The Good China

The last time China invaded India, even the Himalayas didn't prove much of a barrier. Red Army troops poured across mountain passes in 1962, occupying a huge swath of Indian territory--some of which China still holds--and stopping only when their utter dominance was clear. Ever since then New Delhi has eyed its behemoth neighbor warily, even implying that its nuclear arsenal was meant to counter the communist threat from the north.

Until now the capitalist menace seemed less worrisome. For years India's trade barriers proved much more effective than its natural ones: a thicket of licensing and inspection requirements, tariffs and import quotas easily held the world's goods at bay. The policies kept Indian industries fat and happy. It also filled the country with antiquated products--like the infamous Ambassador sedan, still modeled after the 1950s Morris Oxford--made in antiquated ways.

China, though, has crossed this barricade even more easily than it did the Himalayan peaks. As part of its accession to the World Trade Organization, New Delhi must eliminate quantitative restrictions on consumer goods by April 1. Already in the past eight months, as other barriers have been lifted, a tide of dirt-cheap imports from the People's Republic has inundated India: batteries, fans, plastic slippers, even rice. The onslaught may ultimately transform domestic manufacturers more thoroughly than years of halfhearted reforms ever could. And for now, the real winners are long-suffering Indian consumers, whose buying power has expanded exponentially. In places like New Delhi's Ghaffar market, buyers are elbowing one another aside to grab portable stereos, video-CD players, lamps, locks and toys as soon as they hit the shelves. "Customers are so happy," says Rajesh Bansal, who runs a variety store in Ghaffar. "My profits are up, and I feel good that many poorer Indians who could never think of buying things like watches and toys can do so now."

Ironically, many of India's trade barriers were set up to counter a perceived threat from the West. (At one point in the late 1970s an overzealous federal minister threw Coca-Cola and IBM out of the country, famously declaring that India would not be subject to "Coca-colonization.") But since restrictions on 700 products ranging from chemicals and drugs to areca nuts and an array of other consumer goods were eliminated last April, the country that has exploited the changes most has been China. India's Chinese imports totaled $1.3 billion last year, nearly double the figure from five years ago.

Most important, Chinese companies are exporting lower-end products than Western firms are--and pricing them cheaper even than their Indian equivalents. That has opened up possibilities for the bulk of Indian consumers, who are too poor to afford the Nokia mobile phones and Body Shop oils on sale in glitzy Mumbai (Bombay) malls. A Chinese-made wristwatch sold at Ghaffar costs $1.60, compared with $5.40 for a nearly identical watch made in India. Not surprisingly, the Chinese watch is much more popular. What is surprising, say shop owners, is that the Chinese products are also often of higher quality than their Indian counterparts. Chinese fans, for instance, sell for half the price of Indian fans, and come with inverters that prevent them from shutting down during a power surge--a common occurrence in India. Domestic fan makers never had the foresight to install the devices.

After years of exporting to the rest of the world, Chinese manufacturers have grown far larger, smarter and more efficient than their cosseted Indian counterparts. One Chinese TV manufacturer, Changhong, has the capacity to build more sets annually (12 million) than the entire Indian television industry can manage (7 million). In one eight-hour shift a Chinese TV factory can turn out 2,000 sets, compared with 500 sets by a typical Indian plant. "In 1979, when China launched its market reforms, India's standard of living was higher than ours," says Sun Shihai, deputy director of Beijing's Institute of Asia-Pacific Studies, a government-run think tank. "But since then we have pulled ahead in terms of per capita GDP, openness to foreign trade and structural guarantees to foreign investors. China's economy is much more efficient."

In India, on the other hand, the bulk of domestic manufacturers are small enterprises that have never been forced to upgrade their equipment or their practices. (The World Economic Forum ranks India 53d out of 59 countries analyzed for their competitiveness.) Indian companies are handicapped by onerous costs and excessive regulations. Manu-facturing workers typically are unionized, which means higher wages. Frequent power outages disrupt the manufacturing process. And taxes are high. All ultimately add to the cost--and retail price--of products.

The head-to-head competition with China has already begun to claim victims. Several Indian padlock makers have gone out of business in the last three months. Fan manufacturers are scrambling to survive; one of the largest, T-Series, has stopped making fans altogether, while others now buy them from China and resell them. "If foreign goods continue to flood Indian markets, many Indian factories will close down," warns A. K. Singh, a member of the left-leaning All Indian Trade Union Congress. "Hundreds of thousands of workers will lose their jobs, adding to social tensions."

Some Indian manufacturers are crying foul. Amit Mitra, secretary-general of the Federation of Indian Chambers of Commerce and Industry, claims that some Chinese companies are shipping their products first to Nepal, where they are stamped made in Nepal, then bringing them into India to take advantage of the kingdom's no-duty treaty with India. Indian companies have also asked Delhi to levy anti-dumping duties on certain Chinese goods. But dumping is difficult to prove, and the industry lobby has thus far succeeded in getting tariffs placed on only a few items, like sports shoes and batteries.

On the other hand, a growing number of executives think a shakeout would be healthy for the Indian economy. "All this talk about the Chinese threat is just a ruse by Indian companies to hide their own weakness," says Bibek Debroy, director of the Rajiv Gandhi Foundation, a New Delhi think tank. "Indian companies should shape up and become competitive, or close down." Some firms are getting the message. Ajanta Quartz, the world's largest clockmaker, has decided to shift its manufacturing from the western Indian state of Gujarat to a factory in the Special Economic Zone of Shenzhen. "We're setting up in China mainly because of lower taxes, power and labor costs," says Sanjay Das, a senior executive at Ajanta. "There is also much less interference from the bureaucracy." Bajaj Electricals has formed a joint venture with a Chinese firm in Guangdong to make table and pedestal fans. M. K. Jain, a small-scale toy manufacturer in the state of Uttar Pradesh, is getting out of the toy business and has already fired 90 percent of his workers. He now wants to trade in crockery and home appliances imported from China.

An Indian government official in Beijing says that many more joint ventures between the two countries will be coming. "Competition from China can be a welcome development," says T. K. Bhaumik, a senior adviser to the Confederation of Indian Industry, but only if Indian companies learn to make better products at lower prices. If not, Indians will keep scooping up goods marked made in china.