Fifty-six companies moved production facilities out of China between April 2018 and August 2019. However, only three of these companies moved to India and two established production facilities in Indonesia. According to a report by Nomura, a Japanese financial organization, the majority moved to Vietnam and a large part went to Taiwan and Thailand.
One of the main reasons these companies have relocated is the ongoing trade dispute between China and the United States. Tariffs are making China's exports unaffordable for many US importers.
It is true that many companies have been considering leaving China for some time. The costs of maintaining production facilities in the country have been rising over the past two years. With the addition of American tariffs on goods made in China, many companies have had little choice but to relocate to survive.
However, relocation is not a simple task. Companies must find the ideal infrastructure, pay moving and installation costs, and typically must reestablish employees and business connections. This may include training programs for the new workforce, finding new and cost-effective methods of shipping or transporting products, and learning about new incentives and tax regimes for businesses in the country of choice.
India currently offers the demographics needed to become a global industrial powerhouse, similar to China. China may produce a fifth of the world's goods, but India's population is comparatively young and is expected to surpass China's by 2030. The United Nations predicts India to have a median age of 30, while China's is of 40.
What's more: India's employment costs are half of China's. Although India's GDP costs are high compared to other major global economies, economists typically agree that the country is underperforming its market potential. The same can be said of Indonesia, which has an even lower median age (21 years). Both India and Indonesia are considered “sleeping giants” in terms of foreign direct investment (FDI) in each country’s production.
FDI is a reliable indicator of investor confidence in a country. It is also ideal for a developing economy to better generate jobs, absorb excess labor supply and deal with financial challenges. Unfortunately, India attracts only about 0.6% of GDP in manufacturing FDI. Indonesia is slightly better, at one percent.
To attract greater FDI, India and Indonesia need to increase trade. This means countries also need to spend more on infrastructure development, reform land and labor legislation, and offer tax incentives to foreign investors. The good news is that both countries are aware of this and are moving forward with the correct regulation.
Capitalizing on the US-China trade war?
In the trade impasse between the US and China, increased tariffs seem inevitable and China's production is expected to suffer in the long term. The result is that major international companies investing in China are exploring other options.
Some experts have pointed to India as a country that could, in turn, benefit from expanding exports to the US. The country's FDI may also increase. Currently, China's merchandise exports are almost equivalent to India's GDP. A slight change – say even a 10% shift from Chinese commodities to Indian exports – could greatly affect Indian exports. However, to take advantage of this situation, India needs a strategic and competitive approach.
This is because India is just one of many countries that international organizations are considering for future investment. Indonesia, Thailand, Malaysia, Mexico and Vietnam also offer access to large potential markets.
India's ambition to double its exports and generate more jobs largely depends on its ability to become a successful part of the global value chain (GVC) — which includes transport and shipping capabilities. In comparison, China's shipment to the US in 2018 ($560 billion) was almost double India's total exports.
Being the seventh largest global market and the 20th largest exporter of goods, it is no secret that India lacks GVC. According to the United Nations Conference on Trade and Development (Unctad), multinational companies represent 80% of GVCs. To better establish export hubs and a strong value chain, India needs strong operational support, infrastructure and favorable policies for foreign investors.
A step in the right direction is the country's Make In India program, a government initiative to create jobs and improve skills across 25 sectors of its economy. It will be interesting what further steps, if any, India takes to become a global industrial powerhouse.
