Made in Chindia: Giants take different manufacturing paths

It may sound like another example of rivalry between the world’s most populous nations.

The Communist Party recently announced a Made in China program aimed at transforming its manufacturing sector, months after Prime Minister Narendra Modi unveiled his Make in India plan, also targeted at manufacturing. Look closer though and the signs point to a broad shift that could draw the two Asian giants closer economically in the years ahead.

Made in China 2025 is a 10-year campaign to push the country beyond labor-intensive work into more sophisticated sectors, from robotics to aerospace. Modi’s goal is to bring basic manufacturing to an economy that needs more decent-paying jobs. In short, China has set its sights on rivaling Germany or Japan, while India will happily settle for where China is now.

“Whatever industries China will be shedding over the years, India can capture,” said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. “The advanced guys will find that they finally have to compete head to head with China and I think it’s going to be a big, big headache for these industrialized countries.”

Besides sheer scale, China is years, if not decades ahead of its neighbor. According to International Monetary Fund and World Bank data, China’s gross domestic product per capita is almost five times that of India at $7,600 and its manufacturing sector is 10 times bigger at about $3 trillion. Still, China is losing workers by the millions, similar to what Japan experienced in the late 1990s.

Jet planes

Among its ambitions, China wants to jump into areas such as factory automation and build the types of computerized controls needed to make high-precision goods like iPhones or cars. The government is also hoping to challenge Airbus Group NV and Boeing Inc.’s dominance of the market for jet planes.

Also on the wish list: advanced medical devices, energy- saving vehicles, marine engineering and high-end ships for things such as deep sea exploration and equipment for electric power and agriculture.

Analysts have already been busy mining Made in China 2025, putting their spreadsheets on overdrive and spitting out predictions as to which companies stand to gain from the program. Citigroup Inc. has a list of 11 top beneficiaries ranging from Lenovo Group Ltd. to Zhengzhou Yutong Bus Co. China International Capital Corp.’s list exceeds 30 names including Zoomlion Heavy Industry Science & Technology Co., while Macquarie Group Ltd. identified more than 40 companies including Great Wall Motor Co. and Sino Biopharmaceutical Ltd.

Grand ambitions

Still, the campaign is in its infancy and China doesn’t always deliver on its grand ambitions. For example, the government no longer talks about its target to have 5 million electric vehicles on its roads by 2020 as sales never caught on.

That said, China has reason to be pursuing an upgrade. Gone are the days of 10-percent-plus growth as the world’s second- largest economy heads toward its slowest year of expansion since 1990. Labor shortages are driving up wages and squeezing low-end manufacturers such as clothing makers. Industrial profits in the country are down this year, particularly at state-owned enterprises.

Illustrating China’s woes, exporters in the Pearl River Delta manufacturing hub face chronic labor shortages and rising costs. In a recent Standard Chartered Plc survey, wages in the region are forecast to rise by 8.4 percent this year, and over 85 percent of respondents said labor shortages are as bad as last year. Around 11 percent of companies surveyed plan to move factories overseas to keep costs down, with Vietnam and Cambodia topping the list of preferred destinations.

More factories

Vietnam and Cambodia? Not if India’s prime minister has his way. Announced in September, Modi’s Make in India campaign seeks to bring in foreign investment and raise the share of manufacturing in Asia’s third-largest economy to 25 percent by 2022 from the current 18 percent, a percentage that’s largely been unchanged since 1947. Count Foxconn Technology Group among companies getting drawn. Its FIH Mobile Ltd. unit has said it will begin assembling smartphones in the country this year.

While there are some overlaps with the China campaign, such as promoting biotechnology and renewable energy, many of the 25 industries in Make in India are sectors that aren’t exactly cutting edge, such as textiles, leather and mining.

“Promoting the manufacturing sector in India starts from a very low base and it’s going to be aiming to capture a lot of the low-skilled jobs that are leaving China in the tens of millions,” according to Peter Martin, associate director for India at APCO Worldwide.

India’s turn

India may be ripe to take China’s place. Manufacturing’s share of the economy typically starts surging when a country’s average income -- in terms of purchasing power parity -- crosses $5,000 and will continue to soar until $10,000, according to a McKinsey & Co. study. India’s per capita income on that basis is at $5,850 and China’s at $11,850, according to the World Bank estimates.

Yet challenges abound. India’s notorious bureaucracy contributed to the country ranking 142 of 189 -- that’s lower than Ethiopia and Sierra Leone, while China ranks 90th -- on the World Bank’s latest Ease of Doing Business Index. Red tape is so bad it usually takes 30 days and 12 clearances to get a company registered in the industrial hub of Noida, near New Delhi. That’s three times longer than in an OECD country.

And while it’s still early days for the campaigns, history points to China being more successful at getting things done. Three decades ago, both economies were at similar levels. China’s economy took off since then and exceeded $10 trillion last year, while India has yet to crack $2 trillion.

“The Chinese state is capable of articulating and consistently driving a set of goals,” APCO’s Martin said. “It’s a challenge for India to match that kind of consistency in its policy drive toward manufacturing. And that has to do with a really fundamental difference in the political systems which relates closely to India’s decentralized democracy versus China’s developmentalist one-party state.”