Business

China-PLUS-One is an opportunity for Indian firms

Srivats Ram

Srivats Ram

Trade relations between the U.S. and China haven’t been at their best in the past few years. Add to it supply-chain disruptions brought on by the pandemic, exacerbated now by the war in Ukraine... disruptions that have made global majors look beyond China for manufacturing bases or partners, in an approach now named the ‘China PLUS One Strategy’. Srivats Ram, MD, Wheels India, a prominent auto-components maker, said that the opportunity for companies of all sizes, is waiting to be taken. Even if the effects are not felt immediately on the ground, initiatives taken now have high chance of bearing fruit in the medium term, he pointed out. Edited excerpts from an interview:

Can you take us back in time on the reasons for global companies to look at China? 

When large manufacturing entities in the U.S. and Europe moved production to China in the 1990s, they knew they got a low manufacturing-cost base and also access to a big market for a large number of products. It offered a scale where making large investments in China made sense. Companies were able to be profitable. China became a manufacturing power house with global supply chains being quite dependent on China. A lot of international companies as well as Chinese firms became part of the global supply chain.  

And how has that changed in the recent past? 

The change in outlook towards China happened during Trump’s Presidency with his “Make America Great again’ theme. He introduced a duty structure that made it prohibitive for Chinese products coming into the U.S. That was the beginning for a lot of investors and companies in the U.S. to look at a China de-risking from a purely economic stand point. And they began to look at other sourcing bases.  

Has the pandemic hastened the global supply chain derisking strategy? 

During the pandemic, there were a lot of disruptions in many of the economies. This was exacerbated by the fact that different countries were in lockdowns at various points of time. When the large economies came out of the pandemic, there was a sudden demand. China’s position globally became one that was relatively anti-West in its leanings and outlook during the pandemic. China’s Zero-COVID Policy meant that there was industrial lockout and supply chains were not able to supply consistently. There was also the container shortage. Suddenly, lead times between countries increased. Reliability of the global supply chain went down. Not only the U.S., even Europe, which had been sourcing from China, has been forced to look at other locations for both availability and reliability of supply, as well as the cost factor. Zero-COVID policy, supply chain disruption issues, high freight rates and lead times from China – the confluence of all these factors have resulted in a China+1 strategy for many global companies. As the Chinese economy is shutting itself, global companies are exploring other manufacturing locations. 

So, what does this mean for the Indian manufacturing sector? 

It is a great opportunity for Indian manufacturers. Given the magnitude of Chinese exports, India will have big opportunities. While we have to compete with other countries on this, in core manufacturing sectors such as auto and auto components, engineering related products and chemical, a new world of opportunities has opened up. Global companies cannot avoid India as they have to look at derisking their supply chain. Cost advantage of manufacturing in India is still a significant factor from a lower cost sourcing point of view for global firms. It is important for Indian companies to realise what went right for China. Reliability, low cost, good quality and timely delivery made global majors comfortable to source from China. For Indian companies, there are a couple of factors [to review]. A large number of them have thus far looked at the domestic market for their business and export has come into play only when they have had unutilised capacity. This will now have to be seen as a separate business opportunity and they will have to invest in exclusive capacity to give the customer the confidence that they can produce in volumes and scale to make economic sense both to the buyer and seller. The quality of work will have to be high. That is a basic passport that’s required to gain credibility in the global market. 

Are Indian companies geared to leverage this opportunity? 

The establishment of the global supply chain was built over a period of time. The experience of some of these companies in India is relatively less. If India can quickly scale up capabilities and capacities, I do believe that there will be big opportunities to gain from China + 1 to actually make it a India+1 model for a large number of companies in the future. Indian exporters have matured but bad experiences linger longer than good experiences. There are specific expectations of quality in every country. So, a good bit of time has to be spent in understanding these quality expectations of global customers in different geographies. Reliability of supplies, high quality of the products and timely delivery will be important. Also, Indian firms will have to continue to support global companies even if domestic demand goes up. It will have to be a long-term separate business that they are committing themselves to. And, as you go global, local presence in target markets too may be required as it helps especially in challenging times. India has another advantage. The economy is slated to grow faster than most other large economies in the world. Even if it is not going to be as high as that exhibited by China in the 1990s and 2000s, there still is a great opportunity for Indian companies in terms of scaling and India could still replicate the China success story. 

What can the government do to ease this transformation?

The Indian government has already done quite a bit especially on improving the ease-of-doing business. They have incentivised new undertakings with lower tax. Ten years ago, no one would have imagined that the tax rate would be so low. The PLI scheme is a big push towards manufacturing locally and localising technology, strengthening our own manufacturing. This has been a very positive step. However, Indian businesses need to feel comfortable with their forward view, especially coming out of the pandemic, overcoming supply chain issues and the overall uncertainty. What is encouraging though is that manufacturing has been constrained more by supply-related issues than demand related. By and large, companies are not able to make enough of any product and it’s really the supply chain issues that are affecting the global economy. 

Indian firms have typically been conservative – they tend to adopt the safety-first-glory-if-possible approach. Won’t precious time be lost if they adopt the same approach now? 

It is a classic case of risk and reward. Being a niche player in the international market is one thing but mass production requires investment in scale, capability and service. It is in a sense like a new business for Indian companies. They should look at separating this opportunity from the domestic business. It has a higher risk but scaling up is possible and rewards can be high. International companies will look at only those who are willing to invest and persevere with their goals. 

What are the areas that you think are best suited in this emerging scenario? 

Within the manufacturing sector, any area that offers scale can be an opportunity. Where there is a relative labour arbitrage and there are requirement of physical skills as well as software skills, India could be more competitive. By and large, any product in which there is a healthy mix of labour in it, India would be cost effective. Also, in areas where we have specific manufacturing skill which is otherwise in short supply globally, India could build scale, competency and expertise. If Indian companies are willing to invest, there is an opportunity to be part of this global supply chain. 


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Printable version | May 22, 2022 12:12:58 am | https://www.thehindu.com/business/china-plus-one-is-an-opportunity-for-indian-firms/article65443033.ece