China and the World

India gets Shanghaied

Why Reliance is spending $8.3 billion on Chinese power plants

Ambani: if in doubt, buy Chinese

When Anil Ambani’s Reliance Group first inked a deal with Shanghai Electric two years ago, it conferred ‘most-favoured supplier’ status on the state-owned Chinese power equipment maker. It was a bold move at the time, considering the antipathy many felt for the country that had bested India in battle in 1962 and was more recently swamping its markets with manufactured goods.

The gulf between the two countries seems to have only grown wider since. India is expected to run a $20 billion trade deficit with its neighbour this year, on a trading relationship that seems to be based on swapping cheaper raw materials for pricier finished goods.

But Reliance and Shanghai Electric seem to be cementing their own bond. Just last week Reliance announced what’s been touted as one of the largest purchases of power generation equipment in history. Over the next decade, it will spend at least $8.3 billion on three-dozen coal-powered electric plants.

Indian power equipment makers are livid about the deal (they’ve been lobbying for a 14% duty on Chinese power products). “India has vast needs for power and has one of the lowest power consumption rates per capita with no reliable steady source of power across the country,” Anil Ambani told reporters. “The scale of construction we’re wanting to achieve is only possible with global outsourcing.”

Indian plants currently generate around 165,000MW of electricity, but government plans call for capacity to reach around 200,00MW by 2012. The Shanghai Electric deal will boost power supply by 18% reports Bloomberg.

Some observers think that India only has itself to blame. “A contract of this magnitude reveals structural weaknesses in India’s industrial expansion over the past two decades,” argues The Hindu newspaper. “The country has done virtually nothing to improve its capital goods sector.”

WiC has written extensively on the sometimes acrimonious relationship between India and China, most recently because of nuclear power plants China is planning to build in Pakistan (see WiC80). Fears about Chinese espionage have stymied business deals in the past (such as purchases of telecoms equipment, see WiC30). Nonetheless, Indian companies can’t seem to get enough of Chinese products, especially capital goods. “[Chinese manufacturers] have a real advantage,” Simon Jiang, an analyst at Guotai Junan Securities, told Bloomberg. “Their costs are lower and the technology now matches that in the West.”

That’s lead to a palpable sense of alarm in India. “Decisive contests for world power are actually taking place in the realm of high technology, away from the media limelight,” argues Indian diplomat Smita Prushottam. “The West has also been complaining for years that China has strip-mined foreign products for their technological content… India must [now] try to catch up as fast as it can with China on the technology/R&D front.”

Indian businesses are also demanding greater access to the China market. “[The deal] should now put at rest the myths about Indian bias against the purchase of Chinese equipment” says the Financial Express, “[but] shrinking the trade deficit would now require that imports from India be similarly buoyed up by Chinese companies placing large orders with Indian manufacturers.”

Other commentators worry that the country will lose out when the time comes to negotiate a rebalancing. “[India’s] liberal approach to such major trade issues with China has been reciprocated with unreasonable political demands,” argues the Financial Express, referring to the Chinese leadership’s desire to win concessions from India over their 4,000km disputed border.

Little wonder, deals like this one get nationalists so prickly.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.