The Next Wave

By Anindya Sengupta

Today, one of the certainties of the post-pandemic world economy is a tectonic shift in global supply chains. Global giants may not leave China in a hurry but Covid crisis has forced them to look at a China+1 strategy. Will they come to India? So far the picture does not look promising. We need to keep in mind that there are many countries trying hard to attract them, including some of the developed countries. Japan has even announced a special package to lure manufacturing back.

Global business, in fact, had started their search for the next China much before Covid. Rising wages in China was already a serious concern but this was greatly aggravated by the trade war unleashed by President Trump. It was already evident that instead of a single alternative, these companies would like to diversity into multiple geographies. They realised that any China like concentration will push up wages (especially in smaller countries like Vietnam or Thailand) and that country would soon be at the receiveing end of Washington’s trade war. Covid has given a further boost to this ‘multiple China’ strategy. 

A Rabobank Study – published just before the outbreak of this pandemic – confirmed that several auto, toys, computer, robotics, electronics, packaging, hardware, footwear and garment companies want to shift out of China. According to a survey by American Chamber of Commerce in China, around 25% US companies want to shift their production base from China to South East Asia and another 8-10% are ready to go elsewhere.

This shift will depend on four factors:

1. - export baskets that are similar to China. Vietnam, Thailand, South Korea, Taiwan and Japan score high on this (India comes at no 8)
2. - manufacturing wages, similar or lower than China. Mongolia, Bangladesh, Sri Lanka, Cambodia and Laos have the lowest wages (India comes at 9)
3. -  an attractive long‐term investment climate in terms of World Bank’s Ease of Doing Business. Singapore, South Korea, Taiwan, Malaysia and Thailand are at top five here (India stands at no 11)
4. - sound institutional quality (as measured by World bank Governance Indicators). Singapore, Japan, South Korea, Taiwan and Malaysia are in top five here (India is just behind them).

Overall,  Rabobank concludes that Thailand, Malaysia and Vietnam are most likely to benefit out of this relocation process. They would be followed by Taiwan and India. They also added that the benefits will probably be spread across Southeast Asia, with specific industries moving to certain countries, such as semi‐conductors industry to Malaysia or the automotive sector to Thailand.

A study by Nomura, a Japanese investment bank, found that 56 companies relocated production from China between April 2018 and August 2019, out of which only three came to India (26 went to Vietnam and 11 to Taiwan). Why India is not a serious contender so far? India lags behind due to archaic labour laws and associated inspector-raj and also because of the tendency to raise tariff barriers (both are likely to deteriorate post-lockdown). One off suspensions of labour laws would not work as no company is going to set up manufacturing facility for a year or two. Recently, a government appointed committee reviewing India’s export sector and possible entry into RCEP, has concluded that competition is continuously shrinking in India. In Global Economic Freedom Index, India stands at 129 out of 186 countries. As per the latest Economic Survey, sectors dominated by government regulations are lagging behind most (again after this lockdown, government interventions are likely to increase).

Policy makers are wrong to think that they need to cater to just domestic demand. They need to understand the new metrics of self-reliance. Whatever any country produces today in an interconnected world, they produce much in excess of domestic demand. With superior productivity, the USA, China, Japan, Germany and other countries today dominate the entire global market in certain categories. Thus self-reliance today means capturing global market for certain products and strengthening your forex reserves.

Companies leaving China won’t be coming to India only for its domestic market but to create a new global base here. India may attract a limited number of companies in sectors like industrial chemicals or API manufacturing where technology is a factor. But companies in labour intensive manufacturing or assembling of consumer electronics are unlikely to come unless we give up the current protectionist mindset. We need not look elsewhere for inspiration. After the entry of Chinese handset makers, consumer electronics export from India has increased substantially. The only way to win this race is to open up and not close down.