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Why Companies Want to Move Supply Chain from China to India?

Supply Chain from China to India

Consulting | Sep, 2020

Disruptions caused due to COVID-19 have crippled the economies in numerous countries. The global economic lockdown has pushed countries into one of the worst recessions of all time. Countries are observing record high unemployment rate and businesses have come to a halt due to interrupted supply chain, lack of labor and suppliers for the manufacturing and movement of products.

Amidst COVID-19 and US–China tariff war, a strong view is emerging, and being shared by several countries that China is following unfair trade practices. Lack of accountability and transparency on its part pertaining to sharing of information about pandemic coupled with political conflict has further aggravated the entire situation.


Understanding Monopoly of China as Global Manufacturing Hub

Low Wages and Highly Skilled Labor: China is the world’s most populous country, where the demand for low wage workers is lower than the supply of workers in the nation, resulting in low wages. Another reason is absence of laws related to minimum wages in the country. Large labor pool allows companies to produce products in bulk quantities and businesses can also address increased seasonal demands.

Strong Supply Chain: Products manufactured in China conform to the quality standards and safety certifications set by United States. In addition, the country has strong supply chain comprising of multitude of suppliers, distributors and manufacturers that can offer components required for the production of products and reliable logistics that can cargo/ship finished products to other countries. Strong network allows companies to keep margins high, while keeping the overall cost low; therefore, companies prefer exporting finished products rather than assembling components in other countries. Besides, manufacturing and assembling of components in the same country allows them to offer products at competitive prices.

Favorable Policies: China coined export tax rebate policy in 1985 to abolish taxation on exported goods and improve the competitiveness of exported products. The country doesn’t levy tax on exported goods and has 0% VAT policy. Also, consumer products from China were exempted from import tax, assisting country to keep the production cost lowest, while attracting investors.

For the above-mentioned reason, some companies will keep major section of their manufacturing in China. Additionally, companies which service Chinese market will continue operations in the country as their major clients are Chinese people, while, escalating political conflict will force others to move out of the scene. 

Each sector will react differently to the palaver situation. For example, textile and footwear companies are moving to countries with low labor costs such as Vietnam. On the other hand, automakers are setting up their units close to demand generating countries, for instance, India or United States.


Post COVID-19 Scenario

Ongoing pandemic has exposed vulnerabilities of the global supply chain. The overall process of sourcing of raw materials/components, manufacturing and shipping of product, need to be re-examined. Companies or businesses cannot rely on imports from one country for raw material procurement, but instead, need to push for the large scale indigenous production.


                                                       

China was world’s largest exporter in 2019 with export amounting to USD2499.03 billion. Globally, countries have blamed Chinese companies such as Huawei & ByteDance (TikTok) of cyber spying and security concerns. In fact, some countries have banned these companies and their products, which is maligning the faith in Chinese companies. Besides, poor handling of pandemic and heavy-handed reaction to protestors in Hong Kong is also contributing towards development of unfavourable view of China.

Now the question that arises is, which countries can benefit from the reshuffling of supply chain? Several companies are planning to shift their manufacturing bases from China to other developing nations. Dislocation from China is expected to impact Asia the most, as top 10 countries that can benefit from the dislocation are in Asia. Asian countries such as Vietnam, India, Thailand, Malaysia will benefit from the relocation, but no single country will observe complete relocation of companies as they cannot accommodate production capacities required by these companies as a whole. However, countries which have impressive investment climate and cheap labor are likely to benefit the most. Other factors influencing the companies will be low transportation cost, large export baskets size such as China and sound institutional quality. Moreover, countries are considering Vietnam for the very purpose as it has low labor cost (60% lower that the annual average manufacturing wage per worker) and has attractive investment environment. In the past few years, this Asian country has signed over 17 free trade agreements with several countries. The above-mentioned factors are contributing to the increasing inclination of businesses towards setting up their facilities in Vietnam.


Why India is emerging as the preferred destination?

Tariff costs elevate the overall price of the products and conflict between United States and China has already increased the overall cost by over 10% for many companies operating from China. Companies and businesses want resilient supply chain and India can be alternative option in this case.

Also, India has lower annual average manufacturing wage per worker and the export basket of the country is similar to China. Besides, the country has over 42 trade agreements (including preferential agreements) with various countries. Additionally, like China, India also has large pool of skilled workforce; therefore, the cost of sourcing labor in the country is cheap. Besides, the country is home to one of the largest English speaking populations in the world, whereas in China, companies require language translators for communication, which is expected to positively influence companies to invest in India.

 State and central governments in the country are creating more favorable business environments by easing foreign direct investment and lowering corporate taxes so that India can serve as lucrative marketplace and base to other companies. Government of the country is also in direct touch with over 100 global firms, which are planning to move their bases to India. These companies include Cisco, Adobe, Apple and FedEx. At the similar front, companies are partnering and investing in India, and investment of USD5.7 billion and USD15 billion by Facebook and Aramco in Reliance Jio and Reliance Industries Limited, respectively exemplifies that. Apple is also setting up its plant for manufacturing of over 3.2 million iPhones in India for export to other countries.

In order to promote FDI inflows, the government has introduced investor friendly policies and allowed upto 100% FDI in several sectors.


In the e-commerce sector, as of January 2019, India has allowed 100% FDI in marketplace model of e-commerce; however, there is no FDI for inventory driven models.

In order to further push investments in certain sectors, in March 2020, the government allowed NRI’s to acquire upto 100% stakes in Air India. Also, electronics manufacturers were deemed eligible for payment of 4-6% of their incremental sales for over next five years.


Moving Closer to the Customer

Learning from the pandemic, businesses need to stay close to customers so that they can serve them in a better way. Businesses need to set up their manufacturing plants, locally as doing so might increase the cost of the ecosystem and elevate complexity but will surely assist in times of disruption such as one like COVID-19. India is the home to over 1.3 billion people and increasing disposable income indicates that the country might be home to one of the biggest customer bases in the future.


Challenges Before India

FDI revisions and lowering corporate taxes is one of the several steps taken by the government to attract investment by foreign companies but there still exist some bottle necks which need to be addressed for smooth setting of manufacturing facilities in the country.

India faces low productivity in plethora of industries, which is due to inefficient suppliers and outdated technologies owing to which, the companies are unable to deliver quality products at times. Therefore, technological advancements and investments in skill development education sector is the need of the hour for maintaining efficient supply chain and skilled workforce. Also, setting up plants requires land acquisition, approval from state government. These processes are time consuming and might delay the whole process of production. Hence, the government should assist companies by formulating provisions, so that companies can get desired land and required infrastructure, with no or negligible delay in the process.