China’s ‘predatory pricing’ hurting Indian Industry

by Manshu on June 14, 2009

in Opinion

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From FT: HT Economists View

India’s Federation of Chambers of Commerce and Industry said on Sunday that a survey of 110 small and medium-sized manufacturers found that about two-thirds had suffered a serious erosion of their Indian market share over the past year, because of cheaper Chinese products.

In its statement, FICCI said the Chinese imports were between 10 and 70 per cent cheaper than comparable Indian products, a price differential that it said was “huge and difficult to explain”. Amit Mitra, the FICCI’s secretary-general, said Indian industries were being hurt by “typical Chinese predatory pricing” intended to drive rivals out of business so that Chinese companies could capture the market – and then raise prices to more normal levels.

Customer’s Perspective

While Chinese manufacturing is structurally cheaper than Indian manufacturing, the cost advantage doesn’t explain the difference in price alone. In most cases, if it is cheaper, then it is poor quality as well.

Most customers know about the cheap quality and if they are still buying, that means the difference in quality doesn’t matter to them.

This is true for things like decorative lights that need to be used once a year for Christmas or Diwali. Since, you have to use it just once in a year; it doesn’t matter if it doesn’t work after that. Our family works on that philosophy and I am sure many others do too.

Customers seek quality in things that are slightly more durable in nature. Like a mobile phone, you really don’t want a cheap mobile phone, if you have to replace it every three months and that is where quality matters. Same is true for washing machines and televisions and probably that is the reason you don’t see a lot of TV or Washing Machine manufacturers complain about Chinese competition.

Manufacturer’s Perspective

From the perspective of manufacturers; not all manufacturers complain about Chinese competition. When the ban on Chinese toys was imposed, a lot of Indian manufacturers complained about it. They were sourcing from Chinese companies and then branding it under their own names or assembling the final goods and selling it. So, because of the ban, they were not able to source goods from China and then resell them and it hampered their business too. So, in that respect, the FICCI statement just shows one side of the story.

Protectionism

Indian companies are competing with multinationals many times their size in global markets. They are doing well in difficult markets and some have even set up shop in China. During recessionary times, it is tempting to fall back on protectionist measures, and countries all over the world are doing it. There is no reason to protect industries at home, if we want to develop a sector that can compete at the global level.

Rationalizing labor laws, providing tax incentives and improving infrastructure are the right ways to compete with China and not protectionist garbage.

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