Can Indian firms benefit from anti-China sentiment?

The pandemic seems to have brought some unexpected bonanza for small and medium enterprises (SMEs) within a few sectors.

Published: 29th October 2020 07:33 AM  |   Last Updated: 29th October 2020 07:33 AM   |  A+A-

A employee makes a football at Nivia factory during the ongoing COVID-19 nationwide lockdown in Jalandhar Saturday May 16 2020. (Photo | PTI)

The pandemic seems to have brought some unexpected bonanza for small and medium enterprises (SMEs) within a few sectors. The strong anti-China sentiment, with attempts to restructure supply chains, has led to companies across Europe and the US looking at India as a possible replacement for China. This has benefitted some of the SMEs, who have found that their international business has actually made up for that lost from the domestic sector.

While welcome, is this trend here to stay? There are two questions that one will need to consider in this context: One, is it possible to restructure supply chains in a manner so as to replace China? Two, can India benefit from such restructuring?

Moving away from China:

A paper by BofA global research in February 2020 pointed out to a slow tectonic movement of companies in 12 global sectors, with a $22 trillion market cap, away from emerging market economies back towards developed economies. These global sectors included autos, capital goods, software, materials, semiconductors, healthcare, consumer durables, and food and beverages. Global supply chains are being reassessed partly due to financial reasons, such as high tariffs and trade wars.

Another important factor facilitating reshoring is the trend towards growing automation, lowering Chinese labour cost advantages; this is cited as the key enabler for companies shifting from China to America and Asia (ex-China). Non-financial reasons, including growing concerns regarding national security, the employment practices in China, and worries regarding long supply chains and the consequent impact on carbon footprints were equally important in promoting reshoring moves.

The pandemic exposed the vulnerabilities of global multinationals to inflexible supply chains, converting the ‘tectonic shifts’ to ‘visible fault lines’, and forcing companies to accelerate their reshoring plans. As companies pay attention to stakeholder rather than shareholder interests, there is a greater possibility that firms will relocate supply chains, either within national borders, or to countries that are seen as allies.

China’s skilled workforce, strong supplier networks, reliable infrastructure and its governmental support for manufactures may still be attractive enough for companies looking at shifting supply chains outside of China. However, most nations had already commenced the task of diversifying supply chains as part of a “China plus one’ strategy even before the pandemic. An industry report has estimated that it would take only $1 trillion of capital expenditure spread over five years to move all manufacturing not meant for China outside of that nation.

The impact of such movement would also not be high, since the returns on capital employed (ROCE) would go down by a mere 0.7 percentage points, while the free cash flow to sales ratio would reduce by a modest 1.1 percentage points for global sectors ex-China. How will companies manage the higher costs associated with reshoring? Part of it would be facilitated by a shift towards greater automation.

The latter would be driven by better technology as also pricing of such technology. For instance, driven by decreasing costs, the industrial robotics market is expected to grow from $48.7 billion in 2019 to $75.6 billion by 2024, at a Compound Annual Growth Rate (CAGR) of 9.2% during the forecast period.
More importantly, such reshoring costs would also be supported by respective countries through policy support in the form of tax breaks, low-cost loans and subsidies.

Taiwan and Japan have already taken steps in the direction, with Taiwanese firms being provided rent assistance, cheap finance, tax breaks and simplified administration for investments at home, so that they could build a “non-red supply chain” outside China. Japan similarly budgeted about 220 billion yen for companies shifting production back to Japan and 23.5 billion yen for companies moving production to countries other than China. South Korea has similarly announced tax incentives, easing of investment-related regulations and providing financial support for companies that return.

India as new manufacturing hub: 

While India has emerged as an attractive destination for the supply chains diverted from China, it may take a lot for our nation to take advantage of this new-found interest and come up as a global manufacturing hub. One, India’s relatively lower productivity, especially among the SMEs, will pose deep challenges for it to take advantage of the new fault lines.

As an SME owner himself conceded, such poor work norms and lower productivity characterise all Indian firms, but it is particularly higher in MSMEs. This can be explained by the lack of incentive on the part of such small firms to invest in upgrading skills of the largely temporary workers or even in investing in capital equipment.

Two, India’s infrastructure is woefully behind that of China. The share of infrastructure investment in China has been more than 20% of GDP while that in India remained in single digits, with annual spending on infrastructure in the former reported to be 10 times that in the latter in USD terms. Overall investment spending is also much higher in China than in India. In fact, after the pandemic, China has set into motion a plan to construct new digital infrastructure across the country, including building 5G networks, artificial intelligence (AI), Internet of Things (IoT), intercity high-speed rail, and setting up research and development institutions. These may provide China the next and fresh competitive advantage.

Three, in the absence of significant labour reforms and with the reduction in automation costs, supply chains would not get diverted to India in a sustainable manner. In fact, anecdotally, we have found that even Indian SMEs are increasingly seeking to replace ‘costlier’ labour with convenient and cheaper technology. The implications of global geopolitics and the pandemic will be lost if India is not able to put into place significant labour reforms and ramp up investment in manufacturing and infrastructure quickly. Equally, the private sector will need to work according to global standards to truly replace the ‘global manufacturing hub’. And all this while China continues to reinvent itself and innovate.

Professor, Economics & Chairperson, Family Managed Business at Bhavans SPJIMR 
(Views are personal) (

India Matters


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  • a.k.sehanobis

    We are a Nation of Jaichands.The remark of Churchill
    2 years ago reply
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