Leveraging India to Sell More China Manufactured Products

April 9, 2014 Posted by China Briefing Reading Time: 11 minutes

Op-Ed Commentary: Chris Devonshire-Ellis

The dynamics between China and India have long been one of Asia’s more fascinating relationships. Both are vast countries with similar population sizes. Both are ancient cultures, and have long had significant impact upon the development and shape of the modern world over their centuries of existence. Yet they can also appear mysterious, impenetrably exotic and inscrutable for the foreign investor. Much also has been written about the rise of China and India, and their very different paths over the last twenty years. China is often projected as superior, dynamic and modern, and India as dirty, poor and archaic.

Yet in fact, India has been following China’s development progress at a steady clip for much of the past 15 years. Growth rates have reached 8 and 9 percent and, although “languishing” at the 5-6 percent mark for the past two years, the fact remains that India has not been at all slovenly in its development. Much needed infrastructure has been and continues to be put in place. The Delhi and Mumbai international airports are first rate, the Delhi Metro system is arguably better than Beijing’s, and ring roads and express highways continue to spring up in all major cities, and crucially, between them.

While much remains to be done, India is also about to develop high-speed rail lines, upgrade its ports, airports, road and supply chain links and is being ushered into the modern world at a rapid pace. There is no doubt that the India of 2024 – ten years ahead – will look very different from the India of today.

An example of on-going development is India’s airports. The main international terminals in Delhi and Mumbai have had significant makeovers and are now world class facilities. Some of that work was carried out by Indian contractors, but much was also foreign, including Chinese contractors. Materials to build them came from factories across Asia and beyond. These are now completed, but India has another four major hubs to develop, including Bangalore, Chennai, Hyderabad and Kolkata, and Mumbai requires a third terminal and runway. As this report from the Centre for Aviation states, India’s air traffic will triple in the next ten years, making it the world’s third largest aviation market after the United States and China.

There is no reason why foreign manufacturers based in China cannot reach out and start to supply such a market – and all the ancillary developments, such as hotels, road, and other hard and software requirements that go with such huge infrastructure development projects.

In terms of other major industries, India is the world’s sixth largest auto manufacturer – Ford, for example, has recently relocated its entire non-American vehicle manufacturing plant to Gujarat. They require component suppliers, and what better expertise to have than auto component manufacturers with China market experience?

Additionally, like China, India also possesses a huge middle class consumer market. Estimated to be, like China, some 250 million, India’s consumers appear to have been overlooked by many in the rush to get into China. Yet Mercedes Benz sales are rocketing and Japanese manufacturers – no slouches when it comes to investing in Asia – have just named India their second most preferred corporate investment destination in Asia.

Chinese manufacturers and sales representatives are already taking up large quantities of airline seats on travel between the two countries. I fly regularly between them and there are always large numbers of Chinese nationals both to and from India. China and India both share large trade offices in Delhi and Beijing, and Shanghai and Mumbai, and there is free flow of investment information between them.

Yet when it comes to foreign manufacturers in China, there is a disconnect with India. Foreign Chambers of Commerce and the trade offices in China understandably concentrate on China, not India, and it can be hard for the China-based foreign executive to get a handle on what the India opportunities are for his China-based manufacturing plant.

While it is true, and especially from the China point of view, that India continues to have a perception as being backward, poor and undeveloped, remaining uninformed about today’s India is not going to help a China-based manufacturer sell to this new emerging market. In fact in many cases, it is Chinese businessmen that are leading the way, ahead of their China expatriate counterparts in exploring what is happening and developing in India. Consequently, in this article we examine the potential for selling China manufactured products to India.

The India Potential for China Sales
India is a huge country, and not dissimilar to China in many geographic respects. It consists of 28 states and 7 territories, and has a population of similar size. Five Indian States actually border China: Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Sikkim, and Arunachal Pradesh. Although these remain relatively undeveloped, a legacy of the 1962 border war with China, it does demonstrate how close the country actually is. India is not that far away. The flying time between Beijing and Delhi, the respective capitals, is under five hours.

However, of note to China-based manufacturers are probably the better known metropolises. There are two main thrusts for business development in India, being infrastructure – just as foreign investors rushed into China to help build roads, rail and airports, with contractors, civil engineers and architects – plus all the associated products – such is the same for India.

The Indian government has also been offering Private Public Partnerships in India and especially to encourage foreign companies to invest in infrastructure projects – including road, rail and ports. These typically involve significant tax incentives, government funding support and, unlike China, the ability for foreign participants to raise part of their participation funding requirements from Indian Banks.

The Indian government regularly updates PPP offers, please contact our India offices for the latest updates.

Most foreign countries also have extensive trade representation facilities in India, usually housed within their respective Embassy, while national Chambers of Commerce are all extant. Of particular additional note are organisations such as the U.S.-India Business Council and the UK India Business Council, while the majority of European countries tend to negotiate with India directly, and have their own chambers of commerce in India, rather than through the EU. These bodies are all worth checking out for market intelligence and India market support. As long as you are originally from their own country, they will still support you with sales from your China operations to India.

Other areas where foreign investment is heating up in India is in e-commerce, education, publishing, single and multi-brand retail, and luxury goods. Hermes even went so far as to include Indian saris in their India product lines, and despite selling for US$16,000, sold out immediately. There is now a 6 month waiting list for an Hermes sari, the Indian equivalent of the Birkin Bag.

With 250 million middle class consumers, India cannot be ignored. The key, however, to India, large scale infrastructure investment projects aside, is that it is still a country where wealth is relatively concentrated in the major urban cities. This means that Ahmedabad, Bangalore, Chennai, Delhi, Hyderabad, Jaipur, Kolkata, Mumbai, Pune and Surat remain the top ten destinations when in search of middle class consumer wealth. It too, like China, is also growing. India will reach a middle class population of 600 million by 2030.

There are a number of steps to take for foreign owned, China-based manufacturers to look at selling to India. We can identify them as follows:

What are the tariff duties on my products into India? How does the China-India Double Taxation Treaty impact upon these?
China and India both have Free Trade Agreements with ASEAN. Can I leverage this to lower import-export duties?
How can I find a distributor or agent in India?
How can I set up a Liaison or Representative Office of my China business in India?
Are there free trade and development zones in India? What about tax incentives?

India Market Research
These questions are dependent upon the areas in India that are your target markets. However, it should normally be assumed that the larger Indian cities that we mentioned should be the ones to explore. Of these, good first choices to begin to explore the India potential are Delhi and Mumbai. Delhi is important because many Embassies and Indian Trade organisations, such as Assocham and the Confederation of Indian Industry (CII), are based there. These all have research departments and can link you to quality contacts, in addition to providing market specific intelligence about India. They, along with the trade section of Embassies and Chambers of Commerce, may also introduce you to qualified market research firms, agents and distributors. Some of these are massive Indian supply chain organisations, such as the Tata Group. Others are more regionally focused. However, they are out there and the intelligence is available. If you require assistance with introductions to any of the Indian institutions in Delhi, please email our local office at delhi@dezshira.com.

Mumbai, meanwhile, is the commercial hub for India, with many international banks extant in the city. These can assist with helping you with finance and trade structures. Our firm’s Mumbai office can introduce you to pertinent international banks in India. Mumbai is also a major port and has generally excellent logistics and supply chain connections with the rest of the country, in addition to a number of free trade and development zones.

India Tax & Duty Questions
Unlike China, India has not unified its tax code. This means that different tax rates, including duties, can vary across the country. For example, some Indian states are “dry” (no alcohol), meaning that these items cannot be imported at all. Others levy cross-state transportation duties, making the question of applicable duties in India on goods imported into the country a complicated subject. However, we have listed details of importing goods into India in this article, Import and Export Licensing Procedures in India, and will also be happy to answer, in the comments section on that article, any questions about dutiable rates of products into India.

The China-India Double Tax treaty can also have an impact on taxes, and especially if a China based company establishes a subsidiary or related company in India. In that case, the DTA can lower taxes on items such as withholding tax and so on by as much as 50 percent. This should also be considered when trading between China and India and developing a more long term presence in the country.

The fact that China and India both have Free Trade Agreements with ASEAN is also interesting, especially as these agreements lower import-export taxes on products traded between China and ASEAN, and India and ASEAN, to basically zero. Although rules of origin apply, under some circumstances involving the mixing of China components to ASEAN production may facilitate a lowering of overall duty rates for sale on to India. It is a structure worth considering for more regionally advanced foreign investors.

Liaison & Project Offices in India
India allows the establishment of foreign companies as Liaison Offices (LO), similar to China’s Representative Offices, meaning they are not subject to direct profits tax but can facilitate trade between India and other countries and, of course, China. The procedures for establishing an LO in India are not dissimilar to the same processes in China. With low wage and operational costs, the establishment of a Liaison Office in India is starting to make complete commercial sense when it comes to looking at Indian locations to promote your China production.

Unlike China, India also allows the formation of Project Offices. These are allowed to exist for the duration of a contracted project awarded to a foreign investor, and are extremely useful, therefore, as they offer an easy exit strategy when the project is completed. Tax, of course, has to be paid on profits, but they do allow the short term execution of a specific infrastructure development, provide on the ground support, procurement and implementation, and exist under one legal entity.

Beyond this, India also allows Wholly Foreign Owned Entities, although in India they are classified as Limited Liability Companies. These can also have their own import-export licences, buy and sell products, and manufacture in India.

Free Trade & Development Zones and Tax Incentives
Like China, India also has a number of free trade and development zones, and export processing and bonded zones throughout the country. India has a long coastline as well, both east coast (facing Thailand and Southeast Asia) and west coast (facing the Middle East, Africa and Europe) and can provide bonded warehousing, export processing and related services to foreign investors. These can help reduce or even eliminate the need for products to be taxed upon entering India for additional processing. Tax incentives for investing in these zones and VAT rebates on Indian sourced products then exported are also available. Please see our article India’s Special Economic Zones and Tax Incentives for more information.

Summary
As I travel around India and China on a regular basis, I note one consistent theme – the flights are packed with Chinese entrepreneurs. They are all taking advantage of the new Indian infrastructure and middle class development boom – and are familiar with it, having experienced exactly the same in their own country. Foreign owned, China-based businesses tend to be behind the curve on this for reasons discussed – they do not tend to have ready access to India market intelligence in China, and they become too China-Centric. Yet for markets beyond China for Chinese production, it is the Indian market, along with ASEAN, that is the easiest and closest to access.

Developing further sales and profits into a China-based business now means marketing and selling part of that production to India. With the Indian market in need of much infrastructure development, and with a buoyant middle class consumer base, the opportunities to sell to India – having learned from the China experience – are uncannily similar. China-based manufacturers should be looking hard at the potential for developing their market in India.

Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy and the United States.

For further details or to contact the firm in India, please email india@dezshira.com, visit www.dezshira.com, or download our brochure.

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