Why can’t India manufacture cheaper products as compared to the Chinese?


Answer by Prasanna Venkatachari:

China has been able to produce and sell cheaper products than most other countries , not just India. However, let us see what are the key factors that enabled Chinese to produce and sell cheaper products.
1.  Cost Efficient Labour  The notion that China has the world’s lowest paid labour is only partly true. There are other countries like Srilanka , Vietnam whose labour wages are upto 30% lesser than China, but what makes the difference is the efficiency of the Labours. Infact in the last four years Chinese labour wages has been consistently increasing by 15% a year.
The increase in wages is equally matched by increase in productivity.
China’s productivity growth has been and remains far ahead of that of most other countries in the world. Between 1990 and 2010, China’s annualized average productivity growth rate was 2.8 percent, far greater than that of the United States and Japan (0.5 percent and 0.2 percent, respectively).

A Chinese factory making iPhones was able to rouse 8,000 workers from their dormitory and put them on the assembly line at midnight, according to the New York Times. Not the next day. Midnight. Nowhere else are such feats feasible.
2. Commendable supply chain  Supply chain activities transform natural resources, raw materials, and components into a finished product that is delivered to the end customer. China's supply chain is sophisticated and flexible. China’s biggest advantage is their domestic availability of the most of the raw materials required to manufacture a given product (for eg. Electronic components).

3. Competitive Pricing  China can afford to price so competitively because it does not take on certain costs, such as R&D and product innovation. Two reasons for this, Firstly , Most of their manufacturing orders comes from abroad i.e only the developed idea need to be manufactured and secondly, the Lack of IPR(Intellectual Property Enforcement) meaning the products can be easily copied. When Honda launches a product any where in the world, China copies it without delay. Same is the case with many products in electronics as well.

4. Mass Productivity and Dumping The components or products going into production really are mass produced at an aggregate cost and China follows a strategy called dumping. Dumping is the act of a manufacturer in one country exporting a product to another country at a price that is either below the price it charges in its home market or is below its cost of production. The goal of "dumping" is to capture the market or destroy the competition , which China does so effectively*.

*Though there are many countries including The US have been imposing anti-dumping tariff on China.

5.  The controversial currency manipulation  The Yuan is manipulated and pegged undervalued to the US dollar. So the price quoted in US dollar will be cheaper than normal. The manipulation has affected the domestic price of the product and labour wages to a troubling level as It has been kept much lower than it should have been.

What India needs to do to catch up( Not just with the low cost products but overall manufacturing)

In Simple terms,

  • Encourage FDI, Relax rules, Encourage Indian entrepreneurs
  • Push disproportionate percentage of workforce in Agriculture into           manufacturing sector
  • Transformation of unskilled labours into skilled labours
  • Improve logistics and infrastructure and power efficiency
  • Improve overall export (currently 1.7% of world export is India’s)

I have also discussed these points elaborately here: Prasanna Venkatachari's answer to Would the 'Make in India' message of PM Modi excite global investors? What needs to be done to make it happen?

Why can't India manufacture cheaper products as compared to the Chinese?


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