China and India - the reality beyond the hype6 August 2007
China now produces 40% of the world's leather and over 70% of the world's shoes. India has 20% of the world's livestock that will supply hides to the market to be converted into leather. Neither of these countries is new to manufacturing leather, both have had indigenous production for the home market and in-depth training facilities for future technologists for a long time. Recent changes in leather businesses and manufacturing of leather product have followed the trend of other industries and production and have moved or are moving to China.
The movement of production capacity follows the economic law of comparative advantage and will always end up in the most cost effective economic zone. Some years ago the Landell Mills Study on the Leather Industry demonstrated that where the shoe industry goes the leather industry follows. The time lapse was about 4-5 years. The case study was Taiwan - where the leather industry boomed 4-5 years after the arrival of the shoe production. As Taiwan has become increasingly developed, costs have increased and so both have moved now to the mainland - but where next? Recent changes in tax laws in China have seen tanneries scurrying about trying to work out what the next move should be. The government is certainly making waves concerning the presence of polluting industries in China and increasing the pressure on tanneries. At the 25th International Footwear Conference it was pointed out that currently China has 200 factories capable of making in excess of five million pairs of shoes per year and the next biggest country has only twenty - so whatever moves are made they will take time to put into place. Rest assured there will be changes but what are bigger issues that influence such change from outside the specifics of the leather sector? Historical perspective For much of human history, what China and India had in common was the fact that they were the richest nations on earth. Long before Europe emerged, China and India both had high standards of living and numerous technical and scientific inventions at their disposal. It is only recently that China in particular has re-emerged as a global power in manufacturing and in now number two in the world (see Table 1). Why has China grown faster than India? Why has China's economy grown faster than India's? Pundits offer many explanations. Some say that China's authoritarian regime allows the government to make quick, unpopular decisions that are more difficult and time consuming in democratic India. For example, the Chinese government can quickly raze slums with impunity in order to build highways. India's democratic government must satisfy competing interest groups before such decisions can be made. Others suggest that India's strict regulatory environment and aversion to foreign capital diminishes investment in India in comparison to relatively more open China. Still others say that China's better physical infrastructure enables more efficient and sophisticated investment than can take place in India. The simple explanation might be that China has better infrastructure and an authoritarian government and India has an aversion to foreign capital. Better explanations might be that China makes more savings, has a higher investment record (as a share of GDP), a more open economy and less onerous regulations. On the other hand, much of Chinese investment is wasted. China's state sector has traditionally preferentially secured capital from the banks. At the same time, Indian investment is more efficient. World Bank data (2005) provides numeric data relating to doing business in China and India (see Figure 2) - Doing Business Indicators. Clearly there is no clear cut winner or loser in this area. Starting up a business in India is easier - but closing it more difficult. What are the sources of growth? Why has China's economy grown faster than India's? Pundits offer many explanations. China's economic takeoff in the early 1980s took place before much of the investment in infrastructure took place and before China opened its economy to the global market. Thus it would seem that India's poor infrastructure and insularity are not necessarily barriers to strong growth. In addition, although India has some grievous regulations, its capital markets are far more efficient than those of China (where much of the investment went preferentially to state owned enterprises and was therefore wasted). Democracy can hardly been seen as an obstacle to growth. After all, many democracies have performed exceptionally well (Japan, Ireland) while many authoritarian countries have sunk into poverty and despair (Soviet Union, much of Africa and the Middle East). Indeed in the information age, the argument can be made that democracy and the free flow of information offers an economic advantage. China's productivity growth has exceeded that of India (although recent figures indicate that China's productivity falls far short of international benchmarks - maybe as low as 20% for shoe making). From 1991 to 2003, China's labour productivity rose at an annual rate of 6.7% while the figure for India was 4.2%. China has invested far more than India. In the period 1994 to 2004, Chinese investment averaged 37.5% of GDP versus 22.5% in India. China's stronger investment was due to a higher level of personal and government saving and a much higher level of foreign capital inflow. Infrastructure development To operate manufacturing businesses efficiently and in a cost effective manner - the infrastructure must accommodate the daily activities of product flow. This battle has clearly been won by China. Indeed China has greater modern infrastructure and spends considerably more on developing that infrastructure. For example, in 2002 China spent US$128 billion on power and transport infrastructure compared to US$18 billion for India. In 2006 China increased its power supply by an amount equivalent to Britain's. China's highway network amounts to 1.4 million km compared to 200,000 km for India. Finally, due to insufficient port capacity, the lead time for Indian exports to the US is roughly three to four times greater than Chinese. The shipping, logistics, transportation and manufacturing infrastructure has clearly been done well and is conducive to the development of leather and leather products. The supply of leather and leathergoods from China has grown dramatically in the last 15 years. Will it continue? Maybe it will stabilise and then slowly decline (as it did in Taiwan) as other nations pick up the volume, but in the short term this will not change. Regulatory issues Labour - although India has promulgated considerable deregulation, there remains many laws that intend to protect workers but in fact discourage employment, eg Industrial Disputes Act. This Act makes it difficult dismiss workers or employ temporary workers, creating an environment where businesses are reluctant to take on new staff. Although China has labour laws, they are not always enforced. China limits labour to working 43 hours a week, but 12 hour shifts per day are common. Trade barriers have been a sensitive issue in leather making for the last twenty years. General tariffs have been reducing in recent years and this applies to leather as well as other goods. In the leather business, India was a country traditionally with some form of protection - but this has now been eroded. China was much more free and subject to international competition - especially where raw material and chemicals were concerned. Now there are signs that Chinese policy is moving towards higher levels of taxation and increasing the pressure on the tanning sector. Services versus manufacturing China is certainly the current key performing economy in manufacturing (manufacturing accounts for 39% of China's GDP - whereas India's manufacturing represents only 16% of GDP). This is clearly evident in the leather sector where both leather and leathergoods production in China has been booming. India has a massive raw material supply and is a key player - but not on the same global scale as China. Are the service industries in India likely to be the key to their success? While the current perception is that India is the key service provider - the data does not substantiate this. As providers of service, China is tenth in the world and India sixteenth; China' volume in dollar terms is nearly twice that of India's. China has a strong educational advantage while India has the advantage of speaking English (the global business language). However, China has decreed that all graduates speak English and already the level of communication in English in China is much improved in the last five years. Within half a generation, India's advantage could well be eroded. What of the future? Both countries will continue to grow rapidly and with the resources of low labour cost and the world's two largest markets - this is guaranteed. The division of labour will become blurred. Although trade between the two nations has been relatively small in recent times, this will grow rapidly in the future. Both countries will create world class companies, and certainly the West remains oblivious to many of these emerging brands. How many people recognised the relevance of the brand on the balloon above the Shanghai leather Fair last year? 'Aokang'. Aokang is probably the most famous Chinese shoe brand. Aokang are major sponsors for leather products for the Olympic Games. Both countries have large populations, emerging from poverty for different reasons and hungry for consumer items. The development of China and India as consumer societies will see massive change in production and the design. The appeal of consumer product for these markets will need to be tailored to the tastes of these emerging markets. For the leather and leathergoods sector, the indigenous Indian industry will continue to flourish. India's industrial strength lies in a good raw material supply (20% of the world's available hides and skins), good education/technology and low labour cost, allied to stable government regulations. In the short term one cannot see China's dominant position in leather and leathergoods volumes decreasing greatly but the recent changes in taxation and increasing (real) pressure on environmental performance of tanneries may well see a gradual levelling off of production levels and a slow decline with production transferring to neighbouring Asian countries.