Since October 2017, there have been major disruptions in the production and supply of many generic agchem products, leading to major price increases and shortages for many products. This is due to the mandatory closure of many production plants in the north and northeastern regions of China by the government to contain the usual severe winter pollution. The mandatory closure of coal-fired power plants has also been a major factor contributing to the shortage of industrial energy needed for agchem production.
The Chinese side
By and large, the mandatory closure over the winter period of coal-fired power generation plants and many heavy and chemical production facilities resulted in much cleaner air in the most polluted parts of China. However, prevailing good weather has also played a part in this improvement. The particulate matter with length of 2.5 microns or less (PM2.5) in Beijing stood at 58 micrograms, which just met its 2017 target of getting it below 60. Though it has gone down by a third compared to the levels five years ago, the region is still far from meeting its official PM2.5 standard of 35 micrograms. Note, too, that the World Health Organization recommends levels of no more than 10 micrograms.
Going forward, in spite of the improvements achieved through such drastic measures, containing pollution effectively and consistently requires at least the same drastic measures taken, if not more. It simply means some factories will not be allowed to reopen for production in the spring, and their future will depend on the owners making heavy investments in anti-pollution facilities. It will also mean that those factories meeting current anti-pollution standards will need to invest even more to meet near-future standards.
The bottom line is that the major curtailment of production and the disruption in supplies to the world markets over the past few months will be the new normal.
Those factories that will be allowed to resume production at the onset of spring will have to work out with customers how they can ramp up production to meet demand during the winter period, as well as meeting the lower demand periods of late spring and summer. The key issue to be faced is who will end up paying for advanced production and advanced purchases, the Chinese factories or the overseas customers? There is no question that the cost of products will go up and again, this will be yet another new normal.
The Indian side
With the major disruption in supplies starting from the time of the AgroChemEx trade show last October when, for the first time, there was practically no goods to sell and nothing to buy, one would tend to think that the Indian generic agchem producers would be in celebratory mood. But, that is not the case. The Indian producers are mostly dependent on supplies of key intermediates and raw materials from China. Supplies of these were equally affected.
Having said that, China has taken drastic measures to contain an acute pollution situation over their winter, and India has faced some of the same issues, particularly in New Delhi. Schools had to be shut down again for some days in November to protect children from over-exposure to pollutants.
Recognizing that India too has pollution issues, is there a case for having more technical-grade agchem products as well as key raw materials produced in India? I think there is.
One cannot expect the Indian government, both at the central level in Delhi as well as at the state levels, to allow the export of pollution from China to India. Any shift in production from China to India will mean that the local Indian partners will have to ensure that they meet current and future pollution standards prevailing in India.
There are at least two compelling reasons for the Chinese to shift some production to India:
- Risk management.
As discussed earlier, going forward, production and supplies in China are going to get worse before they get better, unless everyone in the supply chain accepts the much higher costs expected. So, having an alternate or additional production and supply base in India mitigates any further constraints in production in China.
- To tap into the significant and growing India market for agchem.
The Indian agrichemical industry, which is estimated at $ 4.4 billion in FY15, is expected to grow at 7.5 percent annually to reach $ 6.3 billion by FY20, with domestic demand growing at 6.5 percent per annum and export demand at 9 percent per annum.
In order to tap into the Indian market more effectively and consistently, Chinese players need to be mindful of the Modi government’s recent push to have more local production and be less reliant on imports. This economic initiative of Prime Minister Modi comes under his drum beat of “Make in India.”
During the past few months, the government machinery has already taken the cue from this drum beat and has instituted new registration rules that are not favorable to technical-grade importers. The import quota is also starting to get restricted.
Having explained that there is a need and a golden opportunity for Chinese and Indian players to come together to fix the production and supply issues and mutually benefit from that collaboration, it is not going to be easy.
There are two major hurdles to overcome:
- Mutual mistrust and cultural differences
In general, Indians do not trust doing business with the Chinese on a joint-venture basis, though they trade with each other. Likewise, the Chinese do not trust the Indians. They can trust just about anybody, just not each other!
They also don’t typically see eye to eye on each other’s food and customs. The Chinese going to India to do business take instant noodles along with them. The Indians going to China to do business can’t eat just about anything the factory bosses serve in their executive dining rooms. I often advise the Chinese bosses to stock some vegetable samosas and just deep-fry them for their Indian guests. They would be much happier with just that than the usual 10-course Chinese banquet.
There are Chinatowns all over the world, but there is only one in the whole of India and it is located in Kolkata, but the Chinese descendants living there have dwindled down from about 50,000 to 2,000. There are Little Indias in many parts of the world — except in China.
The Indians eat their dinners at 8 or 9 p.m. and by that time, the Chinese are just about ready to go to bed!
- A long history of geopolitical rivalry and political differences
The Indians and Chinese have had a long history of border skirmishes and they are still going on today. As recently as 2017, both sides amassed troops on either side of their borders as if ready for “all eventualities.”
The recent push by Presdent Xi of China for his “Belt and Road Initiative” (BRI) is viewed with great suspicion by the Indians and their government. BRI is a development strategy proposed by the Chinese government that focuses on connectivity and cooperation between Eurasian countries, primarily with China as the driving force, and consisting of the land-based Silk Road Economic Belt (SREB) and the ocean-going Maritime Silk Road (MSR). In 2017, President Xi invited regional and global leaders to a BRI Summit held in Beijing. Just about everybody was there except the Indians.
According to a 2014 BBC World Service Poll, only 33% of Indians view China positively, with 35% expressing a negative view, whereas only 27% of Chinese people view India positively, with 35% expressing a negative view. This negative impression of each other runs very deep indeed.
OVERCOMING THE OBSTACLES
There is an urgent need for both side’s government to drive improvements in mutual understanding and mutual appreciation and respect of each other’s culture and colorful traditions.
Indian and Chinese business communities need to set aside their geopolitical rivalries and focus on mutual benefits in trade and commerce. Their respective business leaders could also do their part to foster better mutual cultural understanding and appreciation.
Current major joint ventures between Chinese and Indian companies with production being done in India should be profiled and highlighted. One good example is carbon disulfide manufacturing in India, a $40-million joint venture of Indofil and Shanghai Baijin. This key raw material is used in the production of mancozeb.
Indian and Chinese entrepreneurs brought up in multicultural societies and international business environments can and should also play a part in bridging the gaps.
Just as the Indian leader is championing “Make in India,” the Chinese side needs to invest in India and do more manufacturing there to address the big trade imbalance between the two countries. The total imports from China during the last fiscal year stood at $61.3 billion against India’s export to China worth $10.2 billion. The trade deficit, which stood at $37.2 billion a few years ago, now stands at a whopping $51.1 billion. This is not sustainable.
The need for the two countries’ agchem entrepreneurs to come together and initiate more India-based joint ventures in manufacturing is a foregone conclusion. The rewards to both sides are immense. They just need to set aside differences and put their minds together for the current golden opportunity to collaborate on an unprecedented scale.