China's loss is India's gain in the tech space, at least theoretically

Fed up with its bellicose neighbor, Japanese companies are increasingly looking to shift their manufacturing bases to India. Is that a better option realistically?
Written by Rajiv Rao, Contributing Writer

Indian policy wonks irritated by their country's inability to establish influence in its own neighborhood, are undoubtedly consoled by China's continuing efforts to enrage almost everyone in its backyard.

Relations between Japan and China have been on the rocks because of China's territorial claims on a chain of islands in the East China Sea called Senkaku in Japanese and Diaoyu in Chinese. This further nosedived recently when China declared "an air defense identification zone" over the islands which Japan ordered its civilian airlines to ignore.

So, it seems logical that Japanese companies have begun to embark on a pivotal re-direction of its business strategy. Masakazu Kuji, executive officer of Hitachi Solutions, the information and telecommunication systems arm of Japan's Hitachi, said in the Indian newspaper Mint that "India has been a partner of development [for Hitachi] than China in the past" and that "China has been very difficult in terms of political thing and economic side of it [sic]".

Then, yesterday, the heavy equipment parent company Hitachi, also announced that it would invest 47 billion rupees (US$758 million) in India till 2015-16 as an effort to diversify itself from manufacturing in Japan. And, in order to make things like machinery and power electronics products for the export market and stuff like metro trains, monorail and bullet trains for the Indian one, it once again chose India instead of China in this business redirection. Other Japanese companies such as electronic giant Panasonic have also begun to ramp up local Indian manufacturing in the last year.

All of this has huge implications considering Japan is the second-largest foreign investor in China, with accumulated investment of over US$70 billion. Rising labour costs there also make India look cheap—especially for those in the IT and electronics sector—so there is an economic imperative for these moves. Already, as the New York Times reports, Gurgaon, the tech capital of the north, houses the "Best Western Skycity Hotel, which has a number of Japanese speakers on staff, [and] last year opened a karaoke lounge and restaurant, plainly targeting the area's Japanese residents."

Japan is already the reason the sleek Delhi Metro exists and is plonking more cash into path breaking development projects such as the Delhi-Mumbai Industrial Corridor and the Dedicated Freight Corridor which will create new highways, economic zones as well as cities.

There is however, a huge reality check that needs to take place within this euphoria of a Japanese business migration. The country has a woefully inadequate manufacturing base (15 percent and declining according to recent figures) and far short of the 25 percent it needs to get to by 2025 according to its own target. It is also a psychological chasm away from the 100 million manufacturing jobs it says it must need to create by then to make the nation competitive.

Tack on the chronic power shortages, terrible roads and labor unrest (as witnessed in Haryana's Suzuki plants recently where the general manager of Human Resources was reportedly burnt alive last year)—not to mention the reality of the colossus that is China with its world class supply chains and manufacturing ecosystems which include semiconductor fabrication plants as well as fabless companies—and the Japanese migration story turns out to be an almost laughable dream for India.

However, this is a country which, in its latest National Electronic Policy, clearly wants to not only cater to the exploding demand for smartphones and tablets within its borders by setting up its own fabs but also wants to lure leading global manufacturers of electronics to set up shop here instead of China.

The sad truth is, India will have to conjure up a miracle soon if it wants to fully take advantage of the fallout from China's imperial ambitions.

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