Elon Musk shows why India can’t take China-plus-one narrative for granted

China is Tesla’s second largest market and home to its first gigafactory outside the US. Musk mentioned on X, formerly Twitter, his meeting with Chinese Premier Li Qiang. According to Reuters, discussions included the deployment of Tesla’s full self-driving software and data use agreements in China.

“I have to say that I also have a lot of fans in China. Well, the feelings are reciprocated," Musk said during his trip to Beijing.

The maverick entrepreneur’s surprise decision to ditch an India visit and instead show up in China ought to be a red flag for New Delhi. That there is going to be a perennial ‘China plus one’ advantage can no longer be taken for granted.

The world’s discomfort with China, the Washington-Beijing geopolitical tensions, the trade and tech wars, had begun to lull India into thinking that all is at last in place for our manufacturing sector to take off: The government’s heavy-duty infrastructure push, globally competitive corporate tax rates, a variety of schemes for attracting investments. And if being as competitive as China was tough still, the geopolitics aligned neatly to give India an edge.

After the disruption in global supply chains during Covid-19 created supply-side glitches triggering shortages and inflation in input costs, and its fallout, a cost of living crisis in the western countries, Washington began to urge companies to reduce dependency on China.

In 2022, US Treasury Secretary Janet Yellen coined the epithet ‘friendshoring’ for this push to relocate supply chains to friendly countries – something that was already being called the ‘China plus one’ strategy in global business management circles. Beijing’s aggressive zero-covid policies were mostly responsible for the global supply pain and uncertainties.

The shifting geopolitical narrative suited India well. New Delhi, which had already announced a production-linked incentive (PLI) scheme in 2021 to attract foreign direct investments in specific industries, especially from global electronics manufacturing giants, now hoped to capitalize on the worsening geopolitical tensions between the US and China.

This was an expensive bet to make: Under the PLI scheme, New Delhi gave Apple and Samsung and their contract manufacturers more than ₹4,400 crore of taxpayer money in 2023, that’s just one year, for making smartphones in India.

Also Read: Sunset looms for PLIs with fading interest

The expectation with the PLIs was that beneficiary companies would rapidly expand their manufacturing capabilities, allowing India to take on China as the world’s factory. This scale-up was seen as justifying the significant budget expenditures, at the expense of other spending heads.

Has New Delhi been over-optimistic?

There is evidence that supply chains are being relocated out of China. Official data shows that while the imports of mobile phones from China to the US continued to increase at 10-15%, the imports from the rest of the world grew by over 70%.

However, the data also shows that other countries, especially Vietnam, and not India, are gaining from the ‘China plus one’ driven reconfiguration of global supply chains.

While it is true that many of Apple’s subcontractors have set up manufacturing units in India, and electronics exports out of the country have risen seven-fold since 2018, Vietnam has grabbed a much larger share of the business relocating from China. Samsung now exports from India to a couple of dozen countries, but from Vietnam, it exports to no less than 120 countries.

Data shows that US companies are picking Vietnam over India to relocate their supply chains out of China. Vietnam’s electronics exports to the US rose from $12.1 billion in 2018 to $51.2 billion in 2023. India’s rose from $1.3 billion to $8.9 billion. This means that of the incremental non-Chinese imports to the US, 28% are now from Vietnam, and only 5.5% are from India.

In other words, data shows that India has had limited success in capitalising on the “China plus one" window of opportunity. Manufacturing remains stuck at under 15% of GDP, unchanged over the last two decades.

Musk’s aborted plan to visit India followed New Delhi’s announcement of lower import tariffs last month. Musk had been lobbying for lower import tariffs for Tesla EVs. (The company has been selling fewer than it is producing and desperately needs new export markets.)

The government gave in at last when it announced lower import tariffs as part of a quid-pro-quo policy that requires car companies to commit to invest at least $500 million and begin manufacturing in India within three years to qualify for the concessional duty rates of 15%, down from 70-100% (depending on the import price).

That the government had to accede to Musk’s demands for concessional import tariffs shows that even nine years after Modi gave the slogan of ‘Make In India’, India is still not a natural choice for global giants to locate their manufacturing plants. New Delhi must still sweeten invitations to make in India – whether with lower import tariffs or subsidies, such as by way of PLIs.

Also Read: Indian railways wants to ride the gravy train. But there’s a catch

Meanwhile, China isn’t helplessly watching the “China plus one" narrative being drummed up.

President Xi Jinping’s response to China’s economic troubles post-Covid that many commentators called – prematurely perhaps – the end of its economic miracle has been to double down on Beijing’s plans to dominate the industries of tomorrow.

China has embarked on a plan to lay the base for taking its technology-powered, low-cost manufacturing game to the next level. This strategy is built around what the Chinese are calling “new productive forces". It aims to accelerate advanced manufacturing industries capable of creating high-productivity jobs while also making China self-sufficient against American aggression by reducing dependence on US technology.

It is thus a plan to both reinvent the Chinese economy while also altering the balance of economic power in the world, challenging the superpower status of the US.

For this, China has set its economy on a path of mass production of electric cars, batteries, biomanufacturing and the drone-based economy. According to estimates published in the FT, Beijing’s annual investment in “new productive forces" is now a whopping $1.6trn, double than what it was just five years ago and nearly half of the total business investment in the US in 2023.

World leaders, including Yellen, who said as much on her recent visit to China, worry that with this all-new manufacturing push, Beijing will flood the global economy with mass-produced, low-cost high-tech goods, stealing jobs, incomes and growth from other countries.

It’s anybody’s guess how quickly Beijing will succeed in putting an end to the “China plus one" narrative. What should worry New Delhi is that that window of opportunity may shut even before India can take full advantage of it, as the data above shows.