From fearing China to loving it. It's been a quick about-turn for Indian companies, who are now discovering new ways to piggyback the dragon for profits.

By Swati Prasad

When Raghupati Singhania visited Guangdong (China) recently to firm up an alliance with a tyre manufacturer, it wasn't the price competitiveness of the Chinese company that surprised him. Rather, it was the sheer number of CEOs from India that he bumped into during his 10-day stay that amazed this Managing Director of JK Industries. Although the 55-year-old Singhania won't reveal who his visiting peers were in Guangdong, he says that it was a veritable cross-section of Indian industry.

That's a quick volte-face for an industry that until nine months ago was queuing up at Delhi's North Block, where the Finance Ministry is headquartered, for higher import duties on Chinese goods. India's industrialists are queuing up still, but this time round outside the Chinese embassy for business visa. ''The whole world is going to China, and so must we,'' reasons Bharti Enterprises' Rakesh Bharti Mittal, with impeccable logic.

If not the whole of India Inc-a significant part of it is going to China. Apart from JK Industries and Bharti Enterprises, there's Bajaj Auto, Indal, Lucas-TVS, Videocon International, Usha International, Bajaj Electricals, Kinetic Engineering, Samcor and Aurobindo Pharma searching for their corporate yin and yang in China. And it's a mix of strategies that they are exploring. JK, for example, is looking at China as a sourcing base for exports, and Videocon has acquired a plant that makes internet TVS. Usha, Bajaj Electricals, and Bharti, on the other hand, are getting products made to their specifications and importing them; and auto makers Bajaj and Kinetic are looking to source components cheaper.

Advantage China

So, just why are Indian companies making a beeline to the red giant? ''Given the inherent cost disadvantages in the Indian economy, it is only natural that entrepreneurs should look at opportunities like sourcing products from China or acquiring Chinese firms,'' says Ravi Sinha, CEO and group head of SRF, and who's also the head of China cell at the Confederation of Indian Industry.

Apparently, there are five major competitive disadvantages that manufacturers in India suffer from. First, the labour laws. Companies find it extremely difficult to reduce manpower strength, since labour unions invariably come in the way. In an era where products were sold on a cost-plus basis, Indian companies merrily added to their workforce. But now reorganised shopfloors and shuttering of unviable units have surfaced the flab in most organisations. That's preventing not only reduction in wage bills, but also induction of workers with more contemporary skills.

Second, power is prohibitively expensive in India, not the least because supplies are erratic and theft staggering. Third, the road network is abysmal, forcing manufacturers to adopt extensive lead times for both supplies and deliveries. Fourth, ports are big import and export bottlenecks, and to industries such as garments, a virtual bane. And fifth, the cost of money is high. With capital locked up in idle raw materials and finished goods, companies have to borrow from banks, and thus sacrifice a significant part of their profits. ''These inefficiencies will go with time, but I can't afford to wait,'' says Singhania as a matter of fact. ''I have to take part in the world economy.''

That's exactly the opportunity that China, which sold $291.7 billion (Rs 13,70,990 crore) worth of goods and services to world markets in 2000, offers. Take a look at some of the high points of infrastructure in China: electricity costs Rs 2 per unit versus Rs 4.50-5.0 in India; a trucker can do a 600-km stretch in China in 10 hours. An Indian transporter will need three times that. The average turnaround time at the Shanghai port is less than two days; a port like Kandla can take eight to nine days.

Friendly Communism

The labour and financial environment is even better. Privately-owned Chinese companies are allowed to hire and fire workers at will. The presence of a uniform value added tax (vat) system ensures that they don't have to deal with a multiple tax regime like the one in India. Venugopal Dhoot, chairman of Videocon group, reckons that the vat system lowers end-product costs by as much as 5 per cent. Add to that lower interest rates of 6-6.5 per cent (in India the best bank rate is 12 per cent). That apart, the Chinese government helps big manufacturers with soft loans, shared research and development, and mergers and acquisitions. ''In India, the government does not enable; it only disables,'' quips Sinha of CII.

The net result is that China is the largest supplier of most consumer products. It makes 70 per cent of home appliances sold globally; its two-wheelers have 40 per cent share of the world market; and in toys the country's share is even higher at 75 per cent. Till 1985, China and India used to produce 5 lakh tonnes of aluminium annually. ''Today, they are producing 3 million tonnes of aluminium, and India's production is just 6.5 lakh tonnes,'' points out Askaran Aggarwala, Director, Hindalco. ''In fact,'' adds Singhania, ''over the last decade, China has emerged as the world's manufacturing base.''

It is this cost advantage that Indian companies are now trying to tap into to boost their own profitabilities. Bharti Teletech-part of the Bharti group, and which makes telephone instruments-will import 2 lakh hi-tech handsets from China this fiscal. But why would a company with a manufacturing capacity of 50 lakh sets a year of its own not look to becoming a more efficient producer? ''We simply can't match Chinese prices because of low volumes,'' says Mittal as a matter of fact.

Indeed. Bharti sells cordless imported from China at Rs 1,995 after paying a customs duty of over 40 per cent. ''If cordless phones were to be made in India, the costs would have been substantially higher, which is why most manufacturers have stopped producing cordless phones in India,'' says Mittal. That's true of a whole host of other products. A motorcycle headlight costs between Rs 375 and Rs 470 in India. But, if manufacturers source the same from China, the landed price of a headlight would be around Rs 150. The landed price of fermentation-based chemicals from China like Lovastatin, (used to make medicines that lower high cholesterol), works out 20 per cent cheaper than those made in India. Points out a CII official, who is part of the China cell: ''For a lot of Indian companies, sourcing products or outsourcing production is the first step towards acquiring Chinese firms or forming joint ventures.''

Back-Up To China?

That's not all optimism. The obvious lure for Chinese companies to strike alliances is the access to India's price-sensitive market. While the Chinese are great as manufacturers and bulk suppliers, they are not experienced marketers. Which is why there is not a single Chinese brand that is known worldwide. For Indian companies that's opportunity too. JK Industries, for instance, buys light commercial vehicle tyres in China, puts its own label, and ships them out to customers in South East Asia and the Middle East. By doing so, JK is able to charge a brand premium (even if only marginal) that the Chinese supplier can't. ''Our next step is to sell JK tyres made in China to the Chinese people,'' says Singhania.

Some others, like Shekhar Bajaj of Bajaj Electricals, see that there is an opportunity for India to become ''a back-up'' supplier to China. He expects that to happen in four to five years. In the meantime, he wants his company to acquire cost advantages comparable to China's. ''We missed the bus once by waking up late to globalisation. We shouldn't miss it again,'' says CII's Sinha.

But there's a question that is nagging some Indian CEOs, and that has to do with China's entry into the World Trade Organisation, which advocates free trade. Such an admission, some say, would require China to put an end to a lot of direct and indirect subsidies. In fact, the process has already started and some state-owned companies are caving in. Without subsidies, the argument goes, the cost of manufacturing in China will soar.

Sinha disagrees. ''The death of public companies in China will ensure that those who survive, inherit a (competitive) legacy almost free of cost. So, they will continue to have a cost advantage on their fixed costs.'' But the fact is that Indian industry needs to put its house in order. If it does not benchmark its products against the best in the world, then it leaves market gaps open not just to China but to anybody who's more competitive than India. ''In the end,'' Singhania points out, ''India has to be built on the strengths of Indian industry.''

And if that means having to ride the Chinese dragon, so be it.

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