Financial Daily from THE HINDU group of publications
Monday, Sep 16, 2002
Industry & Economy - Exports & Imports
`India not geared for export industries' Mr M. Arunachalam, Chairman, Indian Chamber of Commerce, Hong Kong
He produces leather garments in factories in both China and India, and no prizes for guessing where he gets them done cheaper. In China. A branch manager of Indian Overseas Bank turned entrepreneur is the story of Mr M. Arunachalam, Chairman of the Indian Chamber of Commerce Hong Kong. From his modest office in Hong Kong, he runs a clutch of trading and manufacturing outfits specialising in leather garments, exporting $30 million worth of goods to the US, Europe and South America, in partnership with a German company. Almost 80 per cent of the production comes from China and the rest from India. In this interview to Business Line, Mr Arunachalam explains why China is the preferred source.
On China's inherent advantages
In China it is not attractive for us to put up a 100 per cent owned unit as we might do in India or Europe. It is much more economical in today's conditions to buy from China or to lease factories. There are a number of factories available for lease. You provide the raw material and take back the finished products. You pay a fixed charge for the conversion. You take the factory for a six months' lease.
That way if you do not have orders, you just tell them, `That's it'. For example, after the 9/11 incident last year lot of order cancellations took place. In China, we were not affected whereas in India we had to keep the factory running with all the incidental costs like the minimum demand charges for electricity which are very high. This adds to costs; even if do not work the factory for three months, we have costs to bear.
In China that is not so. We tell them we have no orders, the factory also closes and sends the workers home. Likewise if suddenly there is a bid order it is difficult to train the people to execute it in India; in China plenty of trained manpower is available, and factories are available.
The advantage in logistics
To ship to the US, I need just two days to load the container at my factory, and to send it to the vessel for boarding. (We are using factories sited two hours from Beijing and near Guanghou.) The port is virtually only about two-three hours drive.
The cost of transporting is also cheaper. The time taken to move goods from the factory to the US customer end-to-end is 18 days. The cost will be $2,500-3,000 per container. From the Indian plant it takes 40 days, and the cost will be between $3,500 and $4,000 at least 50 per cent more. If I want to send a raw material from China to an Indian factory to finish, it takes a minimum of three weeks to reach a container.
The source of China's advantage
Infrastructure. There we have no headaches like power failure. The price of power is Rs 2-3 per unit. There is no such thing as minimum demand as we have in India. We have a factory near Chennai and we pay Rs 6 lakh a month as minimum demand whether we use the power or not. When I have six months of lay-off I have still to pay for the power. India is not geared for export-oriented industries. Competing with China is not possible. The buyer in the US does not care whether I make it in China or in India. He gives the designs, and wants the end-product at a fixed price.
I make 80 per cent of my goods in China and 20 per cent in India.
Why that 20 per cent?
Because we had bought the factory in India and we have to live with it. We have some textile mills in India, it is almost impossible to make profits in spinning.
We are trying to export but it is very difficult because of the high cost of power, labour and bank interest. In China bank interest is less than four per cent as against about 14 in India.
We have an EoU unit in Gandhinagar, Gujarat, making copper enamel wires. All of that is exported to China by air. We have to get the Customs and excise people to come and inspect the cargo; it goes to the Ahmedabad airport, from there to Mumbai then to Hong Kong airport, where we clear and send to China.
Given a choice, we will put the unit in China. Just because we are Indians, we would like to have some manufacturing there.
We are trying to get some improvement done on the procedures, practices but it seems beyond our ability to make the change.
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