Considering the impact of the US-China trade war, the Hong Kong revolt and the Covid-19 spread, it is likely that the US, and the world at large, would reduce trade ties with Beijing
The COVID-19 menace continues to expand globally as the virus has infected 9,38,348 people till now and killed 47,286. And the number is going up by the hour. Prime Minister Narendra Modi has imposed a nationwide lockdown for three weeks in an attempt to slow the spread of the Coronavirus. Everyone, except those related to essential services or facing a medical emergency, has to stay confined to their homes as social distancing is the country’s only hope of getting through this crisis without major damage. Though, as of now, the number of reported Coronavirus infections and casualties remains relatively low in India — around 2,032 confirmed cases and 58 dead — the fear is that, should the virus hit as it has in the United States (US), Europe or Iran, it would lead to a disaster far bigger than anywhere else because of our teeming population and cheek by jowl existence. The Indian economy is large and complex and the pandemic will have direct and indirect consequences over a longer period of time. However, as the American business tycoon Warren Buffett once said, “A great investment opportunity occurs when a marvellous business encounters a one-time huge but solvable problem.”
Governments to the rescue: Right now, the whole world is dealing with losses, both human and economic because of the pandemic. However, we humans have survived in this world despite all the numerous disasters that have visited the planet because we have learnt to adapt ourselves to the environment, no matter how tough it is. In keeping with our indomitable spirit, Governments worldwide have opened up their treasuries and announced financial packages to help businesses and ordinary people tide over these tough times and make up for the financial losses they are experiencing due to lockdowns. While the US approved an over $2 trillion rescue plan for its people, India announced a $22.6 billion (Rs 1.70 lakh crore) package.
China has bigger problems than Covid-19: Before the Coronavirus outbreak shook the world, newspapers were flooded with news related to the US-China trade war. The US imposed three rounds of tariffs on Chinese products last year on over $250 billion worth of goods. While justifying these, US President Donald Trump said that he wanted to “stop the unfair transfers of American technology and intellectual property to China” and protect jobs.
Apart from this, China is also facing anti-Government protests in Hong Kong. The agitations started in June 2019 and the demonstrations, which began as a fight against a Bill that would have allowed Hong Kong residents to be extradited to the mainland, have morphed into a call for free elections, which largely do not exist in China. The Bill was withdrawn later but demonstrations continued and protesters demanded full democracy and an inquiry into police atrocities. The rallies have quietened considerably as most residents hunker down at home to avoid being sickened by the Coronavirus. However, smaller protests nevertheless flare up now and then and arrests continue. To Beijing, it is a direct challenge to the leadership, tantamount to losing control of Hong Kong, which it can never tolerate.
An opportunity for India: Right now, the US has more known cases of the Coronavirus than any other country and people in general blame China for the outbreak of this pandemic. Considering the impact of the US-China trade war, the Hong Kong revolt and the Covid-19 spread, it is likely that the US, and the world at large, would reduce trade relations with China. When it comes to choosing the best overseas manufacturers in Asia, two countries, India and China, are at the forefront. Both nations have very dynamic production capabilities and unique economic landscapes with proven skills, strengths and weaknesses, that make them both viable choices. But now, India will surely have an edge over China and must make the most of this opportunity. Prime Minister Narendra Modi’s goal through the ‘Make in India’ initiative is to bring basic manufacturing to an economy that needs better-paying jobs. With an increasing share of a young working population, India can achieve its full manufacturing potential as it looks to benefit from its demographic dividend and large workforce.
However, it is imperative to weigh our choices carefully by considering specific external factors that will have an impact on our supply chain. First, let’s review the economic landscape in India and China followed by five key factors that influence manufacturing in these two countries.
Pricing: Purchase cost is usually the most important factor when manufacturing overseas. But so is quality, delivery times and the ease of doing business. India’s manufacturing labour is more competitive when compared to China. In 2014, the average cost of manufacturing labour per hour was $0.92 in India and $3.52 in China. India has a huge number of labourers who are skilled as well as unskilled. The skilled, educated workers like researchers, engineers and IT professionals are able to contribute cost-effective development support to manufacturing operations.
Along with a massive workforce and an emerging supply base, India also has access to natural resources needed in production. Notably, iron ore and aluminum for engineered goods, cotton, silk and jute for textiles and coal for power generation.
Logistics: Newer roads and highways, railways, waterways and airports give China an advantage from a logistics perspective. On the other hand, India relies heavily on a massive network and grids of roads which are not always paved or wide enough to be able to transport products comfortably. But, with the introduction of the Goods and Services Tax (GST) E-way bill, the time for delivery of consignments has reduced. The Government is working steadily on investing in the development of railways, highways, ports and airports, which is expected to cut back transportation time and costs by 20 per cent.
Product expertise: China’s major advantage over India is its ability to scale. Beijing has created Special Economic Zones (SEZ) and industrial clusters to encourage manufacturers, suppliers and other relevant parties to be physically close to one another. It provides higher flexibility and the ability to react in case of insufficient quality, non-conforming materials, or other issues. As per McKinsey, Chinese manufacturers are five times more productive than their counterparts in India. However, most Indian manufacturers use high quality machines and tools to produce good quality products. Many Indian industries are well-known for this and are considered trustworthy when it comes to their work ethics and business deals. Unlike China, India does not carry the stigma of poor-quality production.
Language skills: English is the second official language in India and executives have embraced it to conduct business. In contrast to China, India incorporates British customs and legal systems, ensuring a smaller culture gap that needs to be bridged. Therefore, India has a clear edge over China in soft skills.
Manufacturing processes: India’s culture, as compared to China’s, has always been to manufacture at a small scale. In certain instances, to keep costs low, China is relocating production sites to other developing countries and entrepreneurs are replacing manpower with machines. Overall, China is maximising its manufacturing processes, aiming to stay competitive and delivering larger quantities on tight schedules.
India’s manufacturing culture of producing at a smaller scale has at times created a poor image in the eyes of big companies, entrepreneurs and investors. In addition, India favours family and artisanal models which result in buyers facing greater quality risk and production delays.
After China, India is the only country in the world to match the scale of operations and integrate its supply chain for global customers. To effectively harness the emerging opportunities, India needs a carefully-crafted strategy and its meticulous implementation at the grassroots level. Policymakers are far more prepared today than they were during the 2008 economic meltdown. Crude oil is at the lowest it has been in the last few decades, thus reducing overall costs. India has a huge domestic market with a rapidly-increasing middle class and overall population. Investments in the Indian manufacturing sector have been on the rise and post COVID-19 they would increase further. Initiatives like ‘Make in India’ and sector- specific incentives to various manufacturing companies aim to make the country a global production hub.
India is already an attractive destination for foreign investments in the manufacturing sector as several mobile phone, luxury and automobile brands, among others, have set up or are looking to establish their production bases here. This sector has the potential to rank among the top three growth economies and manufacturing destinations of the world. Corporations have a golden opportunity to emerge from the shadow of the services sector and seize more of the global market. Therefore, when we think of scope, this seems to be the best time for India to achieve its dream of becoming a $5 trillion economy. As they say, “Victory comes from finding opportunities in problems.”
(Writer: Abhishek raja; Courtesy: The Pioneer)