5 Paisa - Features of indian stock market

It was in October 2000 that this column had highlighted the onslaught of Chinese manufacturing industry in India and the impact on Indian manufacturing industry (Chinese invasion and mango pulps). Since then Indian companies have moved towards importing components from China, setting up assembly units in China and even looking at the Chinese markets. Indian companies have now been regularly sending its representatives to China to find whether they can do some business with the Chinese. Therefore, it was not very surprising to see two articles in the same week on China’s manufacturing sector in BusinessWeek and Fortune.

The article in Fortune highlights China’s emergence as a major manufacturing prowess globally. What is of importance is that China is no longer just an exporter of low tech labor intensive goods like toys or shoes or garments. But it has rapidly climbed the rungs of the technology ladder to become a leading producer of hi-tech products ranging from computer chips to optical fibre cables to the latest DVD recorders. China is becoming a strategic sourcing point for global companies and the companies are no longer investing just to tap the huge domestic market of China. The latter was the reason why global companies were investing a decade back. But today it has become imperative for most global companies to have production bases in China to compete effectively in global markets. And it is this reason why China has succeeded in attracting US$112.3bn of FDI in the last three years even as we have been attracting less than US$5bn per annum. China’s attraction could be summarized as:

China’s phenomenal growth has implications for all countries in the region. As China sucks in the FDI and sets up huge capacities, the rest of the region is getting starved of FDI. For example in 2001 China attracted more FDI than South Korea, Thailand, Malaysia, Singapore, Vietnam and Indonesia combined. Manufacturing bases are fast moving out of Japan and ending up in China. Thus, Japanese FDI, which was earlier being directed to East Asia, is now moving to China. As I read sometime back Sony today does not produce a single TV in Japan and most of it is being produced in China!

What has been the Indian response so far? As a nation we do not have a response or a strategy or policy – by this I do not mean government policy or government action. But a coherent policy or strategy by the Indian industry associations which can then influence government’ economic policy and agenda and its thrust on infrastructure. As a result we still struggle with labor laws and the government (rather the Finance Minister) pats itself on the back for declaring 12,000 government workers as surplus. The maximum reduction in workforce last year was due to corporatisation of DoT – the workers moved out of the rolls of the government to the rolls of BSNL. That is government size reduction, India style. Companies are acting solo in their own interests as is highlighted in the article in BusinessWeek (India’s China Challenge).

The problem is we like to compare ourselves to ourselves. So we all talk about the phenomenal liberalization and reforms we have done in a decade when the rest of the world has raced past us. We are happy with restructuring and the improved competitiveness of a Tata Steel, a Tata Engg and a National Aluminium or Ranbaxy. But look at the PSUs. And the pace of change is pathetically slow. The only action from the government’s end is the push to set up Special Economic Zones modeled on whiter else but China. A consultant I spoke to recently was hopeful that India could seize the opportunity to be the assembly workshop to a large part of the region. But given the investments going into China and the capacities being set up, I have my sincere doubts about the huge success of these SEZs. I spoke to a few global TV manufacturers and none of them sounded upbeat about the prospect of the SEZs.

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