By Rakesh Gupta and Sudharshan Reddy Paramati Source: Global Times Published: 2015-9-16
The second-largest economy in the world is slowing and people across the world are feeling the effect of the deceleration in China`s growth rate. There are two inter-related aspects of this slowdown. China`s economy has grown at a rate of 7 percent to 14 percent in recent decades, which has allowed developed countries to rely on China`s growth for consumption of resources and exports of finished goods. And China has been a favoured destination for consumption of high value electronic products such as mobile phones and computers in the recent past, as well as being a manufacturing hub for some of the top global tech companies such as Apple Inc.
During this period, China has relied heavily on manufacturing and exports, rather than on domestic consumption. The country also faces risks resulting from excessive infrastructure expenditure and excessive credit availability in the real estate sector and stock market.
Despite China being the largest manufacturer and consumer of mobile phones in the world, we see a trend of companies looking at investments elsewhere. Foxconn recently announced a decision to invest $5 billion in India, which on its own is no cause for alarm. However, when we look at this in the context of a general slowdown in China and global reliance on China`s growth, this can be seen as a business realizing that China may not be as lucrative an investment destination as it was in the past.
Foxconn`s decision to invest in India has been seen as a shift in the potential demand for smartphones in India. Some people interpret this decision from the standpoint of moving research and development and manufacturing closer to a new source of demand. With the expanding middle class in India and the slowdown of economic growth in China, the wider global community is jumping to the conclusion that this move may be because of the expected increase in demand for mobile phones, especially smartphones, in India. However, we see this in the context of a wider shift in economic circumstances in trade across the world.
Some leading economists were surprised by the slowdown in economic growth in China, but it was not unexpected from our point view.
Businesses are realizing that they are exposed to risks based on economic fundamentals in one single country, and leading manufacturers such as Foxconn cannot and should not expose themselves to risks concentrated in one economy.
Foxconn is not be the only company that has decided to invest in India. Even some manufacturers from China, such as Phicomm are also planning to invest in the country. Phicomm has declared its intention to invest $1 billion in India by the end of 2017.
Some may argue that this is only a phenomenon seen among smartphone manufacturers and may not be an indicator for global manufacturing and/or trade. However, we see it as a leading indicator for a shift in the global economic environment.
The mobile phone sector is an industry that adopts cutting edge technology much more quickly and reacts more quickly to changes in the economic environment than other sectors. So we may see a similar shift in other sectors in time.
What remains to be seen is how China reacts to this shift from a broader economic perspective. Manufacturers who are considering moving to India to set up research and development facilities and for manufacturing can benefit from advantages in terms of cheaper labor, better English language skills and technical knowhow. And India`s competitiveness in the computing industry is well-known, since India`s economic growth thus far has been led by the services sector.
However, there may be some challenges in doing business in India, especially for Chinese companies.
India is ranked at 71 - far below China on 28 - in the Global Competitiveness Index, which ranks economies based on policies, institutions and factors conducive to productivity. India`s lower ranking reflects the difficulties that manufacturers and businesses may face when conducting business in the country.
The authors are researchers with Griffith Business School at Griffith University, Australia. Rakesh Gupta is also a visiting fellow with Chongyang Institute of Financial Studies at Renmin University in Beijing.