InterRegional for Strategic Analysis


        
<p>For decades, China has been a leading industrial hub for companies around the world. However, the Chinese economy has recently experienced various crises, including trade disputes with the US, fallout from the COVID-19 pandemic such as lockdown measures and disruptions to manufacturing operations and supply chains, rapprochement with Russia, and oversight policies in certain manufacturing sectors. This has raised concerns among major Western companies operating in China, many of which have sought to leave China and look for alternatives elsewhere. Other companies hope to pursue a China Plus One policy to diversify their supply chains.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p>India could be a potential alternative for these companies due to the low costs of labor, rising investment incentives, the regulatory environment for business, and low tax rates for companies. India is trying to develop its domestic capacities regarding supply chains, which is key factor for companies in moving production from China to India or at least expanding their operations to the latter. Most major companies are looking into moving their offices and production plants to India. This raises various questions about whether India could become a real alternative to China.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p class="has-vivid-red-color has-text-color"><strong>Alternatives to China</strong></p>



<div style="height:12px" aria-hidden="true" class="wp-block-spacer"></div>



<p>Most major Western companies have pursued new directions in recent years. They have increasingly realized the importance of diversifying supply chains beyond China. More companies are looking for alternative markets in Asia, which is the result of the following factors:</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p><strong>1. Rising costs for foreign companies: </strong>As a result of rising costs, the average annual salary in China rose from around $5,400 in 2010 to $13,670 in 2020. The cost of labor in China is now on average three times more than in Vietnam and five times more than in Indonesia, which has led to lower profit margins for foreign companies. Import duties have also risen due to the ongoing trade war with the US, which has exacerbated conflict with companies that have production operations in China. As companies in China deal with rising costs and decreased profits, southeastern Asia is quickly gaining more attention as an alternative to China.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p><strong>2. Slowdown of Chinese economic growth: </strong>The economic growth rate in China fell to less than 1% during the second quarter of 2022 as a result of sluggish economic activity in various sectors such as process industries, technology industries, and real estate. The latter sector is facing a serious crisis that caused financial difficulties for major companies, which stopped paying outstanding debts. In the case of the Evergrande Group, this debt totaled $300 billion. After the economic slowdown in China, the country became less attractive for business.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p><strong>3. China’s "zero-COVID" strategy: </strong>The strict lockdown measures in many parts of China earlier this year led to the halting of production in many factories and disrupted global supply chains. Supply chain bottlenecks in China could affect business by as much as $8 billion in the next quarter.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p>Shanghai’s lockdown measures had a particularly negative effect on domestic and global supply chains. Shanghai is home to the largest and busiest port in the world. Operations were halted for more than two months, which led to significant repercussions for global supply chains and foreign companies. Profits for foreign manufacturing companies in China fell by 16.2% between January and April 2022, compared to a drop of only 0.6% for Chinese private corporations. State-owned companies in China saw an increase in profits of 13.9% during the same period.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p><strong>4. Passage of a law to protect personal information: </strong>Foreign technology companies withdrew or limited their operations in China after China passed various oversight laws and regulations. China passed a law protecting personal information which went into effect on 1 November 2021. The law restricts the quantity of information that companies can gather and establishes standards for how they can store that information. This contributed to increasing compliance costs and heightened uncertainty for Western companies working in China. Under the legislation, companies that violated these regulations could be penalized with fines of up to $7.8 million or 5% of their annual revenue.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p><strong>5. Companies are afraid of US sanctions</strong>: Some companies have left China as a result of pressure from the US, including Apple, Microsoft, and others. This is due to concerns that they could be blacklisted by the US as part of economic sanctions against China. Businesses are also concerned that China could go the way of Russia in the former’s dealings with Taiwan, especially after US Speaker of the House Nancy Pelosi visited Taiwan.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p class="has-vivid-red-color has-text-color"><strong>Indian Markets</strong></p>



<div style="height:12px" aria-hidden="true" class="wp-block-spacer"></div>



<p><strong>Western companies’ withdrawal from China provides India with an unprecedented opportunity, and India will try to attract foreign investment. The Indian government has made various efforts to attract companies that are leaving China. It has tried to create an environment conducive to investment and offered various investment incentives. This has helped attract more major companies to move to India. Google and Facebook are competing over investment in India. In 2020, Google invested around $4.5 billion in India’s Jio Platforms, a digital business affiliated with Reliance Industries Ltd. Facebook also bought a 9.99% share in the same company worth $5.7 billion.</strong></p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p><strong>Electronics giants such as Samsung and Apple have also shown interest in moving to India. Apple produced around 7.5 million iPhones in India last year. The company issued a statement in September 2022 that it would produce the new iPhone 14 in India as part of its efforts to diversify production and end dependence on China. In 2018, Samsung opened the largest cell phone factory in the world in India and has pledged to build the largest electric motorcycle factory in the world there. Japan announced in March 2022 that it would invest $42 billion in India over the next 5 years. </strong></p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p><strong>India could offer a good alternative to China for foreign companies due to various factors, including:</strong></p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p><strong>1. Increasing growth rates:&nbsp; </strong>The Indian economy grew by 13.5% in the second quarter of 2022 compared to the second quarter of 2021. This the result of manufacturing and agricultural policies, cutting back COVID-19 restrictions, and the significant recovery of Indian stocks in the third quarter of 2022, which rose to second place after China in the MSCI index for emerging markets.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p>The Central Bank of India forecasts that the Indian economy will grow by more than 7% in 2022. Some reports suggest that the nominal value of the Indian economy is around $854 billion. India’s growing economic prosperity is a major driver for growth along with changes in consumer behavior and spending patterns, especially in lower-income cities.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p><strong>2. Attractiveness of large consumer markets: </strong>India is projected to become the third largest consumer market (after the US and China) by 2025. Several thousand smaller towns in India could also "drive an equally large spend in aggregate," according to the World Economic Forum. There will also be enormous opportunities to increase spending in developed rural areas through improving infrastructure and expanding access to the organized retail sector through the internet. The expansion of digital communications, infrastructure development, and increased family income and consumer spending in India offers huge opportunities for top companies.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p><strong>3. Investment incentives for the electronics sector:</strong> In March 2022, the Indian government announced broad incentives for electronics manufacturing in order to bolster domestic production and attract major investments for manufacturing cell phone and specific electronic components. This included a 4-6% incentive for additional sales during the base year for commodities produced in India within the target sectors and for eligible companies. These incentives were valid for five years beyond the base year, and might later be expanded to include other sectors such as pharmaceuticals, automobiles, textiles, and food processing.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p><strong>4. Creating a digital platform to expedite projects:</strong> In October, India allocated $1.2 trillion to establish a digital platform that includes 16 ministries and which is known as Gati Shakti. This platform aims to attract foreign investment for infrastructural projects. It seems that India is utilizing this platform to compete with China over international corporations. Amrit Lal Meena, the special logistics secretary for the Indian Ministry of Commerce and Industry, stated in an interview with Bloomberg in October 2022 that the platform’s "mission is to implement projects without time overrun and cost overrun" and that the objective was that "global companies [choose] India as their manufacturing center."</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p><strong>5. Reduced tax rates for companies: </strong>In order to encourage investment in the manufacturing sector, the Indian government has taken proactive steps including offering competitive tax rates. Tax rates for companies operating in India fell for the first time in three decades, especially in the manufacturing sector. Tax rates for manufacturing companies that were established after 1 October 2019 and which begin operations before 31 March 2023 have been lowered from 25 to 15%.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p><strong>6. Expanding local manufacturing:</strong> India is very interested in developing process industries through its Make in India initiative, which aims to put India on the map as a global manufacturing hub and to attract investors and companies. The main products come from ten key sectors including automobiles, chemicals, clothing, consumer electronics, electrical equipment, furniture, heavy machinery, refined petroleum products and shipbuilding. The Indian government has announced many incentives for foreign companies. In March 2020, it indicated that $6 billion had been allocated to bolstering domestic manufacturing in order to attract investment, stimulate manufacturing of electronics and components, and support export-led production.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p><strong>7. Developing logistical infrastructure:</strong> In recent years, India has shown interest in developing its transportation and infrastructure sectors. India’s national implementation plan aims to strengthen international ties with India through improving shipping infrastructure, which makes up 95% of international trade with India in terms of volume and 70% in terms of total value. It has also built new ports, most importantly the Vadhavan port, which is expected to be operational by 2025. This will be India’s first deep water port and is capable of accommodating large ships with cargo capacities of to 25,000 TEU. The Indian government also proposed to build a transshipment port on the Great Nicobar Island in the Bay of Bengal to improve linkages between India and southeast Asia. It is particularly interested in working with entities that could benefit from the manufacturing plants that are being moved. This main shipping port near the industrial zone will aim to improve shipping with southeast Asia, which would make India more attractive to companies in terms of diversification.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p><strong>8. Lower production costs:</strong> India also has particularly low-cost labor available. Wages in India for these workers range between $157 and $196. India also has lower operating costs, competitive infrastructure, and special economic zones that offer duty-free exports. This has encouraged foreign companies to move there. India has endeavored to build and strengthen domestic supply chains and has identified dozens of sectors where it could replace China in global supply chains. These sectors include energy, automobiles, steel, pharmaceuticals, textiles, clothing, seafood products, financial services, IT services, and tourism.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p>Despite India’s significant efforts to present itself as the best alternative for investment in Asia, there are various challenges that could limit its ability to become the chosen alternative to China. Some major companies do not want to entirely move their manufacturing operations to India, but only to adopt a China Plus One or Plus Two approach. This would mean continuing production in China but opening other branches in countries that could help ensure their continued supply during emergencies. This reluctance to fully switch is due to various factors including India’s shifting domestic economic policies, which makes India less competitive against other countries. Average import duties in India have increased significantly in the past few years in order to encourage foreign investment to use local industries and products. However, the constant changes in India’s trade policies have led to reduced confidence among foreign investors.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p>It is undeniable that China remains central to global value chains. China has major advantages that allow it to be globally competitive in manufacturing almost all commodities and products, including clothing, machinery, electronics, communications equipment, and chemicals and compounds. It is also able to manufacture goods that require labor-intensive production at low costs as well as advanced industries. Certain regions such as Guangdong are particularly known for electronics manufacturing.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p>Dismantling existing production lines and supply chains would also pose various difficulties. China offers integrated infrastructure including ports and roads, a top-notch workforce, and advanced logistical services. All of these factors are crucial for keeping to the specific production schedules of international corporations. Leaving China would mean moving all these production networks elsewhere, which would require enormous effort, time, and money. Furthermore, manufacturers around the world are very dependent on raw materials from China as well as semi-finished products, which means that China dominates one of the most important aspects of global industry.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p>In addition to the higher returns on foreign investments in China during the first half of 2022, China’s use of foreign capital rose 20.5% year-on-year to 478.61 billion yuan in the first four months of 2022. This is equivalent to around $74.47 billion or an increase of 26.1% year-on-year. Direct foreign investment in high-tech industries in China also markedly increased by 45.6% year-on-year during the first four months of 2022. China launched 185 additional major new projects between January to April 2022, each of which has foreign investments of more than $100 million.</p>



<div style="height:18px" aria-hidden="true" class="wp-block-spacer"></div>



<p><strong>In conclusion, China remains a key global hub for supply and production for foreign companies. In recent years, it has become a dominant global supplier for manufactured goods. Western companies are continuing to carry out projects that they had planned to implement in China. In light of these realities, India will not be able to become the alternative to investment in China for foreign companies, at least not in the short term. However, it is possible that it could complement China’s role since the two countries at are different stages of industrialization. China aims to become an economic giant through its role in the technology sector and to increase its global value chain participation. Meanwhile, India is in the initial stages of industrialization, which could allow foreign companies to benefit fully from its demographic potential, which would spur its economic growth.&nbsp;</strong></p>

      

Will India Succeed in Drawing Western Companies away from China?