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Why Chinese products are cheaper? How is China able to produce them?

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Why Chinese products are cheaper? How China is able to produce them?
Why Chinese products are cheaper? How China is able to produce them?

Major Questions?

Despite huge capabilities in Indian manufacturing industry, how Chinese producers are able to penetrate the local markets and sell it cheaper than their domestic counterparts here?

The cost of transporting the products through sea, packaging, customs duty, etc. are not cheap. Then how Chinese goods can compete in prices of even low-tech items like toys or pencil battery cells.

The Myth

The popular argument given for cheaper production cost in China is the low wages paid to the workers there. While this may not be entirely true currently but even if this would have been the principal reason, countries like Bangladesh, Vietnam, Thailand etc which offer even lower wages to workers would also produce such products more economically.

Well planning of Chinese Government decades ago !!

The main credit for success of Chinese industry should be attributed to the properly planned and precisely executed policies of the Government. The Chinese Government initiated thoughtful strategies when they decided to open the doors of their economy to foreign businesses/investors some three decades back and have diligently supported the manufacturing ecosystem at their end.

Huge Investment on Infrastructure by Chinese Government!

They have made massive investments in creating necessary infrastructure like electricity generation, highways, ports, etc. to boost productivity.

They also swiftly modified their procedures for starting business at Special Economic Zones which attracted huge Foreign Direct Investment in China. Their policy focus remained on promoting global exports for goods manufactured in China.

Chinese government continues to leverage their currency exchange rates in global market.

Here are few major policy initiatives which make the cost of manufacturing cheaper in China:

Why Chinese products are cheaper? 

Think Global!

The thrust of Chinese government policy makers has remained on economy of scale. They have focused on mass production of products in their factories which lowers their aggregate cost significantly and this makes it cheaper.

China always plans to export their products to the global markets thus the quantum of global demand they eye upon to cater is huge when compared to local Indian manufacturers who concentrate mainly on local demands and their scale is obviously lower which makes the product price higher.

World Class Infrastructure

The billions of dollars invested by China for improvement of highways, roads, rail network, ports, etc. in the last couple of decades have enabled the industry to move the raw materials or finished products easily. This reduces the time and cost spiral for transporting the materials and improves the productivity. In comparison, India lags far behind in this area and needs priority attention to boost its industrial sector. Similar is the case for electricity generation. While Chinese manufacturing businesses can remain assured of uninterrupted electricity power at very cheap rates, Indian industry still has miles away from such scenario.

Productive Labor force

The cost of wages has risen consistently in China in last few years and today it is comparable to most emerging economies of the world. However, the improvement in productivity of labor force in China is perhaps higher than any other place due to continued emphasis on skill development programs for the work force delivered by their government as well as industry. The higher productivity and not lower wage structure thus is the reason for the competitiveness of Chinese products.

Reverse engineering processes

Chinese government does not bind itself with Intellectual Property issues. They allows the industry to copy the products developed successfully elsewhere in the world. There are evidences that China imports, dismantles and studies the popular products from different countries. They then copy the design and produces the product in large quantities. This saved the industry from expensive investments in R&D.

Leveraging their currency

Since Chinese government has not signed WTO agreement which does not bind it to desired transparency stipulations. Economists believe that China skillfully manipulate their currency value to their advantage. They deliberately keep their currency remain weak against US dollar which helps them keep their products competitive for exports.

Dumping

They even export goods at lower rates than their cost in China itself to avail the benefits. This is termed as dumping in international trade. The cheaper Chinese products is causing severe damage to the local manufacturing units of the importing country many of which are compelled to eventually close their operations and making room for more imports to meet the local demands. Chinese government is known to facilitate such activities by their local industry ignoring the protests raised by many countries.

There are of course many other dimensions for the price competitiveness enjoyed by the Chinese industry but Indian government has to find creative ways to promote its indigenous manufacturing sector and frame industry friendly policies to exploit their huge growth potential.

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