For anyone in manufacturing, the China threat has been genuinely concerning for decades now. It almost makes no sense to manufacture something that the Chinese already supply. Yet, Indian companies have hobbled on, using a mixture of proximity and good customer service as a way to hold on to clients.
It is precisely for this reason that most successful manufacturing outfits have survived or even thrived by staying one step ahead on the value chain, or by investing efforts and capital in technological differentiation.
In our own example, Poly Fluoro withdrew from the manufacturing of what we call ‘stock shapes’, back in 2007. Stock shapes are typically items like polymer rods and sheets, which come in certain standard dimensions. It was our understanding that the commoditisation of this space would drive margins so low, that the slightest shift in the market could lead to unmanageable losses. Furthermore, we perceived a genuine dilution in the quality metrics. This made it impossible to compete with Chinese material, which would often be substandard, but marketed in such a way that the end-users would be unaware of the same.
One offshoot of this was seen in the PTFE (Teflon) industry, where the proliferation of reprocessed, or recycled, material had started eating into the market for genuine material. Since there was anywhere between a 15% to 40% price difference between reprocessed and genuine PTFE, competition became impossible, unless the end user was discerning enough to demand the right quality, and knowledgeable enough to test for the same.
Rather than compete on volumes with Indian companies as well as traders who imported in bulk from China, Poly Fluoro invested in technologies such as PTFE extrusion, CNC machining, injection moulding, PEEK moulding, and expanded PTFE (ePTFE) manufacture. In some cases, we spent months or even years developing new processing techniques in-house. While these technologies are also available in China, our aim was to develop the same for high-precision products aimed at clients for whom quality was the key concern. In doing so, the China threat was minimised.
Other Indian companies, who have continued to take the China challenge head-on, have suffered.
Off late, however, multiple factors have started to chip away at the Chinese advantage. These have allowed Indian companies (and indeed companies everywhere), to realise that the China threat was never about fundamentals. In other words, we were not disadvantaged by higher productivity, or more streamlined operations in China. Rather, the competition was largely man-made.
- Lower labour costs
Along with India, China has always promoted the idea that their labour is cheaper. While this is certainly true when we compare them with the West, the fact remains that for many years, Chinese labour laws were extremely exploitative. In contrast, Indian firms have had to conform to things like ESI and PF, where both health insurance and provident fund contributions were mandatory for any firm hoping to compete globally.
The recent introduction of social security in China has pushed up the labour costs there, to the extent that the difference between India and China is now negligible. Indeed, we have recently received requests from Chinese companies for machined parts. When we inquired, sceptically, why they would want to come to us, we were told that machining costs have increased significantly in China.
China’s push to appear more like a global super power and less like a low cost country has also impacted this. Fewer youths are interested to work in manufacturing, causing labour rates to spike. India still has a large labour workforce who, if supported ably by minimum wage laws, still see manufacturing as a profession worth getting into.
- Environmental concerns
In 2016, the PTFE industry was rocked by capacity constraints caused by the shutting down of three large raw material manufacturers in China. The revelation here was that these plants had been flouting environmental laws and dumping effluents in nearby rivers. The moment the companies were held accountable, the price of Chinese materials began to rise. Again, India’s only PTFE raw material manufacturer – Gujarat Fluorochemicals – had installed a state-of-the-art plant that conformed to all the environmental requirements from day one.
Again, it is no wonder that Indian firms were struggling to compete, considering the cost benefits afforded by ignoring regulation. Once the rules were followed, the cost advantage immediately eroded.
- Government subsidies and currency
Customers often ask us why we in India are unable to compete with Chinese companies. To this, our reply is simple: “We are not competing with Chinese companies, we are competing with the Chinese government”.
Given the extent of subsidies and drawbacks thrown on Chinese exporters, it is hardly fair to expect an MSME in India to have there wherewithal to engage competitively. Despite this, we are often told that our prices are only 10-15% higher than the prices from China. In other words, with subsidies in the range of 30-35%, Indian firms are still able to harness our productivity and ingenuity to remain somewhat competitive.
In addition to subsidies, the Chinese currency has been consistently pegged below its true value, lending another blow to Indian manufacturers when we quote clients in US$ or Euros.
- Social issues
Finally, there is little doubt at this time that working with China raises some serious doubts with regards to what we are encouraging. Although this is not a cost concern, companies in the West need to start acknowledging that in encouraging China, we are giving indirect approval for a host of human rights violations that have now become too obvious to ignore.
With the advent of the Covid 19 crisis, the world needs to take an even sterner view regarding China trade, since it appears that there is very little accountability internally for the manner in which they operate. Even now, as the cases spike around the world, China remains stoic in claiming that they have nearly eradicated the virus within their own borders.
Regardless, we have heard of many cases where companies in Europe and the USA have gone right back to buying from China, because the economics are favourable.
While there are definitely calls for companies to pull manufacturing operations out of China and move them to countries like India, it remains to be seen whether these are genuine or simply lip service during a time where anti-China sentiments are everywhere.
The aim of the article is not to put down China, or to claim that they do not deserve to compete in global trade. However, with so many factors benefiting Chinese manufacturers, the world needs to even the playing field by insisting that Chinese companies play by the same rules as the rest of us. As Indian manufacturers, we’re happy to complete on a level footing. What we cannot be expected to do is survive against competition that is so unfairly stacked against us using man-made economic measures.