China sourcing loses charm for Indian cos

Discussion in 'Economy & Infrastructure' started by Yusuf, Dec 8, 2010.

  1. Yusuf

    Yusuf GUARDIAN Administrator

    Mar 24, 2009
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    BANGALORE: China's manufacturing costs are reaching levels that are now forcing some companies that source products from the land of the dragon to reduce such sourcing and manufacture these in India more economically.

    Watch and jewellery major Titan Industries, which sources watch components from China, said it plans to restrict such sourcing and instead make additional investments in its manufacturing facility in Tamil Nadu. Similarly, it is now cheaper for Dell to supply PCs from India than from China, especially to countries in the Middle East, Africa and the CIS countries. Dell, which started exports of PCs from its Sriperumbudur plant near Chennai earlier this year, has become the first major PC brand to export out of India and is now exporting several thousand units every month to West Asia.

    That's not all. Indian auto component major Sona Group also has considered sourcing parts from China in the past but sees no significant cost advantage in doing so. The tide therefore clearly appears to be changing.

    Bhaskar Bhat, MD of Titan Industries, puts it in perspective. According to him, the firm has been outsourcing a lot to Chinese manufacturers, but "that's becoming a challenge as costs are going up". "We want to derisk," he adds.

    Chinese costs have risen significantly, and more so in recent months as the country has eased its monetary and currency policies. China's central bank raised benchmark borrowing and deposit rates in October for the first time since 2007 and increased the reserve requirement for banks twice in November. Since June 19, when it introduced a more flexible exchange rate policy, China's currency renminbi has appreciated by 2.6% against the dollar, making Chinese exports more expensive.

    The expectation is that the currency will rise further in the coming months. Labour has become expensive, especially along the coastal belt, which has been the focus of China's developmental efforts in the past decades. In the past one year alone, labour cost is said to have gone up by 21%. China has also imposed stricter pollution control norms on its industries, compelling them to make relevant investments.

    It's perhaps for these reasons that the Sona Group, does not sees any significant cost advantage in sourcing from China. "We do import a small portion of our forgings supplies from China for one of our group companies. However, because the prices of parts in India and China are similar and owing to the distance and lack of clarity about China's currency situation, most of our sourcing is done within India," said Surinder Kapur, chairman of Sona Koyo Steering Systems.

    India has been second to China in Deloitte's country ranking of manufacturing competitiveness in recent years, and from most accounts, the difference is narrowing. The rising costs, combined with India's growing manufacturing prowess, partly explain why, as TOI reported recently, India exported more automobiles than China did between January and July this year. While India exported 2.3 lakh cars, vans, SUVs and trucks during this period, a growth of 18%, China's exports tumbled 60% to 1.65 lakh units. The same reasons explain why Nokia today exports mobile handsets to some 70 countries, including North America and Europe, from its Sriperumbudur facility.

    Aravind Melligeri, chairman of QuEST Global, which makes aircraft components in its SEZ in Belgaum, Karnataka, in joint ventures with foreign firms, said US and European firms are worried about labour unrests in China affecting delivery cycles and escalating costs.

    "China's currency appreciation is also hurting costs," he said.

    Bhat estimates that the overall cost base (labour and fixed costs) of his Chinese vendors has gone up by 50%. "They have not passed all of that on to us. But sooner or later they will have to ask for a further price increase. And that's when we will find it really difficult," he said.

    However, not everybody is rethinking China. Arvind Walia, MD of Gabriel India, which makes auto parts like shock absorbers and struts front forks, said China would remain a major sourcing destination for the company.

    Read more: China sourcing loses charm for Indian cos - The Times of India

    Pretty interesting this. I wish I could get more figures on who is stopping sourcing from china and which sectors. I just came back from a tour of SL where all those who i visited were sourcing from China.
    I would say good news this for India.

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