In recent years, China has been praised for achieving rapid and remarkable economic growth and industrial development. China has been the driver of world economic growth in the last decade or so and the world applauds China's contribution to global economy.
China has achieved such progress by skillfully adopting liberal policy of encouraging and inviting multi national companies, which are in the forefront of technological developments, to invest in China and enter into technical and financial collaboration with Chinese companies. Given the fact that China's market potential is very large and faced with the problem of nearly saturated market for several products in US and West European countries, multinational companies including large chemical industrial group such as BASF, Dow, DuPont, Mitsubishi and others felt enthused by the proactive policies of Government of China and came forward to invest in massive way and liberally share their technology expertise in China. China has facilitated smooth investment by multinational companies by implementing proactive policies and setting up several industrial parks with integrated infrastructure facilities and also ensuring peaceful industrial climate, without labour unrest and bureaucratic hurdles.
It has been a win win situation for both China and multinational companies based in several countries including USA, Western Europe and Japan, as the interests of both of them have been elegantly met.
Gains for China
When multinational companies invested in China in a big way introducing their updated technology practices, Chinese technicians and engineers and scientists inevitably got exposure to modern technologies and have updated themselves. In the process, the technology base of China has got considerably strengthened, prompting growth of R&D and product development efforts by the Chinese companies.
Certainly, China could not have achieved such rapid economic and industrial growth without massive investments by multinational companies and introduction of sophisticated technology practices by multinational companies in industrial, management and services sector. When multinational companies invest its money and technology in countries like China, India and Middle East to boost their own business prospects, it inevitably results in transferring technology of high standards to the recipient countries.
Now, China is in a position where it can further build it's technology base by it's own efforts, even without needing more support from multinational companies anymore in the same scale.
Dismal performance in recent time
The recent news about the state of economy and industrial growth in China must be causing concern not only to Chinese government but also to multinational companies operating in massive scale in China and the domestic Chinese industries.
China's Industrial firms posted their worst slump in profits since late 2011 in the first two months of this year 2019, as increasing strains on the economy in the face of slowing demand at home and abroad took a toll on business.
The sharp decline in profits suggests further trouble for China's economy, which expanded at its slowest pace in almost three decades last year. The Government of China has already lowered the economic growth target this year to 6 to 6.5% from the actual rate of 6.6% in 2018. Profits made up by China's industrial firms in January-February 2019,slumped 14.0% year on to 708.01 billion Yuvan ($105.5 billion), the National Bureau of Statistics (NBS) said on its website. It marked the biggest contraction since Reuters began keeping records in October 2011.
Profits in the auto sector were down 37.1 billion Yuvan from a year earlier, while those in the oil processing industry fell 31.7 billion Yuan.
The drag was mainly due to price contractions in key industrial sectors such as auto, oil processing, steel and chemical industries, Production and sales are slowing as well.
Of course, the industrial output in March 2019 has recovered to some extent and exports rebounded . Still, there is huge fear that China has to make many more measures to sustain the growth path in view of its massive investments made in the past ( part of which is becoming unproductive due to low capacity utilization) and the market constraints in China as well as in the world market.
The companies in China have many worries from multiple angles.
Massive capacity build up
China built large capacity in multiple fields in the manufacturing and services sectors in variety of ways in the last few decades. As a matter of fact, in the case of several products, the manufacturing capacity built by China is several times more than what the world needs today and in the next few years.
This is particularly so, in the case of chemical and allied industries. Citric acid and methanol are a few of many examples.
While in the past, China has built massive capacity in chemical and allied industry, it has been done without due regard for market outlet and without carefully considering the demand potential for the products in China and the world market in the coming years.
Chinese chemical industries are now facing problems in finding market outlet for the several of the products and is excessively depending upon the world market and its growth. The constraints in marketing its products, due to over capacity scenario, is leading to lower capacity utilization and closure of units. The Chinese companies desperately need world market for survival and for sustaining the growth.
Due to over capacity situation, it is estimated that 20% of the China's investment projects are facing push back at present.
It is said that over capacity has often resulted due to severe competition between various provinces in China to out beat each other in capacity creation and production . Central government in China has not played or has not been able to play any meaningful role in controlling the feverish capacity expansion spree
More the merrier appears to be the driving factor for capacity build up in China until recently.
With over capacity in industrial projects, China has been aggressively trying to sell its products abroad. This has resulted in allegation of dumping of goods and services against China by several countries and many anti dumping duties have been imposed on Chinese products in number of countries.
USA has launched trade war against China, which has created considerable problems for Chinese manufacturers .
Without such big announcement , a number of West European countries have also imposed anti dumping duty on several Chinese products Further, Chinese companies have worries due to increasing labour cost affecting its competitiveness in the global market.
Strict measures by Chinese government on environmental issues due to global pressure and fixation of minimum viable capacity for several products have also forced closure of several units. In view of the over capacity scenario, Chinese government does not appear to be concerned about such forced closures of large number of units all over China.
Unlike in the past, it appears that the confidence level of Chinese chemical industries have considerably slipped down. To overcome the adverse situation, Chinese chemical manufacturers are deploying an array of moves to keep foreign customers by giving discount, tapping tax breaks, trimming work forces and occasionally, shifting production overseas to continue operation and avoid anti dumping duty issues.
What to learn and unlearn from China ?
It has now become necessary for the Indian chemical industries , which are excessively dependent on China for procurement of several intermediate chemicals and even basic feedstock, to examine as to whether they should move on the same path as shown by China or change the strategy for future sustenance.
Certainly, while there are many things that the Indian chemical industries have to learn from China, there are equally many things that Indian chemical industries have to unlearn from China.
Chinese chemical industries have shown dynamic outlook by initiating capacity build up efforts in the past, which has gone a bit too far. On the other hand, there have been great hesitation and even reluctance in building project capacity in India, perhaps due to lack of confidence. Indian chemical industries today is where China was around 20 years back.
While discretion is required in capacity build up, Indian chemical industries have not put forth enough efforts to build capacity and appear to be happy to simply import intermediate chemicals and finished products. In the process, India has become a dumping ground for chemical products. It is tragic to see conditions where several leading chemical manufacturers in the past, have stopped production and started importing the same products which they produced earlier and in the process, converting themselves to trading houses at least partly.
Chinese chemical industries have shown remarkable dynamism in assimilating the technologies received from abroad and rapidly becoming self sufficient in the technology fields. On the other hand, Indian chemical industries have been repeatedly importing technology for the same chemicals, which are already produced in India with overseas collaboration. For example, while there are number of urea projects already operating in India for several decades, for setting up new urea projects, Indian chemical industries are running around the world seeking technologies.
Biggest problem faced by the Indian chemical industries today is on the technology front. It appears that the growth of Indian chemical industries would be conditioned by the willingness of technology suppliers from abroad to provide technology and engineering support. This is not so in the case of Chinese chemical industries. Indian chemical industries are paying fancy price for technology acquisition from abroad even for medium scale projects, where the products are already being produced in India.
While Indian chemical industries have to unlearn from China about the feverish project implementation without adequate forward planning and market study, it certainly has to learn from China and emulate China to become self sufficient in technology fields. Indian chemical industries have to transfer themselves from the position of technology recipients to the stage of technology suppliers.
There appears to be no constraints with regard to the capability to become technology leaders. The problem appears to be in the mindset of professionals and promoters of Indian chemical industry.
Nandini Consultancy Centre, M 60/1, 4th Cross Street, Besant Nagar, Chennai - 600 090
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