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Why are Chinese Products Cheaper?

Volume 14, Number 2 Article by P R Karthik , Muthulingam Suresh June, 2002

Why are Chinese Products Cheaper? :

Chinese products of comparable quality, novel conception and low prices have been flooding the Indian market. The differential in price ranges from 20% to as high as 50%. ?Dumping!? has been the outcry by our businessmen, nurtured over five decades by the license raj, and many industry circles have been clamouring for protectionism. Conversely, companies are sourcing products for the Indian market from China and some like the Patel Group are proposing to shift their entire operations to China.

One of the mainstays of the Chinese strategy of following a mass-production and mass-consumption formula, is to keep the profit margins low and cover the gap by the subsequent boost in sales. With ?Think big, think global? as its motto, the huge scale of operations of the Chinese industry is geared towards supplying not only the large domestic market, but also exporting extensively to global markets at cheap rates. When China opened up its economy to foreign investors, it simultaneously provided a significant thrust to the export potential through a judicious mix of state incentives and the free market mechanism. It created Special Economic Zones (SEZs) that were given preferential treatment. The export sector was given a boost by creating an extensive export network and dismantling impediments to the import of technology. The benefits accruing to Chinese manufacturers are essentially due to seven factors: economies of scale in manufacturing, tariff differentials, lower cost of capital investment, higher labour productivity, lower transaction, power and transportation costs.

An oft ignored aspect of the Chinese business acumen is the Chinese manufacturer?s vision to climb up the value chain and China's competencies in the higher end of the technology spectrum that requires highly skilled labour. The country?s state-level research institutions and major universities have opened research centres and bases that combine production, training and research.

China is doing what Japan did in the 1970s and South Korea in the 1980s. An alternative strategy for India could be to concentrate on building competitive advantage in the services and knowledge based sectors, allowing the Chinese to rule the manufacturing domain.

Reprint No 02201