November 2020 — The conference room of the Confederation of Indian Industry (CII) in New Delhi was being readied for a major event: a grand signing ceremony of two major deals that were to be announced that afternoon. The director general of CII was smiling quietly despite the stress of the last-minute arrangements. A consortium of companies from China’s rail sector would be signing a joint venture agreement with Indian Railways for the manufacture and installation of high-speed locomotives and rolling stock that would transform the speeds of major express trains by a factor of three. The journey between Mumbai and Delhi would be reduced to less than four hours — similar to that between Shanghai and Beijing. The China Development Bank had agreed to fund this RMB 30 billion project with a ten-year soft loan. Meanwhile, in the other conference room, one of India’s top pharma companies would be signing a major licensing deal with the Chinese Academy of Sciences (CAS) to introduce an oncology drug developed in India for the Chinese health care market. The licensing deal would be worth several billion yuan over ten years. Under a parallel agreement, CAS would be setting up a joint R&D lab in Hangzhou, linked to the company’s labs in India. Biotech scientists from both countries would work collaboratively on future drug development. The cost of such an R&D program would be half of what it would be in the United States, and the resulting products would be available to consumers worldwide.”

Welcome to a possible new world in 2020, when India and China may be cooperating closely to create synergies across a number of business sectors. Since World War II, the world has seen many historical enemies write a new chapter in their relationship and focus instead on mutual cooperation via investments and trade. Some, such as the EU, have built fairly tight arrangements covering both commerce and security. Others, such as Mercosur in Latin America and Asean in Southeast Asia, have focused largely on regional economic integration through trade and investment. We deem it a near certainty that by 2020 the economic relationship between India and China will be much broader and deeper than it is at present.

The two sides may even be closer to resolving their border disagreements than they are today. Should this come about, economic linkages between the two nations would grow even more rapidly.

We also believe that manufacturing, rather than agriculture or services, is likely to emerge as the primary driver of growth in economic ties between the two Asian neighbours. For a long time, Indian planners have been attempting to increase the contribution of manufacturing to the country’s GDP. According to the 12th Five-Year Plan, the current goal is to expand the contribution of manufacturing from the current level of about 16 percent to 25 percent or greater by 2025.

To date, part of the challenge has been that the focus has remained largely on addressing domestic needs rather than also developing a plan for export-oriented manufacturing. Other well-known hurdles include problems with land acquisition, onerous labour laws, lack of adequate skills, and poor infrastructure, all of which result in a woefully inadequate logistics chain. If India is to grow its economy at a sustained pace of 7 to 8 per cent or faster, it will have to become a force in manufacturing — for both domestic markets as well as exports. Leadership in services, though exemplary, will not be enough to create much-needed jobs, compete in export markets, and leverage India’s creative capabilities and high-end engineering skills. India needs to embrace the supply chain and logistics infrastructure that stretches across Asia into North America and Europe.

Given the well-known challenges of rising wage costs, shortage of blue-collar workers, and substantial pressure to go green, China will continue to upscale its manufacturing sector to create a much more sophisticated manufacturing base. In this endeavor, China will continue to avail itself of several inherent advantages:

A population of over a billion consumers, which gives its companies a large domestic market and consequently scale

Useoftrained workers and a substantial increase in automation and process improvements, which will keep improving productivity

A well-developed logistics supply chain, which includes a large pool of component vendors and is globally connected via transportation hubs and logistics depots

It is clear that a central pillar of China’s new manufacturing roadmap will be a focus on higher value-added products. China will also give priority to the services sector, which is not only environmentally friendly but can absorb the growing number of white collar and knowledge workers. These priorities will go hand-in-hand with upskilling the work force and placing a much greater emphasis on innovation.

At the same time, the country will attempt to mitigate the upward pressure on wages by offering major concessions to the industry to relocate to the less-developed western regions. Currently, just three major urban clusters—the Pearl River Delta centered around Guangdong province, the Yangtze river delta centered around Shanghai, and the Bejing-Tianjin region in the north—produce nearly half ofChina’s GDP.

This will change with other regions slowly taking over, as businesses continue their inland migration. Firms operating in or entering the Chinese market in this decade will have to keep this in mind, and their strategies will need to take into account the changing manufacturing landscape of China.

If India wants to benefit from this restructuring in China and ramp up its own manufacturing, its firms will have to focus increasingly on manufacturing-for-exports. They will need to become suppliers to China-based original equipment manufacturers (OEMs) by setting up a network of factories in both India and China. In addition, India will have to encourage Chinese manufacturers to locate some of their production in India by making their entry easier in special manufacturing zones that enable hassle-free entry.

As Chinese firms grow in India and see the country’s manufacturing strengths at close quarters, they will be better prepared to outsource some of their own production to Indian firms that are operating in both India and China.

We are already beginning to witness this in the case of auto components, where major automotive OEMs have set up large assembly operations in China. They now expect Indian auto component firms to set up manufacturing and subassembly shops in China also and to become part of their global ecosystem.

This interlinking could also be a cure for the long-term trade deficit that India runs with China—in a way that is beneficial to both countries while allowing Indian firms to understand the Chinese ecosystem before embarking on major investments in China.

With permission from Wiley India

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