Fifty-Fifty: Can ‘ABC’ Rejuvenate Indian Industry?
ABC? Well, that is the latest buzz in nationalistic circles. And in some economic circles too. In fact, in government, the hum has just gotten louder. Especially, after the Press Note 3 (Series 2020). Pray, you may ask, what is ABC? And what is this Press Note all about?
ABC is ‘Anything But China’! Yes, you heard it right. Anything But China. ABC.
And the Press Note (PN 3 of 2020), of April 18, 2020, issued by the Government of India made a critical change to the Consolidated Foreign Direct Investment Policy (FDI Policy) seeking to “curb the opportunistic takeovers/acquisitions of Indian companies due to the current pandemic”, and which will henceforth require prior approval of the government for FDI by any entity based in any country sharing a border with India … the primary intent being to stem any attempts by Chinese firms to take control of Indian firms when the economy is in its current downward spiral.
China's central bank People's Bank of China (PBoC) picked over 1% stake in India's largest mortgage lender HDFC Ltd., and that is what perhaps triggered India’s sudden angst against China, and echoes of ABC. Meanwhile, of course, President Donald Trump has been going ballistic on what he has chosen to nomenclaturise as the ‘Chinese Virus’, creating a pronounced anti-China sentiment, strengthening a call for ABC. Trump is adamant that the Chinese have cheated us all; and he is, in his usual inimitable style, also very sure that his ranting against the Chinese is neither racist nor xenophobic. For once, Trump is not alone.
Australia has called for an inquiry into the origin of the virus. The Chinese Embassy in Berlin sparred publicly with the German newspaper Bild after the tabloid demanded US$160 billion in compensation from China for damages to Germany from the virus. In the past several weeks, at least seven Chinese ambassadors — to France, Kazakhstan, Nigeria, Kenya, Uganda, Ghana and the African Union — have been summoned by their hosts to answer accusations ranging from spreading misinformation to the “racist mistreatment” of Africans in Guangzhou. Many governments around the globe want to sue Beijing for damages and reparations. There is a visible backlash building up against China for its initial mishandling of the crisis that helped let-loose the coronavirus on the world, creating a deeply polarizing battle of narratives and setting back China’s ambition to fill the leadership vacuum versus the United States. So, the ABC sentiment is an emerging reality with many asking even a sequential question: CWDWC? Can We Do Without China?
The first visible sign that ABC may actually be taking effect is the fact that there has been a 67% decline in take-away ‘Asian’ meals in the US. In that country, ‘Asian’ food is synonymous with ‘Chinese’ food, as distinct from ‘Indian’ food or ‘Japanese’ food. Some of the drops in volumes may be because of the pandemic and fears of eating outside food, but a lot surely has to do with a rising sentiment against China, especially in the US. Of course, this supposition may be a bit pre-mature, even perhaps a bit far-fetched, but it is nevertheless an indicator of what the future may hold.
But let us look at this practically, and dispassionately. ABC is a near impossibility at the consumer level as practically every electronic device, household product, even tourist trinket – everything sold in most countries globally, India included, is manufactured or assembled in China. China’s efficient manufacturing base is virtually impossible to replicate elsewhere on the planet, at least in the near foreseeable future. Change is only possible if there is an overt and visible backlash against global companies, especially American, favouring cheap labour over ethics. Manufacturing in China, and sending out to the world, has been the winning formula for years now for most global companies … from luxury Italian brands (which is how some say the coronavirus got to Italy) to the likes of Apple who ship most of their aspirational iPhones and iPads from China. If that doesn’t change, nothing really will change. Or can change.
For a slightly better perspective on the current anti-China stand-off, it may be useful to go back a little in history. Way back in the 1800s, an estimated 33 per cent of the world’s manufacturing output came from China. Defeats in two Opium Wars later, this share had plummeted to a lowly 6 per cent by the 1900s. For decades thereafter, China remained in doldrums as an economic force. In 1980, it was the 48th largest economy in the world. In 1982, with GDPs at roughly US$200 billion, Indian and Chinese economies were almost similar in size.
In 2018 China had a GDP of US$13.6 trillion, and was the second-largest economy in the world, behind the US (US$20.5 trillion), but far ahead of Japan (US$4.9 trillion), Germany (US$4.0 trillion), Britain (US$2.8 trillion), France (US$2.8 trillion) and India (US$2.7 trillion). In 2018, China was also the largest trading nation in the world. Its exports were worth US$2.5 trillion, substantially ahead of the US (US$1.6 trillion). And in 2018, China attracted over US$203 billion worth of net foreign direct investment (FDI), much more than Germany, Japan, UK, France as well as India (US$42 billion), and second only to the US (US$258 billion), showing how monumental foreign investment in China has become. So, China is no push-over. ABC may not be easy for China-haters to pull off.
At US$ 2.5 trillion of exports, China is a formidable foe for anyone, the US included. From electronics to machinery to industrial equipment to computers to even toys and games, China is the factory to the entire world. Taking on its economic might, stopping its production juggernaut is difficult, if not impossible, for even the US.
The dependence of the US on China cannot be understated at close to US$ 420 billion. For India too, imports of US$ 75 billion from China are not something you can scoff at. Or try to forget about.
The current rupture between the US and China does not really come as a surprise to many. As is the case with interpersonal relationships, geopolitical codependency can lead to conflict, especially if one partner starts to go its own way. And China’s last decade of rebalancing – shifting away from exports and investment to consumer-led growth, from manufacturing to services, from surplus saving to saving absorption, and from imported to indigenous innovation – did indeed put it on a very different path from the US. This turned out to be an increasingly uncomfortable development for a China-dependent US. Kind of feeling a bit left behind, America felt scorned, and that scorn led first to blame and is now headed to open conflict.
The backlash against China is already visible: earlier this month, Japan earmarked US$ 2.2 billion to help its companies shift production out of China following the coronavirus pandemic. Many sectors, such as pharmaceuticals, automobiles, agriculture and energy, have come under pressure amid the global health crisis, as their reliance on China and limitations on international logistics have weighed on supply chains. These supply chains can get moved into countries like Vietnam, Bangladesh, Turkey, India and even Brazil. Among the global firms that have already shown interest in India are US-based makers of medical electronics products Teledyne and Amphenol, and medical equipment makers such as Johnson & Johnson. Ministers in the government are actually tom-toming a figure of over 100 global companies that are in dialogue with Indian embassies and ministries. “A phased manufacturing plan (PMP), with a supportive regulatory and policy framework, can do wonders for India,” believes Gurdeep Singh, who once headed Aircel and then ran ADAG’s Reliance Communication. “But it requires astute planning and unwavering adherence to the agreed plan, no matter what,” emphasizes Singh. Former bureaucrat, Bharat Salotra, who ran Alstom India & South Asia, has another dimension to add, “This decade is India’s last chance to take advantage of the demographic dividend. If we don’t capitalize on the opportunity thrown at us by this crisis, our demographic dividend can turn into a demographic disaster”.
A little less than 15% of India’s imports come from China. That is not insubstantial … more so since our shopping list is diverse … electronics and engines to boats, ships and medical equipment.
Nevertheless, sensing an opportunity in this mounting ABC sentiment, the Government of India is said to be developing a land pool nearly double the size of Luxembourg (which is about 243,000 hectares in area) to lure businesses moving out of China, as per media reports. A total area of 461,589 hectares has been identified across the country for the purpose. That includes 115,131 hectares of existing industrial land in states such as Gujarat, Maharashtra, Tamil Nadu and Andhra Pradesh. Sandip Das who had a very distinguished inning as CEO of Hutchison, Maxis and Reliance Jio has an interesting take. “We can make inroads certainly, but not replace China. We must creep in quietly and not be confrontational. Their retaliation can hit us hard. Speed is of the essence as the world is sensitive about China right now. We are not the only country that’s trying to capitalize on the opportunity!” Das makes one very telling point – that about the creeping in. Our biggest negative in this ‘replace China’ drive could well be the media noise we are making … for our competitors like Vietnam, Taiwan, Russia, Israel, Mexico and more, having been forewarned could well be forearmed.
Perhaps the most successful ‘Make in India’ initiative in the past few years has been in the business of mobile manufacture.
Pankaj Mohindroo, Chairman of the Indian Cellular & Electronics Association (ICEA) who was also Chairman of the Fast Track Task Force set up by the Department of Electronics and Information Technology, Government of India to transform India’s mobile and electronics manufacturing eco-system in order to boost domestic manufacturing has a very different take. He says the manufacturing and assembly market for mobiles in India is today worth Rs. 2,10,000 crores. Mobile exports from India today top Rs. 26,000 crores, up from a mere Rs. 1300 crores two years ago. “Tremendous progress has been made in the domestic manufacture of mobiles,” stresses Mohindroo. “Chargers/ adapters, wired headsets, keypads, USB cables, PCBAs …every component and sub-part of a mobile is a big volume and value opportunity, and we need to intelligently choose what to pursue and excel in globally”. Mohindroo could well be right. In just the mobile business, manufacturing of the entire mobile handset is not the target opportunity. Besides the components listed above, the mobile battery, the speaker/mic, the die-cut parts, the connectors, the camera module (sensor, lens, casing), the vibrator, the display, the touch panel, resistors, the capacitors, the diodes and later the memory and IC’s and more are all individually, and together, the opportunity to pursue, and become world-beaters. And each of these components is worth thousands of crores in value. Mohindroo makes another very valuable point – that China makes 75% of the world’s mobiles and 50% of the world’s electronics. For this humongous base, nevertheless, China imports US$ 400 billion worth of components and material; but parallelly value-adds and exports mobiles & electronics worth US$ 600 billion. “They still import a lot of the intelligent stuff like the semiconductors and the ‘memory’ components from Silicon Valley, Japan and Korea”, says he. “But the value-addition in China in an iPhone is 40% perhaps, and maybe 95% in a feature phone”. So, India needs to clearly focus not on a micro-target of value-adding by import substitution in India, but catalyse a huge momentum for exports, and value addition will follow step-by-step in due course. In a few years, we will be NFE positive and there will be huge direct benefits of employment to millions, revenue generation and skill development.
India may actually need to take a more pragmatic view of ABC. China’s exports to India have climbed from US$ 1.83 billion to nearly US$ 75 billion in less than 20 years. Correspondingly, India’s exports to China have gone up from US$ 0.92 billion to US$ 17.96 billion over the same period. We are clearly heavily dependent on China. Getting into an antagonistic position vis-à-vis China may therefore not be an entirely bright idea.
Which is why, Akhil Gupta, Vice-Chairman, Bharti Enterprises & Executive Chairman, Bharti Infratel suggests both caution and a step back to strategise and perhaps rethink ABC. Why should ABC have to be Anything But China, he asks? Why can’t it be Apna Bhai China? Gupta’s suggestion is actually very sensible. China has the capital and the willingness to invest in India. The PN 3 of 2020 notwithstanding, China may not be altogether a negative partner to do business with. India can ring-fence some of the security-prone tech businesses and risk-prone financial businesses, but let China invest in a whole lot of other sectors where investment is in real short supply, and very welcome. Gupta, in fact, goes back a bit in time to the 1994 plague in Surat. He says India had just opened its economy and many FIIs had very recently then invested in the Indian markets. Because these FIIs were now heavily at risk in India, they went out of their way to globally downplay the Surat plague, passing it off as highly localized and with no repercussions on the financial markets. Says Gupta, if these very same FIIs had had no skin in the India game, the narrative could have been extremely negative. Moral of the story: the first step in protecting yourself from the ‘enemy’ is to get him to invest in you!
ABC has two facets. One, which says let's go out and grab the likely vacuum created by the anti-China feeling globally, pro-actively and aggressively. The other side of the coin is to look at China as a ‘frenemy’, a friend and an enemy, rolled into one. And play every situation, every deal, every opportunity by the ear.
To weigh the benefits of what the ‘frenemy’ approach could do, just look at the recent Facebook investment in Reliance Jio – a whopping Rs. 43,574 crores for a 9.9% stake. Why is Facebook suddenly so fond of India? There are many theories doing the rounds, but one of the prominent ones is that Tik-Tok’s meteoric rise in India has rattled Menlo Park. Google and Facebook today corner and pocket 80% of India’s digital spends. What if India were to allow, in fact, roll out a red carpet to the likes of We Chat (Facebook plus of China), Sina Weibo (China’s Twitter), Tencent QQ and Tencent Video (a competitor to YouTube), Baidu Teiba (the Chinese equivalent of Google), Douban (lifestyle forum), Zhihu (Quora in China), Meituan-Dianping (Yelp type), Toutiao (Wikipedia plus Google) and other Chinese successes? Methinks they will do to the Indian digital market what Oppo, Xiaomi, One Plus and Vivo have done to our mobile market. The Government of India can mandate that Indian entities will retain 51% in these new ventures, or other similar protections. This will bring in huge investments both from the Chinese, as well as the threatened US behemoths, and India can gain from both. And ABC for us can be America +Bharat+China! There is a good fifty-fifty chance this would work.
All charts in this column are courtesy of Abhishek Karnani of Free Press Journal (FPJ) from their recent report on post-COVID economy.
