Boycotting Chinese products: Bravado is no substitute for business

Print edition : July 31, 2020

Huawei’s flagship store in Paris, on July 7. Huawei is the world’s largest telecommunications equipment provider, way ahead of companies such as Nokia, Ericsson and its Chinese rival ZTE. Photo: Nathan Laine/Bloomberg

In a drug-manufacturing unit on the outskirts of Mumbai, a file photograph. Chinese producers of bulk drugs, or active pharmaceutical ingredients, have replaced European sources of supply in the last decade. Photo: Rafiq Maqbool/AP

The Modi government’s move to ban all things Chinese is likely to aggravate conditions for the pandemic-hit Indian economy. The pursuit of national self-reliance requires a blueprint that maps out how to achieve it over the long term, with the state playing a key role in the process. China offers lessons, which India could profit from.

AN angry man cannot use his brains fully. So goes an old Tamil saying that aptly and succinctly sums up the Narendra Modi government’s moves in recent weeks to banish all things Chinese. Since the tragic clash in the Galwan heights, the Centre, followed by several State governments, has raised formally, and informally in some cases, unprecedented barriers on trade and investment from China.

Not just ubiquitous Chinese goods, such as mobile phones, which have captured the Indian mass market in recent years, but even Ganesha idols made in China face a ban. In an atmosphere where emotions have been fanned by a frenzy that has forced everyone to want to appear more patriotic than the next person, hurdles that exclusively target investments by Chinese companies have been put in place. The ban on 59 Chinese apps has taken the war into cyberspace (see story on page 79), and several infrastructure projects that Chinese companies are currently implementing are in danger of being abandoned. Shipments at Indian ports and airports have been held up merely on the strength of informal whispers. As the war cries get louder, trade and economic ties appear to have gone into the chiller, hardly a confidence-boosting move if normalising India-China relations is the intent.

But amidst the frenetic calls for revenge, it is time to ask whether bluster and bravado can substitute for the years of grunt work that the pursuit of national self-reliance demands. Most importantly, it appears that India can learn much from China on how to go about building national self-reliance. Vitriolic anger, even if by faux patriots, is hardly conducive to the search for serious alternatives to the economic policies that have been pursued so far. Instead, a cool assessment may well require jettisoning the burden of economic liberalisation that forced India to depend on the kindness of strangers. Above all, it requires a willingness to learn from China, especially from its three-decade-long economic transformation that has won it global markets while it built capability that was based on the hard-nosed pursuit of national self-interest.

Is decoupling feasible?

The calls for India to decouple from China have to be placed in the context of India’s growing dependence on not just China but other countries in the past two decades. Two-way trade between India and China has grown spectacularly in the last two decades. Both imports and exports were worth just a few billion dollars 20 years ago, but while exports have been more or less on a plateau since 2009-10, imports have grown dramatically. For instance, in just four years since 2014, imports surged 25 per cent while exports remained almost stationary (see figures). China accounts for almost 15 per cent of India’s imports, compared with less than 5 per cent 20 years ago. Although imports fell somewhat in 2019, this is likely to have resulted from the significant slowing down of the Indian economy.

The burgeoning import bill reflects India’s dependence on China in several key areas. Chinese power equipment producers, for instance, have invaded the Indian market in the last decade. The prolonged economic boom in China enabled them to develop economies of scale that producers elsewhere in the world could not dream of, which has resulted in much lower prices. Chinese producers of bulk drugs, or active pharmaceutical ingredients (APIs), have replaced European sources of supply in the last decade.

Drugs trade

Biswajit Dhar, an economist who teaches at Jawaharlal Nehru University, pointed out that Western multinationals’ insistence on supplying drug formulations, on which they could command higher profits, instead of the raw materials made things easy for Chinese companies. The dependence on Chinese imports in areas such as vitamins is particularly heavy. Dhar said that almost 90 per cent of the APIs for antibiotics and vitamins were sourced from China. “How can this kind of heavy dependence be replaced in a hurry?” he asked. In fact, a week after “strict” instructions were issued to authorities to stringently check on imports from China, the restrictions on imports of pharmaceutical products and supplies meant for large companies such as LG, Samsung, Toyota and Honda were rolled back. On June 22, Customs officials in Chennai and Visakhapatnam put all shipments from China on hold, on the basis of the ludicrous information of the possible “illegal imports of narcotics”. Clearly, the back and forth reflected a government that was operating in “act now, think later” mode.

Industry voices

The dependence extends to sectors such as chemicals, fertilizers, plastics, auto components, electronics and a wide range of consumer goods (see Figure 3). A recent media report highlights India’s extreme dependence on China. It indicates that India sources 90 per cent of the ubiquitous point of sale (POS) devices that facilitate digital payments from China.

In the past two decades, Indian companies have come to rely heavily on components from China. Bajaj Auto, for instance, which imports alloy wheels and vehicle transmission parts from China valued at about Rs.1,000 crore annually, can turn to other sources but that would take time. Rajiv Bajaj, its managing director, recently said the process “would be long-drawn and not overnight”. Auto industry sources said that even though sourcing from China involved higher transportation costs plus a 10 per cent duty, it still worked out about 15 per cent cheaper than sourcing domestically. That margin is not trivial in an industry that has been reeling under a crisis that that started well before the pandemic (Frontline, September 13, 2019). Quite apart from imports, Rajiv Bajaj also stressed the point that Indian companies that needed global exposure simply could not avoid experiencing China at first hand. “As a global company, we need experiences from various markets in order to complete our understanding,” he told a business daily recently. “It doesn’t matter whether we make or sell. For that reason, I don’t see us [Bajaj Auto] moving away [from China] as of now.” Although industry spokespersons agreed that India needed to reduce its reliance on single-country sources, especially in the wake of the pandemic, they said that the process would require measured steps, not a knee-jerk response.

T.K. Ramesh, managing director of Ace Micromatics, a medium-sized company that specialises in machine tools, said that dependence on China needed to be “measured and take into account our own vulnerabilities”. He said that his company, which has a base in China, was unlikely to be affected adversely because China’s reliance on India was “minuscule” in the context of its overall trade. Ramesh, who travels regularly to China, said: “The pace at which changes have happened in that country is simply amazing, and there is much that we can learn.”

China’s gross domestic product (GDP) per capita has grown 40-fold in just three decades. Not surprisingly, this rapid growth has spawned several global giants such as Huawei in telecommunications network equipment, Tencent in social media, Alibaba in e-commerce and DJI in recreational drones. China did not become the world’s factory overnight. It adopted a long-range strategy that not only enhanced national capabilities through innovation but also scattered its products and services across the world. Just two examples would suffice to illustrate this. The first is of Huawei, the global leader in the cutting-edge 5G technologies, which is under relentless attack by the Donald Trump Administration. The second, is of how Chinese capabilities in railway technologies were enhanced over three decades, which has enabled it to become the unchallenged global leader in “bullet” trains. Each case, each of a different class of infrastructure, highlights the extreme focus that China has been able to provide while making investments in the realisation that the eventual spin-offs from them would provide wide and valuable returns to society.

The Huawei saga

Huawei is the world’s largest telecommunications equipment provider, way ahead of companies such as Nokia, Ericsson and its Chinese rival ZTE. Ironically, the United States lacks a telecom stalwart after a wave of deregulation beginning in the 1980s wiped out American equipment producers, the last to fall being Lucent Technologies. The U.S, under Trump, has been reluctant to let China get ahead and has stepped up its campaign against the Chinese company, telling allies that Huawei’s equipment is not secure.

Huawei is completely unique, indeed the odd man out in the world of capitalism. It earned revenues of $123 billion in 2019, by far the largest for any telecom company in the world. The company was founded in 1987 by Ren Zhengfei, a former senior officer in the People’s Liberation Army. It started with the manufacture of switches, later started to build its own networks and still later started offering consulting services to clients across the world. More recently, it has ventured into the consumer market by making its own hand-held devices, where it has successfully challenged established players such as Apple and Samsung. It employs 194,000 workers worldwide, of which almost half are engaged in research and development.

Although Huawei established its U.S. base only in 2001, it soon started drawing fire from the U.S. establishment, aided by U.S. private telecom companies that either did not have the stomach to resist pressure or were fearful of being overrun by Huawei. Critics of the company often refer to a lawsuit of 2001 by Cisco and another by Motorola, alleging “theft” of intellectual property as evidence of its sharp practices, but what is ignored by partisans is the fact that both American companies later settled the matter out of court, which implies that these serious charged were never proved. Later, in 2005, a report by Rand Corporation alleged that Huawei had “deep ties” with the Chinese government and military.

What makes Huawei completely unique, quite apart from its size and stature, is its corporate structure. Huawei is entirely owned by 104,572 company employees, including Ren, and more than 3,000 retired employees. Employees need to satisfy certain eligibility criteria to become stakeholders in the company. Ren believes this unique shareholding structure fosters the “wolf culture”—each for all and all for each—that the company likes to promote as its core philosophy. Shareholders actually invest in the holding company in which Ren himself owns just 0.94 per cent, the remaining 99.06 per cent belonging to all other shareholders. All shareholders are eligible for dividends, but employees eligible for share allotments as reward for their performance have to pay for the shares. In fact, this is a source of revenue for the company, which is renowned in the world of business for the manner in which it ploughs profits back into the business. In 2019, the company spent more than 15 per cent of its revenues on R&D, making it among the topmost investors in R&D in the world. By then, the Shenzhen-based company had more than 85,000 patents in its kitty. Another interesting facet of Huawei’s structure is that it has a rotating position for its chairperson, which means that at any given time there are actually three leaders available to the company.

This unique structure obviously facilitated the transformation of the company from a humble seller of telephone switches to a global leader in 5G technologies. Unlike its other rivals, Huawei did not have shareholders demanding a larger slice of dividends. Quite apart from not having to distribute all profits immediately to greedy shareholders, this also enabled the company to patiently explore markets around the world. Huawei typically allows a company in a foreign country to try its products for free before the company commits to buy, a practice no other rival offers.

The U.S. establishment and the media allege that Huawei’s ability to offer much lower prices than competitors emanates from the close links and support it draws from the Chinese government. However, impartial observers have pointed out that Huawei’s ability to source parts, components and services that go into its products in-house instead of depending on third parties, as most rivals do, is what makes the Chinese company’s products much cheaper. It has responded to the security bogey raised by the U.S. by allowing its operations in countries such as the United Kingdom to offer its equipment for open testing. These practices have enabled it to not only penetrate the mass mobile telephony market such as those in Africa where it dominates but also to reach out to high-end markets for 5G services that are still only starting to roll out. The moral of the story for India and Indian entities is that leadership, against heavy and mounting odds, is only possible through innovation, not only technological but also through corporate structures that enable companies to swim against the tide.

Infrastructure as an engine

In 2008, in the wake of the global financial crisis, China rolled out its largest-ever fiscal stimulus package. More than $586 billion was injected into projects for the construction of houses and for major infrastructure such as railways, highways and airports. These investments played an important role in expanding domestic demand, increasing employment and stimulating economic growth. While some of this resulted in the growth of non-performing portfolios of banks and in excess capacity, these investments addressed the immediate problem of collapsing demand. More pertinently, in the wake of the COVID-19 crisis, China’s stimulus package significantly dwarfs the efforts of the Modi government. This year so far, the Chinese government has announced investments amounting to a whopping $4.9 trillion. Note the key difference: these are projected investments, not loan waivers, relief measures, tax waivers or subsidies provided to industry as is the case in India.

The strategic thinking that underpins Chinese infrastructure efforts is best highlighted by the manner in which it has completely overhauled its rail network since the 1990s (Frontline, October 13, 2017). While the Modi regime made much of its efforts three years ago to build the country’s first “bullet train” project—about which it prefers to remain silent these days—China adopted a completely different approach. Instead of seeing building of high speed rail (HSR) as marquee projects, it placed these in the context of a complete overhaul of its entire rail infrastructure that was based on a three-decade vision. As a result of its step-by-step approach, starting in the early years of the century, China has completely transformed its rail networks. Separate pathways for goods and passengers was the first step, followed by a speeding up of all trains. It is only later that it started HSR projects, but even here it has established itself as the undisputed global champion, proven by the fact that a whopping 60 per cent of all HSR systems are in China. Armed with technologies it built during the course of this expansion and using ruthlessly the bargaining chip that the enormous scales of its expansion plans gave it, the Chinese government forced multinationals to share technologies in order to play in China. Early entrants such as the train-set manufacturers Mitsubishi, Alstom and Siemens were allowed into China only if they accepted these conditions. And in a recession-hit global market, where else in the world could they sell their wares?

Chinese role in India’s infrastructure building

Biswajit Dhar believes decoupling from China is not feasible in the short run. “But if India starts working on a strategy today, it can possibly be achieved a few years down the line.” Indian policy, he said, “has become hostage to the neoliberal mindset”. “Building self-reliance is not a plug-and-play kind of a thing; we need to strategise.” He said that this entailed first mobilising domestic resources to build indigenous capabilities—even more critically the “building blocks” that facilitate expansion of national capacity. “What we need is an industrial policy that brings together various elements, including technological capability,” he said. A national framework that ensures competitiveness on a dynamic scale requires a functioning innovation system.

However, India’s complete dependence on foreign entities to do this has reached the point where they even build infrastructure in the country. “Look at the number of infrastructure projects involving Chinese companies, several of which have been cancelled in the last few weeks,” said Dhar. “Is it not ironical that while the Indian government has adamantly refused to be a part of the Belt and Road Initiative [BRI], an international project to build infrastructure across continents, Chinese companies are implementing infrastructure projects in India?”

It is interesting how China has engaged with globalisation. This is highlighted by the manner in which it engaged with the World Trade Organisation (WTO) after joining it in 2001. “When you look back on what China did step by step before and after it joined the WTO, you realise what needs to be done here,” said Dhar. China accepted the “most onerous” terms when it joined the WTO. “Of course, we had a theoretical understanding of what would be required to build a strong and resilient manufacturing sector, but China actually did this, and in such a short time.” Dhar said that the word “dynamic” seemed to mean something else in China. “They announced a manufacturing policy in 2015, which stated that they aim to become the leading manufacturing nation in the world by 2049. One does not know whether to laugh or cry when super patriots here proclaim that they will junk Chinese stuff and turn atmanirhar, whatever that means.”

Sacrifice of self-reliance, a neoliberal folly

Three decades of liberalisation has effectively rolled back capabilities that were built in India. For instance, the extreme dependence on foreign sources of supplies for pharmaceuticals is a recent phenomenon that coincides with liberalisation. Dhar points out that Jawaharlal Nehru’s “great quality as a leader to anticipate India’s needs” was responsible for the establishment of a chain of public sector companies—promoted by States and the Centre—which resulted in indigenous bulk drug production capabilities. “But after liberalisation, these were deliberately allowed to turn sick, resulting effectively in the chopping off of the leg on which the Indian pharmaceutical industry was standing,” said Dhar. Initially, imports came from Europe, but after China joined the WTO, imports started flowing into India from China. “Not insignificantly, this was also the time India sharply reduced import tariffs on manufactured goods,” observed Dhar. The difficulties now being faced by each of the sectors that is now significantly dependent on imports from China can be traced to steps that caused the sacrifice of national self-interest at the altar of neoliberalism.

The Indian story of dependence goes side by side with the story of liberalisation. Basically, the neoliberal logic urged governments to drop tariffs and not interfere with free trade. The argument was that the question of price settled all other questions. The attitude of policymakers was, if someone else somewhere else can make something at a cheaper price, why bother to make it at all? “In reality, not a single country in the world has succeeded by following this prescription,” argued Dhar. “Domestic enterprises need to be nurtured. India failed miserably in this. Today, we are paying a price for this folly.”

One of the first sectors to be exposed to unfair competition was the power equipment sector, most notably exemplified by the Enron fiasco of the 1990s. And the company that suffered the most as a result was the public sector equipment manufacturer Bharat Heavy Electrics Limited (BHEL). The company, which had even found innovative technologies to handle the relatively high ash content of Indian coal in its boilers, has been emasculated by the torrent of imports, most notably from China, in recent years.

India had a string of public sector electronics companies, too, virtually in every State, until the early 1990s. Companies such as Bharat Electronics Limited and Keltron made the country’s first TVs. These companies also used to make the first push-button phones. In 1996, after India signed the Information Technology Agreement at the WTO, all tariffs on IT products were phased out, which effectively killed the fledgling domestic industry.

Shifting sands of globalisation

The Indian government’s attitude and response to globalisation, reflected in its dogged pursuit of a liberal economic policy, appears to not take into account the shifting dynamics in global trade and investment. The periodic crises that have rocked significant proportions of the global economy—the Mexican peso crisis of 1994, the East Asian financial crisis of 1997, the 9/11 crisis of 2001, the 2008 global financial crisis, the crisis in the eurozone and, finally, the ongoing crisis caused by the pandemic—has resulted in a growing unease with globalisation. In fact, the first serious doubts that triggered the calls on countries to “decouple” from global production chains started after the 2008 global crisis. Many economists started arguing that countries ought to focus on generating internal demand, something that only China appears to have earnestly followed. In effect, they were pointing to the fact that the “China model” of producing for the world market was passe.

The anaemic growth of the world economy, reflected in the equally insipid growth of global trade, has forced countries into the realisation that an export-led strategy is not the road to salvation. Dhar pointed out that trade as a proportion of GDP of many countries started declining after 2008. This, he said, meant two things: one, that countries were relying less and less on global trade and value chains and, two, that countries were focussing inward. “This was happening to countries as well as industries operating from within them,” he pointed out. He said that in sectors such as electronics, for instance, there had been a significant “cooling down” of these value chains in the last decade.

Soon after COVID-19 hit China, key officials in the Modi government started the chorus of how India could replace China as a production hub for the world. Referring to the significant changes in the nature of the global value chain in the last decade, Dhar said: “There is a difference between what India is doing, or trying to do, and what other countries are doing.” Since the 1990s when globalisation accelerated, every international crisis has also raised doubts about the trajectory, effects and the future of the globalisation process.

Dhar said that India was never in a position to climb onto the global chain. All it has done in the last several decades is source from the chain without ever developing its own strengths. All the free trade agreements (FTA) India has signed in recent years have only allowed foreigners access to Indian markets without getting India access to markets overseas, argued Dhar. “The problem is that we do not have any products to sell in these countries that are produced competitively.” He believes India’s ambitions of emerging as a regional hub are “fanciful”. Even without the advantage of preferential tariffs, which is what FTAs provide, China has been able to overrun global markets, he said. “If India joins the RCEP [Regional Comprehensive Economic Partnership], which would set preferential tariffs for partner countries, it would prove disastrous because whatever is left standing in India would also be wiped out.” He pointed out that India’s recent decision to restrict Chinese investments would have been incompatible with membership in the RCEP. Of course, remaining outside the RCEP club would also be incompatible with the professed aspirations to become a regional economic hub. “No country can become a hub simply because it wishes to. It needs to have the wherewithal to become one and, clearly, India simply is not in the same league as many other countries,” Dhar said. “You cannot flex your muscles if you don’t have any.”

This inward-looking realisation is what has promoted countries around the world, most notably barring India, to embark on a significant economic stimulus to domestic economic agents. In fact, since 2008 China, too had been making an effort at “balancing” its growth strategy, especially in a situation when the global demand for its products has been slack. But instead of withdrawing from global engagement, it rolled out the BRI, an ambitious decades-long project involving many countries across the world and particularly in the neighbourhood, where India remains the sole spectator.

The Modi regime’s pursuit of a bizarre form of “nationalism” that is specifically anti-China not just infeasible, it is plainly illogical. “India ought to just maintain the status quo instead of adding further to the confusion and distress caused by the pandemic,” argued Dhar. The stray noises from the establishment about Indian intentions of pursuing a path of import substitution are fraught with serious problems. How will this be financed? If foreign capital is expected to do this, that is even more questionable, said Dhar. His studies point to the fact that the manufacturing sector accounts for just 20 per cent of all foreign direct investment into India. “India does not have the resources, the technologies nor the ecosystems that would enable the fulfilment of such aspirations,” he said.

The Modi regime is now stranded on the high horse of jingoism it has mounted. It cannot forsake its avowed commitment to its very own version of neoliberalism that is embellished by the warped version of swadeshi that is woven into its genetic make-up. Yet, its ideological predilections prevent it from pursuing the only sensible course available to it: fostering indigenous capability with the state playing a key role in the process. The move to ban all things Chinese was the easy step. Dealing with the chaos in its aftermath will be a wholly different ball game.