The Financial Express

Lessons from China's success in India

M Rokonuzzaman | Published: January 31, 2020 22:01:32

Boosted by the success of Chinese brands in the country, the Indian smartphone market has surpassed the US?market for the first time, on an annual level, to become the second largest market globally. China still sits at the first spot.  	—Credit: YouTube Boosted by the success of Chinese brands in the country, the Indian smartphone market has surpassed the US?market for the first time, on an annual level, to become the second largest market globally. China still sits at the first spot. —Credit: YouTube

In the recently concluded event of the World Economic Forum at Davos, the key topic was about the slowdown of economic growth that has gripped the world. Notably, economic downturn making India's dream of $5.0-trillion economy into a smokescreen triggered discussions, both in formal settings and causal discussions over coffee. Pundits at Davos were of the opinion that unless policymakers and industry leaders back home take corrective measures, the concerns will get stronger. But in the slowed-down Indian economy, Chinese companies are marching forward taking over one after another significant industrial segments. Often the success of 'Make in India' slogan is the success of China, at a loss of domestic market share of Indian companies to their Chinese counterparts. Such reality challenges India's policymakers and industry leaders to take corrective measures.

For encouraging companies to manufacture their products in India, the government of India launched "Make in India", covering 25 sectors of the economy. One of the success stories of this programme has been in mobile phone handset making. As high as 99 per cent of phones sold in India carry Made in India label. But who are making these devices in India, and what is the local value addition? According to Counterpoint Research, Chinese smartphone brands captured 72 per cent of the Indian market in 2019 compared to 60 per cent a year ago. Chinese makers Oppo, Vivo, Realme, and OnePlus captured 37 per cent market share while Xiaomi came second at 28 per cent. Amid the invasion of Chinese companies, domestic players like Micromax, Intex, Lava, and Karbonn are being pushed towards extinction.

To take advantage of diverse incentives, starting from tax differentials to preferential access to capital resources, led by Xiaomi and BBK Group, Chinese brands have invested aggressively in manufacturing devices and accessories in India. In partnership with Taiwanese multinational electronics company Foxconn and Singapore-based technological manufacturer Flex Ltd, Xiaomi alone currently has seven smartphone manufacturing plants in India. Xiaomi has employed 25,000 Indians in these plants. The question could be: if Chinese companies set up plants, and create jobs, why should it be a concern at the loss of market share of the domestic brands?

The issue is about the local value addition and the nature and the number of jobs being created in India. Local value addition in the domestically produced handsets is primarily labour-based. Unfortunately, labour-based value-added content in electronic gadgets like mobile phones has come down to less than 10 per cent of the cost of the finished product. Even though some of the components, including PCB board, are being manufactured in India, the total local value addition is less than 17 per cent, including the contribution through imported capital machinery.

There has been a sharp contrast between the strategy and policy pursued by China and India to attach the 'made in' label to mobile phone handsets. There is no denying that like India, China entered the industry by leveraging the advantage of labour and the local market. But China rapidly took steps to acquire the capacity to add value through ideas. Instead of replicating components or finished products just by adding labour and imported capital machinery, Chinese government and the industry took aggressive measures to invest in research and development, generating intellectual properties. As a result, China's patent filing started showing exponential growth reaching 1.3 million in the recent past. A significant portion of these patents is to improve mobile phone handsets. Chinese companies are taking advantage of these patents in redesigning components and the finished mobile handsets to make them more appealing and less costly.

On the other hand, patent filing by Indian entities in mobile handset making is virtually nonexistent. As a result, Indian companies with the capacity of replicating with labour is failing to remain competitive. The loss of India's domestic mobile phone handset market to Chinese companies is basically the failure of India's industrial strategy of labour-based value addition, as opposed to China's idea-based one.

Upon losing the mobile handset making market to China, India is now concerned about the likely decimation of its automobile component manufacturers. As the Economics Times of India states, "Chinese decimation of Indian phone makers is complete. Automakers next?" Particularly, the emergence of electric vehicle (EV) is opening the corridor to Chinese companies to invade India's industrial heartland: automobile manufacturing. In India, a workforce of 37 million in thousands of small and medium-sized firms have been manufacturing most of the 2000+ parts that automakers like Tata need to assemble for each finished automobile. India imports only a tiny fraction, as low as 15 per cent, of automobile components to meet local production. Despite the local manufacturing of these components, India's main value addition is through labour and raw materials. To cope up with the deadly air pollution, as India keeps progressing to embrace electric vehicles, its labour-based value addition advantage has started evaporating. As opposed to 2000+ parts, EVs are going to have as low as 20 of them. And India is going to import more than 70 per cent of components -- from battery pack to power electronics module, mostly from China. And value addition in those critical components is through patented ideas - that again is a blow to India's labour-based manufacturing strategy.

Like India, many other developing countries are still pursuing industrial strategy based on labour and raw materials. At the backdrop of rising R&D (research and development budget and patent filing of China, most developing countries, including India, kept busy in building infrastructure and giving preferential treatment to labour-based industrial production. Such labour-based value addition strategy is rapidly running out of steam for both the purpose of import substitution and export. Already emergence of robotics and automation is posing a threat to the economic attractiveness of off-shoring.

  Because of the failure to focus on acquiring the capability of offering better quality products at lower costs -- out of ideas, no amount of protection, patriotic slogans, and infrastructure investment is going to succeed to empower developing countries to retain and enhance their progress in industrial economy. The sooner we learn and take measures accordingly, the better will be the outcome.   


M Rokonuzzaman PhD is an academic and researcher on technology, innovation and policy.


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