Step up manufacturing to meet Chinese challenge

The escalation in border tensions with China, resulting in 20 Indian lives being lost, has given a new legitimacy to the move to boycott Chinese goods and the raising of tariffs on imports from China. Should the tensions go down and there is disengagement, there will be an opportunity to re-examine the issues and redefine priorities. Till then, the present regime will continue, irrespective of the economic costs.

There is no doubt that popular sentiment will come at an economic cost, as outlined by two major Indian manufacturers. RC Bhargava, Chairman of Maruti Suzuki, India’s leading car manufacturer, has declared that Chinese imports are necessary, particularly for the company’s vendors, those that sell it components which go into the assembly of the cars.

So, raising tariffs on Chinese imports, the official part of the negative trade policy towards China, will eventually hurt the Indian consumer through higher prices. As for the boycott move, it is an emotional reaction which has not been thought through.

The same sentiment has been reflected by Bajaj Auto, India’s leading bike manufacturer. It has underlined the reality that imports play a key role in strengthening the supply chain which delivers inputs for the manufacturing process. For example, alloy wheels for motorcycles, a critical input, are imported from China. Why? Because they are of acceptable quality and attractively priced.

If restricting imports is bad for manufacturing today, it could be worse tomorrow as the country seeks to keep pace with advancing technology delivering new products. Electric vehicles, which define the future of road transport, critically run on batteries which account for 50 per cent of the costs. There are five leading global manufacturers of batteries for automotives, all with links to China.

Vietnam, a competitor, has entered into a free trade agreement (no or negligible bilateral tariffs) with the European Union. Once this gets going, Indian exports of footwear, garments, marine products and furniture to the European Union will be severely affected as they will be costlier to the European buyers, courtesy the trade tariffs, than those from Vietnam as they will not attract any tariffs.

India is also open to a free trade agreement with the EU, but this will take time to finalise. The Federation of Indian Export Organisations has urged the government to speedily move on a bilateral agreement, talks for which were started in 2007 but have stalled since 2013.

What is perhaps most critical is that global manufacturers seeking to move factories out of China (Indian is keen to host them) will find it attractive to go to Vietnam unless India can offer similar tariff treatment.

China has become a factory to the world because it has extensive supply chains. Goods manufactured there get an enormous amount of inputs from other Chinese manufacturers. What is more, China has its own huge domestic market which is attractive to manufacturers across the world. Meeting this Chinese demand, other than sourcing inputs out of China, is an important agenda for manufacturers across the world.

China also has in its favour the high productivity of its workers. They are not poorly paid at all, as perhaps in Bangladesh, but are able to deliver a high output because of their skills and the sophistication of the manufacturing processes. Plus, China has been able to give itself an enviable infrastructure. India is way behind on not just this but electricity charges too.

Against this background, a key recent decision by several Indian states, easing protection to workers, will likely perpetuate low worker productivity. To be highly productive, workers need to be educated and skilled, get paid attractively and have a degree of predictability in their service conditions.

If lowering the working conditions for workers will not deliver, what will? This is what someone familiar with the highly successful Bajaj story has to say. The Indian two-and three-wheeler manufacturer has beaten

Chinese competition in not just India but also across the world.

A key decision by it decades ago was to go out and recruit engineers at software-beating salaries for its research and development effort. They were simply entrusted to design and manufacture world-class motorcycles.

The result: when Chinese motorcycle manufacturers sought to capture the Indian market in a big push in the early 2000s, they quickly got beaten on quality. Bajaj and TVS had quality goals integrated in their manufacturing ethos.

A similar story was played out in Africa where Bajaj products were priced in between the Japanese and the Chinese and at the end of the day, delivered enormous value, enabled by its chain of dealerships and service centres with trained mechanics. This success story has been repeated across Africa and South America.

To keep abreast with the times in terms of engineering and designing inputs, Bajaj today owns a part of KTM, the European market leader. Why has this success not been repeated in other industries like TVs, computers and mobile phones? Go ask the companies that people them and see how Bajaj, TVS and Hero differ from them.

Considering the economic challenge that China poses, the road to catching up with it has been trodden successively by Japan, South Korea, Taiwan and, now increasingly, Vietnam to take their manufacturing forward.

India has to do the same once the present political and military tensions are behind us. Currently, when there is a semi-warlike situation, it is natural that popular sentiment will take priority over economic imperatives.

It is to be hoped that a suitable atmosphere will return soon, enabling an economic policy to be determined by economic considerations.