Macro Moves

How India can replace China as World’s Manufacturing Hub

Created on 15 Jun 2020

Wraps up in 6 Min

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Updated on 14 Sep 2023

How India can replace China as World’s Manufacturing Hub

The spread of the Coronavirus from Wuhan, the epicenter to the rest of the world, has brought China on a global backlash. The Covid-19 infected millions across the globe, and the lockdowns announced destabilized economies.
Around the world, this backlash is building up against China, one for its initial mishandling of the crisis that led the virus to spread across the globe and secondly for the conspiracy theories that this was purportedly masterminded by China to weaken the global economy.

With this resentment and the currently strained US-China ties have allowed India and other Asian countries to make inroads to attract more investment and provide a viable destination for an indian manufacturing hub. 

China has been a welcome production center for industries like electronics, textiles, medical devices, and automotive. The critical driving factors have been the easy availability of raw material, technological innovations, business-friendly laws, and accessibility to skilled labor. ​​​

However, the scenario changed in 2019, with rising costs of work, as well as strained relationships created by the US-China trade war, clouded China's perception as a favorable production center. With the Covid-19 onset, many multinationals decided to shift manufacturing (partially or fully) to other low-cost destinations, such as India, Vietnam, Thailand, and other Southeast Asian countries, in their bid to avoid the hike in tariffs in 2019.

 The Coronavirus pandemic exacerbated the situation. Across the world, manufacturing companies have sought to reduce their supply chain dependence on China. Many industries have realized the drawbacks of being excessively dependent on manufacturing on a single country and are now looking to expand the geographic spread of their facilities

The Japanese Government in April announced a US$2.2 billion economic stimulus package to help manufacturers shift production out of China. US and South Korean have also followed suit and are looking for alternative manufacturing bases.

 India Seizes the Opportunity.

An economy-crippling lockdown has not deterred India from being ambitious to replace China's role in the global industrial chain. China's weakened global position paves the way for India to bid more investment. The Centre and the States have been working ceaselessly to woo investors and companies who are keen to move their production hubs out of China.

The State Governments have been actively pitching in with their efforts. Some of them have formed economic tasks force to attract firms to set up production units in their respective states. They have also identified land units where these manufacturing units can be set up. Tamil Nadu and Karnataka are offering incentives and implementing fast-track clearance programs to lure multinationals.

Many companies have already approached and initiated talks with Indian authorities seeking to pursue production plans in this country, including electronics, medical devices, and textiles. India should capitalize on this opportunity presenting itself as a viable alternative manufacturing destination. 

India has prioritized efforts to attract supply chains and scaling up in production in India. This shift would be more natural for companies with manufacturing units set up in China and India. They need to only strategize on scaling down the production in China and increasing and expanding production in India.

however, the global business honchos are still at an evaluation stage, and decision making has been prolonged as they are currently in an environment where global balance sheets are fractured. The relocation of entire supply chains would be a mammoth task. The pandemic has brought on a severe cash crunch and capital constraints.

The revised stimulus proposals meanwhile have increased thresholds for multinationals bidding for Indian contracts. Let us evaluate some key elements that make India a prospective and attractive destination 

Spike in FDI 

The Government has recently permitted up to 100% FDI in contract manufacturing, with the focus to increase the share of investments in manufacturing in total FDI. An outlay expenditure of around US$1.85 billion on infrastructure development at essential ports in the country has been laid out by the Government. It has further permitted up to 100% FDI on projects related to ports and is offering a 10-year tax holiday about the construction and maintenance of ports and harbors, in a bid to spruce up investments.

 Technology adoption and automation

 India's overall world rank is 18th on the Automation Readiness Index. The Government has initiated a blueprint to speed up digital manufacturing transformation. Several organizations have come forward in this regard and have invested in setting up Industry 4.0 Excellence Centres. The first of its kind, Centre of Excellence in Industry 4.0 Automation Technology, was set up and funded by Bosch Rexroth at Gujarat Technology University (GTU), while other companies such as Siemens are investing in R&D about digitization technology at plants. Another initiative is the Smart Advanced Manufacturing and Rapid Transformation Hub (SAMARTH) – Udyog Bharat 4.0 will also contribute towards the automation process in production.

 Availability of raw materials

 India has a robust raw material production capacity. It is the leading producer of cotton and the second-largest producer of steel globally. Also, it has bountiful mineral wealth yet to be fully explored. This inexhaustible wealth is varied enough to provide for a sound economic and industrial development.

 Lowered tax rates

Last year India reduced its overall corporate tax rate to 22% from 30% with the prime objective of boosting investments, lure international companies, and strengthen the country's economy. Additional tax sops for manufacturing firms are planning to set up in India, where the corporate tax rate was decreased to 15% from 25%.

 Low labor cost and ease of availability

India boasts of a strong workforce of more than 500 million. One of the prime changes being witnessed on the labor front is making conscious changes to the archaic labor laws to reduce exploitation. The Government has consolidated the existing labor laws into a set of four new codes to govern wages, industrial relations, social security provision, and working conditions. Multinationals follow strict codes of conduct on labor, environment, and safety standards. The objective is to give businesses more flexibility and freedom to operate.

Why India may not Qualify as the Next Manufacturing Hub

The land banks offered by the Government is only one aspect of the production process. China provided an integrated infrastructure with excellent connectivity via roads and seaports, skilled quality labor, and sophisticated logistics for these international companies to operate and function. Hence when these manufacturing units move out, they would look for countries offering a similar setup. 

India is its nascent stage when it comes to being well integrated with global supply chains. India backed out from the multilateral trade agreement of the Regional Comprehensive Economic Partnership (RCEP), despite several years invested in negotiations. Such decisions make it difficult for Indian exporters to benefit from tariff-free access to destination markets or offer reciprocity to its trading partners.

India's volatile relationship with foreign direct investment (FDI) and uneven regulation are grey areas that continue to bother global companies. 

Final Thoughts

In the current scenario, around 1,000 US companies plan to shift their manufacturing base from China, of which 30% are mainly manufacturers of mobiles, electronics, medical devices, textiles, and food processing units. India has initiated several strategies to emerge as the new Indian manufacturing hub and attract foreign manufacturers moving out of China. Considering India's various initiatives to make the country attractive to investors, it is expected to take the lead and emerge as the preferred destination in the next 2–3 years.

However, there are a few challenges that need to be addressed, such as the complexity of doing business, the long-drawn land acquisition process, and low productivity due to outdated technologies. India needs to overcome these challenges at the earliest to emerge as a chosen destination for supply chains and Indian manufacturing hubs.

Increased investment, improved infrastructure, and growth in economic output is the tried and tested path, and India is poised to follow. The challenge now is to catalyze it. India needs to create these conducive conditions for multinationals to use as a base to export to the world and not lose out on this opportunity to other Asian countries who are also keen to get their slice of the cake.

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An MBA Finance graduate, having worked in the Telecom and Banking sector as a Risk and Compliance Manager. An avid blogger with a penchant for traveling

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