China's Manufacturing Story #1 - Lessons for India

This Zerodha article analyzed how China became the manufacturing hub of the world. And whether India could replicate those steps. When Mao died, Deng Xiaoping took over. A major decision at this point was to learn from Singapore “a once backwater little fishing island had begun to cement its place in world conversations”. It was a good place to start because Singapore had started poor with a lot of Chinese origin citizens with little or no qualifications, a situation similar to China in ’79.

~~

 

A major outcome of the Singapore visit was the creation of the SEZ (Special Economic Zone):

“These special enclaves didn’t have the same rules as the rest of China. Different rules applied — freer movement of capital, flexible labour laws, easy land acquisition, consistent, uninterrupted electricity. And quick customs clearances.”

(India followed the same SEZ technique for the IT sector).

 

Crucially, one of the most famous SEZ’s was created in (now famous) Shenzhen because it bordered the still British territory of Hong Kong.

“When Shenzhen became an SEZ, it gave an opportunity for many businesses from across the border to jump in… What companies were coming for was cheap, available, productive labour. And a government that had made it its explicit mission to make their lives easy.”

~~

 

The panellists feel India is doing it wrong with its manufacturing attempts. India talks of its market size and growth story; whereas it needs to start like China (and India itself in IT) and advertise itself as a source of low cost, decent quality labour. The upskilling and moving up the value chain will happen later, not something possible at the beginning.

~~

 

China decentralized. Sure, national goals were still set at the center:

“He set broad national goals such as “we want an automobile sector of X scale by this year, we want a semiconductor industry” and then essentially told provinces — “You figure out how to get there”.”

And Chinese provinces would compete ferociously on who would do more to achieve the center’s goals. Why? Well, a one-party system helped. Anyone doing well at a province could hope to become visible and rise up the ranks. They needed to show results to Beijing to rise up the ranks. Make land acquisition easy; throw tax incentives; try whatever it took. Succeed, get promoted.

 

In India, state-center clashes are legendary. And state level performance doesn’t translate into national level promotions, unless it is the same party.

~~

 

The initial wealth from the manufacturing boom was largely transferred to:

“(The government) which then reinvested it into the conditions for more growth. Healthcare. Education. Ports. Railways. Inland-to-port connectivity.”

You may think this model disincentivized the workers from doing more. But wait. The starting point of the workers was abject poverty in the villages; so these manufacturing jobs even with the government taking a big chunk of the wealth was still vastly better paying. So they remained incentivized.

 

India’s situation on this front is similar, says the article. Rural income v factory income difference would be substantial. A similar approach could, therefore, yield similar results, if done right…

~~

 

In China, only the government could own land. Private ownership of land was forbidden. But now, the government began to give long term leases of land for building factories. The lease money meant a huge influx of money for the government, which then spent it to improve infrastructure relevant to further expanding manufacturing. This was not demand-created growth!

“Supply-led growth where the state invested in building the capacity to produce, and the world’s appetite for cheap goods did the rest.”

 

India doesn’t have that option as the government doesn’t own that much land.

~~

 

China joined the WTO only in 2001, which finally opened them to trade with every country. Sure, the Chinese still kept checks and limits, but the timing worked spectacularly.

“China had a near-inexhaustible supply of cheap, productive labour and it could produce anything and everything for cheaper than the rest of the world.”

 

India does not have an equivalent opportunity where the size of the global market it could cater to can expand pheromonally, at least not overnight.

~~

 

In the next and final blog, we will look at the missteps and colossal wasted money in China’s manufacturing trajectory.