The monopoly that China has achieved in the trade market has been talking point over the past few years. From products like pens, electronic items, apparels etc this nation has broken all trade barriers to create its own footprint in the world market. China’s trade and investment reforms led to an increase in foreign direct investment (FDI), which has served as a major source of China’s capital growth. Hong Kong and Taiwan are the majority source of FDI in China. The United States is the third largest investor in China, accounting for 8.0 percent (US$24.6 billion) of total FDI in China.
Chinese products of comparable quality, novel conception and low prices have been flooding the Indian market. The differential in price ranges from 20% to as high as 50%.
The few factors that affect product cost are:-
1. Cost of Raw Materials:
Raw materials are cheap because:
a. Most of them are produced in China.
b. Due to high demands, they are available at cheap prices.
2. Variable costs like labor costs, machine time etc.
3. Fixed costs like the power bills, leases, Internet, salaries for office staff.
China now has a far larger supply of qualified engineers than the U.S. And China’s factories are far bigger and can react faster than those in the U.S. “Made in the USA.” is no longer a viable option for most electronics products. So, many companies have closed major facilities in the United States to reopen in China, and middle-class jobs are disappearing as the nation has stopped training enough people in the mid-level skills that factories need.
One of the mainstays of the Chinese strategy of following a mass-production and mass-consumption formula is to keep the profit margins low and cover the gap by the subsequent boost in sales. With Think big, think global as its motto, the huge scale of operations of the Chinese industry is geared towards supplying not only the large domestic market, but also exporting extensively to global markets at cheap rates. When China opened up its economy to foreign investors, it simultaneously provided a significant thrust to the export potential through a judicious mix of state incentives and the free market mechanism. It created Special Economic Zones (SEZs) that were given preferential treatment. The export sector was given a boost by creating an extensive export network and dismantling impediments to the import of technology.
The benefits accruing to Chinese manufacturers are essentially due to seven factors: economies of scale in manufacturing, tariff differentials, lower cost of capital investment, higher labor productivity, lower transaction, power and transportation costs. An often ignored aspect of the Chinese business acumen is the Chinese manufacturer’s vision to climb up the value chain and China’s competencies in the higher end of the technology spectrum that requires highly skilled labor. The country’s state-level research institutions and major universities have opened research centers and bases that combine production, training, and research.
China is doing what Japan did in the 1970s and South Korea in the 1980s.One of the important aspects of Chinese products is that they follow “Dumping Strategy”. Dumping Strategy is defined as the export of the products in different countries at a price below the normal price. The objective of this Strategy is to create a monopoly situation in the foreign market thus leading to an increase a share in a foreign market. As China’s economy expanded at breakneck speed, so has pay for employees. But the wage increase has translated to higher costs for companies with assembly lines in China. Some firms are now taking their business elsewhere, which also means China could start losing jobs to other developing countries like Sri Lanka, where hourly factory wages are $0.50.
All employees in China have the right under law to join the ACFTU, which claims some 170 million members and is controlled by the Communist Party. ACFTU has a monopoly on trade unionizing in China and creation of competing unions is illegal. Party leaders have ensured that the ACFTU has a monopolist position. They don’t want autonomous unions springing up, because of the potential threat to their authority. In 2008, collective bargaining became a requirement of the Labor Contract Law that went into effect, forcing most companies — including most foreign-owned ones— to create an ACFTU chaptered trade union within them.
Also, China doesn’t provide workman’s compensation insurance for their workers so workers hurt on the job don’t receive any compensation when they are injured to the point that they are disabled.
Annual average productivity growth of China between 1990 to 2010 is 2.8% whereas that of USA is 0.5% and Vietnam is 0.2%.
INDIA and CHINA
Comparison between the Indian and Chinese two-wheeler industry is inevitable. When discussing China, a few points have to be kept in mind. China can afford to price so competitively because it does not focus on elements like product innovation, research, and development as well as design. The absence of IPR (Intellectual Property Rights) means that products are quickly and easily copied. When Honda launches a product anywhere in the world, China copies it without delay.
Chinese motorcycle manufacturers don’t make huge investments in marketing. In China, customers’ expectations of products are not high. If a product breaks down, parts are replaced. There is no concept of service in the automobile segment. They don’t spend on understanding the customer. Copying collapses time and eliminates the learning curve right through the supply chain.
Since China does not focus on the service sector; India can dominate this area by increasing the after service of a product once it is sold. This will also create a sense of belief in the minds of a consumer which will ultimately lead to the increase the sales. India can outshine China if we target the areas like product innovation, design as well as research and development. An alternative strategy for India could be to concentrate on building competitive advantage in the services and knowledge-based sectors, allowing them to rule the manufacturing domain. India can also compete with China in the manufacturing sector if we change few factors like making commercial rules simple, making business easy, improving agriculture sector and making more skilled labors.