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Why are manufacturing costs higher in India, compared to China?

I have helped my clients in finding manufacturers and local supply chains in India, an experience quite distinct from my ventures in China. Here are some personal insights, for reference purposes only.

01: Introduction

As China, the longstanding global manufacturing powerhouse, experiences labor shortages and significant increases in labor costs due to economic growth and shifting demographics, India is emerging as a compelling alternative. Many believe that India, with lower labor costs, offers a faster and more suitable environment for development. Chinese companies are flocking to India, driven by this shift. Drawing from my years of experience working in India, I’ll share my views on the current challenges and their impact on production costs. These insights are for reference and are particularly relevant before companies (or factories) reach scale. Investors should conduct thorough research before making decisions and avoid blindly following trends.

India’s government is actively seeking to stimulate the economy with policies such as the Goods and Services Tax (GST), demonetization, and various investment initiatives. These initiatives send positive signals, and we believe India will soon become a globally recognized investment destination.

02: Factors Impacting Costs

Cultural Integrity Issues in India

Indian time perception is one of the worst globally. A promised five minutes might easily become an hour or two. Deception is an art form in India; if you’re quoted a quantity of 10,000 units, they might claim 50,000 or even 100,000. Never release your goods until you are fully prepared to receive payment. This challenge is significant.

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Power Shortages

India faces severe power shortages, with a majority of its electricity generated from fossil fuels. It ranks among the lowest globally in per capita electricity consumption, leading to frequent power cuts. In the region where I reside, Noida (a Delhi suburb), power cuts occur up to ten times a day, mostly in the form of short interruptions. This situation gives insight into power cut frequencies in other cities. Factories must invest in backup generators and UPS systems, increasing production electricity costs significantly.

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High Factory Rental Costs

Although India’s economy lags behind, its cost of living is not low. Factory rental rates in Noida, for instance, range from INR 20 to 30 per square meter per month, with some going as high as INR 50. These rates often come with annual increases of 5% to 10%. This trend has emerged with the arrival of Chinese businesses. Collaboration among these businesses is essential to prevent unchecked price hikes by local landlords.

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High Costs of Outsourcing Chinese Staff

Every company establishing a factory in India relies heavily on Chinese engineers and management personnel dispatched to support operations. These individuals require allowances, and their costs, including airfare, visas, accommodations, and daily expenses, can be equivalent to the wages of 20 to 30 Indian workers. This paradox arises because comprehensive wages are not necessarily lower than in China.

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Rapid Wage Increases Among Indian Employees

While basic salaries for ordinary Indian workers hover around INR 10,000 per month, the wage increases among Indian employees are staggering. For example, at the beginning of 2017, a Chinese translator could be hired for INR 20,000, but by 2018, securing one for INR 50,000 became challenging. Translators with salaries exceeding INR 100,000 were not uncommon, and temporary translators charged up to $100 per day. Similar trends were observed across other employee categories, almost matching or exceeding Chinese rates.

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High Factory Renovation Costs Compared to China

Factory renovation costs in India are significantly higher than those in China. This is partly due to the need to import materials, leading to higher prices. Furthermore, Indian workers exhibit lower construction efficiency and poorer quality workmanship, necessitating additional expenses such as stabilizers for sensitive equipment. Consequently, Indian factory renovation costs far exceed those in China.

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Low Efficiency of Indian Workers

Low-skilled Indian laborers typically have lower educational backgrounds, limited learning abilities, and a propensity for absenteeism. Their belief in destiny often deters them from adopting more efficient work methods. Indian laborers prefer taking leave, with higher-educated workers reluctant to engage in repetitive tasks. While improvements in factory assembly line efficiency are ongoing, challenges persist in construction site labor teams.

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Higher Prices for Goods in India

There is a common misconception that India, perceived as a poor country, should have low prices. However, upon arrival in India, one may be surprised to find that many items are more expensive than in one’s home country. For example, dining at a restaurant in India can incur a tax rate of up to 40%, significantly inhibiting the industry’s growth. Such high tax rates affect the prices of various products, leading to unexpected expenses. It’s essential to adjust your perspective regarding India’s cost of living and taxation.

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High Costs for Importing Raw Materials and Logistics Clearance

India’s manufacturing sector is underdeveloped, with an imperfect supply chain. Importing goods from China results in high import duties and layers of fees from customs, logistics companies, and clearance agencies. The logistics process, from shipment to arrival, often takes two months or more, and unexpected factors, like customs complications, can add to operational costs.

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Low Education Levels

Despite India’s vast labor force, its long-standing preference for elite education has led to significant disparities in the quality of its workforce. Highly educated workers are often unwilling to work in manufacturing due to poor working conditions and low wages. Uneducated workers lack even the most basic labor skills, falling short of minimum requirements for industrial assembly lines. This makes recruiting talent in India extremely challenging.

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Establishing a new factory in India is time-consuming and costly. A myriad of paperwork and approvals is required, often involving additional expenses. The process can take several months and is mentally and physically draining.

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Inadequate Infrastructure

India’s infrastructure is outdated, with the national railway and road systems suffering from age and neglect. This results in high transportation costs and significant delays. While India has yet to establish an efficient and comprehensive transportation system, road conditions in many regions are deplorable. For example, a 27-kilometer journey from Noida to the Delhi airport can often take two hours or more. Due to poor roads, it may take over a week or longer to travel from northern India to the south. In some cases, goods shipped from Shenzhen, China, arrive quicker and cheaper than those shipped from Kolkata, India. Time equals money, and every delay adds to your costs.

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Stringent Regulations

India boasts an array of complex regulations that burden many enterprises, especially foreign ones. The services sector, in particular, is heavily taxed, with taxes reaching up to 40%. These taxes hinder industry growth significantly.

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Cumbersome Documentation

Opening a factory in India involves dealing with a mountain of documentation, often accompanied by payments. The process is incredibly slow, lasting several months and causing significant mental and physical exhaustion.

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Environmental Concerns

Anyone who has visited India is familiar with its undrinkable water and the risks of street food. Indian cuisine relies heavily on spices, making it unpalatable for many. Suffering from poor waste management, street animals are ubiquitous, and the country’s roadsides resemble garbage dumps. These conditions present a significant adjustment for newcomers.

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In conclusion, problems and opportunities coexist. Successfully navigating the challenges of investing in India can lead to a resilient and adaptable enterprise. Many competitors falter along the way, leaving well-prepared companies to thrive and become leaders in their respective fields.

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