Will a weak rupee help exports?

Popular wisdom based on an economic principle that has outlived its utility can often play rough with those who hold dear to it. With the rupee in free fall, most policymakers must be shaking their heads in relief; exporters, too, must be heaving contented sighs at the prospect of recovering lost ground in the wintry landscape of recession in the most prized markets of the West.

But a falling rupee may help exporters' margins more than lift their volumes. Recent interest subsidy concessions offered by the Commerce Ministry betrays this confusion — the government does not seem to know what it wants to lift margins or volumes. So, while exporters benefit from the falling rupee, whether it helps exports as a whole is another matter.

For years, policymaking with regard to exports has rested on the assumption that price was the most valuable ally of exports; lower export prices, it was held, helped China stamp its massive footprint in world markets. Cheap labour and a weak yuan did the trick more than quality or other features such as brand-building quality and emphasis on innovation and flexibility in markets with shifting tastes.

BEYOND Pricing

But how much does pricing really affect competitive positions of producers/exporters in markets? In the Chinese case, price is increasingly giving way to other factors that are helping consolidate its hegemony in global markets.

Two years ago, the United States Department of Commerce gave out data that showed India slipping from the top five slots as apparel exporters, edged out not just by China, but by Bangladesh, and countries such as Indonesia and Thailand. China still remained the top exporter of apparels. It is possible that the yuan played no small part in retaining that edge. It would also have helped Chinese exports of mass volume goods such as latex gloves or chefs' caps — quotidian goods requiring little technological upgrade.

But China has been diversifying its export basket with manic speed and efficiency. By doing so, it is also dispelling the old wisdom about pricing as an essential ingredient of competitive advantage.

According to the US-based National Science Foundation's Science and Engineering Indicators 2010, China is “the largest single high-technology exporter and has changed the relative positions of the developed and developing countries”. The Chinese did not use the strategy of price to elbow its way into a market dominated by the US Japan and Germany. Two of the more familiar Chinese product names will show how they did storm the bastions of American and Japanese superiority in white goods.

Success of Haier, Lenovo

When the Qingdao Refrigerator Company catering to the domestic Chinese consumers entered into collaboration for technology and equipment with German major Liebherr in 1984, it began a journey towards a new identity for its product that would symbolise a new competitive thrust in traditionally Western-dominated markets.

Haier's development as a brand of Chinese white goods represents more than just collaboration with a renowned player in the business. It meant a restructuring of business practices, acquisitions of synergistic firms and the establishment of production bases in countries with relatively cheaper labour such as Indonesia and Philippines, and much later Pakistan, the Middle East and Africa. It took on competition headlong from American giants such as Whirlpool and GE by setting up bases in the US as well as aggressively marketing its fridges and other home appliances.

In the bargain, it proved that price need not be a driver of export growth as much as brand creation and positioning, of a continuous focus on quality, relocation of production bases closer to buyers. Haier is now the 4{+t}{+h} largest white goods manufacturer in the world with more than 50,000 employees, 240 subsidiaries and 30 design centres around the world.

Lenovo strategy

Consider Lenovo as another example of a global exporter that does not use price to leverage its position in competitive markets. Today the world's 4{+t}{+h} largest personal computer seller, Lenovo began its journey to global stardom as late as 2005 through a top drawer-acquisition; when IBM sold its personal computer business to the Chinese firm that catered till then to the domestic market, it gave Lenovo the handle to leverage its position in the business.

In 2007, Lenovo innovated radically by centralising its marketing and services activities from around the world in Bangalore.

That act lent muscle to a fledgling vendor dipping its feet in a growing market swarming with iconic global and domestic brands. It is now the third biggest name in India after HP and Dell. But equally it gave Lenovo a foretaste of global competition: India was the first market outside China; only two years later, in 2008, did it introduce its consumer products elsewhere.

Brand creation

The growth of multinationals carries with it several benefits for the Chinese entrepreneur/owners, none of which accrue from low prices. By turning transnational, the firm transcends the tensions of local currency fluctuations. An appreciating yuan may affect earnings or margins, but not market share in the short or medium term, since that share has been acquired through brand goodwill.

For Indian exporters and policymakers looking to exploit the benefits of a cheapening rupee, of seeking to diversify markets (Latin America, Africa), China offers valuable insights.

By simultaneously diversifying exports and markets, by carrying the battle to the ‘enemy camp' as it were (as Haier and Lenovo among others have done, on the basis of brands rather than price), Chinese exporters have done much more than become multinationals: they have shown that over the long haul, temporary dips in earnings or margins are more than offset by the creation of a brand.

( blfeedback@thehindu.co.in )