RANBAXY (GUANGZHOU CHINA) LTD. The first Sino-Indian JV, Ranbaxy (Guangzhou China) Ltd. raked in $12 million in 2003

In January 1999, when Venugopal Dhoot of consumer durables major Videocon International went on a reconnaissance trip to Shanghai, he was floored by what was on offer: The provincial government was willing to lend 100 per cent of the cost of Videocon's proposed internet TV plant-cum R&D centre; the land was being offered at a concessional rate; turnaround time for ships at the Shanghai port was much shorter, compared to 16 hours in India; power cost a bare 4 cents a unit, a third of India's; highly skilled design engineers were available for as little as Rs 5 lakh a year, a tenth of what they cost in India; moreover, Videocon could also tap the booming Chinese market by paying a value added tax of just 7 per cent. Losing no time, Dhoot set up Videocon International in February 2001 to produce internet TVs. Last year, it churned out 80,000 internet tvs. This year it will produce a quarter more. Says Dhoot, Managing Director of Videocon International: "The China proposition is simply irresistible."

India Inc. couldn't agree more. Since the late 90s, when Indian companies sat up and took serious note of the Middle Kingdom, fear of China has gradually been replaced by a sense of opportunity. Now that the expected decimation of Indian manufacturing by aggressive, low-cost Chinese manufacturers has not happened, Indian companies have suddenly realised that it makes a lot of sense to set up manufacturing units in China to take advantage of the country's low costs and superior infrastructure to tap not just the local market, but big neighbouring markets such as Korea and Japan.

According to industry chamber, CII, there are some 70 Indian companies (including Ranbaxy, Orchid Chemicals, TCS, Infosys, Sundram Fasteners, Essel Propack, and Aurobindo Pharma) in China with an investment of around $65 million. (The estimate is on the lower side; just the eight companies listed in accompanying graphic The China Brigade, have investments worth more than $80 million.) At the moment, the industries that have established a foothold in China are limited and include pharmaceuticals, automotive, electronics and electricals, packaging, and software. Needless to say, more industries (such as footwear and textiles) could soon make a beeline for China. Says Professor Manoj Pant, School of International Studies, Jawaharlal Nehru University: ''Cost competitiveness alone is going to drive companies to China.''

China Calling

The smarter companies figured that out long back. Take Ranbaxy, for example. It entered China way back in 1993 and set up Ranbaxy (Guangzhou, China) Ltd to manufacture a generic drug, Cifran. While the initial years proved difficult, Ranbaxy's patience and commitment have paid off. Last year, the joint venture, which started production in 1995, raked in $12 million (Rs 55.2 crore at last year's exchange rate), and will break even next year. It has a host of new products in the pipeline targeted at the growing cardio-vascular, gastro-intestinal and masculo-skeletal diseases. Says a Ranbaxy spokesperson, explaining why a local manufacturing plant is critical: "China is a market where hospital sales account for over 90 per cent, and pricing is controlled by the government."

With Ranbaxy showing the way, a gaggle of Indian pharma companies has followed suit, including Dr Reddy's Labs, which manufactures bulk formulations, tablets, and capsules in Jiangsu province, and Aurobindo Pharma, which has invested $23 million in a joint venture to make bulk drugs. The latest pharma entrant is-and the biggest investor so far-Orchid Chemicals, a Chennai-based company that set up its North China Pharmaceutical Corporation in 2002 and is already exporting 35 per cent of total production of cephalosporins back to India. What has helped pharma companies make up their mind is the fact that Chinese bulk drug manufacturers are ace price warriors. In the late 90s, for example, Chinese companies started selling norfloxacin in India for half the domestic price. Dr Reddy's, one of the big norfloxacin manufacturers in the country, had to abandon the product line. Says a spokesperson for Dr Reddy's Labs: "It's impossible to compete with Chinese bulk drugs unless you manufacture in China."

A similar, if somewhat different, factor played on the mind of Sundram Fasteners' Suresh Krishna when he approved a plan to set up a 6,000-tonne fasteners manufacturing plant in the Haiyan Economic Zone, 100 km from Shanghai. Krishna found that he was losing his big American automotive customers in China such as General Motors because local rivals were not just cheaper but could also supply just in time. Fasteners' new $5-million plant, then, gives Krishna an opportunity to tap both the growing automotive market in China and customers that his company supplies to elsewhere. "The whole idea was to move in quickly and take advantage of a growing domestic market and use China as a base for exporting to other Asian countries," says Krishna. For the first two years of production, Fasteners has been given a 100 per cent tax holiday, which will come down to between 70 and 40 per cent in the two years that follow. That apart, Fasteners, which got the land at concessional rates, will get a full refund of the value added tax in the first four years. By the way, it took the company less than 18 months from application to commercial production.

K. RAGHAVENDRA RAO MD, Orchid Chemicals The Chennai-based company has made the biggest investment of all Indian firms in China

The communist government's remarkably industry-friendly approach has charmed India's it sector, too. Tata Consultancy Services has a 160-member outfit in Guangzhou. Infosys has offices in Beijing and Shanghai with 150-odd people, and Polaris has plans of setting up a subsidiary. Says Girija Pande, Regional Director (Asia-Pacific), TCS, which plans to use China as a base for Japan, South Korea and Taiwan: "It is the single-minded devotion of the administrative machinery and the political system in China to develop the information technology sector without any barriers that prompted us to set up a wholly-owned subsidiary in the country."

Companies that have no immediate plans of setting up a manufacturing base in China are settling for sourcing. JK Industries is one such. For the last three years, it has been sourcing tyres from China and selling them in the Middle East, Africa, South America, and parts of South East Asia. "By sourcing from the 'factory of the world', we are trying to not just cut costs, but also synthesise our technical expertise and global marketing skills to expand our tyre business in international markets," says Raghupati Singhania, Vice Chairman of JK Industries. Another company, Bajaj Electricals, is treading the same path. It has tied up with about a dozen manufacturers to source electrical appliances. Says Shekhar Bajaj, Chairman, Bajaj Electricals: "China's cheaper costs mean that we sell more appliances at competitive prices in India." Interestingly enough, appliances sourced from the bigger suppliers are co-branded, but those from the smaller ones carry only the Bajaj name.

Despite China's compelling proposition, there are some issues. China's legal system is rather complex and each province has its own set of laws in addition to the central government's. To make matters worse, most provinces have not codified their laws. So, there's a lot of grey area that Indian companies must deal with. TCS, for one, has tried to deal with that problem by creating its own compliance manual. Then, not all manufacturers are equally cost efficient or good with quality. JK Industries had to help its Chinese suppliers upgrade their quality before starting supplies. Just the same, if the new China story unfolds the way it is expected to, then the number of Indian companies getting themselves an address in the Middle Kingdom will only soar.

-additional reporting by Aditya Wali, Swati Prasad, and Nitya Varadarajan