India woos companies that are leaving China

Thu, Aug 06, 2020

HARISH MEHTA


THE migration of global companies out of China has begun as they are worried about rising labour costs in that country and the disruption of their supply lines caused by the coronavirus pandemic. India is making a powerful pitch to benefit from the shift.

In an early-bird example, the German firm Casa Everz, the producer of the healthy footwear brand Von Wellx, is moving its entire production from China to India, signalling a successful beginning to the Indian government's push to woo companies that are anyway leaving China.

The Von Wellx factory is being set up in the city of Agra in Uttar Pradesh state in collaboration with the Indian firm Latric Industries which will market the brand that is sold in over 80 countries and has more than 100 million customers. Udaybhan Singh, the Minister for Micro, Small and Medium Enterprises in Uttar Pradesh, welcomed the German company that would help create over 10,000 direct and indirect jobs.

It is believed that dozens of global companies are shifting a part of their supply chains out of China, though many will likely relocate to other destinations such as Vietnam and some Asean countries. They wish to move out because they have suffered disruptions in Chinese cities due to strictly enforced lockdowns.

Companies in the United States, Canada, Europe, Japan and Australia have been hit with supply chain shocks as the flow of materials from China was disrupted by the pandemic. Their chief executives are instructing their supply chain officials to develop alternative sources that are completely independent of China.

Thomas Vajda, senior adviser in the US Department of State's Bureau of South and Central Asian Affairs, has declared: "India can quickly become a favourable jurisdiction for more of the industrial activities that are happening currently in China."

To start with, Indian officials abroad have reportedly contacted more than a thousand companies in the United States and other countries with offers of incentives for them to move activities to India. Some of these initiatives are not new and are part of New Delhi's policy to woo foreign capital under its "Make in India" programme.

The Indian outreach occurs at a time when US President Donald Trump has blamed China for spreading the Covid-19 pandemic. Indian Transport Minister Nitin Gadkari recently commented that China's current troubles were a "blessing in disguise" for India to attract investment.

The Uttar Pradesh government started talks in May with companies in the US, South Korea, Japan, Thailand the European Union. Uttar Pradesh Chief Minister Yogi Adityanath has set up an economic task force that is coordinating visits by investors from Thailand in October, and South Korea soon afterwards.

The state of Haryana is also in the hunt. Chief Minister Manohar Lal Khattar has stated: "Haryana has chalked out an aggressive strategy to woo the investments and companies intending to either shift from China or setting up of a new manufacturing facility in India."

Deepak Bagla, the chief executive of Invest India, the government's national investment promotion agency, has stated that the pandemic had given a sense of urgency to these companies' efforts to reduce the risks of operating in China. And Nisha Biswal, president of the US-India Business Council, believes that global companies that were already manufacturing in India may be the first off the blocks to reduce production in their Chinese factories, and ramp up production in India.

The Indian government is taking a cue from Japan which had announced a US$2.2 billion package in April to help Japanese companies shift their manufacturing out of China after the outbreak of the pandemic. Prime Minister Narendra Modi announced a US$266 billion package in May to stabilise the Indian economy and to attract investment. Earlier in April, India unveiled a Production Linked Incentive Scheme for electronics manufacturing, offering financial incentives to producers of mobile phones and some electronic components to start or expand their existing domestic manufacturing in India.

PLANNING TO MOVE

Global firms that are looking at India include the US medical equipment giant Abbott Laboratories, and Johnson & Johnson. It is believed that around 200 American companies are planning to move their production to India.

A significant signal of encouragement has come from the American mega firm Apple which has been talking to the Indian government to produce iPhones worth about US$40 billion over the next five years by increasing production at their current contractors in India. An Indian official reportedly confirmed that Apple's plans were to diversify its manufacturing outside China.

Following the German footwear brand Von Wellx's recent shift of its manufacturing base from China, Indian economists are hoping that more will follow. Pronab Sen, a former head of the National Statistical Commission, has stated that the pace of investments in India was slowing and the trend of production shifts into the country would help boost the economy over the long term.

While Indian officials are keen for global companies to move to India, the reality is that supply chains linked to production units take several years to establish, and the existing chains in China are extremely sophisticated with large ports and highways as well as excellent logistics. Companies based in China have come to expect similar infrastructure in countries where they might move to. They will carefully study whether the infrastructure, including logistics, in India match up.

To set the record straight, companies started moving out of China almost 10 years ago as Chinese labour costs began to rise. The shift has accelerated in recent years along with the pickup in Chinese operating costs.

And to put it in proper perspective, India is just one of several low-cost Asian countries where multinational manufacturing companies are considering relocating their production. Although India has taken various initiatives to woo investors, it remains to be seen whether it will emerge as a preferred destination.

The Japanese financial group, Nomura, has found that of the 56 companies that moved their base from China in 2018-19, Vietnam attracted 26, Taiwan drew 11, Thailand eight, and only three companies went to India.

The Indian authorities have already made much progress to install a business-friendly environment, but they must not lose the momentum.

The writer is founder editor-in-chief of The Calcutta Journal of Global Affairs