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India Sets Sights on Companies Leaving China. But Why Manufacturers are not Rushing into India?

Author: Exports News
Jul 11, 2023
6 min read
1709
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1709
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Jul 11, 2023
6 min read
Firms leaving China for India

European and US businesses have a "increasingly firm commitment toward the mature and vibrant Chinese market," according to the European Chamber's 2019 poll. The Confederation of British Industry's director-general, Tony Danker, however, claimed last week that "any company that I speak to at the moment is involved in reconsidering their China-focused global supply chains." COVID-19 was kept under control at the beginning of the pandemic thanks to China's stringent "Zero-COVID" regulations. More than two years later, the nation's enduring limitations are still hurting its economy and causing delays in international supply chains. Economic growth is being seriously harmed by Beijing's "Zero-COVID" agenda. This is mostly a result of the irritation felt by the global business sector. Out of the 56 firms, 26 relocated to Vietnam, 11 went to Taiwan and eight to Thailand and only three went to India and two to Indonesia.

As the ongoing trade dispute between China and the US continues to escalate, tariffs are making exports from China more and more expensive for US importers. Many firms have been doing their sums and looking for new locations to re-site their manufacturing operations. For many businesses, the relocation strategy has been in place for some time. Costs had been steadily rising in China for some years. However, because of the inconvenience and unpredictability of moving, many people were hesitant. The increased US tariffs placed on Chinese-made goods over the past year or so were what finally tilted the scales.

Manufacturing facility relocation is not a simple task. Infrastructure, communications, and connectivity are additional aspects to take into account in addition to overcoming the expensive initial setup costs. It's crucial to have reliable and economical transportation, warehousing, and other logistical support. That is only the beginning. Finding the correct trained labor and putting the new hires through training that is relevant to their production process are additional challenges. Government backing, an advantageous legal system, a beneficial tax structure, and the simplicity and quickness of establishing a firm in a new nation are further factors to take into account. But the most important question is which country is easiest to set up a business in?

Is India a Viable Alternative for China?

India and Indonesia appear to have the perfect demographics to compete with China, which currently produces one-fifth of all goods worldwide, as global manufacturing powerhouses. They both rank second and fourth in terms of population, with India's population predicted to overtake China's by 2030. Additionally, their population is still rather young. According to the United Nations, the median age in India is 30, whereas it is 31 in Indonesia. China's median age, in contrast, is 40. Furthermore, India's labor cost is half that of China's.

Why Are India and Indonesia Not Receiving Their Fair Share of Firms Leaving China?

Although the GDP growth rates of both India and Indonesia are high when compared to other major world economies, economists generally concur that both countries are not operating at their full potential in terms of FDI (Foreign Direct Investment) in manufacturing, which is why they are both known as "sleeping giants."

FDI is a good indication of external investor confidence in the success of economic reforms and prospects as they are a sign of how willing foreign corporations are willing to commit to long term investments in a country or even move their manufacturing processes from China. FDI is necessary for a developing economy to create jobs, absorb excess labor supply and plug financial gaps. But India today pulls in a miserly 0.6 per cent of GDP in manufacturing FDI. Indonesia is a touch better at one per cent.

The ease of doing business is the primary justification given by companies for their relocation. In the Reuters article previously mentioned, a smartphone executive was quoted as claiming that there is a single point of contact in Vietnam who handles everything on the government side.

Both India and Indonesia need to further liberalize trade, invest more in infrastructure development, change land and labor regulations, and provide tax benefits for foreign investors. They could take a page from Thailand and Vietnam's playbook in this regard. For economies to function at their best, advantageous taxation, legal reforms, and freedom are required.

Business owners leaving China

Both Countries Are Making Moves in the Right Direction.

Indonesia is introducing tax incentive for foreign companies setting up manufacturing facilities in the country and making it easier for businesses to obtain a license.

The recent unexpected reduction in the corporate tax rate has placated businesses and helped shift India's growth trajectory. However, India must exert more effort. For instance, increase tax incentives for investing in the kind of industry the government wants to encourage, such as high-tech and electronics export production. Additionally, it needs to make it simpler to import parts so that more assembly work may be done in India. Infrastructure, as both countries are acutely aware, is also very important. Indonesia stated their intention to invest 40% of yearly GDP in infrastructure over the next five years, despite the fact that financing the project will be difficult given the country's weak FDI inflows and constrained fiscal policy options.

Both countries heavily rely on roads for transportation, but if modern rail and water transit were more accessible, businesses could save a lot of money and time. India and Indonesia lack the manufacturing culture that is common in nations like Germany, Japan, China, and South Korea. This means that in addition to having robust and accessible vocational training programs to provide individuals interested with the requisite skills, its most intelligent residents must also want to consider working in this field.

Graduates with degrees supporting manufacturing are few in Indonesia. Indonesia barely generates eight STEM (Science, Technology, Engineering, and Mathematics) graduates per 1,000 residents, compared to 20 in India and 34 in China, according to global business consulting company McKinsey & Company.

The fact that brands like Samsung and Apple already produce some of their mobile phones in India is encouraging for the country. Apple, which has previously started producing iPhone parts and older models in India, anticipates beginning production of the more recent iPhones this year. One of Samsung's largest factories in the world is located in Noida, and 30% of its output is exported.

Even though there has been progress, more needs to be done if India is to meet PM Modi's goal of raising the manufacturing sector's proportion of the GDP to 25% by 2025, which was initially stated in 2014. More companies are coming to the conclusion that China is an unreliable partner, and they are increasingly seeing India as a possible replacement. The tendency appears to be being supported by New Delhi, and in the near term, the Indian economy is expected to perform pretty well, especially when compared to the rest of the developing world. This is welcome news for everyone worried about China's negative influence on the international scene.

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Comments 1

Pooly Martinas

Sep 07, 2023 11:29

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