Monday, 25 May 2009

Five things China can learn from India - 1.Cost competitiveness

This might come as a surprise, but China is not as cost competitive anymore. China has a cost problem it does not recognise.

I am alternating posts between what India can learn from China and what China can learn from India. This is the first of what China can learn.

China’s great strength is that it can produce at low cost and on scale. There are other countries which are cheaper eg Vietnam. But none could match the scale and deliver the cost advantages. That was so in the past. Not true anymore. India is cheaper and can match the scale.

What has happened in China is that costs have risen and risen in the eastern seaboard where much of the economic activity has happened. And the currency, the RMB has strengthened. The twin impact has been that China no longer enjoys the massive cost advantage it had.

Like for like, India is cheaper than China. Cost of living in a top city in India vs a top city in China. Cost of labour in a small town in India vs a small town in China and so on. India is 20% cheaper. Subsidies distort the picture on both sides, but if you strip them away, this is the truth. One of my biggest surprises when I came to China was that everything was more expensive than India. Daily necessities like milk, bread, vegetables, fruits. Utilities like power, water. Cost of transport. Everything. Even toys are more expensive in China than in India.

This might sound counter intuitive because even now India is flooded with cheap Chinese imports. I predict that soon, this will dry up. Costs have crept up and China has not waged war on costs – this is a little bit like boiling a frog slowly. With economic prosperity has come some complacency in China. Costs are not attacked in business with the same intensity as in India. Indian business attacks costs like a maniac – without that they wouldn’t survive. China can survive for now, because there is simply no other option for production on such scale in the world. But margins are being squeezed. When a competing nation with the same capacity for scale comes, China will lose, if it doesn’t wage war on costs. This is one reason why its not succeeding in services.

Why is India not taking advantage of this cost competitiveness. It is, but on a smaller scale. Infrastructure is the bottleneck, as my earlier post observed. The American importer would rather pay 2 cents more to be sure that he would get delivery on the committed date.

The best time to cut costs is when the going is good. China , beware. Now is the time to learn cost competitiveness from India.


Hang said...

Many things in China got expensive in the past five years. The inflation rate was really high before the credit crunch. The RMB appreciates against major foreign currencies quickly. These factors have weakened China's competitiveness in terms of cost. Luckily, the logistics service in China is very good, which in my opinion may have offset some of the lost cost competitiveness.

Ramesh said...

Yes Hang, this is a recent phenomenon and my view is this is not fully being recognised. Yes infrastructure is China's key strength, but it should not lose its other key strength as well.

Adesh Sidhu said...

Not only India, Mexico will also emerge as a low cost option for manufacturers in next five years. Low cost labour was one of the biggest reason and that gap is narrowing now.

rads said...

I dunno 'bout China but in India cost of living is more compared to US. And I'm conting the cost of living by the wages an average person earns every month and the amount he would have to spend that same month for surviving. In US he earns, say 2000$ per month and he would spend max. 1000$ but in India he earns 35k Rs. and has to spend 20k Rs. to survive, atleast this is the case with cities like B'lore, Hyd, and Chennai. I may be wrong on a large scale but this is out of my experience. But I guess I went off topic coz the discussion is on China and India.

Ramesh said...

@ Adesh - Yes Mexico is already there and sometime in the future Africa will emerge

@Rads - you are right, the relationship between earnings and costs is a different equation and countries will be positioned much differently as you have said. But in absolute cost of producing a product or service, China is losing out to India.

@Adesh & Rads - I still can't post a comment on your sites although I am reading all your posts. Nice one rads on fractal art and the tips on wallpaper. Adesh - missed you for a few days but you are back with your inimitable post on Meeting customer expectations. You've brought out the essence of marketing in a paragraph. Great stuff.

Ming said...

It is an interesting read. I think that Chinese industries and governments have realized this aspect. That's the reason why there is a big push to "go west." The challenge to India is to capitalize on the cost differentials here, and to open as many factories as possible to move people from subsistence farming to unskilled manufacturing. India needs an export-driven industrial policy to get people out of poverty.

I hope Ramesh or other Indians can shed some light on cultural aspects as well. For example, I am always puzzled why the Western music is so popular in China (as illustrated by the number of kids learning piano and violin), but not in India. Or at least, that's my impression.

Ramesh said...

Thanks for dropping by Ming. Yes, the "go west" move is in this direction. India absolutely has to industrilaise more - there is no other way out of poverty.
Thanks for the idea of sharing cultural similarities and differences. Its amazing how much of similarity is there - far more than differences. Maybe I'll post on that too.

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