The steel makers in the US have not taken the Chinese invasion on the steel market lightly. They lobbied to put pressure on the US government to block its entry into the World Trade Organisation (WTO). They were worried, the Chinese companies with " prison labour ", would play havoc with their fortunes. They have already seen their supermarkets getting flooded with Chinese goods. To believe that the Chinese can take over the US market was plain paranoia.

The threat of a Chinese invasion on the Indian market is as strong. It may not be the steel companies but, those producing consumer goods, small tools and machinery may have reasons to worry. The small and medium industries are likely to be hit the most. Should the Indian SMEs panic ?

Perhaps not, if the they do their homework well to face up to the coming challenge.

What makes the Chinese products - torch lights, pens, umbrellas, apparels, toys, locks & electronics - so competitive in the world market ?

The Chinese have low labour costs in production. But, the wage rates in Chinese small and medium industries, per se, may not be lower than those in India. In fact, the available reports indicate the Chinese wage rates in such segments are above those in India. But, the productivity of that labour in that country is much higher. They also have at the same time, better and cheaper equipment & technology (that in fact, partially accounts for higher labour productivity). These factors are generally well known.

What makes the Chinese a potential threat to the rest of the world in the product segments talked about is their strengthening industrial culture, superior entrepreneurship, stronger work ethics and organisation of production. They have better infrastructure with the entrepreneurs not requiring to run from pillar to post to get basic amenities, facilities and paper work done. They spend less on advertising their products. There is less of brand image that the Chinese products are have and the companies bother about, except for the products of the multinationals there.

All the advantages notwithstanding, the Chinese products may not be more competitively produced than in India. The real advantage lies with their rather unknown system of accounting in the state enterprises and the government sponsored thrust to export at whatever price these products fetch.

The Chinese products do not fall in the higher end of the quality line. You do not expect the top of the line Nikon camera to be made in China, but definitely the ones with the lowest price tag. But, what they offer is value for money to a price sensitive customer. That is where the mass market is. They cater to the low and medium income groups all over the world. This is the reason, why they have a global presence.

India has a huge population in the low and mid range of income.

Is the Indian small and medium industry equipped and prepared to take on the Chinese challenge ? Not yet.

The Indian small and medium industries face the drawback of inadequate credit flow. The banks are reluctant to support the entrepreneurial abilities in these sectors. They have less trust as well as inclination to work hard to ensure freer flow of credit to these companies as also to recover those. The Indian small and medium industries lack innovative ideas and work more as copy cats. In the process, the system very quickly gives rise to excess capacity in every segment to adversely affect the profitability of the industry. This in turn makes credit flow more arduous.

The sectors also suffer from high transaction costs, infrastructure bottlenecks and more importantly a policy framework that creates more confusion than solutions. In fact, the government's policy of incentives, over the years, has made the small and medium industries unduly dependent on government sops. The policy has not created a genuine environment for increased entrepreneurship and investment, but has tried to absorb the disadvantages of its own making.

Then, every state government, as a matter of routine, tries to attract small investment. In the competition among the states for that, the overall investment turns out to be sub-optimal and most often production runs as long as the sops are retained. The competitive advantages of the regions in terms of location, resource availability and proximity to markets are all ignored because any disadvantage out of these is to be taken care of by some tax benefits or land availability at low costs.

Yet, small can be beautiful in India. The small and medium scale industries in the country have flourished despite, limited support from the banks. The main reason for this is not so much the economies of these units but, the failure of large projects. It will not be of surprise if is found that the large companies owe the most to the banks and the financial institutions and that the non- performing assets of the banks are mostly in the fold of the big companies. Somehow, the big projects, for whatever reasons, are in trouble. Project management is poor most often if not the investment concepts. The mega investment projects are heavily dependent on transport logistics, energy sources, raw materials linkages and location of the markets. Given the economies of scale of these large projects, they are affected by business cycles and intense global competition in today's globalised world. The SMEs have operational flexibility and locational advantages in terms of proximity to the market.

In the steel sector one is not surprised to see the growth of small steel producers literally taking over the long products market. The induction furnaces and merchant rolling mills have already put their stamp on the market. Despite all the technological disadvantages and diseconomies of scale, these units are growing without much support from the government or the banks. One will be surprised to see tiny sponge iron plants coming up in the country, producing as low as 10,000 - 15,000 tonnes of these products in locally developed plants in states like Orissa, Madhya Pradesh and Bihar. Nowhere in the world, one will perhaps see such innovative technologies.

The small and the medium sector companies can look for a longer life, if they re-orient their mindset. They have to look for opportunities and efficiency and not for government support. Identify products the Chinese are selling. Use new technology to ensure better product quality and reduce costs. Ensure better services, the Chinese may not be able to do so. Organise and educate the labour force. An educated and learned work force is an asset to any company.

The government has to rethink on its energy pricing policy. If small and medium industries have to grow, electrical power costs should be rational. You cannot pass on the burden of inefficiency of the power generating and distributing companies onto the industrial consumers in the name of market pricing. You cannot also distribute electricity free to the farmers and then pass the load on to industry. Theft of electricity cannot be stopped so long the prices are high. At these prices, there is no possibility of power intensive industry to come up and flourish. Only those taking short cuts will have some chance to survive.

Whereas the Chinese threat to the small and medium enterprises is real and is to be taken more seriously than it is being done at present, the government needs to re-examine its involvement in the development of these industries. The best course the government can take is stay away from it to the extent possible. The government should build up conditions for this sector's growth. The government should also ensure flow of critical market and product information to the industry. Bring the world of information to the industry in the most efficient manner. The Indian small and medium enterprises will take on the Chinese as well as the world.