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Roundtable-Discussion on “The Way Forward for Chinese Companies to Invest in India”

C3S Event Report No: 012/2019

The Chennai Centre for China Studies (C3S) held a Roundtable Discussion on “The Way Forward for Chinese Companies to Invest in India” led by a delegation from China. The delegation included Ms. Lishuang Chen, Co-founder, Hangzhou Yinfeng Cultural Creative Co. Ltd., and Mr. Arjun Natarajan, Executive Director, SNB Roadlines & Transports. The event was held at C3S on May 7 2019. Mr. Sunil Rallan, Managing Director, J Matadee Free Trade Zone Pvt. Ltd; Member, C3S, chaired the discussion.

Ms. Lishuang Chen and Mr. Arjun Natarajan work with both private sector companies and state-owned companies in China. Their primary aim is to help the Chinese companies realize the potential of the Indian market despite the many perceived challenges.

Mr. Sunil Rallan provided a brief introduction on the situation in China in the early 1990s. At that point, the aim of Indian companies via investing in China was to gain access to the Japanese skills sector operating within China, as Japan was yet to establish itself commercially in India. However at the time, Indian companies were not too keen on expanding their presence in China as the US was their main focus. Since the Beijing Olympics 2008, China has been considered a prime global market by global investors including those from India. In the present day, Indian companies face many indirect problems in China regarding import tariffs and Value Added Tax (VAT). In theory, VAT is levied on both domestic and imported goods. But in practice, it is seen that the domestic companies in China can sell their products in the market without VAT. The main difference between the policies in India and China is that, a policy in India is either beneficial or not beneficial to all companies alike; whereas in China, the policies are either beneficial to a few or not beneficial for many others. Despite these differences, there are still a few large Chinese companies that have been set up in India.

According to the Mr. Rallan, Chinese Small and Middle Enterprises (SMEs) should start investing in India, in order for them to tap the benefits of the unexplored Indian market. The core challenges that Chinese suppliers face in India is that many of the Chinese SMEs are of unknown brands who are primarily manufacturing enterprises for other large companies from the US and the UK. Therefore, they have no established relations in India or a strategy that they can use to set up their businesses successfully. Secondly, they face the problem of payment risk. Usually, the Chinese suppliers expect a 30-40% of the payment before dispatching a product to their customer. But the Indian customer is wary of the quality of the product and therefore is not willing to pay before inspecting the product. The Chinese suppliers also face the issue of safe storage in India. Initially, vendors used to push the surplus products from storage but now, to facilitate inspection of the product by consumers and to deliver the product in time, vendors practice ‘vendor managed inventory’ wherein, they pull only the required number of products so that their products would not be damaged.

It was further explained by the speaker that the advantages of trading from within the ‘Free Trade Zone’ (FTZ) would help the Chinese suppliers overcome their challenges. Firstly, by trading from a FTZ, the suppliers can maintain ownership over their products and would have a certain amount of control over the sales. Secondly, until the products are sold, they need not pay taxes or obtain import licences. Thirdly, if the parts of a product, for instance a machine, are sourced from different countries, it would be beneficial for the supplier to assemble and repack the product according to customer requirements, all from one place. Finally, trading from an FTZ would also enable the customer to inspect the product before purchasing it and it would allow the supplier to provide critical after sales services. In such a situation, the best strategy for the Chinese companies while investing in India would be to first enter as a trading partner, test the company’s product in the market and analyse how receptive the market is to the product, build relationships with local companies and then gradually localize their product in the partner country. It is important for the Chinese companies to see these grey areas in the system as opportunities for them to successfully set up their companies in India.

Mr. Arjun Natarajan explained the reasons for the Chinese being reluctant to invest in India. Firstly, Chinese SMEs are very cautious of the Indian market and are waiting to see a success story from any one of the larger companies that has already invested in India. They want to check the market’s receptivity before they could invest. Secondly, the Chinese government is yet to identify India as a viable market mainly due to a lack of in-depth knowledge about the Indian market. Besides, many Chinese investors hold a negative perception of India. Mr. Natarajan underlined that he and Ms. Chen are keen to meet their own primary objective, which is to bridge the gap between India and China and convince potential Chinese investors that investing in India would not only expand their businesses but also improve the geopolitical situation. Besides, with the US-China Trade War, China is slowly starting to see the need to expand into India.

Ms.  Lishuang Chen raised concerns regarding the two governments’ relationship, the policies that are already in place, and the perceived culture shock that the Chinese workers face when they work with Indians.

The two delegates also raised a major concern about the levels of return on investment in India. They are of the view that, for the same amount of investment in China and India and in a period of maybe 3-5 years, the returns on investment is significantly more in China than in India. This difference was mainly due to two factors:

Level of Disposable Income: The disposable income of the middle class in China is significantly more than in India mainly because the rising middle class in India is still not as high as that in China.

Labour Productivity: Though the labour cost in India is much less than the labour cost in China, labour productivity in India is still significantly low in both organised and unorganized labour markets. This statement was supported by the view that the productivity of one Chinese is equivalent to the productivity of five Indians. Mr. Sunil Rallan responded to this by highlighting how past experiences have shown the productivity of labour and eventually the sales of a company can be increased with adequate training.

In response to Mr. Arjun, Mr. K. Subramanian, Former Joint Secretary (Retd.), Ministry of Finance, Government of India; Treasurer, C3S, stated that the Chinese are much willing to invest time and human resources for training in Africa. If the same could be done in India, the results would be quadrupled.

Col. R. Hariharan, VSM (Retd.), Retired Officer of Intelligence Corps, Government of India; Member, C3S, pointed out that Chinese companies will be able to successfully conduct business in India after arriving at a model that would work in the Indian scenario, factoring in all the positives and negatives and by building confidence between the companies and the countries’ governments. On a similar note Mr. Rajaram Muthukrishnan, Investor and Director, Voice Snap Services Pvt. Ltd, Chennai; Member, C3S, stated that China needs to implement a proper Indian Business Model. The absence of a rigid framework does not encourage private entrepreneurship to flourish between the countries.

Mr L. V. Krishnan, Former Director- Safety Research Group, Indira Gandhi Centre for Atomic Research, Kalpakkam; Member, C3S, stated that China perceives India to be less organized than Southeast Asia, as the large number of Chinese diaspora in Southeast Asian countries facilitate better connections with their home country, China. In addition, the nature of payment systems in existence also hinders enhancement of trade between China and India.

Prof V. Suryanarayanan, Former Director, Centre for South and South East Asian Studies, University of Madras, Chennai, India; President, C3S, mentioned that India should market herself more to capture greater market space in China. The lack of language skills causes communication gap between the two countries’ people, and addressing this challenge is of paramount importance.

Mrs. Uma Balu, Founder and Director, Sahara Asia; Member, C3, described the high demand for designer ware and handicrafts of Europe in China. The Chinese are an artistic people and would appreciate the quality of Indian handicrafts. The Chinese also keen on traditional medicinal methods. Ayurveda and other Indian medicinal procedures would find a great market in China. The tourism industry is vital for bridging the two countries and the Indian tourism industry can be more adaptive to foreign visitors. To be specific, the accommodation and food should be in sync with visitors’ needs, including those from China. This will further improve people to people contacts.

Ms. Asma Masood, Research Officer, C3S, stated that the poor perception held by China of India may be due to the projections by the Chinese media. Business facilitation consultants such as Ms. Chen and Mr. Natarajan can dialogue with Chinese government officials that China’s media needs to portray the positive narratives of India. This would help dispel the hesitation held by some Chinese to setup business ventures or invest in India.

(Compiled by Interns, C3S- Ms. Anjana Balaji, IInd year B.A Economics, Stella Maris College, Chennai, and Ms. Harani Saravanan, IInd year M.A International Studies, Stella Maris College, Chennai.)

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