Can India beat China in the race for exports dominance?

Yes, says Edelweiss Securities in a report that rates India's chances higher than China's

There is a lot of apprehension on how Indian exports will grow if the global economy does not pick up. India’s growth story, to an extent, is also dependent on export growth. And it is widely believed that India’s growth in manufacturing sector is solely dependent on growth rate of global economies. How will India grow if global economies were to slow down? 

A report titled ‘Manufactured Exports – Propitious time’ by Niraj Mansingka and Amit Mahawar of Edelweiss Securities says that favourable demographics, rising competitiveness and positive changes in the business environment will drive Indian exports.

The report says that India is rightly placed to exploit the vacuum that will be created by China. By calendar year 2012, China had cornered 10.6 per cent of world manufactured exports. China’s competitiveness can be judged from the fact that only nine other countries in the world could increase their market share by more than one per cent. India’s increased by only 0.8 per cent.

 

China owed its growth to a differentiated model as compared to other countries. Its growth rested on three pillars -- low and supressed wages as the demographic surplus saw nearly infinite labour supply, low cost of capital on account of an artificially capped low interest rate environment and an undervalued exchange rate.

 

All these factors are currently losing sheen. Wages since 2010 have been rising at a rate of 18 per cent a year and currently stand at $3 per hour (in India it is less than $1 per hour). Further, there is a shortage of labour in China now. Edelweiss says that in 2013, China faced acute labour problems and expects labour supply to touch zero by 2017 and go into negative territory after that.

 

Huge foreign exchange inflows in China have resulted in a sudden spurt in the currency’s value against the dollar. Moreover with the rise of ‘shadow banking’ (non-banking finance companies which borrow and lend at higher interest rates as compared to regulated conventional banks), the Chinese government is under tremendous pressure to lift the 3.3 per cent retail deposit rate ceiling, which will raise interest rates, wiping out China’s low capital cost advantage.

 

Meanwhile India is best positioned to capitalise on the space that China is likely to vacate. India’s demographic dividend, says Edelweiss, throws up a huge opportunity for manufacturing, as one-fourth of incremental global working age population will come from the country. Among countries with large labour pool supply, India’s labour costs are in the bottom quartile.

 

With a slowdown in domestic economy during the decade long rule of the United Progressive Alliance government, contribution of exports to the Indian economy has increased. India’s manufactured exports’ contribution has increased from four per cent in 1990 to around nine per cent in 2012. More importantly these exports which grew at a CAGR of 9.5 per cent between 1992-2002, shot up to 17 per cent during the period 2002-2012.

 

Taking a top down approach in stock selection, Edelweiss has identified four sectors that stand to gain the most if India dominates manufacturing export market. These are transportation, chemicals, engineering and textiles. Edelweiss has further narrowed down companies in each of these sectors which are in a sweet spot to gain from the export boom.

 

There are some interesting titbits of information in the report of each sector which gives an idea of the opportunity available and India’s competitiveness in the market.

 

1) Transportation

· Auto ancillaries have been one of the fastest growing segment in the transportation division on account of a surge in large market for small cars, engineering skills (also called ‘frugal engineering skills’), low-cost skill based manufacturing and adherence to strict quality control.

 

·  India is now the sixth largest vehicle market in the world surpassing France, UK and Italy. It is the largest manufacturer of tractors, second largest manufacturer of two wheelers and fifth largest manufacturer of commercial vehicles. This is helping the country to fast emerge as a global manufacturing hub.  

 

Carlos Ghosn of Nissan has been quoted in the report and he said, “China is also a low-cost manufacturer. But there is something unique about India’s frugality of engineering and management. If I have to fight the battle on low cost, I am going to do it (with a base) in India.”

 

2) Chemicals

·  India’s chemical industry is next only to China in the world.

 

·  Its advantages are diverse that include sizeable manufacturing base, large refining capacity, strategic location of being close to consuming Asian markets, basic chemistry skills and engineering and process skills.

 

·  Chinese companies are moving up the value chain towards technology driven products, thus vacating space for generic products for Indian companies. Environmental hurdles can impact the manufacturing capability of China, which is already seen in sectors like dyes and dye intermediates.

 

3) Engineering

·  India accounts for only 0.8 per cent of global engineering exports but is the second fastest exporter after China.

 

·  India’s advantages are availability of inputs like high skill engineering talent, raw material and low cost labour.

 

·  With its extreme cost focus and availability of engineering skills, India has carved a niche in ‘frugal engineering’. With costs in China rising, companies are looking towards India for a ‘China + 1” strategy. China has a large market share in engineering and this potential void presents an opportunity for only a few countries like India.

 

4) Textiles

·  There are many positives for India in the textile space which include a multi-fibre raw material base (cotton/jute/cellulose and synthetics).

 

·  India has 19 per cent of global spindle capacity (second only to China); 8 per cent of rotor capacity (third to China and Russia) and has the largest number of looms in the world.

 

·  India is as cost efficient as most of the large exporters in the world with only power cost being amongst the highest.

 

·  The country has a reasonable presence in the export market being the largest in the world with a 25 per cent share of global cotton yarns, 12 per cent of world’s production of textile fibres and yarn.

 

·  India accounts for 36 per cent share of US imports of cotton towels and 47 per cent of US imports of bed sheets.