by Chinese competition. Some industries in China received big state subsidies, aimed at saving jobs rather than earning foreign exchange. But overall China exported at a profit, not at a loss.

Many Thai companies competed with China. Indeed, Birla companies in Thailand exported several goods to China, including viscose fibre, acrylic fibre, and carbon black.

But while Thailand was more competitive in fibres, China was more competitive in woven textiles, since the cost of conversion was very cheap in China, thanks to very low wages of $35-40 (Rs 1,700-2,000) a month.

Much of this cloth was made in factories in interior China with large state support, and these exports could indeed be called dumped, he said.

But this did not apply to the huge multinational factories in Shanghai or Guagzhou.

In these major coastal cities, wages were relatively high and subsidies low. Wages were low in interior areas. Every Chinese province had considerable financial autonomy, and could support industries of its choice.

Mr Mahansaria said Thailand could beat China in a wide range of chemicals — caustic soda, STPP and so on. China had very cheap raw materials, but internal demand for these was huge, so China was progressively becoming an importer of raw materials.

The main global threat from China lay in textiles, where its low wages, cheap power and cheap capital were buttressed by state support. Low wages in the interior were once offset by high transport costs, but China was now building world-class infrastructure everywhere, so its transport costs kept falling.

When global textile quotas are lifted in 2005, will it be a boon for India (as our negotiators have long argued) or will China sweep all before it? Mr Mahansaria believes that China will beat all low-wage countries, including Cambodia, Vietnam, Indonesia, and of course India.

Many competing plants in south-east Asia are run by multinationals with brand names, and Indian factories will not easily compete with these.

India cannot compete even with Thailand, let alone China. Look at factories in the two countries with the same size and technology. The Thai factory will typically beat the Indian one hollow, and outsell the Indian company in the Indian market even after paying 35% import duty plus countervailing duties.

Why? Mainly because Thailand is a low-tariff country for industrial inputs, levying something like 5% duty on a wide range of inputs, and 10% on a few others.

It levies heavy import duties on luxury items, but not on industrial inputs. This keeps it globally competitive.

The biggest problem in India is the high level of excise and import duties on machinery. Machinery is duty-free in Thailand, and for that matter in most south-east Asian countries.

This means that from day one, a factory in India is uncompetitive compared with a comparable one in Thailand or China.

Nehru and Indira Gandhi created a big capital goods industry behind protectionist walls. This made India widely admired at the time, as a country that could rival the west in technical attainment, even if at higher cost.

But today the policy of subsidising heavy industry behind high tariffs stands exposed as a truly terrible policy. It made India admired for all the wrong reasons that made the Soviet Union admired too.

The Soviets also built second-rate factories with high-cost machinery, yet for decades was admired as a once-backward country rapidly catching up with the United States. We know today that was a statistical illusion.

How are the ten Birla factories in Thailand faring? Mr Mahansaria says they are in good shape, and export no less than 60% of their output. They are competitive and do not fear China.

Here lies hope. It shows what we can do in India with decent policies and institutions.

Right now, India has imposed anti-dumping duties against some Thai products made by the Birlas! This shows that Indians can make competitive goods, if only the Indian government will facilitate it.

The ingredients of success are clear: low or zero duties on industrial inputs and capital goods, reasonable prices for power and capital, better infrastructure, and labour flexibility.

If we go in those directions, we will be able to stand up to China and become a manufacturing power in our own right.

What do you think?