amitavroy
amitavroy
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To what extend the Chinese will go to attract FDI
«on:
06/27/04 at 12:08:31 » |
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Hi All,
After reading this article about how the Chinese govt officials helped Sundaram Fasteners to set up a plant in China ,I feel like kicking our Govt. Officials, and Politicians with the hardest shoes available in the market .
Any solutions for our Govt officials other than kicking them out of Jobs because our labour laws give them full immunity from being kicked out.
http://sify.com/finance/fullstory.php?id=13508302&headline=Indian~cos~to~gain~from~Chinese~foray
Indian cos to gain from Chinese foray
Sundram Fasteners Ltd has built enough floor space at its Chinese plant to handle four times its capacity. "This is something we learnt from the Chinese," says Suresh Krishna, Chairman and Managing Director, Sundram Fasteners. He explains that if a Chinese company gets an order for one million parts, it will put in place a capacity of 10 million.
In an interaction with The Hindu group on Friday, Suresh Krishna asserted that Indian companies wanting a global footprint should look at places like China and Brazil "a bit more carefully," China more closely than Brazil. Labour cost arbitrage is a significant advantage that Indian companies will enjoy and one that is expected to continue for some more time.
Suresh Krishna said outsourcing of manufacture from the West was bound to increase, especially since the labour cost was at least 15 per cent to 20 per cent lower in India and China compared with the West. "The wave is just starting. It is an economic compulsion, not by choice." With outsourcing increasing, China and India would be the two logical markets that original equipment manufacturers (OEMs) in the West would look at. Although Thailand and Indonesia were the other options, they did not the have the scale required by the OEMs and were also not as competitive as India and China.
Elaborating on the cost advantage, Suresh Krishna said labour cost (wages and pension fund contribution) accounted for as much as 32 per cent of sales in the West, whereas it was just about 5 per cent in India. The OEMs were primarily looking for a 15 per cent to 20 per cent arbitrage. With the labour cost structure, Indian companies could offer this arbitrage to OEMs and still continue to make money.
Sundram Fasteners' Chinese subsidiary - Sundram Fasteners (Zhejiang) Ltd - started production in May 2004. The plant, set up at an initial investment of Rs 23 crore, has a capacity of 6,000 tonnes of high tensile speciality fasteners. It is located in Haiyan county in Zhejiang province. The company has committed to invest Rs 57 crore over five years.
Why China? The managements of most companies that were outsourcing - General Motors, Ford, DaimlerChrysler, Fiat, Cummins, Delphi - were either India-centric or China-centric. That was why Sundram Fasteners decided to start manufacturing in China, after studying the market long and hard, so that it could tell its global customers that they could source from it - either from India or from China. Ford had a $1-billion outsourcing programme from China while General Motors, too, had stated its intention to buy components on a large scale from China. Almost 70 per cent of the market is going to China and "if I don't go there, I will lose it."
Suresh Krishna said in terms of cost, India and China were almost equal, although Chinese operations now had a 5 per cent to 10 per cent advantage over India. But he expected this to even out over time. He spoke of how during the process of site selection, Sundram Fasteners looked at 18 economic development zones and shortlisted three. Company officials visited the three zones, all near Shanghai, where a number of automobile manufacturers have their plants. However, Sundram Fasteners did not want to be in Shanghai on account of rising wages and also because workers switched jobs often.
Suresh Krishna said there is tremendous competition between the economic development zones to attract investment. The performance of the officials administering the zones was judged on three criteria - how much foreign direct investment was attracted, how much VAT (value-added tax) they generate, and the job opportunities created. The zones have the freedom to decide what they are going to do with VAT, which is levied at 17 per cent. Aside from a fixed percentage - about 10 per cent - that the zones had to pass on to the federal government, the provincial government retained the rest. The provincial government or the local county had the freedom to decide what it wanted to do with its share of the VAT collected. In the case of Sundram Fasteners, Haiyan county decided to waive the entire VAT it was eligible for, except what it had to pass on to the federal government.
The Chinese officials, Suresh Krishna noted, are well prepared for meetings and all that prospective investors have to do, once they have decided on a location, is to fill up details about the project in a single sheet of paper. Obtaining all clearances was the responsibility of the officials.
The Deputy Mayor of the county invited a whole host of officials from all departments to the signing ceremony just to ensure they were committed to the project.
The Deputy Mayor even passed on his mobile phone number and told Sundram Fasteners officials to get in touch with him any time in case they faced any problems. And he kept his word.
During construction, when the company faced problems with getting power, the county administration provided generating sets at its own cost. Also, it put up an effluent treatment plant at its cost and all that Sundram Fasteners had to do was to lay a pipeline within its premises to convey the effluents to the treatment plant and pay nominal charges. "I would like to see that happen in India. I didn't have to invest and I didn't have to worry about conforming to pollution norms," Suresh Krishna said.
These illustrated how the officials in China lived up to their promises and showed they would go "that extra mile" to attract FDI.
The Chinese plant provided Sundram Fasteners with the flexibility of inter-plant transfer of products - that is, the China plant could ship parts to the Indian operations or vice versa, depending on the requirement.
The Chinese plant would first supply to international customers outside China, then target multinationals with operations in China. Only after that, would it approach Chinese companies to sell its products.
Terms of employment simple
WHEN it came to recruiting workers, Sundram Fasteners (Zhejiang) Ltd, the wholly owned subsidiary of Sundram Fasteners Ltd, decided to look at possible recruits at least 1,000 km away from Haiyan county, where the factory is located.
The reason: the company realised that young boys and girls in the interior came from larger families than those near the coastal regions, and hence needed the jobs more. They were more committed to "supporting their parents."
Suresh Krishna, Chairman and Managing Director, Sundram Fasteners, said the workers were also keen on learning English.
The employment terms were simple. The starting salary was $100 and after a six-month period, employers had to pay an additional 30 per cent of the salary towards social security. The contract could either be extended or terminated. There was no permanent employment as everything was by contract, which also meant that there were no problems of "hire and fire." Each time the contract was renewed, wages had to be renegotiated.
The first preference among the Chinese was to work for an American multinational and the next choice was for any multinational. The trick, according to Suresh Krishna, is not always to depend on English-speaking managers because they are expensive.
The subsidiary had been asked to highlight its Chinese character. The Indian employees should try and merge with the local people, observing their traditions. "I have even asked them to learn a bit of the local language," at least some of the common phrases. The number of Indian employees would go down from five now to three next year, and to one or two the year after.
The subsidiary also regularly highlighted the history of the parent company mainly to instil pride and loyalty among the workers. "Building pride takes a long time; building trust even longer," says Suresh Krishna.
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