India’s boycott of the China-led One Belt One Road or OBOR initiative last week betrays an anxiety on part of the Indian establishment. As a culmination of the unprecedented economic rise of the Middle Kingdom, OBOR is China’s version of the Marshall Plan – the extremely successful business stimulus launched by the United States to power West European recovery following World War II. OBOR seeks to fund over a trillion dollars’ worth of projects in more than 60 countries across Eurasia and the Asia Pacific.
New Delhi’s concerns are not limited to the $50 billion Chinese Pakistan Economic Corridor – a product of OBOR – which blatantly challenges India’s security and sovereignty concerns through its presence in Pakistan-occupied Kashmir. For the Indian media, OBOR symbolises China’s transformation into a superpower and therefore has made many a talking head nervous.
However, recently the Indian media missed a more obvious indicator of China’s growing industrial prominence than OBOR. On May 5, China’s answer to Boeing’s 737 and Airbus’s A320 airliners – the C919 – made its maiden flight. The C919 symbolises much more than OBOR that China has a clear pathway to technological prominence – the distinction today held largely by Germany, Japan and the United States.
This should worry India on two counts – because it once again outlines the qualitative gap between India’s and China’s industrial progress, and because it is a thorough indictment of India’s development strategy.
The quality of production
Progress in industry depends on the sophistication of production and technological know-how that a country’s manufacturing sector is able to master. In other words, there is a profound difference between making semiconductors and clothes. Textiles are easy to make largely because the technical know-how for large-scale textile production is easy to master. Thus, this depresses prices and subsequently the wages. On the other hand, making semiconductors requires superior technical know-how, and heavy capital investment. Such activities ensure that wages stay high and jobs secure, since very few can emulate this kind of economic activity and capital investment.
This is the reason why silicon wafers – a crucial component in the semiconductor chip – built for the smartphone industry come mostly from just two companies in Japan. This is also the reason why there has effectively been a world duopoly of Airbus and Boeing in the making of passenger airliners. The capital investment, technical know-how and training of workforce required in these niche but crucial industries is simply too much of a barrier for anyone else to get in.
This makes China’s entry into the airline industry extremely interesting. The successful production of the C919, while currently based on foreign technology and components, is a great start for the Chinese to cross the last mile of economic transformation, which requires mastery in industries with extremely difficult know-how and high capital expenditure.
Why India must worry
The profound success in indigenous manufacturing by China has to serve as a stern lesson for India. It is quite fundamentally at odds with the industrial strategy of India under both the previous United Progressive Alliance government, and the Modi dispensation.
For one, it exhibits the prominent role of the Chinese state in the country’s development. The C919 has been manufactured by COMAC, or the Commercial Aircraft Corporation of China, a state-owned entity. China’s essential strategy has been to court Boeing and Airbus to set up shop with the promise of orders, and utilise their presence within the country to transfer technology to local players. The Chinese state is now practically guaranteeing a domestic market for the Commercial Aircraft Corporation of China to grow, thereby cushioning it from foreign competition till it can stand on its feet to match Boeing and Airbus in the international market.
While such a strategy may surprise most believers of the conventional view of globalisation, free trade and free market, seasoned China viewers are used to it. China’s strategy to build competitive advantage in the aerospace industry is all too similar to its approach in other industries in the past. The state ensures adequate consolidation of labour, land and entrepreneurial talent, and combines it with assistance in foreign technology-transfer and subsidised financing. Such industrial mercantilism has ensured that the Chinese today produce more steel than the rest of the world combined, produce the largest number of cars, rule the world markets in machinery for construction and mining and are basically the world’s final assembly point for electronic goods.
If China is to avoid the middle-income trap, it has to relentlessly focus on improving productivity. The key to productivity is to become adept at sophisticated manufacturing, where technical know-how and high capital investment matters more than labour costs. The Commercial Aircraft Corporation of China and the success of C919 is a sign of the Chinese leveraging their state-guided development model to this end.
However, in obsessing over the OBOR initiative, the discourse in India once again missed the signal for the noise. Yes, the One Belt One Road initiative is audacious in its scope, but China’s determination to carve out a competitive advantage in one of the most intricate industries of today is easily the better guarantor of its economic heft.
Akshat Khandelwal is a writer and entrepreneur based out of Delhi. His Twitter handle is @akshat_khan.