Developing Trade Relations Between China and India
The long, slow and often chilly courtship between China and India is finally hotting up. From bilateral trade worth just US$1bn in 1997, trade between the two countries hit US$18.7bn in 2005, up nearly 40 per cent on the year. Both countries predict two-way trade to surpass US$30bn by 2009.
China last year surpassed the United Arab Emirates to become the second-largest exporter of goods to India after the US. More than US$8.9bn worth of largely low-cost manufactured goods were shipped to Indian ports in 2005. India, meanwhile, boasts a US$843m trade surplus with its giant neighbour, largely due to soaring shipments of iron ore to support China’s booming steel industry.
Yet trade still remains a fraction of what it could be. This is born partly out of fear of the unknown. India’s elected politicians and unions dread China’s low-cost manufacturing clout, and have done for years. In turn China, increasingly used to dealing with acquiescent South-East Asian countries and fawning western states, quite simply can’t work India out.
“The Chinese see India as complicated. They can’t see where they’re going to make money,” says Lord Meghnad Desai, professor at the Centre of the Study of Global Governance at the London School of Economics. “It’s not so much a language as a culture barrier. They can’t see how India works, how this chaotic place works. But they will. Give them 10 years. They should build India’s infrastructure. They’re certainly welcome to come and try.”
Then there’s the issue of the 1962 border war between the two nations that led to the ousting of India’s then prime minister Jawaharlal Nehru. China’s victory still rankles Delhi and, though younger politicians and businessmen downplay the issue, it’s clearly the biggest barrier to bilateral trade in the eyes of India’s powerful older clique of business families.
“India and China are not seen as two markets working together,” says J.J. Irani, director of Tata Sons, the investment division of Tata Group, India’s largest privately run corporate. “The war did not help, and there’s a lot of uncertainty [on the Indian side] about going into China. We need to break down the feelings of suspicion, the fear of the unknown.”
Born two generations and a globalized world away from Irani, Saurabh Dhoot, a scion of one of India’s richest families, simply looks bemused at the question. “Questions of enmity between the two don’t really come up any more,” says the 22-year-old director of the Chinese operations of Videocon, a leading family-run Indian consumer goods manufacturer. “Opportunity is opportunity and business is business. We can’t allow that historical baggage to weigh us down forever.”
All agree that Beijing and Delhi need to get closer; something both are clearly eager to do. In April 2005, Chinese premier Wen Jiabao visited India and boldly put the border issue on the table. This year, Indian prime minister Manmohan Singh will make the return journey, with bilateral as well as regional trade very much on the agenda.
Fear and confusion between the two countries, which between them boast more than a third of the world’s population, has traditionally worked to the benefit of rival nations and trading blocs, notably the US, Europe and Japan. Since emerging from its shell in 1978, China’s relationship with the west has driven its export-dependent economy. And India, since taking its own market-orientated stance in 1991, has focused on burgeoning trade in information technology and financial services, notably with the US, where many of its corporates have secondary listings on the New York Stock Exchange. By ignoring each other, synergies between India’s specialist industries (high-tech software and IT services) and China’s (low-cost, large-scale manufacture of hardware and components) have been largely squandered.
“Even though [China and India] export a lot of products to the west, a lot of the value and profits are owned by western companies,” says Winston Mok, chief executive of Invenite Capital in Singapore. “We [in Asia] do the sweat, they enjoy the profits. We need to control more of the value chain – intellectual property, branding, marketing, sales. The key is how the two can work together to build Asian-global companies that sell our brands to the west, rather than letting the west extract a lot of profit from us.” Now, would-be global brands are on the rise in both countries – there’s Infosys, Pantaloon and Tata from India; and Haier, Lenovo and Li Ning in China. The process has begun, but it will take time.
Many argue for the drafting of a formal free trade agreement (FTA) between the two nations, which would push bilateral trade into the stratosphere and furnish the development of national brands and even whole municipalities. “The trigger for all of us is when India and China start to export and import massive amounts of pharmaceutical goods, agricultural goods, consumer goods,” says Ketan Patel, founder and CEO of London-based Greater Pacific Capital, which has raised US$400m to invest in private and listed Indian corporates. “Hubs should be included in this. Both countries have technology hubs and some companies have gone cross-border. But why not allow Shanghai or Shenzhen technology hubs to do deals with Bangalore? That would really drive things – not company-to-company but hub-to-hub.”
And while an FTA may still be as much as a decade away, greater bilateral trade and partnerships may ensue naturally if the latest set of World Trade Organization talks stalls this year. Another deleterious round of bickering between a protectionist European Union and an increasingly isolationist US will, many believe, provide the necessary impetus for Beijing and Delhi to work closer together on bilateral and regional trade, political issues and even military partnerships. A trading bloc of almost 2.5 billion people harnessed to significant human and natural resources could be powerful indeed.
“Most probably the [latest] Doha round of trade talks, at the end of April 2006, will fail,” says the LSE’s Desai. “The EU will sabotage events in Geneva, and at that point China and India will say: ‘We’re going to do things on our own now’. In the short term, that will harm less-developed countries, but in the long term it will harm the EU and the US, which want greater access to the Indian and Chinese markets.”
Corporates on both sides are certainly showing a broader willingness to explore previously alien business territory. Indian companies, from farm equipment makers Mahindra & Mahindra to pharmaceutical giants Ranbaxy, Cipla and Dr Reddy, have long-established mainland units, while Chinese telecommunications giant, Huawei is a mainstay in Bangalore.
David Lu, chairman of Eminence Group, a Shanghai-based conglomerate with assets of Rmb3bn (US$372m), last year led a business delegation to India and came back with a bag full of ideas. “We are studying four main areas – IT, energy saving, tourism and healthcare,” says Lu. “We’re eyeing a US$30m investment in the hotel industry with Tata Group, and have been in talks with Dr Reddy about share swaps and distribution channels for our products. The opportunities in India are endless, and we expect to see annual minimum returns of 20 per cent on any investment there.”
D.P. Jindal, chairman of Indian steel giant Jindal group, is currently in talks with Chinese rivals Baosteel and Tianjin Steel to set up a US$50m to US$70m joint venture in eastern China. “Initially, we want to import semi-finished steel products and complete them here. Then we can sell to the East Asian market and the US. Producing in China is cheaper than producing in India, and the labour is more disciplined and productive.”
Indian aviation and liquor billionaire Vijay Mallya, founder and chairman of Bangalore-based United Breweries (UB), is also keen to break into China’s fast-growing spirits market. He says that though China’s beer market is saturated, low-cost liquor would be a winner. UB is the third-largest maker of spirits worldwide. “There’s a huge gap for low-end liquor – like vodka, whisky, gin, rum – that we fill in India, that’s missing in China. We’ve already started to export small quantities to Taiwan, just to test the waters. I’ve been in talks with banks including Citigroup and companies in China to set something up.” Mallya says he’s also keen to begin direct flights between Mumbai and Shanghai for his fast-growing Kingfisher Airlines, which recently bought a fleet of superjumbo Airbus A380 jets to service future India-US routes.
To be sure, India has been cautious about letting Chinese firms enter strategic markets. Mainland telecoms firm Huawei has been forced to scrap expansion plans in Bangalore several times over fears that it would export Indian technology back to Beijing. The fears were compounded by the fact that Huawei’s founder, Ren Zhengfei, has historical links to China’s People’s Liberation Army. Likewise, a plan by China Unicom to build a high-speed fibre-optic communications line over the Himalayas was quietly dropped by Delhi following security fears voiced in parliament.
India’s mandarins are wary of letting China usurp their regional stranglehold on high-margin technologies, such as software, IT services and outsourcing, and a generous chunk of the business community seems to agree. It explains why India is one of the leading imposers of anti-dumping measures on China via the WTO, and why India has such tight trade restrictions against China but not against its east Asian neighbours, Korea and Japan.
Such wariness sometimes slops over into the business world. “We’ve gone as far as Africa and Latin America, but we haven’t done a single deal in China,” says Tata Sons’ Irani. “And a lack of understanding is stopping us. If you look at India now, retail is a very sensitive sector because of the large number of small shopkeepers. Cheap Chinese products have basically taken over the US economy and we are aware of that. The government is worried and they have every right to be.”
But these days it seems that for every Huawei there is a Videocon Industries, the Indian manufacturer of televisions and white goods that last year shifted its entire research and development operation from Paithan in India to the southern Chinese town of Foshan. Last year it posted $500m in revenues in the mainland, says Videocon’s Dhoot, where it employs 5,400 people and pays Rmb100m in taxes.
“Logistically, China is a much better place to operate than India, as the Chinese government really supports electronics,” he says. “We export Videocon-branded TVs back to India and sell non-branded TVs to our Chinese customers – TCL, Changhong and Skyworth. We’ve never had a problem with the Chinese authorities and we want to be the first producers of plasma panel TVs in China, probably next year.”
It all points in the right direction, so what of the profits to be made between the two countries? Securities investors will largely need to stick to Indian stocks, given China’s capital restrictions. Pharmaceuticals and healthcare – notably Ranbaxy, Cipla and Apollo Hospitals – are most likely to benefit from China’s pressing need for quality drugs and high-level healthcare for its increasingly wealthy urban populace. Software firms in India, such as Wipro, Infosys and TCS, will benefit enormously from the Chinese market when restrictions on technology exports are eased, as will Chinese consumer goods makers, such as TCL and Haier, when India slashes tariffs on consumer goods.
Tata Group is pressing the Indian and Chinese authorities for the right to export iron ore slabs direct to China (currently only base iron ore is exported, raising production costs for both sides). That makes it another good bet, as is investing in fast-growing mid-sized firms in both countries.
Rather than investing in stocks, one private equity specialist, who preferred not to be named, buys large chunks of mid-sized Indian and Chinese firms in healthcare, pharmaceuticals, IT services, business production outsourcing, consumer goods and electronics.
“First, I take out the top five companies in [those sectors] and dismiss them,” he says. “The next 10 after those are probably good targets because they’re neither in family hands nor overvalued. That middle segment has huge growth potential, so you focus on them, because they’re financially far more intelligent targets.”
A few quirks remain as barriers to bilateral trade, most notably Indian bureaucracy. Michael Nock, chairman of Hong Kong-based Doric Capital, notes that it took an afternoon to get the requisite business licences to set up shop in Hong Kong and slightly longer in Shanghai, but no less than six months in Bangalore.
“Business licences are easy to get in China because the approval process is decentralized. In India, there’s much more bureaucracy,” says Avinash Datta, president and managing director of Mahindra (China) Tractor, a division of Mahindra & Mahindra. “My experience is that the Chinese authorities, once they know what you’re selling and that you’re serious about setting up in China, make it very easy to get started. It’s much harder to invest the other way into India.”
But such quibbles seem pedantic amid the increasing optimism surrounding India-China trade. There are obstacles, to be sure, but the most important single shift has been India’s latent willingness to accept that China’s smooth-running economy has long overtaken its own. India’s population is set to grow by 500 million over the next half-century, and it needs jobs for the many, not the few. That can only come through burgeoning trade with countries such as China. It means collaboration, not competition.
“There’s no point competing with China anymore. They want stability and so does India, and we need to work together on projects – not just oil and gas but on a much broader spectrum,” says Suresh Prabhu, an Indian member of parliament and former minister of industry.
“Over the past five years we have begun to get to know each other very well, and now we need to scale things up. We must encourage more Indian investment in China in software, IT services and so on. And we must encourage more Chinese investment in infrastructure, because they are the best at it.”
Now that Indian politicians are also jumping aboard the trade bandwagon, things are starting to look rosy. Issues remain, and probably always will, but trade is growing faster than ever before. It’s a positive sign for both countries as well as for the Asian economy in general.