#BoycottChineseGoods makes no economic sense as India lacks China's manufacturing edge

Days after China created a “technical hold” on the United Nations Security Council’s (UNSC) declaration to term Masood Azhar a global terrorist, India has seen a call for a ban on Chinese goods from its trader community and consumers on social media sites such as Twitter, who trended the hashtag #BoycottChineseGoods last week. The call for a ban is neither the first nor unanimous as consumers continue to buy the latest mobile handsets assembled from imported Chinese parts.

Members of trade body Confederation of All India Traders (CAIT) have called for a ban on Chinese goods on the eve of the Holi festival on Tuesday, likely symbolising the festival’s tradition of getting rid of the evil by lighting a bonfire. With billions of dollars of investment and business at stake, the move, however, is not likely to have a real impact on business on the ground, according to sector analysts and channel checks at retail stores.

 #BoycottChineseGoods makes no economic sense as India lacks Chinas manufacturing edge

Red flags flutter outside the Great Hall of the People during the closing session of the Chinese People's Political Consultative Conference (CPPCC) in Beijing, China March 13, 2019. Image: Reuters

Chinese mobile phone players are in the lead in the Indian market

At the time when many in India were seeking a boycott of Chinese goods on social media sites, China’s Xiaomi, the leading smartphone brand in India with about a 29 percent market share, announced a Rs 3,500 crore investment in its India entity – its largest investment in the country till date, which will be used to expand business in consumer durables. In recent years, it has invested in at least 10 Indian startups.

Channel checks of mobile phone distributors across Mumbai, for example, does not show a dent in sales of such goods. Over the past five years, Indian consumers have increasingly favoured Chinese mobile phone brands from Xiaomi, Oppo and Vivo for factors ranging from better pricing to higher quality and features, helping them gain share from their global rivals Samsung, Nokia and Apple’s iPhone.

Three of the five top-selling mobile phone brands in India are Chinese in origin. However, a majority of these are now assembled in India with parts imported from China, buoyed by Prime Minister Narendra Modi’s Make In India initiative. Xiaomi, Huawei, and Chinese smartphone maker Oppo have also invested in manufacturing plants in India. A Xiaomi spokesperson was not immediately available for comment.

At least seven prospective phone buyers that we spoke to, said they are considering buying either a Xiaomi’s Mi or Oppo’s Realme brand of smartphone.

Dhruv Talra, 28, a Delhi-based software professional is in a hurry to buy a new phone after having accidentally broken his present Samsung handset and has considered models from Nokia, Xiaomi, Realme and Samsung. He has narrowed down on the Redmi Note 7 Pro and Samsung A50. Talra doesn’t think much of the noise on social media seeking a ban on Chinese goods.

“There isn’t really a manufacturer who fully produces mobile phones in India. Most of the hardware is produced in China and some phones are only assembled in India such as the Mi ones,” he says adding that a complete ban on such goods would be difficult in the absence of a legislation.

Indian startups bankrolled by Chinese companies

Last week, China blocked for the third time a declaration by the UNSC to blacklist Pakistan-based jihadist Azhar as a global terrorist. He is the head of Jaish-e-Mohammed, which had claimed responsibility for the recent Pulwama attack. India has said it is “disappointed” with China’s blocking of the decision but has not taken a strong stance or openly confronted China. On its part, China claims to be playing a constructive role in easing tensions between India and Pakistan, Reuters reported on Tuesday. This is what triggered the call for the ban of Chinese products on social media last week. But actually implementing it on the ground is an altogether different matter.

According to a KMPG report this month, Chinese companies have invested nearly $2 billion in Indian startups during 2017 alone — a clear indication of their desire to expand in a growing India market.

Chinese giants such as Alibaba, Xiaomi, Tencent Holdings, Ctrip, have invested several billion dollars’ worth investments in Indian tech startups. It’s not just about physical products, top Android apps downloaded in India including TikTok are also from China. PUBG Mobile, the game that has hooked the entire nation, is also owned by a Chinese company. India’s largest ecommerce payment giant Paytm’s parent One97 Communications counts Japan’s Softbank Inc, China’s Alibaba, Asian private equity firm SAIF Partners, and US-based Berkshire Hathaway as its key investors.

Advertisements of Paytm, a digital wallet company, are seen placed at stalls. Reuters

Advertisements of Paytm, a digital wallet company, are seen placed at stalls. Paytm counts China's Alibaba as its investor among others. Reuters

The shift to India comes in the backdrop of a slowing domestic market in China. India’s favourable growth and cheap labour are a plus.

Chinese authorities are expected to take measures to support the economic weakness with industrial output falling to a seventeen-year low, an SMC Global Securities Ltd report said on Monday.

“China Industrial production rose 5.3 percent year-on-year in the January to February period, the National Bureau of Statistics said, which was less than the 5.6 percent gain economists had forecast. The pace of growth was reportedly the weakest since 2002,” the SMC Global report said. This year, China could run its first annual current-account deficit since 1993, according to a 16 March report in The Economist.

China is the biggest trading partner for India. India, which is the world’s third largest automobile market, imports ten times more auto components from China than it exports. India will rely more on China for auto components for electric vehicles, according to a report by brokerage Stewart and Mackertich Wealth Management Ltd.

In the financial year 2018 alone, Chinese exports to India touched $4.3 billion.

China has the manufacturing edge that India lacks

As #BanChineseGoods and #BoycottChineseGoods trends, the efficacy of this movement may be questionable. When viewed from the economics perspective of international trade, the banning of Chinese goods definitely helps in boosting the patriotic sentiment but may fail to leave a dent in the real world. The impact of such a boycott, which lacks the necessary fangs to go for the kill, may not be realistic till India decides to impose such a ban or advises its consumers to boycott such goods.

China does enjoy an absolute as well as comparative advantage over India when it comes to the manufacture of a majority of goods – from tech, white goods, auto components, to household items. The burgeoning trade deficit over the last decade gives enough clues to conclude that India's imports from China are way ahead of what it exports to them. And given the fact that China excels in the technical expertise when it comes to production, complemented by the inexpensive resources of labour and capital, it would be foolhardy to assume that it could be so easy to just support the ban by a handful of citizens represented over social media or off it.

According to this Business Standard report, in key industries such as pharmaceuticals, textiles, toys, bicycles, renewables, Chinese imports count for a significantly high percentage, to just pull the plug overnight thanks to a Twitter hashtag.

imports ten times more auto components from China than it exports. Image: Reuters

imports ten times more auto components from China than it exports. Image: Reuters

In a hypothetical scenario, the repercussions of this boycott would be dire for India in the simplest form of the increase in the cost of goods. This will lead to an increase in the price of the domestic goods, which shall lead to an increase in spending, decrease in savings and could spiral into an inflationary regime.

If this momentum were to make a dent in the real sense, it would involve bringing about a change in the fiscal policies which dictate the terms of trade between the countries. Trade restrictions that have actual fangs in the form of tariffs, quotas, export subsidies, minimum domestic content, et al., need to be activated for the boycott movement to prevail.

However, fortunately, the legislation does not work solely on the sentiments of a few netizens as better sense would prevail amongst the lawmakers before taking drastic measures. Till then, the social media can only take solace in the fact that the boycott sentiment shall be equated to patriotism during the festivals which will actually limit the purchase of colours during Holi and crackers during Diwali.

Ironically, tweeting about it shall invariably continue via phones made of Chinese components!

The authors are independent financial writers based in Mumbai

Updated Date: Mar 20, 2019 11:17:34 IST