Opinion
Mint Explainer: Covid may speed up China's loss of manufacturing supremacy
Summary
- India can gain from China’s decline but has stiff competition from many other Asian countries.
The covid-19 pandemic is causing a gradual shift in global manufacturing as companies look for alternatives to China as a supply source. There are early signs that India may stand to gain as a result, with some tech manufacturing shifting to the country. Global companies are likely to adopt a China+1, or even a China+2 or +3 strategy, as Apple has done. But India has stiff competition from Vietnam and a few other Asian countries. Still, India can replace China as a global growth driver.
China’s decline as a manufacturing hub
For almost three decades, the Chinese economy grew in near double digits. Abundant cheap labour, good infrastructure and controlled exchange rates made China the world’s factory. But covid has substantially eroded China’s appeal as a global manufacturing hub.
A zero-covid strategy, with repeated lockdowns of its business hubs, has forced the world to consider alternative destinations as a long-term derisking strategy. The world then has begun moving to other manufacturing destinations that offer the same advantages China did over the past few decades. Also, there is a greater emphasis on on-shoring, near-shoring and friend-shoring.
This phenomenon is showing up in two distinct trends globally.
The world has suddenly woken up to the perils of keeping all its eggs in one basket. So, suddenly China+1 has emerged as a viable alternative for the world over the medium-to-long term. Apple, Samsung, Volvo, and Adidas have moved out or begun moving some of their production out of China.
In fact, it appears likely that some companies will adopt a China+2 or even a China+3 strategy to insulate their supply chains as much as possible from any future global turbulence. It’s already evident in the approach of Apple, which is splitting its production in China, Vietnam and India. A complete withdrawal from China is not possible in the near term. China has built a vibrant manufacturing ecosystem over the years that is almost impossible for other countries to replicate immediately.
Meanwhile, the US wants to encourage high-tech manufacturing on its shores and is pushing its allies to do the same. The CHIPS and Science Act aims to do just that – boost manufacturing of and research in semiconductors in the US.
Of course, the pandemic alone is not behind this approach by US President Joe Biden and his team. The US is also worried that China could possibly lift technology know-how from other countries to emerge as a knowledge superpower.
In all this, China, too, is adopting a derisking model of sorts, transitioning from an export-driven economy to one that is domestic consumption driven.
Does India gain from China’s decline?
India has been trying to boost domestic manufacturing over the past decade - policies initiatives like the Make in India and Production Linked Incentive (PLI) scheme are efforts to do just that. There have been some success stories, and there are early signs that some electronics-good manufacturing will shift to India from China. For instance, India has emerged as a mobile-phone manufacturing hub, with even Chinese giants Xiaomi, Vivo and Oppo planning to export India-manufactured phones worldwide.
But India needs to keep improving on the “ease of doing business" parameters. Removing land acquisition bottlenecks, improving basic infrastructure, and judicial reforms will remain a priority for the government.
India has got stiff competition from other Asian countries, such as Vietnam and Malaysia. Vietnam is fast emerging as an alternative to China with its cheap labour, favourable demographics, abundant human resources, and political stability. In fact, a parliamentary panel pointed out last year that India is not the first choice for companies shifting out of China, with Vietnam, Taiwan and Thailand leaving India behind.
The G20 Presidency gives the Modi government a big platform to showcase India’s prowess to the world.
India can replace China as a global growth driver
While most corners of the globe are slowing down, India’s domestic consumption-led economy is the relative bright spot in the world. While the employment-intensive merchandise exports sector will face the heat from a global slowdown and rate hikes will also take a toll, India’s economy will still grow between 6% to 7% in the near term, according to most estimates, from the World Bank to the IMF. In fact, India is expected to be a big driver of global growth this year, contributing 20%-25% to it.
CAN INDIA EMERGE AS A MANUFACTURING HUB?
*Covid has eroded China’s appeal as a manufacturing hub
*Companies looking to friend-shore, near-shore and on-shore
*India will gain, but has competition from other Asian countries
*India needs to push ahead with gen-next reforms
*India can replace China as a global-growth driver
