Niche opportunities abound in China

During the last 10 years, a sea change has occurred as to how Indian businesses view China. The fear and awe has been replaced by a realistic understanding of Chinese import ‘threat’. Over the decade, Indian businesses acquainted themselves with Chinese markets by visiting Chinese trade fairs and developing business relationships.

Anil Bhardwaj, Secretary General, FISME

However, during this limited exposure to China what Indian businesses, particularly SMEs, missed was the rise of Chinese markets: for imported consumer and producer goods as well as for raw materials and intermediate products for processing for export to third-country markets. Indeed, China is set to overtake Japan as the biggest importer in Asia by around 2015. Many countries, particularly Asean, have lapped up the opportunities in the burgeoning Chinese market.

Asean exports to China increased on average by over 46% a year from the year 2000 to reach $52.4 billion in 2005. That was much higher than the annual growth rate of 4.3% in Asean exports to all markets outside China. Malaysia became the largest exporter to China ($12.7 billion) within Asean in 2003, a position previously occupied by Singapore at $10.1 billion. The previous trade deficits became surpluses in Malaysia and the Philippines, while deficits were lower in Thailand and Singapore in 2003. The Philippines’ exports to China have quintupled since 1999 (2005). Thailand’s exports to China doubled from $2.8 billion to $5.7 billion between 2000 and 2003. The bilateral trade deficits fell to 6% of exports in 2003, compared to 20% in earlier years. Indonesia, Malaysia, the Philippines and Thailand had exported mainly primary products to China in the early 1990s. By 2003, though, information and communication technology (ICT) goods had comprised three-fifths of those products.

If we look at bilateral trade between India and China, it has expanded phenomenally since the ’90s. During 2006-07, China absorbed 6.56% of total Indian exports, while providing for 9.13% of India’s total imports.

In the history of Sino-Indian relations, a very important milestone has been crossed as per India’s Economic Survey 2007-08. China has become India’s largest trading partner displacing the US and India has entered into the top-10 nation list of China’s. The bilateral trade between India and China is growing more than 50% per annum and is slated to cross the $100 billion mark within three years.

In this backdrop, the Federation of Indian Micro and Small & Medium Enterprises (FISME) commissioned a study to identify ‘Business opportunities for Indian SMEs in China’ under a project supported by UNCTAD, DFID and department of commerce. The study was conducted by Amitendu Palit of ICRIER.

The study brings out clearly that there is a huge market in China waiting to be tapped. However, these opportunities may not be spread sector wise but lie in product niches. For identifying competitive exports, the study looks at Indian and Asean exports to China in the last five years and also at products that the Asean countries and India are exporting to other parts of the world, but not to China, for gathering insights on competitiveness.

In a further detailed analysis of Indian and Asean exports to China, the report has identified exports that are common to India and Asean and the ones that are not. Competitiveness of Indian exports has been determined by employing tested empirical methods such as competitive revealed advantage. According to the study, there is a ‘ready market’ in product categories in sectors such as textiles and apparels, leather, chemicals and dyes and marine and tea/coffee. The study empirically brings out that Indian exports in these categories are very competitive.

In leather alone, China imports goods worth $4 billion, much greater than the entire exports from India to the rest of the world. Ironically, China so far has not been even on radar of Indian leather exporters. The products of Indian interest in China are trunks, suitcases, vanity cases and handbags with outer surface of leather; leather belts and bandoliers.

Indian exports in this category are just $2.7 million whereas the Chinese imports in the same are in region of $357 million. So there is a potential of expanding exports 13 times.

Similarly, in inorganic chemicals, China’s import in categories where India has a clear competitive edge is to the tune of $6.3 billion while India’s exports to China stands at $316 million. The scenario presents a major potential area for increasing our exports 20 times.

In textiles, the product categories where India has competitive advantage in exports is paltry $2 million, whereas China imported goods worth $137 million. That means a potential for increasing the exports 60 times.

The study provides insights that in sectors such as engineering and electronics, the potential of ‘mutualism’ and ‘collaboration’ is enormous. A large number of Chinese SMEs having excellent manufacturing facilities historically relied on Hong Kong-based traders for exports. Many Chinese SMEs do not have exposure of direct exports and they suffer from handicaps such as language, international commercial transactions among others. However, Indian Companies could tie-up with such Chinese SMEs, supplement them with their Indian operations and export to third countries. Examples, such as that of Mahindra and Mahindra in small tractors, underline a potential opportunity wherein their Chinese and Indian operations have complimented each other to win American Markets.

Therefore, the study provides solid evidence that in areas where India has clear competitive advantage over our competitors or where we could be the supplier of choice, even there we have not served the Chinese Markets to the fraction of the existing potential. Besides, there are a large number of niches for Indian SMEs to exploit in almost all product categories, which cannot be captured by empirical analysis based on cost alone. Such opportunities are based on smaller order sizes for special products, of some unique qualities and the like. These opportunities could be known only when Indian SMEs chase the Chinese Markets with the same vigour and tenacity as we chase the EU and the US Markets.