The MNCs have started realising the threats of having concentrated manufacturing capacities in one country –particularly so if the name of that country is China.
There are four main reasons for this possible exodus of companies;
Cyberspace is more than filled with the first two reasons mentioned above. However, the dollar inched higher, stock markets struggled for traction and crude oil fell sharply again at the beginning of May ‘20 because the US-China spat over the origin of the COVID-19. The possibility of Trade War Version 2.0 succeeded to put the brakes on all optimism about an economic re-start as many countries around the world started easing restrictions in the last few days. It seems the capital market across the world is ready to factor-in the Trade War Version2.0. While we wait and watch how this latest version unfolds – the next reason seems to be nothing but stupid common sense. It is difficult to close down a shop overnight –it is extremely difficult to close down an operational plant and then move it to another country, so –it will take quite some time. If we look at all these purely from the Indian point of view –right now India has no policy to bear any part of the relocation costs. But the same applies to all other countries that are likely to compete to host the relocated plants. India is often perceived to be a benefactor of such an exodus ---but, are we ready to seize upon it?
The last reason, e.g. currency revaluation might not be a direct reason for companies to leave China. Such devaluation does provide competitive advantages to companies that are originally Chinese but not as much to those global players who use China primarily as a manufacturing supply chain hub to access Chinese markets as well export to other countries. This is not at all taken very positively in a globalised economy in the background of a trade war and deteriorating diplomatic relations that have already sent capital markets into a downturn.
Which Are These Companies? Which Are The Sectors?
Let us look at the situation a little more minutely.
A laundry list of foreign firms are planning to move their production units –partly or fully –mostly from sectors such as automobile components and electronic parts, mobiles, electrical and medical devices, food and food processing, textiles, and synthetic fabric---the number can be close to 1000 according to some sources. And a few hundred companies have already approached the PMO and the Department for Promotion of Industry and Internal Trade.
There is a domestic play too—there will be some forward as well as backward integration. India is a big market on its own and there is a strong domestic consumption factor. Pharmaceuticals and consumer durable companies are heavily reliant on China for sourcing. They are the ones who have suffered in the last couple of months due to restrictions in imports. Some of these companies are exporters too. These people had suffered last year when trade war started as well likely to be a possible victim of Trade War version 2.0, if any –thus, they have to think of localisation to stay afloat.
Here is an example -most Auto firms import parts like fuel-injection systems for the latest engines and other electronic parts from China. “In the next few months, we will see most of these Indian vehicles makers localize the manufacturing of such parts or sourcing them from a different location with a foreign partner," said an industry leader in a business channel.
What we have done in the recent past? And –who are our competitors?
Thankfully the theme of the Budget2020 was a paradigm shift from MakeInIndia to MakeInIndia + AssembleInIndia -and this theme had lots of ifs and hopes.
But, after COVID-19 pandemic, deaths near almost 3,00000 globally, the IMF announced the great lockdown recession will drag the global GDP lower by at least three per cent in 2020. As countries start blaming China out in the open - and this theme suddenly looks quite prudent as diplomatic relations between India and other global leaders are supportive now.
In a nutshell, Budget2020 raised duties on butter, cheese, shoes, ceiling fans, food grinders, iron, room heaters, tea and coffee makers, kitchenware, and hair dryers to 20 per cent from 10 per cent. In the case of margarine, peanut butter, chewing gum, and infant food, duty had been hiked by 30 per cent and more. The duty on shelled walnuts, durum wheat seeds and margarine was raised to 100 per cent. Imported food and grocery items, shoes, ceiling fans, wooden furniture, kitchenware, appliances, hairdryers, shelled walnuts, and other items became little costlier as the budget raised basic customs duty to as much as 100 per cent on some of them to encourage local producers. Import duties were also increased on refrigerator and air condition compressors to 12.5 per cent from 10 per cent, and that on small motors to 10 per cent from 7.5 per cent.
Basic customs duty also doubled to 20 per cent from 10 per cent on Printed Circuit Board Assemblies (PCBAs) used in making the mobile phones as out the 300 Mn PCBAs used annually, only 160 Mn are made in India and go into cell phones.
India is primarily facing competition from the ASEAN countries. As per a recent survey conducted by a consultant firm targeting the affected companies some respondents prefer ASEAN countries over India. The reason is the manufacturing cost difference between India and some Southeast Asian countries - which is still about 10-12 per cent according to industry estimates. These countries are primarily Indonesia, Thailand, and Vietnam.
ASEAN has free trade agreements with China, India, Japan, South Korea, Australia, and New Zealand. The FTAs mean that it is also possible to export, with low or zero duties, to markets in China, India, Japan, South Korea, and Australasia.
If you set up a big manufacturing unit of anything in any of the smaller nations in the ASEAN zone (be it Indonesia, Thailand, or Vietnam) what do you do with the product? You have to essentially export it back to the US or EU or the countries mentioned above. You can hardly sell much locally as there is not much local consumption in these countries (compared to India or any G20 nations).
In March, India’s cabinet announced a production-linked incentive (PLI) scheme for the electronics sector with an outlay of over Rs 40,000 crore. “There is a clear negative sentiment against China. We have received requests for supply from India," said the president of the Electronic Industries Association of India. “If we play our cards right, we could double our exports (of electronic products) in three years”. The Delhi Mumbai Industrial Corridor (DMIC) mega region can well lead India’s economic integration with the global supply chains.
Centre had also slashed the Corporate Tax to 25.17 per cent in September last year while for new manufacturers, the applicable tax was brought down to 17.01 per cent(inclusive of all cess and surcharges) making it not only globally competitive but also the lowest in South East Asia. Government officials in consultation with Niti Aayog are trying their best to bridge the manufacturing cost difference between India and some Southeast Asian countries –the latest secretary-level reshuffle was done keeping this in mind too.
The Challenges ~ Role of the States And reforms in Labour laws
Countrywide the first phase of lockdown eased only recently. On one hand, we have to continue our fight against this deadly pandemic while on the other we need to act proactively. Enough words have been spoken on the need for investment in infrastructure, reliable and quality power supply, speedy and single-window clearances, and transparency. Businesses go where the grass is greener—currently, we have succeeded in projecting ourselves as greener pastures, now we must make it one. Though India’s rank in Ease of doing business has improved to 63 recently, we are still at no. 136 for ‘starting a business’.
However, many industry leaders, not wanting to be quoted, say there is only so much the centre can do; it is up to the states to get their acts together---be it on land acquisitions, labour Laws, or providing social and other infrastructure. The onus, thus, should be more on the states to attract companies looking for an alternative manufacturing base. The states have to frame more liberal policies across all sectors and consider reforms particularly in labour laws with an open mindset.
India is a labour surplus country and according to many estimates there will be millions of job losses across the sectors in the post-COVID-19 world and countries like ours will suffer the most. India needs reforms in the labour Laws for the labourers’ sake – or, these jobs will be lost forever. Policymakers should understand this –that, there is anyway no security of jobs in the unorganised sectors, and almost 70-80 per cent of the blue collar workers of India work in these unorganised sectors without any kind of bargaining power with the employers. The recent migrant labour crisis across the states proved it once again both in letter and spirit.
It is high time our policymakers and their esteemed advisors with prophetic hallows behind their heads should understand nobody is coming to relocate in your state to fulfill the job creation target mentioned by any political party in their election manifesto. They will be there to fulfill the long term Business Vision of the respective corporate group, get appropriate returns (ROCE) on their investments, and once that part is best assured ---jobs will be created slowly but steadily. But there has to be a time lag.
Reforms in labour laws do not always mean indiscriminate hire and fire. They rather aim to provide ways and means to strictly enforce discipline within the factory premises and demand higher productivity in the organised sectors as well in semi-organised ancillary units. States need to work on establishing self-contained industrial hubs/SEZs/EOUs with appropriate labour laws that earmark space for manufacturing, commercial, educational, residential and social infrastructure. States need to also look at some nitty-gritty like common effluent treatment plants for all in any hub/zone and ensuring “single window” and fast-tracked clearances case to case basis. There should be space for expatriates who work in these companies to enjoy their evenings or weekends without any restrictions.
The Silver Linings
Japan has already announced a ¥243.5 billion financial aid for its companies asking them to shift their manufacturing plants out of China –of which ¥23.5 billion for those planning to move to other countries. Media reports indicate that the US government will support companies contemplating India as an alternative to China while the US President is blaming China openly for almost everything. The rising trade war between the US and China has also pushed South Korean companies to consider moving some of their plants to India. Apart from giants like Posco and Hyundai are considering Andhra Pradesh as a likely place to set up their factories, several small tech companies are also keen to invest in India. A South Korean company has launched the production of COVID-19 rapid antibody testing kits at its subsidiary at Manesar in Haryana, with a capacity of making 500,000 kits per week, to meet the needs of the Indian market.
The author is an industry veteran with interests in capital market