This might come as a surprise, but China is not as cost competitive anymore. China has a cost problem it does not recognise.
I am alternating posts between what India can learn from China and what China can learn from India. This is the first of what China can learn.
China’s great strength is that it can produce at low cost and on scale. There are other countries which are cheaper eg Vietnam. But none could match the scale and deliver the cost advantages. That was so in the past. Not true anymore. India is cheaper and can match the scale.
What has happened in China is that costs have risen and risen in the eastern seaboard where much of the economic activity has happened. And the currency, the RMB has strengthened. The twin impact has been that China no longer enjoys the massive cost advantage it had.
Like for like, India is cheaper than China. Cost of living in a top city in India vs a top city in China. Cost of labour in a small town in India vs a small town in China and so on. India is 20% cheaper. Subsidies distort the picture on both sides, but if you strip them away, this is the truth. One of my biggest surprises when I came to China was that everything was more expensive than India. Daily necessities like milk, bread, vegetables, fruits. Utilities like power, water. Cost of transport. Everything. Even toys are more expensive in China than in India.
This might sound counter intuitive because even now India is flooded with cheap Chinese imports. I predict that soon, this will dry up. Costs have crept up and China has not waged war on costs – this is a little bit like boiling a frog slowly. With economic prosperity has come some complacency in China. Costs are not attacked in business with the same intensity as in India. Indian business attacks costs like a maniac – without that they wouldn’t survive. China can survive for now, because there is simply no other option for production on such scale in the world. But margins are being squeezed. When a competing nation with the same capacity for scale comes, China will lose, if it doesn’t wage war on costs. This is one reason why its not succeeding in services.
Why is India not taking advantage of this cost competitiveness. It is, but on a smaller scale. Infrastructure is the bottleneck, as my earlier post observed. The American importer would rather pay 2 cents more to be sure that he would get delivery on the committed date.
The best time to cut costs is when the going is good. China , beware. Now is the time to learn cost competitiveness from India.
I am alternating posts between what India can learn from China and what China can learn from India. This is the first of what China can learn.
China’s great strength is that it can produce at low cost and on scale. There are other countries which are cheaper eg Vietnam. But none could match the scale and deliver the cost advantages. That was so in the past. Not true anymore. India is cheaper and can match the scale.
What has happened in China is that costs have risen and risen in the eastern seaboard where much of the economic activity has happened. And the currency, the RMB has strengthened. The twin impact has been that China no longer enjoys the massive cost advantage it had.
Like for like, India is cheaper than China. Cost of living in a top city in India vs a top city in China. Cost of labour in a small town in India vs a small town in China and so on. India is 20% cheaper. Subsidies distort the picture on both sides, but if you strip them away, this is the truth. One of my biggest surprises when I came to China was that everything was more expensive than India. Daily necessities like milk, bread, vegetables, fruits. Utilities like power, water. Cost of transport. Everything. Even toys are more expensive in China than in India.
This might sound counter intuitive because even now India is flooded with cheap Chinese imports. I predict that soon, this will dry up. Costs have crept up and China has not waged war on costs – this is a little bit like boiling a frog slowly. With economic prosperity has come some complacency in China. Costs are not attacked in business with the same intensity as in India. Indian business attacks costs like a maniac – without that they wouldn’t survive. China can survive for now, because there is simply no other option for production on such scale in the world. But margins are being squeezed. When a competing nation with the same capacity for scale comes, China will lose, if it doesn’t wage war on costs. This is one reason why its not succeeding in services.
Why is India not taking advantage of this cost competitiveness. It is, but on a smaller scale. Infrastructure is the bottleneck, as my earlier post observed. The American importer would rather pay 2 cents more to be sure that he would get delivery on the committed date.
The best time to cut costs is when the going is good. China , beware. Now is the time to learn cost competitiveness from India.
