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issue: January 2006 APPLIANCE Magazine

Appliance Industry
New Delhi Report - India Vs. China


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by Adite Chatterjee, India correspondent

The media loves it. So do financial analysts and economists. The India-versus-China comparison invariably rears its head at seminars and conferences and is the flavor of the season for business writers in international media.

India lags behind China in terms of foreign direct investment (FDI). Compared to China's FDI of U.S. $50 billion, India's $5 billion FDI inflows seem like a drop in the ocean. Despite the fact that the Indian economy has been growing at 7 percent annually, India does not quite make the mark as the No. 1 destination for foreign investment. The reasons are many-ranging from a lack of infrastructure to restrictive labor laws, bureaucratic delays in getting necessary approvals and corruption.

India, however, has had no dearth of foreign investors. Virtually every large multinational-including Philips, Electrolux, Whirlpool, Samsung, LG, and others-has facilities in India to manufacture appliances.

What has been the impact of foreign investment on the Indian white goods sector? And what does the future have in store for the industry? APPLIANCE asked Rajeev Karwal, whose career in the Indian white goods industry has spanned more than 15 years and who has had stints in top managerial positions with three transnational companies: LG, Philips and Electrolux. Here is his assessment.

Foreign investment in the white goods sector in India has proved beneficial in more than just raising Indian manufacturing standards to global levels. It has also led to a tremendous improvement in quality of products and productivity of employees, Karwal said. The overall trend towards higher foreign participation in this sector has also translated into government reducing levies and duties. For instance, duties on air-conditioners have come down to 16 percent from the all-time high of 40 percent.

Consumers, Karwal said, benefit with products that meet global quality standards and with more consumer-friendly features, including better energy efficiency.
In terms of the sheer appliance market size, India has some catching up to do on China. Color TVs and refrigerators, to some extent, do boast big numbers-a 10 million CTV market and 3.7 million for refrigerators-but the numbers are still small in the majority of the other product segments like washing machines (1.6 million), air-conditioners (1.2 million) and microwave ovens (650,000). In terms of manufacturing capabilities, Indian strengths lie in areas that have a bias towards mechanical and electrical capabilities. Here, Karwal said, India has a competitive advantage because these segments are labor-intensive. Consequently, India has emerged as a world leader in the manufacturing of auto components. In electronics and plastics, India is simply not competitive on input costs.

Until this deficiency is overcome, Karwal said, India must continue importing electronic and plastic components to produce appliances. To grow the domestic market for appliances, a number of barriers have to be overcome, including unavailability of cheap and reliable power in rural areas and some urban areas, lack of infrastructure and poor roads. Purchasing power of a vast majority of the Indian population continues to be low and is a major barrier in terms of growth of demand.

However, there is no looking back for the Indian white goods industry. As India integrates into the global economy, purchasing power is bound to grow. With almost a million new homes being added as potential buyers of appliances every year, the industry is banking on big-time growth in the not-too-distant future. As domestic consumption grows, the industry is bound to develop further and attain global competitiveness.

The major difference between India and China, Karwal added, is in their economic models of growth. India focuses on an entrepreneurship-based growth model, and entrepreneurs are reluctant to invest in projects with a high gestation period. Chinese projects, on the other hand, receive stronger government support and the Chinese state funds large groups building large manufacturing plants that offer economies of scale.

One example is in the DVD players market. The Chinese government saw the potential in the innovation, which was developed by Philips, and invested huge sums of money to set up plants to manufacture DVD players and allied products, Karwal explained. The government's proactive strategies have helped China to become a leading player in the global consumer electronics scene. The Indian government, as well as the industry, need to recognize the fact that Indian products and processes have to continuously move up the value chain in order to enhance India's global competitiveness.

Such a national strategy, Karwal said, would help in quickly enhancing India's global competitiveness in this sector.

 

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