India is not a Substitute

A Nomura report says that of the 56 firms that have left China, while 26 went to Vietnam and 11 to Taiwan, only 3 relocated to India.

While speaking to the media at the conclusion of the annual meeting of the IMF at Washington, the FM Ms Nirmala Sitaraman said that global industry leaders who are contemplating getting their business out of China are definitely considering India in their pitch. She, therefore, said that it might be important for the government to meet up with a lot of industry leaders and invite them to India. She said that she would go back to India and will prepare a blueprint for international companies that are looking beyond China to make India their investment destination.

She said that she would identify and approach, all those American, European and British multinationals who are contemplating such a move and put forward to them as to why is India a far more preferable destination to invest and set up production facilities. She said that irrespective of what is going on between USA and China, India wants to create an eco system to invite these firms to India, to set up a manufacturing/export hub here and also cater to the domestic Indian market, irrespective of whether they want to continue to be in China or not.

She expressed the confidence that Vietnam is getting saturated and does not have enough manpower to support further investment and that since India has lowered its tax rates, it is an attractive investment destination for multinational firms.

While any such move by the government is highly belated, let us first get our facts correct. The first is that there is no exodus of foreign companies of any sorts from China and if there has been one, then India has certainly been bypassed, such that it has been unable to occupy that space in international trade, which has been vacated by China, as in the case of garment exports to the USA, where it is Vietnam, Thailand and Bangladesh, which have benefitted the most from China’s loss of American markets.

A Nomura report says that of the 56 firms that have left China, while 26 went to Vietnam and 11 to Taiwan, only 3 relocated to India. The second is that it is a myth to think that with China’s unmatched low production cost base and a huge domestic market foreign companies are eager to leave China and where the FM is mistaken the most, is that if India gets its act right in terms of ease, cost and risk of doing business, foreign companies will anyway flock to India, irrespective of whether they remain present in China or not; and that’s because India has huge manpower resources, together with a huge domestic market to boot. India is no alternate to China. It can be made attractive on its own and in fact, compete with it.

The fact is that it is wrong to presume that foreign companies are eager to leave China. Much as in August 2019 President Trump ordered American companies to leave China, they are in no hurry to do so. China manufactures one-quarter of the world’s manufactured goods, due to its highly efficient manufacturing ecosystem, a vast network of small factories that supply components to the big companies, highly skilled manpower by the millions, a great infrastructure and efficient logistics that ensure smooth transport/export of goods.

Most of the American companies have set up Chinese subsidiaries wholly owned by them and 97% of their China entities are highly profitable. Why will they leave China and if they do, any process to do so, would be slow, difficult, expensive and disruptive. Moreover, they also cater to a huge domestic market, by being situated in China. A company like Caterpillar of USA has 30 manufacturing plants in China and most of the heavy-duty equipment it makes is sold locally and not exported. Apple tried to relocate its manufacturing to Texas.

The USA, but miserably failed to set up the entire supply chain consisting of thousands of component suppliers and the thousands of skilled manpower needed and could thus not build the extensive supply chains needed to relocate to the USA. That explains why there is no worthwhile dip in the foreign investment inflows into China.

The reality is that with its huge resources, manpower and domestic market, India can easily be a parallel competitor to China. We do not need to even replace it. But that will not happen until we make India an attractive place to set up manufacturing facilities like China has done, in terms of highly efficient supply chains, skilled manpower ease of doing business, freedom to work, infrastructure, logistics supply chain and most importantly a government devoid of red-tapism and corruption. As usual, India is late and evidently it is yet at a blueprint stage as the FM says, at a time when others have bagged the opportunities. So as always the Indian elephant is slow in its response.