Column : Lessons from the Dragon

Written by Arindam Bhattacharya | Updated: Apr 12 2011, 08:12am hrs
China regained its position as the largest manufacturing nation after nearly 150 years, dethroning the US, which reigned for about 100 years having taken over from Great Britain towards the beginning of the 20th century. In recent months, I have been part of several discussions with leaders from the manufacturing sector from around the world on this shift in leadership. These discussions usually feature how China, in recent years, is shifting the focus of its manufacturing industry from low-end, labour-intensive to higher value-added and IP-rich products, and the central role played by the Chinese government in the development of their manufacturing sector.

Starting sometime in the 1980s, China was rightly seen as the world leader in manufacturing of low-cost and/or labour-intensive products, ranging from textiles, toys and consumer durables to electronics and automotive components. Hardly a cause for alarm for leading global manufacturing companies. But few realise that China has also become the world leader in many industrial products and capital goods. It is the global leader in thermal power equipment, wireless telecom equipment, marine containers, large cranes, textile equipment and has two of the worlds top five railway rolling stock manufacturing companies...

This recent shift presents a fast-growing competitive challenge to the incumbents in these industries from the developed countries. The incumbents believe that they are competing not with individual Chinese competitors but rather China Incan industrial ecosystem consisting of the companies, the government and academic institutions with none playing by the rules, in particular, on intellectual property rights. There is no doubt that the Chinese government has led the development of the manufacturing sector. The recent shift into value-added products has been driven by its explicit policy on developing pillar industriesstrategic industries where they want to build globally competitive capabilitiesas described in the five-year plans. To achieve this shift, China has exploited different policy levers that include: (i) creating huge national demand (can vary from 15% to 80% of global demand) through large investment programmes, (ii) promoting local ownership through state participation and/or limiting foreign ownership, (iii) offering preferential market access to local firms or restricting participation of foreign owned firms, (iv) setting standards that influence local demand and favour local firms, (v) offering fiscal incentives and preferential access to funding to local firms, and (vi) facilitating technology absorption and development by local firms.

Many of these policies are seen by global firms as the price of doing business in Chinathe largest market in the world for many products and services. Of these, the one on technology absorption and development is perhaps the most critical for global competitiveness and which gives sleepless nights to western firms. There are two parts of this China IP development strategy. One part is using the power of the state to access technology based on terms of trade, i.e., access to China market vs IP transfer through partnerships. Local firms then digest, optimise and improve transferred technology. The second part of this policy lever is to build domestic capability through technology parks and business incubators with access to funds and technical support, create technology transfer markets and strong linkages to universities, and develop China-specific technical standards and government testing institutes.

This understanding and knowledge about China and its industrial strategy can be the subject of a good academic paper. What use is it to India and its industrial companies

Our finance minister in this years Budget speech said is imperative that the growth in manufacturing sector picks up. We expect to take the share of manufacturing in GDP from about 16% to 25% over a period of ten years. While this is a bold aspiration for the nation, despite having the second-fastest growing manufacturing sector in the world, the share of manufacturing in GDP has not changed much over the past decade.

Clearly, business as usual is unlikely to achieve this aspiration. What, then, should be Indias strategy for the sector that will change this trajectory This is where Chinas experience becomes relevant and several lessons can be drawn.

Chinas success has resulted from making clear choices, and then developing policies and deploying the states full resources to support the choices made. China made two fundamental choices. The first choice was to create manufacturing zones with the best enabling environment in terms of the infrastructure, ease of setting up new businesses, and flexible labour policies to attract foreign investment and become the factory for the world for labour-intensive products. It achieved this objective spectacularly and, in just two decades, became the largest manufacturing economy in the world. The second, more recent, and perhaps the more important choice was on creating pillar industriesindustries seen as critical for the countrys security and long-term manufacturing competitiveness.

If we have to achieve the bold aspiration that we have set for ourselves, we have to make our own choices. We face well-recognised challenges on creating new industrial capacity in terms of access to land and raw material, and an enabling environment for ease of operations, including flexibility in employment. Solving these challenges will require us to make choices. A more fundamental choice is on building our own pillar industries and developing IP, and the role of the government in this development. We can follow the current trajectory laid out after liberalisation, of limiting the role of the government, and not be seen as playing favourites and letting the market forces do the job. Or like China (and other emerging countries) have done, believe that at this stage of our economic development, the state has to play a key role in shaping the future of the industry, and implement policies in the short and medium term that will specifically guide the choices.

Indias manufacturing sector has an unprecedented window of opportunity to determine its future. Over the next two decades, India will make large investments in infrastructure, defence equipment and new manufacturing capacity. At the same time, millions of new consumers will come into the market and will need all manners of goods and services. We can use this opportunity to create our own terms of trade to build local capabilities and knowledge. The choices we make today will determine not only if we achieve the target of 25% share of GDP, but more importantly, the future global competitiveness of the manufacturing sector.

The author is managing director, the Boston Consulting Group, India.

These are his personal views