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Last Updated : Aug 05, 2020 04:58 PM IST | Source: Moneycontrol.com

Being Atmanirbhar: India Inc takes baby steps to move away from Chinese dependence

The critical factor is this - can Indian companies and the government keep their foot on the pedal, even after the nationalism fervour subsides.

 
 
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When China sneezes, India catches a cold. And what happens if China falls sick? Indian companies may perhaps need a ventilator.


Such has been the dependence of Indian companies, that for many of them, their supply chains may collapse if imports from China come to a standstill.


Indian companies did catch a cold when, post the standoff at Galwan Valley, shipments from China went through additional scrutiny at Indian ports, delaying supply of critical raw materials and components.


Production of companies across sectors, including automobiles, white goods and pharmaceuticals were disrupted.


But to ensure history doesn't repeat itself in future, government has called for an 'Atmanirbhar' India Inc. Moneycontrol spoke to industry leaders and companies across sectors to understand if it's possible to overcome the dependence on China; and if there is an opportunity, what will it take to do so.


The good news: companies have taken notice, and a few have already taken the initial steps. The not-so good news: This will take time.


 White goods - A start has been made
For producers of TVs, fridges and air conditioners to avoid Made in China components is easier said than done. There are no domestic manufacturing capacities available for segments like semiconductor fabrication (used to produce chips for mobile phones, LEDs and small appliances), air compressors and open-cell panels.


According to the United Nations COMTRADE database on international trade, India imported electronic equipment, including finished goods and components, worth $19.97 billion in 2019.


Industry veterans are of the view that while the government is working on setting up semiconductor fabrication facilities in India, it will take at least five to seven years to completely replace China.


“There should be a definitive tax incentive for setting up complete manufacturing units in India rather than a pure customs duty imposition. The 20 percent customs duty cannot stop component import because we have no facility yet in India,” said the vice president of an electrical goods maker.


However, India has made a start. The Ministry of Electronics and Information Technology is working with the appliance and electronic goods makers to look at segment-wise information about which component is made where and what will be the requirement to set up production facilities in India.


After semiconductor fabs, setting up air compressor units would be the next step so that products like air conditioners and refrigerators need not rely on China for getting this component.


Auto - A road map needed
China’s share in the overall $120 billion Indian automotive industry is just 4 percent. But that is just half of the story.


Here is the critical part. The country's share in India's automotive import is a substantial 27 percent, or $4.75 billion, of the total $17.6 billion, according to the Automotive Component Manufacturers Association (ACMA), the apex body of auto parts manufacturers.


India imports drive transmission parts, electronic and electrical items, cooling systems, suspension, braking and steering parts from China.


Despite some companies achieving localisation as high as 95 percent, some critical parts are still being imported from China. These parts are not imported by vehicle manufacturer but by their parts vendors. It is a similar story for battery cells.


A senior executive from a large company involved in supplying crucial automotive parts said, “More than giving a warning to China, it was the government’s way of telling us to be self-dependent. ‘If it is done once it can be done again in future, so better pull up your socks’, was the message to us. But automotive industry is already highly localised.”


To ensure high self-reliance, planning and incentives are needed.


“We can achieve an Atmanirbhar Bharat only when a clear roadmap of eight to 10 years is planned, and economies of scale are achieved. Our logistics costs are some of the highest in the world. Industrial power costs are also high. It's a vicious cycle," Rajan Wadhera, President, the Society of Indian Automobile Manufacturers, said.


Steel - Identifying alternatives
JSW Group Chairman Sajjan Jindal was among the few leading entrepreneurs who openly talked about building local capabilities rather than depending on China.


He added that many of his industrialist friends were upset as business with China is important to maintain healthy margins, but Jindal said the situation has arisen "because of our complacency" in accepting cheaper products from across the border, instead of developing local capabilities.

His son Parth Jindal had earlier mentioned that the JSW Group will completely reduce its dependence on China over the next two years.

The Group's flagship company - JSW Steel - has already identified alternative sources for some of the raw materials it uses to run its steel plants.

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"A lot of things, including ferro alloys, electrodes and refractories are imported by Indian steelmakers from China. The dependency is particularly high - 75 percent - when it comes to refractories," Joint MD and Group CFO Seshagiri Rao told Moneycontrol.

"We have a plan. We have identified suppliers in Turkey, Brazil, Norway and South Korea. In the next two years, we will get out of China," Rao said.

While that is promising, the tougher task is to find sources for capital goods used in steel industry. Even if one goes to manufacturers in Germany or Italy, these companies actually produce their equipment in China, Rao pointed out.

Critical thing, Rao said, would be for the Indian government to incentivise these German and Italian companies to set up shop here. "China insists that these companies set up local units and transfer technology. There is no reason why we shouldn't do the same," he added.

Pharma - The API puzzle

Not just India, but other countries too are looking to reduce their reliance on China. And that is beginning to benefit companies in India, especially those in the pharmaceutical industry.

One of them is Aarti Drugs, which was one of the few companies to report a stellar rise in revenue and profit in Q1 FY21. The company manufactures Active Pharmaceutical Ingredient, or APIs, that are used to produce drugs.

Despite the company's obvious gains, it is too early to say if India is becoming more self-reliant in the requirement of this critical raw material. Indian pharma companies import anywhere between 60 to 90 percent of their API needs from China.

The good part is that the Indian government has announced Rs 6,940 crore and Rs 3,000 crore, respectively, for performance-linked incentives (PLIs) and bulk drug parks. Under the PLI scheme, financial incentives will be offered to eligible manufacturers of 53 identified critical APIs on their incremental sales over the base year (2019-20) for six years.

Companies, including Aarti Drugs, are already finalising plans to make the most of the incentive. But this is a long-term play.

India Ratings and Research believes material benefits, if any, will be visible only in the long term. Chinese raw material suppliers have inherent advantages in scale, cost productivity and government support, which are difficult to build in the short to medium term.

Clearly, not just for the pharma sector, but overall, that will be the critical factor in becoming Atmanirbhar - if Indian companies and the government can keep their foot on the pedal, even after the nationalism fervour subsides.

With inputs from M Saraswathy, Swaraj Baggonkar, Viswanath Pilla & Prince Mathews Thomas
First Published on Aug 5, 2020 04:58 pm
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