China's Manufacturing Story #2 - Non-fatal Errors

The Zerodha article points out that slowly but steadily, Chinese manufacturing moved up the value chain. Patience and strategy matter. Uniquely, the Chinese government identified some sectors as critical (e.g. telecom) and poured money and helped arm-twist Western companies into sharing technological knowhow with Chinese partners. To help domestic companies grow in those sectors, when they were new and inferior initially, China would prevent Western (superior) tech from being sold, thereby creating a “protected home market to develop in”.

“This model played out in multiple sectors — solar panels, electric vehicles, high-speed rail equipment. The value chain expanded.”

Of course, this can be risky –local companies may stay at low quality only with no fear of competition from superior products. Remember the License Raj?

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China adopted a spray-and-pray approach.

“They just threw money at everything and hoped something worked… even if the waste along the way was colossal… China got solar panels wrong the first few times. It produced far more steel than the world needed. It built ghost cities… But in that churn, it also built BYD, Huawei, CATL — companies that now define global industries.”

Even official Chinese government reports put the wasted money at $6.8 trillion between 2009 and 2013 alone.

 

Which brings us to a very tough question for India:

“Do you think India can afford such waste”

Note this isn’t the kind of “waste” we are used to, where money was deliberately spent on sectors or companies with no prospects due to bribes. Here “waste” refers to money spent with good intentions but which no/bad outcomes.

“In a democracy like India, such wasteful expenditure is going to be questioned, debated, and be a thorn in the side of a ruling party that decided to pursue such a strategy.”

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There have been costs in China’s way. Not just wasted money but also the sweatshops and the child labour (a lot initially, much lesser now). Like the Industrial Revolution era, a few industrial owners made a lot, the workers little (but still better than the rural abject poverty). Wealth inequality grew a lot. The competition among provinces led to over-investment and real estate bubbles.

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While India cannot (should not?) copy all steps taken by China, some steps must be taken up. Like labour law reforms. Ease of closing loss making companies. Faster land and permit clearances. Stop protecting small scale industries esp. when they will always be inefficient in some sectors. Make electricity supply reliable for industries. We also need to increase R&D spending, esp. related to manufacturing.