When China meets India

Any Chinese splurge of cooperation is viewed with one eye on suspicion and another on pondering. In May, Director General of Asian Affairs Department of Foreign Ministry of China, Huang Xilian’s benevolence to contain wide trade deficit by combining Made in China 2025 with Make in India signaled an encouraging tone to mitigate the trade disputes with India. 

The statement seems confusing as it did not reveal how to contain trade deficit. Conceptually, Made in China is different from Make in India. Even though they are both for development in manufacturing, they are at different stages to trigger development. Make in India reciprocates the first stage of Chinese manufacturing, embracing intermediate technology and volume production. Made in China 2025 embarked on development on advanced stage to re-built Chinese manufacturing hub with a qualitative workshop. It aimed to transform China from a manufacturing giant into a world manufacturing power. Pointedly, it targeted to develop ten areas of hi-tech manufacturing - integrating new Information Technology in manufacturing, NC control tools and robotics, aerospace equipment, high-tech ships, energy saving vehicles, power equipment, biological medicines and others. 

Trade deficit between India and China was spurred by some few electronic items. They were large imports of mobile phones and computers. They account for over one-sixth of India’s trade deficit. Both these two items did not find place in Made in China 2025 programme. Given the trade structure between the two countries and Made in China programme, one wonders how will it energize Make in India to off-set the rising trade deficit with India.

Will China import more from India to support its Made in China programme? Or, will China invest in India to manufacture component and parts to support its Made in China vision? 

China is loosing sheen as the low production hub. Wages have been rising with American pressure to delink the renminbi with US dollar. Corporate tax was unified, resulting IN the end of concessional tax regime for the foreign investors. 

The only way China can increase its imports from India and buttress its Made in China is to encourage India to develop small and ancillary industries as a “Supporting Industry”. Supporting Industry concept was originally rooted in Japan. It gained popularity in mid-1980’s, when Japan’s export expansionism was drubbed by yen appreciation by USA, UK, West Germany, France and Japan in an agreement, popularly known Plaza Agreement.

Broadly, supporting industry is defined to produce parts, components, casting, forging, plastic moulds and tools to support assembly type industry. Assembly type industries comprise of automobile, electrical and electronic equipments. Thailand defined supporting industry as the entrepreneurs who produce parts, components that are used in final assembly processes of automobile, machinery and electronic manufactures.

The concept of supporting industry was quickly adopted by major Asian newly industrial emerging economies (NIES), viz. Thailand, Malaysia, Indonesia, Philippines and Vietnam later. The Plaza Agreement, which forced Japanese yen to appreciate from 240 to 160 yen per one US Dollar at one stroke in 1985, made the Japanese export products costlier. This forced Japan to dislocate its production base from Japan to low cost countries in Asian NIES. But, the parts and component manufacturers in Japan, who were supporting the Japanese assembly type industries as sub-contractors, were not available in Asian NIES. This ushered the development of supporting industries in Asian NIES.

From Japanese manufacturing perspectives, the development of supporting industry became essential to be competitive in the global market. One of the reasons for the success of Japanese assembly industries even after yen appreciation was its success in building up competitive supporting industry in low cost countries. The diversity in Asia NIIES helped to become the central supply chain of Japanese manufacturers. 

India lagged in developing supporting industries. There is no concept of supporting industry under Micro, Small & Medium Enterprise Development Act, 2006.  Indian small and medium industries are at distance from the real meaning of supporting industry. The main aim of Indian small and medium industries is employment generation, irrespective of technology up-gradation and growth in financial strength, which are required to develop a competitive assembly type industries such as automobile, electrical and electronic industries. Ironically, India made a fast growth in automobile, but lagged in development of supporting industry. This results imports of component and parts whenever any new model is introduced.  

The development of supporting industry was struck by policy constrains of Government of India. There were two policy impediments. They were cap on investment ( Rs 10 crore in plant and machinery) and foreign investment ( upto 26 percent). These caps restricted the scope of technology up-gradation and increase financial strength of the small and medium scale units . They are the two most essentials to develop supporting industries. 

Similar on the heels of Japanese manufacturing model, development of supporting industries should be a new era for SME in India. China can take a lead in fostering the supporting industry in India by pouring investment and create a strong supply chain to support its Made in China. This will usher a greater scope for India to export to China, which, in turn, help in reducing trade deficit.

The advantage for China to engage India as supply chain is India is emerging as a low cost production base after Chinese renminbi appreciated by over 25-30 percent under US pressure. 

 Correspondingly, it will play an active role in pushing the Make in India programme. In this process, a coherent combination between Made in China and Make in India can be ideal to contain trade deficit.  

Currently, China is on overseas investment binge. It is the third biggest global foreign investor. Unbundling cap on investment and foreign investment in SME and mellowing the security threat can produce India an investment friendly turf for Chinese investment.  Development of supporting industry should be viewed a strong pillar for the new era of manufacturing sector which is tending towards automation and digitisation.