WHY MANUFACTURING HUBS ARE SHIFTING TO INDIA

India’s role post COVID-19, especially in the manufacturing sector, is a subject of great interest, hope, and speculation for the rest of the world. Many believe India will emerge as one of the preferred centres for fabricated products vis-a-vis China, if not the foremost option. On the other hand, China that has been the world’s factory for the last three decades, leads in manufacturing because of its FDI-led manufacturing exports. Almost 50 per cent of China’s growth comes from exports, creating millions of jobs.

The coronavirus outbreak in China interrupted the supply chain of the foreign companies, and this issue is also likely to be the point of controversy between China and the rest of the world. Moreover, the fight for supremacy in technology and military, the gaps between US-China on commerce, intellectual property rights, and geo-political issues are here to stay. Therefore, foreign businesses that heavily depended on China are now seeking to diversify the risk for their distribution chain by moving away from China. And India seems to be an ideal alternative for them.

India, the world’s fifth biggest economy with an abundant labour force, provides the ideal alternative in terms of thickness and dimensions of the markets. With the median age of 27, and around 900 million ‘working-age’ people, India is a young and aspirational market. Earlier, China used its massive labour force in production by attracting FDI; it is time for India to do the same, particularly when foreign companies are searching for an alternative manufacturing base. According to a United Nations Development Programme (UNDP) report, India is going to have a working-age population of 1.14 billion by 2025, with increasing urbanisation and a populating middle-class, creating a massive domestic market. India is also a resource-rich country. Therefore, India has its own points set to attract both market-seeking and resource-seeking FDI.

This discussion has two components:

• Why companies are shifting from China
• And why Industries are relocating to India

In China, compared to any western country, the same goods used to be manufactured with significantly low costs because of ‘economies of scale’. In 2010, 1/3rd of products on the planet were being manufactured in China that made China the 2nd largest economy after the US. However, as of now, many organizations are moving out of China.

Let us look at a few of the events and situations driving this change.

The Trade War – It all started in 2018 when the US imposed tariff of 25% on Chinese goods. Officially, US claims that they had to impede China as they were only importing $100 billion of products from US. The US, on the other hand was importing nearly $500 billion of goods from China. Such a disparity in import-export was inevitably going to create situations. Getting deep in to the matter, the real reason lies behind China’s policy of intentionally devaluing is currency (Renminbi (RMB)/Yuan) for which the US consumers have to pay fewer dollars. On the other hand, products made in the US were more expensive that led the US to use more RMB. Such a disparity led to higher export from China and Lower export from the US. Over a period of time, this situation led to an all-time high United States trade deficit with China of approximately $539, as per the 2018 data.  Chinese authorities favour Chinese firms and Chinese companies often easily get the land (factory site) at lower costs or and sometimes ever without any costs, and not to mention low rates of taxes.

There have also been many copyright and patent issues between the US and China. From defence sector to the electronics and telecommunication equipment, china has been blamed for copying or reverse engineering many western products and technology. Recently, the US has banned Huawei as the nation took it as a threat to its national security. Nearly 50 American organizations have already moved out from china and the rest are on the road.

Global Supply-Chain Disturbance – Many nations rely on China for distribution of their products. Because of the recent lockdown in China amid COVID-19, many products from the markets have been entirely wiped out and the country has not been able to fulfil the global requirement. This has made other countries believe and change their thoughts about dependency on a single source for a variety of products.

Increased Labour Costs – In the 90’s China, the average labour cost for a worker was around $140 to $150 per year. But now, the costs have been increased tremendously to approximately $14,000 each year, which is quite a big multiplication. This has made manufacturing more costly in China and the companies are also not able to make profits as high as before. Such a scenario has pushed companies to relocate their manufacturing facilities. Also, in 2016, China saw a decrease in the production output first time in the history.

For instance, Samsung, a South Korean company which is also the 2nd largest smartphone manufacturer in the world has completely shut down its manufacturing facilities in China and is gradually ramping up its production in India.

Political Uncertainty ­– As China grew to become the 2nd largest economy in the world, they have also grown their military strength. Lately, China involved in a battle with Vietnam, Malaysia, Brunei, and Philippines in the South China Sea region. This reflects China’s increasing pressure on small countries and the use of its economic and military power to target and capture their markets. Countries like Zambia, Djibouti, and Congo are facing challenges in paying back Chinese debt. Sri Lanka, an Asian nation failed to pay debts (Hambantota Airport). All these events make China a politically unstable region and therefore, more and more countries are trying to maintain their distance.

As countries across the globe prepare to move manufacturing out of China, the same countries are considering developing nations like India as an ideal place for establishing their manufacturing facilities. Let us look at some to these reasons in detail.

Low Labour Costs – This is one of the prominent reasons behind businesses moving in India. The average monthly wage for a Chinese labour lies from $140 to $340 per month whereas in India, the costs are as low as $70 to $200 per month. So, it is considerably cheaper to manufacture products in India as compared to China.

Low Taxes – In 2019, the corporate taxation in India was cut down from 30 percent to 22 percent and for new manufacturers it has been reduced to 15 percent. Also, implementation of GST in tax collection makes much easier for companies to pay their taxes.

Market Size – India has the 2nd largest population in the world. Even if a business targets to 5% population of the country, their customer base will be larger than the entire population of many small countries. In a nutshell, more population and a larger middle-class means larger customers base and in turn, better revenue and profits. In any case, as per the data of 2019, the Indian consumer electronics market values at approximately $10.93 billion and consumer durable loans have increase up to $921.4 million in the financial year 2020. Being the India is 5th largest market in the world, India’s growth is not dependent only on the rise of manufacturing sector, but it is stimulated from service-based industry such as IT, retail, and banking.

Ease of Business – Unlike China, Indian businesses have to face a fair amount of competition in markets. This enables them to sell their goods and services at competitive prices. In addition, the Ease-of-Doing-Business Index also suggests that India is gradually becoming one of the favourite places for entrepreneurs due to its improved ranking of 63rd over the years. And not to forget the ‘Collateral-Free loan scheme’ that allows all MSMEs with a turnover of up to INR 100 crore and an outstanding credit of up to INR 25 crore to opt for government-backed loans.

There are numerous reasons ‘Why India could be the next manufacturing hub’ for the global economy. To support the vision of becoming significant manufacturing hub, Indian government is changing its policies to attract businesses and boost the economy. The ‘Make in India’ initiative has also attracted a large number of foreign investors in India who have been looking at a feasible alternative to ensure their continuity across the globe.