INB 311
Asian Business Environment – India and China
Dr. Lairson
India – China Manufacturing
10/21/14
Major trends in global manufacturing:
ICT and fragmentation of supply chains and distribution to specialized states
of various components;
Value added focused in knowledge-intensive elements of supply chain
Design
Marketing and branding
Management and coordination of supply chain
Technology of manufacturing: robotics; reduced labor content; additive
manufacturing
Rising costs in China continues pattern to relocating labor intensive parts of
supply chain:
To inward China
To Southeast Asia
Back to the US
Amrit Amirapu and Arvind Subramanian, "Manufacturing Futures," Business Standard,
May 9, 2014 indiamanufacturing.docx
Who is Arvind Subramanian?
Should India engage in a greater emphasis on manufacturing, and follow the China
model?
Rising supply of young workers, many from rural India
Economic gains from restructuring
Create gains from new supplier firms
Create a pathway to upgrading and additional productivity increases
Formal versus informal manufacturing
registered (formal) manufacturing. According to our calculations, the level of
labour productivity (measured as value added divided by employment) in 2010
was about 4.2 times greater in formal manufacturing than in the rest of the
economy. Second, between 1999 and 2010, productivity in this sector grew at an
annual average rate of 5.3 per cent compared with 4.3 per cent for the rest of the
economy. Note that these benefits only pertain to formal manufacturing because
informal manufacturing is a low-productivity and non-dynamic sector - compared
to not just formal manufacturing but large parts of the economy.
Have the gains from manufacturing diminished, perhaps especially as a result of China
and technological change?
Global peak in manufact./GDP is 1988
Declining role for manufacturing in India
Some comparisons are illuminating. Take India's largest state, Uttar Pradesh. It reached
its peak share of manufacturing, of 10 per cent of GDP, in 1996 at a per capita state
domestic product of about $1,200 (measured in 2011 purchasing power parity dollars).
Indonesia attained a manufacturing peak share of 29 per cent and at a per capita GDP of
$5,800. Brazil attained its peak share of 31 per cent at a per capita GDP of $7,100. So,
Uttar Pradesh's maximum level of industrialisation was about one-third that in Brazil and
Indonesia; and the decline began at 15 to 20 per cent of the income levels of these
countries.
These findings serve to emphasise that if India is to become a manufacturing
powerhouse, it has to reverse a process that has been entrenched for several years in
several states. It is not that patterns of specialisation cannot be changed. But that reversal
will require a lot of hard work, so that a critical mass of policies is changed to create an
environment that is conducive to making high-productivity manufacturing attractive to
investment, domestic and foreign.
Does it still make sense for India to emphasize manufacturing?
If not, what are the alternatives? Agriculture?
What are the consequences of not using manufacturing as a base for growth?
What are the policy requirements to make India a manufacturing force?
What is a manufacturing ecology?
What are the elements and relationships of a manufacturing ecology?
See chart in article about India states and manufacturing.
Nirvikar Singh, "Comments on the 'Puzzle of Indian Manufacturing.'
Why has India failed in manufacturing to match China?
“A recent video interview with just one successful entrepreneur, Vinod Sharma,
the Managing Director of Deki Electronics, lays out the needed policy
agenda so clearly that it should be required viewing for policy
makers. Mr. Sharma produces electronics components such as
capacitors, ubiquitous in a range of consumer electronics. He employs
500 workers, so is not small by Indian standards. His workers do not need
high school educations. They receive on-the-job training, or have
vocational training certificates that represent some requisite basic skills.”
“Why is Mr. Sharma hesitant or unable to expand? His cost of doing
business is higher than it would be in China – where he has acquired
a factory. What’s better about China? Much cheaper and much more
reliable power, more transparent and less costly processes for
acquiring land, more rational and flexible labor laws, better
infrastructure in several dimensions – inland transportation, housing
for workers, sanitation – and a local manufacturing ecosystem that
create positive feedback loops and economies of agglomeration.”
“Sharma talks about high transaction costs in the tax system, tax rate
changes that have unintended consequences because of variations in
different stages of the supply and production chain, and cumbersome
regulations that still require multiple forms to be filled out— now
electronically in addition to the paper versions that have always been
required. And there is also the lack of clarity in legislation and delays in
litigation that pervade the Indian legal system.”
Hypotheses about Factors that matter

Lack of skills

Lack of organizational focus

Government regulations

Cost of capital / lack of tax incentives 
Lack of competitive pressure
Lack of connection to global production networks, role of quality changes
and changes in product mixes, changing management quality...
Lack of sufficient industrial dynamics – too few new entrants
Insufficient trade liberalization
Inadequate management skills and entrepreneurship
Keith Bradsher, "As LED Industry Evolves, China Elbows Ahead," NYT, JUNE 17, 2014
ledchina.docx
Chinese strategy in the LED industry

Product of the Chinese economic system and its strengths
o Active policy to capture knowledge from FIEs in China
o Locally state owned firms
o Bet on rising global market for LEDs, solar, wind turbines
o Low costs of capital and subsidies
o Distributed government entrepreneurship
o Build industry capacity –
o Drive prices down via scale economies
o Expand global demand from falling prices
o Gain market share via price competitiveness
o Defeat global competitors – raise prices
o Problems with inconsistent – low quality
Where in China?
Guangzhou
Foshan
Build firm capacity
China – east coast China - is vacating labor intensive, low skilled manufacturing
Chinese manufacturing is moving up the value chain
Strategic opportunity for India?
EIU, "China to maintain manufacturing supremacy," May 23rd 2014
chinesemanufact.docx
Can India compete with China in manufacturing?
China’s labor force will peak this year at 802 million
Who is EIU?
Conclusions on China
By plotting our forecasts for labour productivity growth
against nominal wage growth in a group of emerging
economies in 2013-18, we discovered that there are few
destinations that will become more cost-competitive than
China, and none that will see their workers have a larger
increase in productivity than those in China.
Most countries should see slower nominal wage growth than
China in 2013-18. But among them only India can boast a
labour force even approaching the size of China's, in an
environment in which economies of scale are important.
Wages are, of course, only one factor in relocation decisions.
Production is also affected by the cost and availability of
capital, infrastructure, inputs and the risks of operating in the
market. We also mapped productivity growth against our
score for operational risk. We consider most emerging
markets to be riskier places to do business than China,
What are the implications of this analysis for India? What will Indian firms need to do to compete
effectively in global consumer markets in manufacturing?
Major reasons to believe that low-cost manufacturers will not
desert China en masse for other emerging markets in the coming
years. But this does not mean that the dynamics of supply chains
will remain static in 2014-18. We expect proximity to final markets
to become an increasingly important factor because of shortening
product life-cycles, a trend apparent across consumer goods
segments, from clothing to technology. A shorter shelf-life creates
a higher marginal benefit for firms that can ship from factory floor
to shop shelves more quickly; for China, rising incomes mean that
its manufacturers will focus increasingly on the domestic market.
What are the implications of this analysis for India?
The most direct challenge to China's dominance of global
manufacturing may come not from its many smaller competitors,
each stealing a morsel of its market share, but from a behemoth on
its doorstep. The Association of South-East Asian Nations (ASEAN)
Economic Community (AEC), which is due to come into effect in
2015, aims to turn its ten South-east Asian member states into a
single base for production and manufacturing and, eventually, a
single market. On their own, Vietnam, Malaysia and even Thailand
lack the economies of scale to compete with China. Collectively,
however, the community will comprise more than 625m people,
with a GDP of almost US$2.5trn
If the AEC is able to bring intra-country tariffs close to zero, value
chains could be established that exploit the resources of its
member states, from R&D in Singapore to capital-intensive
manufacturing in Thailand to plentiful labour in Myanmar. And as
the region will experience some of the world's fastest economic
growth in 2014-18, the battle to supply goods to its burgeoning
consumer markets will be intense.
Nevertheless, the most striking aspect of China's position at the
centre of global manufacturing is its continued comparative
advantage. In this respect, China will be strengthened by further
improvements to its already impressive high-speed infrastructure
and the depth of its industrial capacity in the coming years. And,
despite government promises to crack down on the environmental
cost of production, continued growth in China's urban population
will ensure it remains a highly competitive location for a broad
swathe of manufacturers.
China and India in Global Production Networks
What are the major changes in the Chinese economic system affecting its
competitive position in manufacturing?
Starnes, co-founder of Florida-based Specialty Medical Supplies, had planned to move
the firm’s plastics business near Beijing to Mumbai, India. He let go of 30 workers and
offered them hefty severance packages, but other workers demanded similar payouts.
They detained him for a week, freeing him after he agreed to their demands.
Starnes preferred Mumbai because he found cheaper workers there. It helped that the
dollar is gaining strength against the rupee, while it is steadily losing value against the
renminbi.
China is no longer the cheapest source for many products, causing companies to shift production to other
countries “in search of the ‘next China,’” according to Fisher and Keh. Since the mid-1980s, China used its
low-cost labor to effectively become the pre-eminent outsourced manufacturing destination. But with the
double whammy of rising wages and a strong RMB, those Chinese supply chains have reached an
“inflection point,” the researchers note.
The transformation in Chinese supply chains has evolved almost unnoticed over several years
In their research, Fisher and Keh identify the major shifts. One, Chinese companies such as Foxconn (the
manufacturer of iPhones) and prominent apparel supplier Luen Thai are relocating or expanding operations
from high-wage coastal provinces to cheaper locations in interior China, India or Indonesia.
Two, many Chinese contract manufacturers are building their own brands, investing in R&D and
innovation, and tapping into China’s domestic markets. The Goodbaby Group, a maker of baby strollers
based in Jiangsu in Southeastern China, commands 70% of China’s juvenile products market, according to
the country’s ministry of light industry. It has five R&D centers and owns 4,465 patents. “What makes
Goodbaby striking is that it is unusual and a harbinger of the future — where China is trying to go,” says
Fisher. “It competes on innovation.”
Daphne, a Chinese maker of women’s shoes, began as a contract manufacturer. What does this mean?
What about India?
Many Western companies that sourced solely from China are finding suppliers elsewhere in a “China + 1
strategy” — or +2, +3, etc., depending on the number of alternative outsourcing locations they add. In the
case of Walmart, for example, it is “China + 17,” and the firm is also considering sourcing locations that
might have been “out of question a decade ago,” such as Ethiopia, Myanmar or even the U.S., says Fisher.
India’s commerce and industry minister Anand Sharma was in New York City last week to sell business
leaders the idea that the country can rival China as a manufacturing center, according to a Bloomberg
BusinessWeek article. “But for manufacturers that don’t want to rely too much on China, switching to
India is no easy task,” the article noted. It described the country as “notorious for its lousy
infrastructure and inflexible labor laws … [and] an also-ran among Asian countries trying to build
up their manufacturing sectors.”
The Indian government is attempting to change perceptions about the country. It has plans, for instance, to
build an “industrial corridor” between Delhi and Mumbai. Working with the Japanese government, the
Indians envision a series of seven new industrial cities equipped with what’s standard in China but still
unusual in India: “The programme envisages development of infrastructure linkages like pioneer plants,
assured water supply, high capacity transportation and logistics facilities,” according to the project’s
website.
The problem is, some Americans aren’t convinced India has changed its ways. They point to India’s plans
to promote local manufacturing at the expense of foreigners. A proposal by the Indian government to favor
Indian companies, for instance, has drawn complaints from lawmakers in the U.S. Senate Finance
Committee. Chairman Max Baucus (D-Mont.) and ranking Republican member Orrin Hatch (Utah) last
month released a letter to Secretary of State John Kerry calling on the Obama administration to address
what they called “unfair trade practices” and “protectionism” of India. The senators described their “serious
concern about policies adopted by the Government of India that shut out U.S.-made innovative products
and transfer U.S. intellectual property to its domestic industry.”
Can India become a supplier of components to the Chinese assembly machine?
Reference:
Vinish Kathuria, et al., "The Effects of Economic Reform on Manufacturing Dualism:
Evidence from India," Journal of Comparative Economics, 41 (2013) 1240-1262.
MCI, "Boosting India's Manufacturing Exports, 2012-2017"
Maria Bas, "Does services liberalization affect manufacturing firms' export performance?
Evidence from India," August 7, 2012
Indiaserveexport.pdf
Impact of trade reforms on labour's share of firm revenues. July 25, 2014
Indiastructrans.docx