“We never thought that China can be our partner”

February 2016

China and India have been bruited about as the Asian giants most likely to go head to head. However, as China seeks low-cost countries and joint ventures, Modi Enterprises owner KK Modi says India is rolling out the welcome mat as it operationalises “make in India”: manufacture and improve the standard of living in India.

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Here is the transcript of the video.

Emmanuel Daniel (ED): How much of what the current government is doing is reaching you and your businesses?

K.K. Modi (KKM): The government is changing beyond recognition the old way of doing business. If you look at India, we made a mark in the IT business. China made a mark in manufacturing. Now, India wants to make a mark in manufacturing.

ED: Isn’t that a policy that was pursued at a time of independence? The Nehru government did pursue industrialisation, but it failed.

KKM: That is very true, that is what happened. Government was trying to broker how industry reaches the masses, how jobs are created. Now, the government is not intervening. I think India has the resources because a lot of young people are joining the workforce. And there is already a momentum of growth. So we are capable of increasing the rate of growth substantially.

ED: A lot of manufacturing is actually tied to government policy, demand, land acquisition, and infrastructure building. How fast do you think this transition to manufacturing is moving, and how real is this development of becoming a manufacturing hub?

KKM: I think the present manufacturing costs in India are actually more than in China. But logistics cost is improving. Therefore, investment is coming in. So I think with the inflow of foreign capital and easing of government controls, we will move faster.

ED: Your business is a beneficiary of domestic consumption in India. How sensitive is your business to inflation, logistics cost, and infrastructure in India? Have you seen improvements that have been reflected in your own business?

KKM: Right now, our international businesses, particularly exports, are growing much faster. Yet we still don’t have enough capacity. Some Indian companies make more money exporting than selling domestically, such as those in chemicals, pharmaceuticals, high-tech manufacturing. In those industries, productivity is increasing and there are very few strikes. People are concerned about keeping their jobs, and you can find educated people. So we can manufacture goods to international standards.

ED: Are you making more money exporting?

KKM: Right now, exporting is good business. I hope Indian business also improves. But Indian business is a little slow. International business is very, very bullish and very profitable.

ED: Are you also a beneficiary of the growing trade agreements taking place both in Asia as well as in Africa?

KKM: I think trade agreements play an important role. But there is a fear of the global economy slowing down, of tariffs, of the ease of doing international business.

ED: Are you or were you a beneficiary of trade barriers in the past that kept India as a closed market?

KKM: Very much. But as the Rupee has depreciated, all of a sudden, we find that our international business is becoming more profitable. So the decline in the value of the Rupee and lessening of control or removal of barriers is helping Indian industry. In fact, the time is right now to expect capacity improvement. Oil is low. Copper is low. So there is a slowing of international demand. But Indian competitiveness has never been better.

ED: I note that you are actively involved in a number of trade federations as well as business federations both in India and in the region. What are some of the most important themes that you are pushing personally?

KKM: Right now, the Indian federations are pushing the government to reduce control. The government has carried out a study; there was a conference on start-ups; and the prime minister has announced that no inspector will visit for the first three years any new company that has started. Our big limiting factor has actually been the inspector—government intervention. Now if government intervention reduces, then it is good for industry.

ED: One of the government’s interventions that was not well understood by foreigners, and foreigners doing business with India, has been the tax regime. It still comes across as somewhat opaque in that the tax liabilities of foreigners generating revenue in India are not clear. Maybe government is clearing the process, but it’s understood differently by different suppliers and so on. How do you think that’s coming across? And do you think there should be greater clarity on the tax front?

KKM: I think clarity in tax payments is the need. The tax men are very, very zealous. They want to maximise revenue. In the process, they are skating on very good people.

ED: Was it always like that? Or is it something that is a temporary phenomenon you think?

KKM: I think it is mostly from the last government. After the previous government, there was a very big move to control corruption and blackmail. Prime Minister Modi is going in that direction. Already, he has announced that paying of taxes should be easy. But the tax men are interpreting the loss very differently. But I’m sure good things will prevail. And we will reverse the situation soon.

ED: You appear to be very confident. What are some of the plans that you have put in place to take your business to the next level? Are you looking at financing? Are you talking to investors to help you go forward?

KKM: I think most businesses that are not heavily burdened with debt—and we are one of them—can grow their investments, especially right now, with the low interest rate, ease of money coming in, and opportunities coming from Indian–Chinese collaborations.

The beginning of the first joint venture with Chinese companies occurred last year in the manufacture of sophisticated chemical products. Many other new Chinese companies are coming forward. The only problem is that India is interested to work with Europeans and Americans. We don’t understand the Chinese mindset. And the Chinese do not understand the Indian mindset.

ED: What is the most difficult part that is not connecting at the moment?

KKM: I think Chinese people have very low trust because they have heard so many things. There is much higher trust between American and Indian, and between European and Indian ventures. The Chinese are not accustomed to joint ventures. They would rather go either 100 percent, but they are too afraid to work in India alone. So they require a joint venture. But there is a deficit of trust.

ED: And the Japanese also take the joint venture route quite well.

KKM: Well, the Japanese are better but they are not so aggressive right now. And the Chinese have very good technology. They have good marketing connections all over the world. But the cost of production in China is going up and controls are increasing. So right now China is locating some of its production to India. The largest telephone company in China is going to put up a very, very large telephone manufacturing facility in India.

ED: The Chinese are very aggressive and are looking at countries that do not have a western bias, because technology adoption encounters difficulty in some countries.

KKM: I think certain improvements in Chinese technology are needed. But China is capable of doing this. Also, the Chinese have to use more Indian components and Indian labor. While this will be a problem because of a language barrier, the future is joint ventures between China and India.

ED: Do you see more and more such collaborations taking place? Does that result in some kind of technology transfer?

KKM: Most of the Chinese companies have not done joint ventures though they are excited to do joint ventures. They still have to understand the rules of engagement because Chinese companies have technology, and that technology requires a little bit more sophistication, which they can do. The Chinese are hungry unlike the Japanese and Americans.

ED: Partially, they are hungry because they are also being funded well, especially from their own banks. And that’s why they can go to market more aggressively. If it wasn’t for the funding, in some ways, they would be almost at par with the Americans.

KKM: The Chinese know what their government wants to do. And recently, the Chinese government has announced that they are going to create a monetary instrument of funds, which will rival Royal Bank. And I’m sure this new development will make Chinese companies more aggressive because the government will give them funds with ease. Not so much restitution as the investment companies face. So I think China will find a way out of this slowdown and for collaborating with lower-cost economies like India.

ED: Do you think that is what will drive the industrialisation of India?

KKM: That is what I think. So far, we never thought that China can be our partner. We always thought that technology will come from US, Europe, and, to some extent, from Japan. But now, Chinese companies are becoming aggressive. And they are finding ways to have low-cost manufacturing bases and modern plants that are pollution-free. And for that, they don’t want to build the plants only in China. If the Chinese government gives them support, then they will have the funds. And the Chinese have enough foreign currency.

ED: Right. What about joint ventures outside of India with Chinese companies? I think that you have a very strong showing in Africa.

KKM: We ourselves are not exploring that possibility because we see all the opportunities in India, because we can manufacture in India, and we have the technology that western countries do not want to give to us.

ED: You seem to be a believer in made in India.

KKM: Very much so. “Make in India” is a phrase that our prime minister created. Not made in India but make in India. Make in India means that you don’t only manufacture, but you also improve the standard of living in India. India is the first country in the world to ask the profitable companies to invest 2 percent of their profit into social responsibility projects.

ED: How do you think about social responsibility given the fact that you are in a business that is a health risk in some ways? Do you see yourself diversifying? Do you see yourself using the retail network that you have to push other things?

KKM: I think a really big opportunity for us is re-educating India.

ED: Tell us about the Indian consumer.

KKM: The Indian farmer, the Indian manufacturer, requires modern knowledge, which uses computers, digital technology, even money transfer. Most of the population has not been exposed to that. That requires education or re-educating the people who have already studied and are working. So India has started a program where we go to many companies and their facilities. So the workers or managers or people can get a new degree. We are also getting a lot of support from Africa.

So I think India and China both will grow.

When we made the first joint venture with the Chinese, the Chinese partners were very, very nervous because we had the majority. I took them to meet Prime Minister Modi. Mr. Modi convinced them that in India, anybody can go to court, and the court will not fail you because you’re in India. He said, “The most important thing is that I am fan of China. I will make sure India is aligned with the Chinese. And if you have any difficulty with your partner, just remind me that I met you and come to me.” So I think the prime minister will try to bridge a gap.

ED: He’s already working at it.

KKM: He’s working at it. People thought he is not going to meet Americans. He has visited the United States many times. He will also form partnerships with Pakistan. And I think India will extend the hand of friendship to the Chinese, because the Prime Minister believes that China has done wonderful things. And he praises a lot of Chinese enterprises. So I think, if Mr. Modi remains here for a long time, India and China will collaborate. Actually, the border is just of one for fighting. It is not a real issue.

ED: How would you describe the current leadership? Is it right wing and conservative? How is it able to capture the imagination of a more broad-based, Indian population?

KKM: Prime Minister Modi won the election because people thought and people still believe he will make India prosperous. And that is the mandate he has. And he’s working on that. His biggest problem was the trust deficit. We have trust deficit with China, trust deficit with Pakistan, trust deficit with Bangladesh, trust deficit with the US. So he has taken it upon himself to establish a relationship with the leaders in these countries. And that is very important.

ED: A final question. How is your company evolving and changing? And how confidently are you investing in the future? What are the milestones that you set for yourself as a company?

KKM: I think we are very bullish. We want to be an enterprise that can grow 25 to 30 percent per year. And that is only possible if we have a stable government, a government that does not interfere. And the government must remove the fear of tax men because the foreign countries, the foreign businessmen, do not want to face imprisonment. They want clear rules that they can understand. I am sure the government will correct the situation.


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