Among the many fundamental changes in human life that the pandemic is likely to trigger, none might be more consequential than altering the way the world does business.
COVID-19 has thrown light on a global blind spot. The world has suddenly woken up to the reality that a hegemonic China has become the irreplaceable fulcrum of a globalised economy and is using that leverage to develop untrammeled power.
Taking advantage of the established, consensual economic wisdom of a post-Cold War world order that prioritised hyper-globalisation over national boundaries, China built its industrial might over three steady decades by offering a substantial pool of low-cost, efficient labour and wielding authoritarian control over the human resources.
How China monopolised supply chains As multinational companies remained fixated on keeping production costs low, and western governments allowed massive outsourcing of manufacturing and industrial capabilities in exchange for financial gains, China exploited the opportunity to monopolise global supply chains.
Until the virus raided us, the world overlooked the dangers of putting all eggs in the Chinese basket. As China sharpened its manufacturing prowess and became 'world's factory', it simultaneously developed a complex mesh of internal supply chains and interoperability that made relocation even more difficult, and consequently the world became even more deeply reliant on China-dominated global supply chains.
How deep go China's tentacles? A study by a business intelligence company shows 51,000 companies sourced direct suppliers from Wuhan alone, while "five million companies have one or more tier-two suppliers in the region," according to Brink.
The article quoted another survey highlighting how manufacturers around the world are at the mercy of China. Around 57 percent of companies "are experiencing longer lead times for tier-1 China-sourced components", a list that includes US tech giant Apple which, despite shifting some production to India and Vietnam, remains critically dependent on China.
China's role as the preeminent supplier of goods and components across nearly all industrial sectors " technology, automotive, electronics, pharmaceutical, equipment or consumer goods " makes a rerouting of global supply chains almost impossible.
It is a measure of the disruption caused by the pandemic that such a possibility is being increasingly discussed now. As the virus ravages its way through the world (latest figures put global toll at 248,245) there is a sudden urgency to diversify and relocate manufacturing and supply chains out of China.
Pushback against China
This pushback is the result of two distinct impulses: geopolitical and geo-economic. COVID-19 has reinforced the reality that China, at best, is an irresponsible power and a malevolent actor at worst that falsifies and suppresses data, spreads misinformation, lies and indulges in predatory mercantilism to achieve its geopolitical objectives.
Some of this behaviour was already known. The virus has inadvertently translated that malevolent Chinese behavior into real consequences. Governments around the world " from the US, Germany, Australia to India " are in no mood any more to overlook China's role in spreading and abetting the pandemic that has killed over two hundred thousand people already and destroyed economies.
In the geo-economic arena, many companies are rushing to repatriate some of their production from China to avoid getting caught again in a situation that the pandemic caused where entire global supply chain collapsed due to over-reliance on one source.
This disruption threatens to transform the way the world does business, and it has brought some unexpected opportunities for many nations that seek to benefit from the shifting of production lines away from China. Some of the shift that may happen out of China could also be a corrective measure since China had a disproportionate share of global manufacturing pie. In this respect, the pandemic may have accelerated the trend.
A second chance for India?
Quite naturally, as the country with the world's second-largest population, a large pool of skilled, semi-skilled workforce, a young demography and a humongous domestic market, India ranks among the top of these (mostly southeast Asian) nations that are keen to seize the supply-chain opportunities. The pandemic may have devastated global economy and brought economic powerhouses to a standstill, but it has simultaneously opened up larger-horizon prospects for nations like India that now has a second chance, having missed the bus on manufacturing and export-led growth altogether.
A lot of hopeful talk is suddenly floating around in Indian media that foreign companies are lining up to tap India as the alternative manufacturing hub, and India is well-poised to capture the tectonic shift.
This exuberance is unsupported by facts. Past developments do not inspire confidence.
A study by Japanese financial group Nomura found that between April 2018 and August 2019, 56 companies relocated supply chain and manufacturing out of China. Of these, 26 went to Vietnam, 11 chose Taiwan, eight settled in Thailand and only three came to India.
Centre's aggressive bid
Make no mistake, India is aggressively pushing for a share of the manufacturing pie. If there was reason enough for India to boost its stillborn 'Make In India' initiative, that impulse has now got an added urgency thanks to the prolonged lockdown that has broken the back of Indian economy. India desperately needs foreign direct investment that may boost labor-intensive manufacturing and create jobs to kickstart its economy.
In a blog post, Narendra Modi has asked Indians to "rise to that occasion and seize this opportunity" since India has "the right blend of the physical and the virtual" and "can emerge as the global nerve centre of complex modern multinational supply chains in the post COVID-19 world."
The prime minister has taken the lead in holding discussions with chief ministers and Cabinet members to persuade foreign investors to shift their production lines and promote local investments. States have been encouraged to capitalize on manpower skill and improved infrastructure. Media reports indicate Modi has asked chief ministers to develop a "comprehensive plan".
It was discussed that a scheme should be developed to promote more plug and play infrastructure in the existing industrial lands/plots/estates in the country and provide necessary financing support @EconomicTimes
" deepshikhas (@deepshikhasET) April 30, 2020
Various strategies to bring investments into India in a fast-track mode and to promote Indian domestic sectors were discussed. Detailed discussions were held on guiding states to evolve their strategies & be more proactive in attracting investments @EconomicTimes " deepshikhas (@deepshikhasET) April 30, 2020
The meeting with Cabinet members that was reportedly attended by Union finance minister Nirmala Sitharaman, home minister Amit Shah and minister for commerce and industry Piyush Goyal, among others, discussed a "scheme to promote more plug and play infrastructure in the existing industrial plot, estates in the country and provide necessary financing support". Plans were drawn to handhold investors, look into their issues and issue faster regulatory clearances.
We are being told that coronavirus will trigger "manufacturing exodus from China" due to "rising labour costs, shortages of workforce, a trade war with the United States, the rise of manufacturing hubs in southeast Asia and now a pandemic that originated on its mainland."
This argument claims that India's huge domestic market will tip the scales in its favour compared to more nimble-footed southeast Asian rivals.
Some articles claim about a thousand companies "are currently engaged in discussion at various levels such as investment promotion cell, Central government departments and state governments" and they are apparently attracted by India's "vast domestic market, cheap manpower, resilience of its economy and a strong democracy" while "regulatory hassles, compliance burdens and policy flip-flop" are the downsides.
There also have been reports that US state department is encouraging its businesses to shift production lines out of China to India, and US business captains have apparently been advised by the Donald Trump administration to propose to Indian government to offer incentives in this regard.
Not just media, we also witness a reflection of this narrative in government circles where ministers are making a spate of hopeful statements. Union minister Ravi Shankar Prasad was quoted as saying recently that "distrust against China could work to India's advantage" and anger against China could lead to a boom in electronics sector for India.
Prasad's Cabinet colleague Nitin Gadkari thinks "it's time to convert 'hatred' for China into India's economic opportunity." These are dangerous delusions.
India has some advantages in its huge domestic market, low-cost, abundant labour, high share of working population and a government (at least verbally) ready to invite foreign investors through policy tweaks and infrastructure upgradation but these advantages are offset by realities, mindsets and political compulsions that cannot be changed overnight.
India's structural shortcomings
Let's start with a bit of statistic. For all the talk about India being a more lucrative destination for investors willing to hedge against overdependence on China, the production cost difference, according to some estimates, between India and South East Asian countries is about 10 to 12 percent.
True, some of the interest shown by the global manufacturers is genuine. For instance, Wuhan, the origin of the virus, is considered the nerve centre for automotive sector. The pandemic has caused some multinationals to focus on India for auto components and electronics. Pankaj Munjal, chairman and managing director of auto parts maker Hero Motors Co., told Livmint that he has received several enquiries from companies who have operations in China.
However, any such shifting of production line involves a huge amount of money in initial setup costs. The pandemic has dealt such a body blow to global economy that many companies are not in a position to spend the amount of cash needed to tinker with existing supply chains.
Let us assume that a company manages to raise the cash needed to invest in new operations. Let us also assume that India manages to offer competitive facilities in terms of infrastructure, connectivity, transport and other logistics. However, companies still have a challenge in finding skilled manpower, invest in training regimes and count on policy support, tax breaks, availability of land and slashing of red-tape bottlenecks.
This is where India falls frequently short. India's proclamations on foreign investment do not match its actions on ground. Lack of land reforms, uncompetitive labour laws, restrictive trade regime and a predatory tax policy scare away most potential investors.
According to an OECD index on FDI restrictiveness covering 68 countries, India possesses the eighth most restrictive FDI regime. As an Economic Times report pointed out, a Property Rights Alliance trade barrier index calculated for 86 countries ranks India as having the most restrictive trade regime bar none.
Writing in The Times of India, David M Sloan, a member of a Washington-based global advisory consultancy, pointed out that unless India is ready to adjust its policies, carry out over overdue labour market and land acquisition reforms and ends "tax terrorism", along with appointing a PM's emissary who will listen to investors' woes and hardsell India's USPs to leverage the COVID--induced crisis, India might as well forget displacing China.
Placement as a potential market
Manufacturers choose destinations for production line based also on which end of the market they are targeting. While Thailand and Malaysia compete for higher-end sectors "their ages price them out of labour-intensive work such as stitching shirts and sneakers that is more likely to go to Bangladesh, Myanmar or Cambodia," as per a Reuters report. Vietnam is going for both ends of the market, while Taiwan has given Taiwanese firms located in China huge breaks on tax, land, water and electricity.
As discussed, rerouting of supply lines involves huge upfront costs. This is one of the reasons why Japan has designated $2.2 billion of its stimulus package to help firms shift production out of China. Sadly, for all its trumpeting inviting foreign investment, India has announced no sector-specific incentives, targeted tax breaks or given a promise to carry out much-needed reforms that could be politically controversial.
Further, we have seen no definite policy measures to exploit India's advantage of a long coastline along eastern shores that is strategically placed to connect with Asia-Pacific markets, allowing for optimised supply chains and minimum transportation costs.
Finally, any talk of India benefitting from the disruption caused by the pandemic overlooks the resilience of Chinese supply chains and China's centrality in global economy. Instead of a clean relocation, most manufacturers are looking at a 'China plus one' strategy where companies diversify while maintaining their presence in China.
The 'China-plus-one' strategy requires the new location to be proximate to China, and that is a big reason why Vietnam " whose cities such as Hai Phong are just 865 km away from China's manufacturing hub of Shenzhen " has emerged as a top destination.
"By situating manufacturing centers close to traditional hubs in China, manufacturers are able to reduce costs with limited interruption or delays to existing supply chains," an article in China Briefing pointed out.
There's more. Though COVID-19 originated in China, the country managed to overcome the pandemic and restart its economy even as the world struggles with the virus " reinforcing the very reasons that attracted global businesses to China in the first place.
India is eyeing higher end of the manufacturing chain since it already has a domestic supply line on production of mobile phones, but these aspirations confront the reality of the efficiency of Chinese system.
For instance, Katy Huberty, head of equity research for North America Technology Hardware at Morgan Stanley was quoted as saying: "Technology vendors are encouraged by the pace at which China's production has ramped up post the COVID-19 shock, and this has reinforced their belief in locating the production of their high-volume products in China. This provides reassurance that China will remain a large base for manufacturing in these products."
German newspaper DW reported that more than "70% of companies surveyed by the American Chamber of Commerce in China (AmCham China) in March said they had no plans yet to relocate production and supply chain operations or sourcing outside of China due to COVID-19."
While China's centrality in global supply chain has caused huge amount of losses and bottlenecks, while its actions in abetting the spread of the pandemic has angered nations, the factors that drove its centrality in global value chains remain intact, and India will have to go a long way before it can dream of weaning that away.