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Will we ever break India’s craze for Chinese produce?

Cheap Chinese phones on display at a Delhi market. Photo: M Zhazo

For several weeks in September and October, a campaign to boycott ‘Made in China’ goods went viral on WhatsApp groups and social media. Messages that spread like wildfire, triggered by China’s latest provocation-blocking India’s bid to sanction the Pakistani terrorist Masood Azhar-urged consumers to stop buying Chinese goods ahead of Diwali, from firecrackers to Diwali lights, even showing them how to identify ‘Made in China’ barcodes.

Among the groups leading the call was the Swadeshi Jagaran Manch (SJM), the economic wing of the Rashtriya Swayamsevak Sangh (RSS). On October 20, SJM members burnt effigies of Madhya Pradesh ministers because they had invited Chinese companies to an investors’ summit. By November, the groups were quick to label the boycott a resounding success. Local trading bodies in Gujarat, Punjab and New Delhi reported a fall in demand for Chinese goods, particularly firecrackers, in the lead-up to Diwali, by as much as 20 per cent. SJM national convenor Ashwani Mahajan said the boycott had shown that “for the first time after Independence, a certain consensus has arisen among people against Chinese products” which was “going to add to the zeal against buying Chinese goods despite cheaper prices”.

While in the virtual world the consensus was the boycott had taught the Chinese a lesson, the verdict in the real world was somewhat different. Trade figures released on November 8, which drew little attention, showed imports from China had continued to rise, by a little over 7 per cent, suggesting that the campaign had barely made a dent. India imported in October as much as it had in June, and this was despite the fact that China’s overall exports to the world that same month fell by 7 per cent, underlining the continuing Indian thirst for Chinese goods despite a slump in global demand.

FIRECRACKERS TO PAYTM

Why did the boycott fail to make a dent? In the imagination of many people in India, the ‘Made in China’ tag largely refers to cheap goods, from toys and electronics to handsets and firecrackers that dominate the China bazaars now ubiquitous in many cities. However, these goods constitute only around 1-2 per cent of India’s total imports from China. Indeed, the total firecracker import is unlikely to cross even the million-dollar mark. China’s access to the Indian market is, in fact, far more deep and extensive than just low-end consumables. India’s largest imports from China are electronics ($20 billion), nuclear reactors and machinery ($10.5 billion), chemicals ($6 billion) and steel ($2.3 billion). After China, India’s largest imports come from the United States, Saudi Arabia and UAE, which together account for roughly what just China alone sells to India. The fact is that even a 100 per cent boycott of cheap goods would have a minimal impact on overall trade, or for that matter succeed in exerting pressure on Beijing to change policies as the boycott campaign intended.

India’s trade with China is growing. But so is the imbalance in China’s favour. In 2015-16, bilateral trade reached $71 billion. India’s exports accounted for just $18 billion. Union commerce minister Nirmala Sitharaman told Parliament on November 28 that the deficit “can be attributed primarily to the fact that Chinese exports to India rely strongly on manufactured items to meet the demand of fast expanding sectors like telecom and power”. The minister also pooh-poohed any suggestion of a ban, pointing out that “as India and China are WTO members, any restrictions imposed on trade need to be WTO compliant”. “No blanket ban can be imposed on China or any other member country under the WTO framework,” she adds.

SJM protesters burn Chinese goods at a protest in the capital. Photo: Ramesh Sharma

Today, the Chinese presence in the Indian economy is widespread. Many of the messages urging consumers to boycott Chinese goods were probably sent from Chinese smartphones, which are, from Huawei and Xiaomi to Lenovo, Vivo and Oppo, flooding the Indian market. The latest wave of Chinese investment is into India’s biggest start-ups. E-commerce giant Alibaba owns an around 40 per cent stake in online payment company Paytm’s parent company, in which it has invested $680 million. Companies from Ola Cabs to Makemytrip all have investment from China. In the biggest such deal in August, a Chinese consortium acquired Mumbai start-up Media.net for a reported $900 million. When Paytm’s profile rose even higher following the demonetisation announcement, the SJM announced it would now “look into” the company’s “Chinese connection”. It didn’t, however, call for a boycott-perhaps correctly realising that consumers, especially post-demonetisation, would have given it short shrift. Boycotting cheap toys is one thing, but when even India’s biggest online companies have a Chinese connection, what do consumers do?

THE NEW NORMAL

As unpalatable as it may seem to supporters of swadeshi, India’s dependence on Chinese goods is a cold, hard reality of a globalised world. And India is far from alone in its thirst for the products of the world’s factory. When a country makes more than 50 per cent of the world’s computers, two-thirds of its DVDs, ovens and toys, ‘Made in China’ is the global reality for now. In a reminder of this reality, right in the midst of the boycott campaign, the Reserve Bank of India (RBI) was busy making adjustments for the entry of the Chinese currency, the renminbi (RMB), into India’s foreign exchange reserves. Not only the RBI, but most of the world’s central bankers had to alter metrics of their forex reserves after the RMB, the world’s fifth-most powerful currency after the American dollar, the Euro, the Japanese yen and the British pound, was included in the International Monetary Fund’s Special Drawing Rights basket on October 1.

Despite this new normal, the Indian manufacturing sector’s dependence on China has not been studied well. The last such effort was in 2011, when the national security advisor of the time confidentially studied the extent of Chinese penetration into Indian economy. The conclusions were startling:

China is positioned to price its products 40 per cent cheaper than India, despite rising wages. And India comparatively has very limited number of products in global trade. In 2011, China accounted for 62 per cent of India’s telecom imports, a number estimated to have crossed 75 per cent today with the fast expansion of 3G and 4G networks India’s pharmaceuticals industry is close to hundred per cent dependent on China for the supply of bulk and active pharmaceutical ingredients (APIs), of which China is the world’s biggest producer China accounted for 26 per cent of India’s manufacturing GDP in 2011. This share could go up to 75 per cent in the next five years, says the study.

In each of these sectors, China is estimated to have a 30 to 40 per cent cost advantage at the very least, with government support to major companies and well-established supply chains. Nowhere is China’s cost advantage-and India’s embrace of ‘Made in China’-more evident than in Yiwu, a trading town in China’s southern Zhejiang province that houses the world’s largest commodity market, a sprawling edifice, a city within a city that stretches across the size of 750 football fields. The market is so huge that if you spent eight hours every day and three minutes at every shop, it would take you around one year to visit the entire space.

There are multi-million dollar Yiwu business just to design, sell Indian jewellery and God statues

The Indian thirst for Chinese goods has left a deep imprint on Yiwu’s supply chain. Every year, three to four lakh Indian businessmen-not only from India but from all over the world-travel to Yiwu. They account for 75 per cent of foreign traders who visit the city, which ships around $1 billion worth of goods to India every year (the actual value is likely far higher if you include goods that end up in India through third countries). Much of what is sold in Yiwu comprises the ‘Made in China’ goods of the low-cost variety, although there are also sellers offering more expensive electronic equipment, and increasingly so as China’s manufacturing moves up the value-added chain.

INSIDE THE WORLD’S FACTORY

Yiwu presents a snapshot of what China’s manufacturing did right, and why India continues to be in its tight embrace. What is especially striking is that a large part of the Yiwu supply chain caters specifically to the Indian market. There are multi-million dollar Yiwu businesses that design and sell Indian jewellery and statues of Hindu gods, a sharp indictment of the failures of Indian manufacturing.

Pradeep Shetty, from Mumbai, is an Indian businessman and a leading figure of the resident Indian community. He’s been trading with China since 1994 when he moved to Hong Kong. Not only does he source a variety of goods from China (from electrical items and bags, to luggage and jewellery), he is also one of the biggest suppliers of sunglasses to the US for many top brands. Shetty doesn’t just source from China. He also has a factory in Zhejiang province where he produces neckties and clothes for global export-an Indian making in China for the world. “The Yiwu story is a bit of a miracle,” he says, referring to its unlikely rise as a lynchpin in global trade. Shetty says it was historically a poor town, surrounded by mountains. Most residents left for nearby provinces to find work in factories. They would return home once a year with extra stock and store it in local warehouses as they were cheap. “Traders from West Asia first started coming here to buy this stock in bulk,” Shetty says. “Trade then took off from there. The rest is history.”
Among Yiwu’s entrepreneurs is Wang Yifeng, who started out on the factory floor but made a fortune when he started making artificial jewellery, which is one of the city’s big businesses purely because of Indian demand. A city that has no history in designing or producing jewellery is now one of the biggest centres of the trade in the world. Yiwu exports several hundred million dollars worth of artificial jewellery to India every year, which are sold everywhere from Rajasthan to Andhra Pradesh. Yiwu’s ‘Indian jewellery’ is also being exported to the Middle East and Europe. “India is our biggest customer,” says Wang, who isn’t aware of the boycott campaign.


LESSONS FOR ‘MAKE IN INDIA’

The Yiwu commodity market grew organically, but also had huge official backing. Foreign enterprises were given incentives to invest in factories and register trading companies, while massive investments in infrastructure connected the city to the hinterlands and ports. If what ‘Make in India’ hopes to achieve is to replicate this success story, it certainly faces a tall challenge. Yiwu businessman He Hailuo is one of its biggest exporters of Christmas decorations to the US, Europe and India. The city accounts for 60 per cent of the world’s trade in Christmas decorations, and was once described by the BBC as “the city where Christmas is made and sold”.

On a recent afternoon, his large store on the fourth floor of the Yiwu market is packed with Christmas trees, lights and decorations, as a large shipment to India is readied. Can India replicate its success? Businesses like He’s are facing rising costs-wages rose by 20 per cent last year-but at the same time, he like many others believes the supply chain is so well-oiled it’s difficult to think of moving elsewhere. “Some firms are moving to Vietnam, but where else would I have 50 suppliers and such a smooth supply chain?”

From factories in Zhejiang and nearby Jiangxi where labour is still cheap, goods are transported on four-lane expressways (there are no inter-provincial barriers or tax changes or hold-ups). The goods will be shipped from Ningbo, Shanghai or Guangzhou, ports with sprawling capacities that don’t have any equivalent in India. “Starting a factory is a seamless process,” says Shetty. “If you’re a foreign company, there are tax incentives. Once you sign the deal, from day one there is land, power and water.”

INVESTMENT PUSH

That is exactly what the government of India is now offering to Chinese manufacturers to try and convince them to make in India (and to not just sell to India) in an effort to change the nature of a trading relationship that Delhi sees as increasingly unsustainable. “When out of $70 billion trade, your deficit is $50 billion, something is wrong,” says a senior official.

Ironically, India is looking to reduce its dependence on importing Chinese goods by roping in the Chinese. The long-term trends are in India’s favour, from rising costs in China to demographic trends. “We are open to them setting up industrial capacity in India. What we are not okay with is them dumping Chinese goods in India, so we should differentiate between the two things,” says Ravneet Kaur, joint secretary in the commerce ministry’s department of industrial policy and promotion (DIPP), who met with Chinese investors in Beijing in early November.

“There is a reason why we are seeing so much Chinese interest,” says Kaur, who also chairs a working group with the Chinese on building industrial parks in India, with five currently under discussion. “Especially with the Chinese economy going through a bit of a difficult time, a lot of the big Chinese industries and investors are looking at India as an option. It will take some time for them to understand how things work here, but we have given them a clear offer that land is available, so you won’t have issues with acquisition and court cases and prolonged litigation. I believe it will take off quickly.”

The five industrial parks under discussion cover automobiles, energy, small and medium enterprises (SMEs) and real estate. The first park in Maharashtra, undertaken by China’s largest truck maker Beiqi Foton, will take off in December. The project was delayed because the initial plan to manufacture commercial vehicles was changed to passenger vehicles as the Chinese company felt the competition in the former was too stiff. The company has taken over 31 acres of land, and a further 31 acres has been offered that will be acquired by December, says Kaur. The second park, by energy company TBEA in Gujarat, was also “running smoothly”, and is thinking of expanding it to a second phase with a focus on renewables. Another park in Gujarat will be dedicated to Chinese SMEs, in a bid to replicating the Yiwu model.

The two newest projects, still in the talks phase, are in Haryana. The Wanda Group, China’s biggest real estate firm owned by its richest man, Wang Jianlin, has projected a $10 billion investment over 3,200 acres. The project has run into some difficulties, as around 300 acres are yet to be acquired because of opposition from residents. The company is reluctant to start work until the entire acquisition is complete. Another major real estate firm, the China Fortune Land Development company, is also in talks over a large project in Haryana.

TO MAKE IN INDIA

But getting the Chinese to ‘Make in India’ will be no easy task. “The problem is, the relationship is now dominated by traders and not stakeholders,” says Nagraj Naidu, Joint Secretary (Economic Diplomacy) in the MEA. “The Chinese are interested in investing, but they are still largely looking at trading and selling. That phase has not yet come.” He cites the examples of Chinese mobile phone giants like Xiaomi and Vivo. India is their biggest overseas market, yet they are content to sell in India. “Some of them are now moving towards assembly which is a start, but not yet manufacturing,” says Naidu. “Eventually, they will have to do it.” Where Chinese investments are taking off is in the start-ups space. “A lot is happening on the services side, but not yet in manufacturing,” says Naidu, who also sees solar energy projects as a particular opportunity given India’s big targets and China’s capacity.

In 2015, Chinese investment in India reached $800 million, the highest in a single calendar year. Total investment in India is estimated at $4 billion, a paltry figure on a par with what Beijing has invested in Nepal and Laos. The hope is that it won’t always be the case. “As I see it, if China has an overcapacity problem and moves industries to India, it is a good thing for us as it means jobs for Indians and a whole lot of development that will come around this,” says Kaur. “There is no move at the national level to discourage Chinese investments. As for sentiment on a ban on Chinese goods, I don’t think it is so much a cause for concern that it would detract Chinese investments.”

There are no easy choices for India. As the commerce minister told Parliament, a blanket ban of Chinese goods is not only unfeasible in terms of India’s WTO obligations, but would also likely have huge repercussions, especially in pharma where there are no real alternatives now. Last year, India’s imports of bulk drugs from China constituted almost two-thirds of its total imports. “Efforts are being made to revive the API industry to lessen dependency on imports of key starting materials, intermediates and bulk drugs, including from China,” Sitharaman said in November.

Imposing tariffs may be one path, but that alone won’t address India’s manufacturing limitations. What would is a long-term plan to revive industries that have suffered with the rise of China as a global manufacturing powerhouse. “It’s something that is unbelievable that you have thousands of Chinese employed merely to design artificial Indian jewellery,” says Shetty, the trader in Yiwu. “A friend from Mumbai orders 25 to 30 containers every month. It’s the same with toys, or even artificial plants. We used to have factories. But they all closed the minute the Chinese woke up.” Whether India can now do the same remains to be seen.

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