💸 India v/s China: A $847 bn Opportunity
China's economy is struggling and this could be a great opportunity for India. Here's how.
Ever had that one kid in class, or that one cousin who excelled at everything?
Your personal Sharma Ji ka beta/beti who your parents compared you to?Â
You’re super lucky if you didn’t have to face this, but if you did the whole of India can relate.Â
After all, we also have our very own Sharma Ji ka beta: China.
But China’s growth is slowing down now, and many believe there are several sectors where we can finally get ahead of the country.
Like the chemicals sector: a $847 billion market.Â
🇨🇳 What’s Going on in China?
For years China has been the world’s factory.
You see, after witnessing the country’s impressive growth even during the Great Recession of 2008, a lot of foreign countries began investing in China.Â
It received FDI (foreign direct investment) of around $100 billion in 2010 alone.
This along with factors like cheap labour and easy government policies have helped China grow and build several industries and create a monopoly (You can read more about it here).
But over the last few years the country has been slowing down.
Even before Covid came into the picture the country’s economic growth had been declining, falling from 6.6% in 2018 to 6.1% in 2019. The lockdowns have only made this situation worse. The country’s manufacturing sector has shrunk massively and its economy has also further contracted.
And one sector that has been deeply impacted is the chemicals sector, especially specialty chemicals.
Now, two questions arise here:
1) What are specialty chemicals and
2) Why are we talking about this sector specifically?
Well, specialty chemicals are as you guessed it special chemicals.
While normal chemicals are used in a wide-range of industries, specialty chemicals have specific functions and are used by specific industries.
For instance, chemicals like sodium and chlorine are used in almost every industry, but chemicals used in the pesticide industry are much different than chemicals used in the food processing industry.
And we’re talking about the chemicals sector because it is a chuppa rustom. While it doesn’t get much limelight, chemicals (specialty or not) are used in almost every industry.
So, this sector is super important and China is currently the third-largest exporter of chemicals and the largest exporter of specialty chemicals.
But just like the country’s economy, this industry is also slowing down in China. Why?
🤔 Why is China’s Chemical Industry Slowing Down?
For years, China succeeded in growing rapidly because businesses had massive support from the government.
They would get favourable loans and wouldn’t have to comply with pesky environmental laws.
But now things have changed. Since China became the world’s top polluter and saw a number of explosions and blasts in chemical factories, it has started implementing super strict environmental laws.
Thanks to these laws, around 25% of companies in just China’s Shandong province had to shut down in 2018.
What’s more, China is also reducing the amount of credit it is giving out, since companies have become used to easy bailouts. China is now focusing on balancing growth with credit.
All of this has contributed to the slowdown in the chemicals sector and manufacturing in general.
And like we said, China’s growth was supported majorly through foreign investments. But now a lot of major countries do not want to be dependent only on China.
This is because Chinese supplies turned out to be unreliable during Covid. And several countries are worried that making China the world’s top manufacturer has hurt them and given China too much leverage.
So, foreign investment into China is set to witness a slow down, with some companies completely moving their factories out of China. Plus, for years Western nations have been following a China +1 strategy. Huh?
You see, China’s growth has scared a lot of the world’s superpowers. So, they have been trying to diversify their investments. Thus, they created a rule of sorts that they would never invest in China alone, rather they would also invest in some other country to help it grow and become a replacement for China.
So far, countries like Vietnam, Malaysia and Thailand have benefitted from this. But now could be India’s turn to profit.
🚀 India’s Turn to Get Ahead
Believe it or not, India and China are very similar.
We can also provide the world with cheap labour and we also don't have super strict environmental laws.
So, we could easily replace China, especially in the chemicals sector where we already are the sixth largest producer.Â
Despite this we rank 14th in terms of exports and have a $15 billion trade deficit when it comes to chemicals.
That’s because due to lack of good infrastructure, our logistics cost in terms of manufacturing and supplying become too high.
Plus, a lot of chemicals especially specialty chemicals are made from petroleum byproducts: something that we have to import. This also limits our manufacturing potential.Â
Inspite of these drawbacks, India has seen a 106% growth in exports from FY2013-14 to FY2021-22.Â
And if foreign investors begin pulling out money from China and start investing it in India, we could see massive growth here.
To ensure that this happens the government is trying to introduce product-linked incentive schemes for this space.
And to solve the raw materials problem, BPCL is entering the petrochemicals business.
Which is why a lot of investors are seeing India as the next chemicals hub.
This is clearly evident in the growth of the stocks of companies like Deepak Nitrite (grew 630% in the last 3 years), Alkyl Amines (grew 850% in the last 3 years), Aarti Industries (grew 110% in the last 3 years). Although there could be several other reasons like increased revenue and new products behind their growth as well.Â
The industry is also offering a 25% return on capital employed, suggesting strong growth.
However, we do need to keep one thing in mind. Unlike China, we have to balance both growth and the environment. We cannot sacrifice one for the other. So, regulations around this sector need to come up and we need more funds to go into research and development to counteract the impact of harmful chemicals.
With this sorted, the chemicals sector's growth could easily help fulfill India’s dream of becoming a $5 trillion economy soon, as homegrown chemicals will also give a boost to several other industries.
âš¡In a line: China's economy is slowing down and this could be a great opportunity for India to enter into the global chemicals market.
💡Quick question: In what other sectors do you think India can beat China?
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