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2006-03-11 India-Pakistan
The Microeconomic Rise of India
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Posted by john 2006-03-11 18:53|| E-Mail|| Front Page|| [511 views since 2007-05-07]  Top

#1 Interesting. Much of the same irrationality displayed in the Great Leap Forward.
Posted by Nimble Spemble 2006-03-11 19:45||   2006-03-11 19:45|| Front Page Top

#2 China's already facing a worker shortage for their industries at current wages. As soon as they try to mimic the model of running factories in less well-developed countries they are going to come smack up against their lack of management structures, accountability measures and incentives.

I just hope they do it slowly so that WalMart has time to source elsewhere. ;-)
Posted by lotp 2006-03-11 19:50||   2006-03-11 19:50|| Front Page Top

#3 Article: According to a UBS report, during the 1998-2003 period, the average return on capital employed (ROCE) for an Indian firm was about 17%. For Chinese firms the figure was only 11%.

The writer uses these number to suggest that Chinese state subsidies promote the inefficient use of capital. However, another reason for the lower returns might be that it is more difficult to start up a company in India, and easier to start one up in China. Competition could simply be more brutal in China. Note that there is lots of foreign investment in China. This means a lot of foreign firms are producing for the Chinese market, reducing returns for Chinese firms. There is little foreign direct investment in India, which means little competition for India firms producing the same thing. Could this be why Indian firms are making more money?

The one thing Yasheng Huang doesn't seem to understand is that companies in closed economies are hugely profitable. This is because the state makes it difficult for competitors to enter their markets. In closed economies, it's the *people* who make no money.
Posted by Zhang Fei 2006-03-11 20:34|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com]  2006-03-11 20:34|| Front Page Top

#4 The key metric is the return on capital. Investors have been pouring money into China despite the fact, they aren't getting the return they could get elsewhere. The reason is that the investors believe that sometime in the future the payback (from investing in China) will warrant the poor returns they are currently recieving. "We can't afford not to be there, even if we aren't making any money from being there." If this sounds reminiscent of the Internet bubble, its because the thinking is the same. Will it end in a similar bust? I'd say the chnaces are a lot higher than many think.
Posted by phil_b">phil_b  2006-03-11 20:42|| http://autonomousoperation.blogspot.com/]">[http://autonomousoperation.blogspot.com/]  2006-03-11 20:42|| Front Page Top

#5 phil_b: The key metric is the return on capital.

Return on capital has been very high in India even before the recent opening of its economy. It's when return on capital starts to head south that we will know that India's economy has truly opened up. Efficient use of capital doesn't mean returns are high - it means that capital is allocated where returns are the highest - it's a relative kind of thing. Returns in China are low because the Chinese savings rate is high, meaning capital is cheap and domestic competition is therefore ferocious. Returns in India are low because the Indian savings rate is low, meaning capital is expensive and domestic competition is therefore tame. The treatment of foreign investors in India is also atrocious - this is why most of them avoid India despite over a decade of hype. Note that Enron walked away from a billion dollar power plant investment in India - that's $1b hard-earned simoleons it had to write off. Companies like Enron invest in India. Companies like Intel invest in China.
Posted by Zhang Fei 2006-03-11 20:51|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com]  2006-03-11 20:51|| Front Page Top

#6 phil_b: The reason is that the investors believe that sometime in the future the payback (from investing in China) will warrant the poor returns they are currently recieving. "We can't afford not to be there, even if we aren't making any money from being there." If this sounds reminiscent of the Internet bubble, its because the thinking is the same. Will it end in a similar bust? I'd say the chnaces are a lot higher than many think.

The Internet bubble involved handing out free goods and services in return for mouse-clicks. The China phenomenon is part of a well-trodden path first explored by other East Asian countries. In fact, many of the major foreign investors in China are the ex-tiger economies - they are there because it is cheaper to manufacture in China. Japan used to manufacture in Southeast Asia. As did Korea. As did Taiwan. As did a host of American and European companies. They have moved some of their facilities to China.

The Internet, in contrast, was pure hype. Advertising revenues will pay companies to hand out free goods and services. Consumers will start spending a much bigger chunk of their household income on telecom-related services.

By contrast, the China story isn't even particularly Chinese - it's a story of manufacturing being moved to a poor country because of it opens up its economy. In effect, it's a rerun of what the tiger economies experienced in the 70's, 80's and 90's, except China has a deeper pool of cheap labor. India hasn't opened up its economy. That's why the profit margins of domestic firms is high. Once foreign companies are allowed in, Indian companies are going to get crushed, and returns will plummet, as they have for Chinese firms.
Posted by Zhang Fei 2006-03-11 21:03|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com]  2006-03-11 21:03|| Front Page Top

#7 Crushed?

Some Indian companies are doing quite well in international competition - like Bharat Forge, Reliance, Tata



Posted by john 2006-03-11 21:09||   2006-03-11 21:09|| Front Page Top

#8 john: Crushed?

Some Indian companies are doing quite well in international competition - like Bharat Forge, Reliance, Tata


No offence - but has foreign competition been allowed in their home markets? Has Honda been allowed to build a plant in India to compete with Tata? Gimme a break.
Posted by Zhang Fei 2006-03-11 21:16|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com]  2006-03-11 21:16|| Front Page Top

#9 err.. yes

http://www.hondacarindia.com/about/honda_in_india.asp
Posted by john 2006-03-11 21:22||   2006-03-11 21:22|| Front Page Top

#10  like Bharat Forge, Reliance, Tata

...Mittal Steel. I don't think you can discount the experience some of these companies gain in the global market.
Posted by Rafael 2006-03-11 21:29||   2006-03-11 21:29|| Front Page Top

#11 It seems Intel has announced investments of 1 billion in India

Nokia has just opened a plant
"Built up in 23 weeks, the plant commenced commercial production from January 2 this year and has already made over one million handsets. The facility currently has around 1100 employees."
Posted by john 2006-03-11 21:31||   2006-03-11 21:31|| Front Page Top

#12 John, a Honda Accord costs $40,000 in India. It costs about $28,000 at worst stateside. Tariffs are involved. Honda isn't competing on a level playing field with Tata.

Note also that Honda lost US$30m in a single strike at its Indian operations. You don't get that kind of thing in China:

Labor dispute at Honda Motor Co's motorcycle factory in India that developed into clashes between workers and police on Monday is hurting production, with the company incurring a loss of 3 bln yen to date, the Nihon Keizai Shimbun reported without citing sources.

The dispute was triggered by the dismissal of four and the suspension of 50 employees for stopping production lines, with workers going on strike at the end of May, the business daily said.

The average production units at the factory dropped to 400 motorcycles a day in June, although production has gradually recovered to 1,000 units, the Nikkei said.

Honda Motorcycle and Scooter India Pvt, a wholly-owned subsidiary of Honda, account for 25 pct of Honda's global motorcycle output.

Honda said the company is investigating the link between the labor dispute and the demonstration.
Posted by Zhang Fei 2006-03-11 21:33|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com]  2006-03-11 21:33|| Front Page Top

#13 Mittal Steel.

Mittal is a peculiar case hard to ategorize it as an Indian company - it is only now building a plant in India. A lot of top management is poached from the state owned Steel Authorty of India though...


Posted by john 2006-03-11 21:35||   2006-03-11 21:35|| Front Page Top

#14 Note also that Honda lost US$30m in a single strike at its Indian operations. You don't get that kind of thing in China:

Do you know what was behind these series of strikes against Japanese plants?

Response to a Japanese minister suggesting that companies investing in China should hedge their bets and invest in India also.

Karat - the leader of the CPI(M) Communist Party of India (Marxist) paid a visit to Beijing.
When he returned (with his orders), the unions launched their attacks.

Posted by john 2006-03-11 21:39||   2006-03-11 21:39|| Front Page Top

#15 The Honda plant would be sourcing its parts locally so import tariffs would not apply.
There are heavy excise duties on car purchases though..



Posted by john 2006-03-11 22:03||   2006-03-11 22:03|| Front Page Top

#16 The imported Honda units are of course another story...
the tariffs would apply..
I doubt Tata has a car in that category though...
The Honda would compete against other brands

Posted by john 2006-03-11 22:06||   2006-03-11 22:06|| Front Page Top

#17 Looking at the Tata page, there doesn't seem to be a model in the Accord category...

http://cars.tatamotors.com/tatamotors/index.aspx
Posted by john 2006-03-11 22:15||   2006-03-11 22:15|| Front Page Top

#18 India has all those things (which I don't actually understand) + Aishwarya Rai. It's just unfair!
Posted by gromgoru 2006-03-11 22:24||   2006-03-11 22:24|| Front Page Top

#19 John: Do you know what was behind these series of strikes against Japanese plants? Response to a Japanese minister suggesting that companies investing in China should hedge their bets and invest in India also. Karat - the leader of the CPI(M) Communist Party of India (Marxist) paid a visit to Beijing. When he returned (with his orders), the unions launched their attacks.

A Honda Accord costs $30,000 in China (China charges a 20% tariff on the auto parts imported for assembly by Honda, but Chinese auto assembly wages are $2 per hour). Vs $40,000 in India. And $28,000 in the US. Not real surprising why profits for Tata are high - it's sitting behind high tariff barriers, as India's state-approved national champion.
Posted by Zhang Fei 2006-03-11 22:25|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com]  2006-03-11 22:25|| Front Page Top

#20 On topic stuff here:

http://p081.ezboard.com/fhinduunityfrm10.showMessage?topicID=37.topic

Posted by Listen To Dogs 2006-03-11 22:30||   2006-03-11 22:30|| Front Page Top

#21 Note that Enron walked away from a billion dollar power plant investment in India - that's $1b hard-earned simoleons it had to write off. Companies like Enron invest in India. Companies like Intel invest in China.

I could mention Motorola's huge investment in semiconductor plants in China. The same semiconductor division that later went on to take a big nosedive.

Anecdotes are not data.
Posted by Phil 2006-03-11 22:31||   2006-03-11 22:31|| Front Page Top

#22 Phil: I could mention Motorola's huge investment in semiconductor plants in China. The same semiconductor division that later went on to take a big nosedive. Anecdotes are not data.

Actually, they are points of data. Motorola's semiconductor division was losing money and is an also-ran - that is why it was spun off. Enron's power plant division was perhaps the only money-making division at the company. So Motorola lost money in semiconductors in China - heck, it lost money in semiconductors worldwide. Enron made money with power plants, but lost money in India.

Motorola has other investments in China - notably in cell-phones. It made huge amounts of money there, and is now reclaiming the top spot it once had in China - from Nokia.
Posted by Zhang Fei 2006-03-11 22:59|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com]  2006-03-11 22:59|| Front Page Top

#23 Zhang, I was specifically referring to FDI, which by definition can choose any country to enter. FDI should flow to where it generates the highest returns (discounting risk). We both agree that in the case of China it doesn't. So either economic theory is wrong or FDI flows to China for reasons other than return on capital in the normal timeframe of.

I still maintain the comparison with the dotcom bubble applies.
Posted by phil_b">phil_b  2006-03-11 23:32|| http://autonomousoperation.blogspot.com/]">[http://autonomousoperation.blogspot.com/]  2006-03-11 23:32|| Front Page Top

#24 Phil: Anecdotes are not data.

Speaking of data - savings rates are much lower in India, and investment returns are higher. This should mean that India's population buys more stuff. Let's look at auto sales in 2004. Chinese consumers bought 5m cars in that year. India's number was 1m.

This suggests one thing to me - the Chinese are under-reporting, not over-reporting growth rates. There's a rational reason for this - during the ideological era of the Great Leap forward, the incentive was to over-report, because the alternative - accurate reports about the dismal failures of collectivism - was being executed as a capitalist roader for sabotaging the Chairman's great plans.* Today, reporting high provincial growth rates means bigger demands from the central government for taxes, which are collected by the provinces (unlike in the US, where they are handed directly to the respective levels of government - city, county, state, federal). All of the provinces are sandbagging to evade central government demands for tax revenues.

But doesn't lackadaisical reported economic performance pose a threat to the jobs of government officials? No - because (1) they get and keep their jobs not for performance reasons, but because of favors rendered to specific higher-ups and (2) high single-digit percentage growth is nothing to sniff at. And if they're fired, there's lots of favors they can call in - lots of ex-officials have turned successful private businessmen. Note that Deng Xiaoping had no official position immediately prior to becoming China's top leader - all he had were scads and scads of favors rendered while coming up through the ranks before becoming the commander of the Chinese military. But just prior to becoming China's top leader, he had been purged (dismissed) from his official positions for years.

* Many provincial officials would have liked to report the correct (but dismal) numbers during the great disasters of that period. But they would have been shot, and new officials instituted to report the sparkling numbers the Great Helmsman (Mao) expected to see. So they provided falsely optimistic numbers, confiscated entire harvests for central government coffers and left tens of millions to starve.
Posted by Zhang Fei 2006-03-11 23:44|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com]  2006-03-11 23:44|| Front Page Top

#25 phil_b: Zhang, I was specifically referring to FDI, which by definition can choose any country to enter. FDI should flow to where it generates the highest returns (discounting risk). We both agree that in the case of China it doesn't. So either economic theory is wrong or FDI flows to China for reasons other than return on capital in the normal timeframe of. I still maintain the comparison with the dotcom bubble applies.

Actually, I wouldn't agree that FDI doesn't flow to where it achieves the highest return in China. It's not a mania. SC Johnson, Procter and Gamble and other consumer goods companies have plants in China not because they are blinded by a myth, but because they are competitive against Chinese manufacturers, who sell products for about the same prices as they do. A bottle of body wash (which the Chinese seem to prefer to bars of soap) sells like hot cakes despite its sticker price of 30RMB, half-a-day's pay in the wealthier cities. I can't imagine the average American paying $4 for a bar of soap. But the average Chinese will pay 30RMB for a bottle of body wash. The Chinese market is a gold mine for foreign companies currently, and is likely to become a much bigger factor in years to come.

Why do foreign companies invest in China? Because of China's liberal investment policies, as well as its low costs. Goods from China are cheap because Chinese land and labor are cheap, and because China has fewer investment restrictions than countries like India, Korea and perhaps even Thailand. Returns on domestic Chinese investments are low because China is awash in capital, not because of inefficient allocation of capital. But foreigners make good money in China because the opportunity is large, and they invest only in those sectors where they can make money.
Posted by Zhang Fei 2006-03-11 23:55|| http://timurileng.blogspot.com]">[http://timurileng.blogspot.com]  2006-03-11 23:55|| Front Page Top

23:55 Zhang Fei
23:55 2b
23:44 Zhang Fei
23:42 trailing wife
23:39 Jules
23:32 phil_b
23:28 trailing wife
23:21 doc
23:16 Zhang Fei
23:13 Bobby
23:12 Sherry
23:02 Anonymoose
22:59 Zhang Fei
22:56 Silentbrick
22:50 trailing wife
22:45 Pappy
22:42 Fred
22:39 BA
22:38 Pappy
22:31 Phil
22:30 Listen To Dogs
22:30 Zhang Fei
22:25 Zhang Fei
22:24 gromgoru

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