Corruption and taxes eroding profits of Chinese firms in India

Corruption and taxes eroding profits of Chinese firms in India
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First Published: Tue, May 13 2008. 11 23 PM IST
Updated: Tue, May 13 2008. 11 23 PM IST
Mumbai: India shines like a tempting lure for Chinese companies seeking to expand abroad, and at first glance, the Indian market looks like a natural fit.
Who better than the Chinese, after all, to provide basic computers and air conditioners at bargain prices?
But Chinese firms have found profits in India are hard to come by. Tax barriers are everywhere, eroding their cost advantages. Corruption is rampant, adding another layer of difficulty. And Chinese goods have a low-quality image that is very hard to shake off.
The challenges are not unique to India. Most are exactly what Western companies encountered when they first arrived in China some 20 years ago. But Chinese companies, whose success so far has been largely built on their home-court advantage and low costs, are much less prepared to tackle those issues.
Chinese companies, for example, lack technological know-how, marketing savvy and managers with international experience. Winning over Indian consumers is much harder than wooing the Americans or Europeans, who treat TVs and DVDs almost as disposable items.
Indians want to make sure that their hard-earned savings go into products that will last. Branding and marketing are the key in India, but that just happens to be Chinese companies’ Achilles heel.
“People here think the Chinese goods are cheap, but of poor quality,” said V. Balakrishnan, chief financial officer of Infosys Technologies Ltd, India’s No. 2 software exporter. “Some even say they send all the good ones to America... Chinese firms need to spend some time to change the perception.”
Unlike Western companies with deep pockets which are more willing to invest for the long haul, many Chinese firms are under pressure to turn in a profit quickly. Chinese TV maker TCL is not willing to splurge on expensive TV marketing, because it hopes to make a profit in India this year after three loss-making years.
Instead, TCL took a group of distributors to its factories in China last year, making a favourable impression on those who went. But TCL has 4,000 partners in India, and winning their allegiance through such tours might be slow and costly.
Cost advantages also evaporate in India. After shipping and taxes, TCL’s products are already 30% more expensive when they reach India. Moving goods from one state to another can incur taxes of 12.5%. On top of that, labour costs are rising at 20% in the technology industry in India.
“Frankly, it is much harder to strike it rich out here,” said Warren Wang, who is managing director of TCL’s India operations, after having worked for the company both in Europe and North America.
Still, India is a market that companies including TCL, the world’s largest producer of tube TVs, cannot afford to lose.
Sales of tube TVs are falling almost everywhere in the world except in India, and TCL expects India’s market for tube TVs to surpass China’s to become the world’s largest within a year or two.
For Chinese companies whose domestic market is becoming saturated, fast-growing India represents the biggest prize. India is also a test for Chinese firms with multinational ambitions: If they can’t make it in India, how can they expect to conquer the developed markets?
That is why Lenovo, the world’s fourth largest computer maker, sees India as an important test market for it to try to replicate the success it had in China before taking the strategy to other markets.
Thanks to heavy TV advertising and tapping of two Bollywood stars to serve as brand ambassadors, Lenovo in India has achieved its highest brand awareness outside China.
Its sales still trail those of Hewlett-Packard and India’s own HCL, but its marketing is seen as stronger than HCL’s.
“We talk less about price, more about our competitive products,” said Amar Babu, Lenovo managing director for India. “We strive to be the No.1 in the market.”
Early arrivals from China, such as telecom equipment provider Huawei Technologies Co. Ltd and refrigerator-maker Haier, have become quite successful in India, proving the Indian market is a prize worth fighting for. Huawei is eyeing $1 billion (Rs4,220 crore) in sales this year there, almost doubling what it did last year, due to high demand for network gear.
Huawei hasn’t had an easy ride in India. Few remember now that when it first arrived eight years ago, local media speculated that Huawei was going to steal India’s technology secrets.
Instead, it’s Huawei that is tightly guarding its technology, placing heavy security at its development centre, which occupies several floors atop Bangalore’s most expensive hotel. Most of its staff are Indians, who feel proud that they are developing products at Huawei instead of less challenging outsourced work for Western firms.
The Indian market is not for the weak-hearted, and Chinese companies that invest a lot and invest early will be rewarded, just as South Koreans were rewarded after going to India 10 years ago, and as Americans who went to China 20 years ago have finally arrived at their pay day.
“I have felt very deeply how thorny the road is to become a multinational, but we have to do it,” Wang said. “India is a very tempting cake for us.”
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First Published: Tue, May 13 2008. 11 23 PM IST