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Storming the Great Wall
Surajeet Das Gupta |
February 08, 2003
How serious is Harish Kumar, the dapper chairman of Delhi-based Maharaja Appliances about the China Factor? Well, he's so serious he has called in a high-priced tutor and is taking Mandarin lessons several times a week. And he flies to the Middle Kingdom every month.
Why is China so high on his priority list? That's simple. Kumar imports 20 per cent of his components from China and must stay in touch with suppliers.
Says Kumar: "We import components from China because they're at least 50 per cent cheaper than in India. And that helps me sell my finished products at attractive prices domestically."
Kumar may be one of the few taking Mandarin lessons but across the nation, businessmen are beginning to tackle the Chinese dragon head-on.
Two years ago the Chinese manufacturing juggernaut made its first move to muscle into the Indian market, dangling fantastically low prices as bait on a range of goods from televisions to toys.
But anyone who thought Indian companies would close shop was mistaken. They're tackling the market in a variety of ways. At one level they're identifying opportunities to win a slice of the burgeoning Chinese market.
At another they're leveraging the Chinese market as a source for components and finished goods -- to cut costs and stay competitive in India and internationally.
Says Satish Kaura, chairman of tube maker Samtel India: "Two years ago Indian manufacturers thought they'd be finished by the Chinese onslaught but now they're learning to take them on successfully and learn from them."
Take JK Tyres that has tied up with a Chinese tyre manufacturer to produce LCV and truck tyres. These tyres are sold by JK under its own brand name in several parts of the world.
Says Raghupati Singhania, managing director, JK Industries: "We've two advantages. By sourcing these tyres from China we've been able to release capacity in our domestic plants that can be used for making radial tyres. So I save on fresh investment.
"Secondly, it's 20 per cent cheaper to source tyres from China than in India. So we're more competitive internationally."
The company is, in fact, moving even further -- the tyres made in China are being sold in India under the JK name. And it's charging a 20 per cent premium on its tyres. JK expects its global business to be worth around Rs 800 crore (Rs 8 billion) in the next three years and half of that will come from China.
Others are aiming squarely at the Chinese market. They see a large domestic market waiting to be tapped by setting up a manufacturing base. Bajaj Auto has been scouting for a partner in China to make two-wheelers.
Notes Sanjeev Bajaj, vice president Bajaj Auto: "Ninety five per cent of two-wheelers in China are made by local companies and are of inferior quality. About 5 per cent are made by the Japanese but they're two and a half times more costly. We see an opportunity to produce Japanese quality two-wheelers at prices that match the Chinese. It's a clear window of opportunity."
Still striking the right alliance is a problem. Says Bajaj: "There are 400 vehicle manufacturers in China so we're still looking for the right match."
The company has also been looking at opportunities to source components that Bajaj says can be 50 per cent lower than in India but it has not been able to locate a reliable supplier.
And who said India could not match Chinese on production costs? That's precisely what Pune-based Bharat Forge has been doing successfully.
Bharat Forge has tied the knot with European major Renault Vehicle Industry, a large heavy trucks manufacturer, to supply flexible beams to the company's Chinese plant.
It's also providing engine components to a Chinese auto company. Says Amit Kalyani, vice president and chief technology officer, Bharat Forge: "We provide quality which isn't available with Chinese manufacturers because we've the technology. In China the tremendous growth in volumes in the auto sector has not been matched with equivalent technological upgrading. So we've a clear niche."
The push into the Chinese market has helped the company lower its dependence on the US from 66 per cent to 53 per cent last quarter. China already accounts for 21.4 per cent of its exports.
For Samtel, China has proved a good opportunity. The ability to provide quality at lower prices has helped Samtel make a dent in the Chinese market.
The picture tube manufacturer has a two-pronged strategy: on one hand it imports glass shells from China, on the other it exports black-and-white television picture tubes to the country.
Don't forget that China has a glass shell manufacturing capacity of 40 million annually with large-sized plants and prices are at least 4 per cent to 5 per cent cheaper than in India.
And on the export side, Samtel offers reliable quality and also lower prices -- it's 2 per cent to 3 per cent cheaper than Chinese manufacturers -- for its black and white picture tubes.
Says Kaura: "The local black and white market in China is shrinking and we're able to offer good quality at cheaper prices. This helps us squeeze the local manufacturers, many of whom are closing."
Sourcing components, however, remains the big attraction. A range of home appliance makers is turning their eyes to China for parts.
AC maker Voltas, for instance, has a joint venture with US major Fedders International in India. The Indian JV is now sourcing rotary compressors for its room ACs from the Fedders plant in China.
The reason is simple, says K J Java, senior vice president in the company: "The price we get is 5 per cent cheaper than if we source from India because of the economies of scale in manufacturing there. We're leveraging on the strength of our partner in China."
Bajaj Electricals has gone a step further -- jointly branding products imported from China. The Mumbai-based company realised it didn't make economic sense to manufacture pedestal and wall fans in India because of low volumes so it tied up with China's Midea -- the world's largest fan maker which produces 17.5 million such fans compared to a total Indian market of 1.5 million.
Midea makes the fans in China according to Bajaj's specifications. Bajaj jointly brands the fans and sells them using their large distribution network in India.
Says R Ramakrishnan president and CEO, Bajaj Electricals: "It's win-win for both. The Midea brand gets recognition of its brand in India by the rub-off effect of associating with Bajaj, as their brand is unknown. We make a cost saving of 15 per cent because it's manufactured in China. We also have access to the latest in technology and design as they're the world's largest."
Even the paints industry is making inroads into the Chinese market. Asian Paints recently bought Berger International, which has a plant near Shnaghai.
Asian Paints plans to use the Chinese market as a stepping stone. Says Manish Mehra, CEO, Berger Paints, China: "Once we have achieved considerable size we will then look at catering to the Asia Pacific countries."
That's the good news. But Indian businessmen shouldn't underestimate the Chinese challenge. The first wave may not have made a big dent but ruling them out could be suicidal.
While Chinese manufacturers have failed to make any big breakthrough in home appliances because of quality doubts, they have still built up a 5 per cent market share. And Chinese tile manufacturers have already grabbed over 15 per cent of the vitrified tile market.
To add to the challenge, Chinese companies are pushing their brands for the first time -- an area considered their weakness. Haier, a large home appliances and white goods company from China, has already set up a 100 per cent subsidiary in the country and is expected to introduce its range of products imminently.
Haier, which has made a dent in the US market with its branded product range could become a force to be reckoned with in India too.
And in some sectors, they appear to be winning. Domestic sports footwear manufacturers say at least half of them will have to close down against the onslaught of cheap Chinese imports. Chinese products already constitute 10 per cent to 15 per cent of the sports footwear market in India.
Take the makers of Action sportswear shoes, which has had to reduce sports shoe prices by 20 per cent this year to match the Chinese. Laments N K Aggarwal, director, Nikhil Footwear, makers of Action sports shoes: "Their costs are 40 per cent lower than ours. Plus traders are under-invoicing imports.
But taxes on us are as high as 35 per cent. If this continues and excise duties don't fall we'll stop manufacturing and start trading."
Other industries may also feel the crunch soon. Indian cycle companies should have been able to match the Chinese.
But warns O P Munjal, chairman of Hero Cycles: "Steel, the main input for manufacturing cycles, has tripled this year. We're paying Rs 3,000 more per metric tonne compared to Chinese manufacturers. If this continues and we're no longer able to absorb the increase by squeezing our margins, the Chinese will get an opportunity."
Even for companies doing well, it's premature to declare victory against the Chinese. Notes Singhania: "As we have accepted WTO regime, custom duties which are at 30 per cent will go down to 15 per cent. That's when Chinese products will become even cheaper. Plus they're now pushing for better quality."
Already there have been outright losers in the battle with the Middle Kingdom. Videocon, for instance, invested Rs 35 crore (Rs billion) to set up a plant to manufacture Internet TVs in China, which would be sold both there, and in India.
Says group chairman Venugopal Dhoot: "We have realised the cost differential is not enough to justify setting up a TV plant in China. While their input costs are cheap their labour costs are twice as ours so I don't see any advantage."
Gearing up for the future, Maharaja too is putting pressure on its Indian vendors to cut costs and prices so it can match the Chinese. Kumar is taking many of his vendors to China so they can learn first-hand how to replicate Chinese practices in their factories.
Says Kumar: "The gap in the last few years in price has already narrowed to around 10 per cent in some vendors. I see it going down further."
Domestic tile manufacturers are cutting costs to compete successfully. They're also leveraging their distribution strength -- an area where Chinese tile manufacturers have no strength.
Says Prakash Guddard, vice president marketing, Kajaria Ceramics: "We have a plan to cut costs by 5 per cent. Plus we're strengthening our 400-dealer base by offering them better margins and pushing them to go for concept selling. This large distribution strength can't be matched by traders importing Chinese ceramic tiles."
While Indian companies are for the most holding their own against the Chinese assault and in some cases profiting from the encounter, there still remains the big question -- for how long?
Additional reporting by Arti Sharma