China Intelligence Report: November 2007

Pacific Rim Alliance Opens New Office in India
Move Gives PRA Increased Capabilities for Clients and Adds to Asian Presence

Pacific Rim Alliance (PRA), which provides on-the-ground analysis and support of Asian business options for U.S., South Asian and European companies, announces it has opened its fifth global operations location in Hyderabad, India.

Pacific Rim Alliance, which also has business operations locations in Grand Rapids and Ann Arbor, Mich., Sydney, Australia, and Shanghai, China, opened the new office because of increasing opportunities for its clients working in the automotive industry. “Our new Indian location gives PRA new capabilities and an option for our clients,” PRA CEO David Hemmings said. “With out newest location, many of our customers will be able to capitalize on India’s emerging status as a major player in global manufacturing.”

The Hyderabad location was chosen because of its proximity to two large Indian shipping ports in Mumbai and Chennai. “One of the things that attracted us to India, in addition to work we have already engaged in with one of our manufacturing clients, are the growing opportunities that exist for companies wanting to sell into the Indian market,” Hemmings said. “India is growing leaps and bounds in two specific areas: the automotive sector and smaller vehicles as well as the county’s ability to handle higher complexity manufacturing jobs.”

Hemmings believes now is the time for automotive suppliers to begin looking at facilities in India to support the country’s burgeoning automotive market and says if “they don’t get there soon, they will not have the opportunity.”

Understanding the Automotive Business Opportunities in China versus India

U.S. automotive and manufacturing supplier companies are now questioning whether to expand their businesses to either India or China. However, there is only one response, annoying as it may be to hear -- “It all depends.”

It depends on: Where you are in your business. What product or service you provide and what immediate business objectives you want to achieve. And what are your short- and longer-term goals/strategies? While you determine your answers to those questions, let’s compare the potential and opportunities in both China and India, with a few directed observations from me, and leave you to distill the answer that most applies to your company.

Don’t look to the media for facts to help you make your decision. The facts you seek are unlikely to be available in the press, yet the fear some articles propagate may force you to feel you should react. Here are a few real facts. Where they require further analysis, I have attempted to represent not just the numbers, but also the relevance – using the automotive market as an example.

Let’s consider the recent newspaper headline:
India’s Car market Grows at an Average of 20 Percent a Year, Outpacing China

In 2006, the most recent year we have total and validated numbers for, China built 7 million vehicles and India built 1.94 million (of this number domestic passenger cars were 1.00 million). For the first time, India’s car market grew slightly faster than China’s did at over 20 percent. This percentage comparison has led to the assertion that India’s automotive market may be a more attractive business opportunity than China’s. While its higher growth rate may be technically correct, it is an irrelevancy...

Consider that the average sales price of an Indian vehicle was US$3,000, while the price of the average Chinese vehicle was in excess of US $21,000, and you can see that the unit market is 350 percent larger and 700 percent more valuable, even if it is ONLY growing at 16 percent versus India’s 20 percent.

How Many Car Companies are there in China and India? At the end of 2005, we calculated there were 130 companies in China actually manufacturing vehicles. By the end of 2006 these had consolidated to around 100, and today the numbers continue to shrink. As we approach the end of 2007, consolidation has resulted in numbers that tell us there are now 16 foreign joint-ventured companies with 24 production facilities and about 45 wholly Chinese car manufacturing companies. That adds up to about 61 individual Chinese-based companies making cars. India, meanwhile, has 19 major players in the country with four wholly owned Indian companies and the rest a mixture of Indian and foreign joint venture operations with local labor producing recognizable models for the Indian market. It must be said that these Indian off-shore companies are recognizing the need to design specifically for the Indian market as the purchasing power of the Indian market is still very low. This is resulting in the average Indian car being very small indeed, and many are in fact three-wheel motorized carts.

Car Ownership per Capita. As of July 2007, India had a population of 1.1 billion and China 1.3 billion. The United States has just reached a population of 300 million, and we luxuriate in an average ration of 468 vehicles per 1,000 of the total population. (Before you point out that many of you have two cars, remember those who are too young, too old, too ill or too poor to own and drive a car.) The rest of the world lags behind to varying degrees. Europe is about 400 per 1,000; Central America 130 per 1000. Meanwhile, China is about 10 per 1000 and India six per 1000. Virtually all real growth for first-time new-car sales (rather than replacement) are expected to be in India and China and both are expected to catch up quickly, resulting in the forecast that by 2020 we may be building a 100 million cars a year. This year, 2007, probably will result in about 60 million new vehicles being produced worldwide, and, as production numbers in many western countries are declining, the expected manufacturing growth rate for China and India is nothing short of meteoric.

India and China’s Ability to Buy These Vehicles. The sector of the buying public targeted by the automotive industry is frequently referred to as the ‘middle class,’ yet it has proven difficult to define exactly what middle class actually means. In our research and market reports, PRA uses a different definition, which for simplicity sake we call the DI class (Disposable Income). That includes anyone who has money left over after he has kept himself alive and has money to spend on something other than life support. Shelter, food, medical, etc. are all life support. Initially, a small “DI” will result in small purchases … a cell phone, a TV, maybe a motor scooter.

However, with an emerging “DI” class of more than 150 million in China, 40 percent savings rates, an eight-to-one purchasing parity, (meaning that what one U.S. dollar in China buys takes eight U.S. dollars to buy in the USA), and these Chinese start to have purchasing power. Add to that the collective sense of possession in a Chinese family and it does not take much of a stretch of the imagination to see that Chinese family units can quickly aspire to own one of the less expensive cars, even if they only earn a country-wide average salary of less than US$1,000 per annum. (Note that on the industrialized coastal strip of China, the average is already approaching US$2,000 and in Shanghai and Beijing it is more than US$3,000.)

India is not so well off. The average salary in India is less than US$500 per annum and the “DI” class number in the area of 50 million. There is a particularly large number of lower-class Indians, known as the Dalit’s, who subsist on less than US$1 per day and for whom survival is problematic and vehicle ownership is impossible. However, they also are expected to eventually make it into the “DI “class. By 2025 there are expected to be 583 million ‘middle-class’ Indians. In the meantime, that leaves a lot of low-income people trying to aspire to vehicle ownership, and it explains why Indian cars are tiny and the sell price commensurately low.

It All Depends! So back to your question of India or China ... The reality is that both countries have their automotive industrial strengths and weaknesses. If you are a major player, with high technology and aspiration or need to supply the top end of the world’s automotive production, then you should probably be looking at China. The challenges in China are significant, but business there is not impossible, it is just different. The culture, language, politics and pace must all be understood and managed, but as has been said about other relationships, “Maybe you cannot live with them but you probably cannot live without them either.” Like it or not they are the major game in town and if you are predominantly an automotive-based company, then you probably need to be in China.

If, however, you are exploring a smaller sector of the automotive market, and like the idea of working with people that speak at least a recognizable version of English, then India has many opportunities. However, do not fool yourself into thinking that India is easy pickings. Business is dynamic and fast paced. There is both a strong entrepreneurial and engineering approach to business in India, but you have more of a chance if you want to avoid being stepped on by the auto-industry giants all stomping around in China.

Whatever you decide, go back to the basics. Decide on what you want to achieve and then use all the good business practices you have at your disposal. Plan your approach, go to either or both countries and see for yourself, and then implement your business plan in a crawl-walk-run manner. By that we mean: Crawl -- get the basics right with a small team. Walk -- grow the team and build on your market strengths and successes. Run -- grow the market sector you operate in and seek to dominate that sector.

In the end, will you succeed? As I said before, “It all depends,” but at least now it depends only on you!

Government Interference and Controls Continue to Impede India's Manufacturing Progress

India's manufacturing growth accelerated in September as Bloomberg reports that rising incomes have spurred consumer spending. Meanwhile, the Economic Times of India has proudly stated that India could indeed emerge as a challenger to China in Manufacturing in the next three to five years. On the other side of the analysis is Business Week, which quoted J.J. Irani of Tata as saying that India was fast losing the manufacturing race with China. So which of these two perspectives are closest to reality?

The answer, of course, depends on your perspective. The Business Week story focused solely on Tata, the huge Indian conglomerate. Tata’s interests are incredibly broad and there are clearly several impediments to Tata’s attempting to gain the ability to further invade some of the business areas, it too, would like to control. From that perspective, Tata is correct. Their basic complaint is also that of other large multi-national interests which believe that India has far too much government, too much regulation and too much corruption to allow normal Western business style practices to prevail.

When you stand back and look objectively at Indian business, it is clear that the private sector operating in an entrepreneurial and non-regulated manner has significant capacity and the ability to be very successful. But the moment you have to deal with Indian government bureaucracy, everything grinds to a halt. If you plan on engaging in business in India, it is imperative, before you invest, that you understand the size of the opportunity, the bureaucratic impediments to implementing that business and the methods and techniques that will allow you to operate successfully.

Automotive in India is an excellent example. Against certain measures, India’s auto production is actually increasing faster than China’s production. However, do not lose site of the fact that many of these autos are actually three wheeled motorcycles with large metal trays and canvas awnings, rather than the products that are coming out of SAIC, VW, Brilliance and Chery.

The automotive industry in India is also being impeded by a lack of steel and therefore the demand for cars, is driving up prices. India makes its own steel and is exporting it to China and Korea. But India is also re-importing steel from offshore sources. This is another example of the Indian government impeding growth. If they would license the Indian steel producers to allow the production of more steel – it would significantly reduce this bottleneck and keep manufacturing prices down.

As with China, business in India is not impossible, it’s just different. Understanding the differences and knowing how to navigate your way through the bottlenecks and mazes could lead to highly profitable opportunities in the Indian subcontinent.