Outlook Explains | Why Japan Wants India to Replace China in Global Supply Chains

India and Japan's decision to deepen cooperation in artificial intelligence (AI), semiconductors, quantum technologies and advanced manufacturing marks more than another bilateral agreement. Announced during the 16th India-Japan Annual Summit, the pacts show Tokyo's broader effort to diversify supply chains and reduce strategic dependence on China, placing India at the centre of its evolving China+1 strategy.

The agreements come at a time when governments and businesses are reassessing where critical goods should be manufactured. Supply chain disruptions during the COVID-19 pandemic, rising geopolitical tensions and increasing competition over advanced technologies have exposed the risks of relying too heavily on a single production base.

For Japan, whose manufacturers have spent decades building extensive operations in China, the need to diversify has become both an economic and strategic priority.

Why China+1 Matters

The China+1 strategy refers to companies maintaining operations in China while expanding manufacturing into other countries to reduce concentration risks. Rather than replacing China altogether, the approach seeks to build resilience by diversifying production across multiple markets.

For Japan, the strategy has gained urgency in recent years. China remains one of its largest trading partners, and Japanese companies, from automobile manufacturers to electronics firms, continue to depend on Chinese factories and suppliers. However, growing strategic competition between Washington and Beijing, concerns over Taiwan, disruptions to global logistics and increasing emphasis on economic security have prompted Tokyo to rethink how those supply chains are structured.

That shift has increasingly brought India into focus.

With one of the world's fastest-growing major economies, a large domestic market, a young workforce and expanding manufacturing ambitions, India offers Japanese companies an opportunity to diversify production while maintaining access to a rapidly growing consumer base.

The partnership also rests on a broader strategic convergence, with both countries placing greater emphasis on resilient supply chains, trusted technologies and long-term economic security.

From Investment To Technology

The agreements signed during Prime Minister Sanae Takaichi's visit signal that the relationship is moving beyond traditional trade and infrastructure into next-generation technologies.

The two sides announced cooperation in artificial intelligence, semiconductors, quantum technologies and advanced manufacturing, reflecting a shared effort to strengthen economic security while reducing vulnerabilities in critical supply chains.

The summit also reinforced Japan's long-term commitment to India's industrial development. Since elevating bilateral ties to a Special Strategic and Global Partnership in 2014, the two countries have steadily expanded cooperation across infrastructure, defence, connectivity and investment.

Japanese participation in projects such as the Mumbai-Ahmedabad High-Speed Rail corridor has become one of the most visible examples of that partnership.

During the summit, Prime Minister Narendra Modi said the India-Japan investment partnership was "steadily strengthening", noting that around 120 new business agreements concluded over the past year are expected to bring more than US$10 billion in Japanese investment into India.

He added that both countries are working towards attracting 10 trillion yen (around US$65 billion) in Japanese investment over the next decade while doubling the number of Japanese companies operating in India.

Those commitments show Japan's confidence in India's long-term manufacturing potential. While Japanese investment has traditionally favoured East and Southeast Asia, India's improving business environment, expanding infrastructure and policy push towards advanced manufacturing are steadily changing that calculation.

Why Semiconductors Matter

Semiconductors have emerged as one of the defining pillars of the partnership.

India's semiconductor mission aims to establish a domestic chip manufacturing ecosystem through incentives for fabrication plants, packaging facilities, research and advanced manufacturing. The initiative forms part of New Delhi's broader ambition to position itself as a global manufacturing hub while reducing dependence on imported chips.

For Japan, the opportunity extends beyond investment. Semiconductors underpin industries ranging from automobiles and consumer electronics to robotics and advanced manufacturing. Diversifying chip production has therefore become central to Tokyo's broader strategy of strengthening supply chain resilience.

The partnership, however, reaches far beyond semiconductors. Electronics manufacturing, electric vehicles, pharmaceuticals, renewable energy and advanced materials have all emerged as sectors where Japanese technology and investment increasingly complement India's manufacturing ambitions.

Can India Replace China?

Japan's growing investment in India does not suggest that China is about to lose its position as the world's manufacturing powerhouse. Instead, it shows a gradual shift towards diversification rather than dependence on a single production base.

China continues to possess advantages that few economies can match. Decades of industrialisation have produced integrated supplier networks, world-class logistics, modern ports and manufacturing clusters capable of producing goods at scale. These ecosystems allow companies to source components, assemble products and export them efficiently, making China indispensable to many global supply chains.

India, however, offers a different proposition.

Its large and youthful workforce, expanding domestic market and lower labour costs have made it increasingly attractive for labour-intensive and high-value manufacturing alike. Government initiatives to strengthen industrial corridors, simplify investment rules and promote advanced manufacturing have further improved its appeal to international investors.

The semiconductor mission forms part of that broader strategy. By encouraging fabrication, assembly, testing and research, New Delhi hopes to position itself as a long-term participant in global electronics manufacturing rather than simply a consumer market. For Japanese companies seeking to diversify production, these initiatives create opportunities to establish new manufacturing bases while reducing exposure to supply chain disruptions.

India's manufacturing ecosystem is still developing and lacks the supplier depth that China has built over several decades. Logistics, power reliability and transport infrastructure continue to improve but remain uneven across regions. Regulatory procedures have become more investor-friendly in recent years, although businesses continue to cite administrative complexity and implementation challenges compared with more mature manufacturing markets.

These structural differences mean that India is unlikely to replace China outright in the near term. Instead, Japanese companies are increasingly adopting a "China+1" model, retaining operations in China while expanding production elsewhere to spread risk and build greater resilience.

A Broader Manufacturing Partnership

Beyond semiconductors, the India-Japan partnership is expected to deepen across sectors that are central to future industrial growth.

Electronics manufacturing, electric vehicles, batteries, pharmaceuticals, renewable energy and advanced materials have all emerged as areas of cooperation under the two countries' expanding economic partnership. The latest agreements on artificial intelligence, quantum technologies and advanced manufacturing further signal a shift towards high-value industries where both countries see long-term strategic benefits.

For Japan, these sectors are closely linked to economic security. Building trusted supply chains with reliable partners has become increasingly important as governments seek to reduce vulnerabilities in critical technologies. For India, Japanese investment brings not only capital but also advanced manufacturing expertise, technology transfer and deeper integration into global production networks.

The partnership therefore extends beyond increasing trade. It is increasingly aimed at building industrial ecosystems capable of supporting next-generation manufacturing.

Looking Ahead

The agreements announced during the 16th India-Japan Annual Summit highlight how the relationship is evolving from one centred on infrastructure and investment to one increasingly focused on technology, manufacturing and economic security.

Japan's China+1 strategy does not seek to replace China overnight. Rather, it reflects a broader effort to diversify supply chains and reduce dependence on a single manufacturing base. India, with its expanding industrial ambitions, growing market and deepening strategic partnership with Japan, has emerged as one of the principal beneficiaries of that shift.

Whether India can eventually rival China's manufacturing scale remains an open question. China retains significant advantages in infrastructure, supplier networks and industrial capacity. Yet Japan's growing investments, technology partnerships and long-term commitments suggest that New Delhi is no longer viewed merely as an alternative market, but as an increasingly important manufacturing partner in the next phase of global supply chain realignment.