China's pain doesn't provide optimism, yet

Rising costs in China provide an opportunity, but competition, low automation and scale mar prospects

Rising costs in China have snatched the tag of the world's manufacturing hub from it. But that might not be good news for India just yet.

A snapshot of pointers from a Deutsche Bank research report sums up the China story: Since 2001, real wages in the manufacturing sector in that country have risen about 200 per cent in dollar terms, surpassing Thailand and narrowing the gap with Philippines. Last year, productivity in China increased the least since 1999 (though it outpaced the rest of Asia). In 2011-12, unit labour costs - the ratio of wages to real output per employee - trended up to a larger extent than in countries in the Association of Southeast Asian Nations.

Some reports suggest by 2015, the cost of doing business in China would be on a par with that in the US. Latest figures from World Steel Dynamics show the cost of producing steel in China is close to that in the US.

Ostensibly, China's shifting advantages should augur well for India, so far considered a poor cousin. "India has been exporting raw material. Now, the time has come to export steel so that value addition happens in India. Ultimately, India should become a hub for engineering industries for which steel is a critical input, as well as an export hub for many such industries," said a steel producer.

"We used to source more than 60 per cent from China. But now, we are sourcing 60 per cent from India, while the balance is from other countries, including China," said Anant Bajaj, joint managing director of Bajaj Electricals.

But beyond the optimism lies the reality.

"We must also look at countries such as Malaysia and Thailand that are quite competitive in pricing. We cannot think of it as an opportunity unless manufacturing is scaled up. Look at their exports and ours; the difference is humongous," Bajaj said.

The problem is while India is a low-cost destination, costs here aren't the lowest. "As China moves up the value chain, due to rising labor costs and a shrinking working age population, it would create the space for countries such as India to enter mass manufacturing. However, it would still be a competitive space, as countries such as Indonesia, Philippines, Vietnam and even Bangladesh would want to enter here. Therefore, India will have to work hard to take advantage of this opportunity," said Sanjeev Sanyal, Deutsche Bank's global strategist.

Also, infrastructure and power costs in China are lower compared to those in India.

"For India, the opportunity to persuade global manufacturers to relocate from China appears limited, considering the higher costs manufacturers incur on land, input material, capital, etc. For a large-scale manufacturer, the wage bill is probably 6-12 per cent of its profit-and-loss account. So, even if salaries increase 50 per cent, the overall cost impact wouldn't be more than three to five per cent; further, there is also the issue of productivity. Hence, rising labour costs alone may not force manufacturers to shift from China to India in all sectors," said Kumar Kandaswami, Deloitte India senior director.

Scale, too, is an important factor. Consider this: Blue Star imports compressors for its air conditioners; to break-even, about a million compressors are required. But the size of the Indian industry is three million. "It will certainly be an opportunity for India, but it will materialise only in the long run, say after five to six years," said B Thiagarajan, president, Blue Star.

Whether it's consumer durables, automotive parts or packaging, more automation is the need of the hour. "The automotive parts industry needs more automation of labour. If that can be put in place, we can make good of the opportunity created by China's rising costs," said Vinnie Mehta, executive director, Automotive Component Manufacturers Association of India.

Angshu Malik, chief operating officer of Adani Wilmar, pointed to the difficulty in finding people to label oil baskets manually.

India's advantage, however, lies in the fact that it offers a large market to manufacturers. "Several manufacturers who already have large presence in China are evaluating India and other emerging markets for their next phase of offshore growth. Also, India offers certain industry-specific advantages. For instance, cotton textile manufacturers in India benefit from the easy availability of raw material. Similarly, for engineering and pharmaceutical companies, India provides highly skilled workers with relevant domain knowledge," said Biswanath Bhattacharya, KPMG India director (management consulting practice).