By Deeksha JanianiThe world is a more stressed-out place today compared to five years ago, and a big reason for that is China.
China's current leader Xi Jinping has proved to be a thin-skinned and power-hungry man. Under him, China has made aggressive territorial claims in the South China Sea, Taiwan and in the Himalayas, causing its relationships with India, the US and Europe to deteriorate. China is fast becoming the unpopular kid in class, and negative views of the country are near historic highs.
China however, is a major player in global supply chains. These supply chains are increasingly at risk as tensions rise, particularly in the semiconductor chip industry, which is concentrated in a few countries. Taiwan’s TSMC chips for example, account for one-third of new computing supply. These chips power our smartphones, electronics, AI and advanced missiles.
Faced with Chinese aggression and American sanctions, multinational companies are belatedly trying to diversify their supply chains across industries. Companies like Apple, Google, Sony, Adidas, Nike and Samsung have already set up shop in other Asian countries as a hedge against supply chain risks. This trend is likely to intensify if the relationship between China and the West continues to deteriorate.
The global supply chain rejig gives India a once-in-a-millennium opportunity. India has built-in strengths that would help it to take advantage as the world searches for a China alternative: a young workforce, a large base of entrepreneurs and the Centre’s push towards manufacturing. But is India doing enough?
In this week’s Analyticks:
- Can the tiger beat the dragon?: India has a golden chance to boost manufacturing and exports. But there are obstacles in its way
- Screener: Indian companies set to gain from shifting global supply chains
Let’s get into it.
India needs to get its act together fast, as global supply chains shift away from China
This isn’t the first time that China has presented India with an opportunity in world trade. Since 2008, China has been exiting low-cost and labour-intensive manufacturing as it moved up the value chain. This opened up a $150 billion opportunity for India.
However, India managed to capture only 10-15% of the market vacated by China. Most of this low-end space was snapped up by other Asian countries like Vietnam and Bangladesh. Despite the Indian government's efforts to boost domestic manufacturing with schemes like ‘Make in India’ and PLI, little changed on the ground.
The share of manufacturing activity in India’s real GDP has remained flat in the past seven years, indicating weak domestic and export demand. Exports clocked a growth of just 4% CAGR in FY15-FY22.
Compare this with Vietnam, which saw a sustained rise in its manufacturing activity and double-digit growth in its exports between 2014-21. This was led by sectors like textiles, footwear and furniture.
India’s services exports are growing at a much faster clip than goods exports, thanks to business services like accounting, audit and R&D.
An unequal relationship: India exports raw materials to China, imports components, finished goods
India has barely moved up the value chain when it comes to merchandise exports. It was mainly exporting raw materials and intermediate goods to China in 2021. India's mix is comparatively more diverse for the US, as textiles and pharma exports come into play.
Over 50% of India’s imports from China consist of capital goods and consumer durables. This reveals a key weakness for India: the lack of a component manufacturing ecosystem.
It is often cheaper for India Inc to import finished goods and key inputs from China. An IIFT study showed that Indian companies preferred Chinese suppliers across industries like pharma, telecom and textiles, both due to price and better quality. "Without Chinese imports, pharma manufacturing in India would come to a halt," one observer noted.
However, there are advantages that India can leverage as countries increasingly opt to trade with trusted allies, popularly known as ‘friendshoring’.
Where does India hold an edge over China?
One long-standing factor playing out in China is rising labour wages.This has prompted China to shift away from labour-intensive manufacturing in the past decade.Between 2013 and 2022, hourly wages in China doubled to an average of $8.27, while they remain below $3 in India, Vietnam and Thailand.
Business disruptions during China's ‘zero-covid’ days, and the whimsical decisions of a single leader have also sped up the supply-chain ‘de-risking’ drive. In contrast, India offers a stable and democratic government committed to pro-reform policies.
India’s younger demographic is also a natural advantage. The median age in India is only 28, while it is 39 in China. Effectively, India has a higher number of young, energetic people available for work in factories.
India however, is still struggling with structural problems, many of which came to the forefront during Apple’s recent entry into the country.
India has a long way to go before it can emerge as a global manufacturing hub
Apple faced many teething issues while setting up operations in India, including the inability to find local partners similar to its 150 component suppliers based in China. To manage this, India is giving out faster clearances to Apple’s Taiwanese and Chinese suppliers to set up their presence in India.
Poor production yields, lack of product designers, and lower flexibility among Indian manufacturers are other gaps Apple is working to resolve. In addition, there is the attitude issue. A former Apple employee interviewed by the Financial Times said that “there just isn’t a sense of urgency” in India.
Jamshyd Godrej, Chairman of Godrej & Boyce, highlighted that it’s the ease of doing business which caused Vietnam to jump to the front, ahead of India. He said, “In Vietnam, when you have an industrial park, the park authorities take care of every type of clearance. It is literally a one-stop shop.”
India also faces issues such as poor port infrastructure, policy inconsistency, socialist-era labour regulations, and poor learning levels among its students, which must be addressed in order to improve the country's competitiveness in the global manufacturing landscape.
What can be done to ensure that India doesn’t miss the bus again? Sunil Vachani, chairman at Dixon Technologies, lists three key things that should be prioritized – “We need to achieve large scale in manufacturing to be globally competitive. The time has come for mega factories. We also need a vibrant component ecosystem. And we need to design in India”.
Fate has smiled upon India owing to China’s missteps. But this time, it is competing with other Asian nations for a larger share in the global manufacturing pie. India will need to think big and act fast to win this race.
Screener: Nifty 500 companies that will gain from shifting global supply chains
This week, we take a look at stocks that stand to gain from the China+1 strategy. This screener reflects companies that have a global presence and are likely to see QoQ revenue growth of over 5% in Q4FY23 and revenue growth of over 10% YoY in FY23.
Industries like electrical equipment, pharmaceuticals and consumer electronics feature in the screener. Major stocks in the screener are Larsen & Toubro, Varun Beverages, Havells India, Voltas, Natco Pharma and Amber Enterprises.
Natco Pharma may see the highest revenue growth of 70% QoQ in Q4FY23, according to Trendlyne’s forecaster. ICICI Direct reports that the company plans to expand its presence in other geographies and in the crop protection segment in Brazil, Canada and China. This move is likely to contribute significantly to revenue growth in the medium to long-term.
Forecaster estimates Varun Beverages’ quarterly revenue to increase by 62.1% QoQ in Q4FY23, with an 18.7% YoY growth in revenue for FY23. The company is set to increase its capacity by 20%, which will be operational before the summer, according to Motilal Oswal.
Amber Enterprises may clock an estimated revenue growth of 42% QoQ in Q4FY23 and 43.3% YoY in FY23. ICICI Securities sees strong growth from the refrigeration and air conditioning, and electronic component segments, which are focused on exports.
You can find some popular screenershere.
