It’s Round 2 of China+1. India needs to Update the Playbook

India was among the gainers as a series of jolts forced the world to break a 40- year habit of seeing China as its sole factory floor. But as the East Asian giant gets its bearings back and more nations eye a piece of the manufacturing pie, policymakers need to update the playbook to become an export hub.

While Mexico, Vietnam and India have benefitted as manufacturers reconfigure production and sourcing strategies away from China, a recent BCG study says Morocco and Turkey are in a strong position to take advantage of this change to expand their export manufacturing. That could pose a threat for India’s plan to become an export hub, but the opportunity is that over 90% of North American manufacturing executives surveyed by BCG said they would continue to move more production and sourcing away from China over the next five years. So, the window to attract more companies isn’t closed.

The country is well poised to take advantage of the opportunity, says Ravi Srivastava, Global Leader-Operations Practice at BCG and one of the authors of the report. “We need to make our advantages count.”

One of the advantages the report talks about is the direct manufacturing costs in export. According to BCG’s calculations, the average landed cost of India-made goods imported into the US is 15% lower than that of goods made in the US. In contrast, the average US landed cost from China is only 4% lower against the US costs; it is 21% higher for goods subject to US tariffs. This helped Indian exports to the US rise 44% to $23 billion from 2018 to 2022, while China recorded a dip of 10% in exports to the US, according to the BCG study.

Srivastava sees more room to expand here. “If we take goods imports into the US from other geographies, India’s share is still small at less than 3%. In comparison, despite the decline, China still has almost 20% share. Mexico is close to 15% and ASEAN is about 11-12%,” he says.

Anchor Manufacturer Formula

The combination of competitive landed cost and low export share can be used to strengthen manufacturing and exporting capabilities. One way to do this is by identifying 20 products that it can make and export, says Ajay Srivastava, founder of New Delhi-based think tank Global Trade Research Initiative (GTRI).

“AI and automation-powered supply chain management tools shorten lead times by providing businesses with real-time visibility across cross-border, first, middle, and last-mile logistics. It helps manufacturers partner with the right logistics service providers to ensure service-level agreements are met, serviceability is enhanced and customer experiences are not compromised,” adds Chokshi.

He suggests the government invites one large global player from each product group to make in India. This focus on anchor manufacturers will lead to the development of an ecosystem around the product. The government must collaborate with such companies to understand their specific needs and offset price disadvantages effectively. Generic incentives often fall short in addressing the unique requirements of many segments, he says.

Experts use the example of Apple making iPhones in India to put this point across more clearly. Now more global corporations can be encouraged to set up bases in India as they know Apple has conducted thorough research on factors such as production costs, availability of skilled technicians and labour regulations. This will instil confidence in them that India offers a cost-effective solution for manufacturing needs.

Ajay Srivastava points to the automobile sector to show how anchor manufacturers help. The country is today a major auto manufacturer and exporter, but the seeds for this growth were sown in 1981 when the government established Maruti Suzuki. “In a decade, Apple may replicate what Suzuki achieved in the automobile sector during the 1980s. The entire automotive sector in India witnessed a remarkable 250% increase in productivity between 1983 and 1995. The government’s recent astute policy decisions have set the stage for such a transformation,” he says.

The GTRI co-founder identifies electronics (component manufacturing for products like laptops, tablets, TVs, washing machines and refrigerators), complex machinery, biosimilars, APIs, solar photovoltaics, lithium-ion cells and simpler items like high-fashion clothing and shoes as the products that could be on anchor manufacturers’ list.

Initially, the country might have to focus on assembling products. Many multinational electronics manufacturers have ramped up operations in India for assembling operations. Efforts are on to deepen the manufacturing process. Experts say it takes time to set up appropriate supply chains and develop skill sets in such segments. “For a country with such a diverse population, skills and various manufacturing and logistics hubs spread across a large geography, it takes time to establish the ecosystem,” says Bhavik Mota, Director, Maersk IMEA (Indian Subcontinent, Middle East and Africa).

The general view is that as the government introduces more manufacturing policies and increases spending, India will see more global manufacturers setting up shop here.

Focus on FTAs

At the same time, India has to watch out for the Association of Southeast Asian Nations (ASEAN). Exports from this grouping to the US have increased 65% over the past five years; India’s grew 44%, says Ravi Srivastava of BCG.

Trade agreements are a good way to increase exports. Using these pacts, companies can avoid paying tariffs and bypass protectionist policies. This enables them to export and sell goods in a foreign country at competitive prices.

Experts say India should have more free trade agreements (FTAs) with major importing countries. “Compared to ASEAN, the number of free trade agreements that India has is actually lower. Tariffs make a big difference to some companies. So, I think trade agreements are key. India is trying to sign many of those. But in terms of the number of pre-trade agreements, these are still lower than those of some of the other countries,” says Srivastava.

Vietnam, a part of ASEAN, has done relatively well in attracting companies such as Apple, Samsung, Google, Nike and Adidas because of its FTA with the European Union, says experts. The country also has a relatively skilled workforce at competitive costs and a growing electronics ecosystem. But the EU FTA lifted 85% of tariffs on Vietnam’s goods in 2020, boosting exports in electrical machinery & equipment, apparel, footwear and machinery & mechanical appliances.

The Southeast Asian country’s efforts to become an alternative manufacturing hub to China began much before the US-China trade war started. The country reaped the benefits of these efforts when the need to shift supply chains from China became urgent. Industry observers point out that India, too, has to constantly keep working towards becoming a manufacturing hub. Opportunities arise suddenly and stakeholders have to be ready to grab these quickly.

India has 13 FTAs with various geographies. But a problem is that some of these worsen the trade imbalance for the country. India should have targeted economies with which it had a trade surplus, say experts. They also say FTAs of the modern era have to cover more than just trade. The deals should also draw investments, skills, and technological partnerships and create employment opportunities across sectors.

Experts say FTAs should not only help India become an integral part of the global value chain but should also help it move up that value chain. The steps taken by the government towards building world-class infrastructure, empowering the workforce by reskilling and upskilling, and investing in research and development centres would help, they add.

‘Market-backed’ approach Proven manufacturing capabilities have helped some countries attract companies in segments like microchips. But this is just the initial phase of the supply chain shift. “The initial rush to shift manufacturing base to countries with already developed infrastructure is a short-term phenomenon,” says the Chief Strategy Officer of Allcargo Logistics, Ravi Jakhar.

This trend has to be sustained by implementing stable and long-term policies. Experts point out that companies will only invest if they can reap the benefits over decades. At the same time, policies must be suitable for a major chunk of industry. Ajay Srivastava of GTRI reiterates that generic incentives often fall short in addressing unique industry requirements.

Ravi Srivastava of BCG says, “A solution for a company operating in one industry will differ from that of one in another.” Even for companies within the same industry, the strategies will differ depending on the market.

What this means is that not all companies might prefer setting up a base in India. “For instance, if there is a company that has a big domestic market in India, it is easier for them to come to India. On the other hand, if the market they are serving in Southeast Asia is bigger, then they would rather go to Southeast Asia,” says Ravi Srivastava.

The BCG report — Harnessing the Tectonic Shifts in Global Manufacturing — states only 55% of North American executives have confirmed their production shifts have met its objectives, implying there isn’t a one-size-fits-all answer. It suggests a “market-back” approach — which means companies have to remain open to continuous learning from the market.

Companies looking to diversify supply chains should tailor the footprint to their industry and balance cost against other operating considerations. A successful footprint transformation can improve companies’ resilience and sustainability and cut their global manufacturing and supply-chain costs by 20% to 50%, the report states.

Logistics is Key

Apart from market and supply chain sensitivities, logistics plays a crucial role in companies deciding on a manufacturing destination. Building resilient logistics operations are critical when preparing for shifts in supply chains, say industry stakeholders.

BCG’s Srivastava says there has been some improvement on that front, but not enough. “I think it is a little patchy in India. There are some things that are very good, and there are some areas where the average travel time or delivery time is longer.”

Reducing logistics costs, shrinking overall lead and turnaround times, and building sustainable supply chains are key factors that need to be considered while building strategies to absorb supply chain disruptions, say experts.

“Technology will play a pivotal role here,” says Soham Chokshi, CEO & Co-founder of logistics solutions provider, Shipsy.

Countries can improve logistics facilities in a short span by using the latest technology. This will attract more manufacturers. Critical processes like procuring freight, tracking cargo across modes, line haul operations, compliance management, and last-mile delivery can be digitised relatively easily.

“AI and automation-powered supply chain management tools shorten lead times by providing businesses with real-time visibility across cross-border, first, middle, and last-mile logistics. It helps manufacturers partner with the right logistics service providers to ensure service-level agreements are met, serviceability is enhanced and customer experiences are not compromised,” adds Chokshi.

Better logistics also means easier transportation of raw materials. Improving this infrastructure is crucial if India has to stay ahead of competitors like Vietnam, which is seen as having a natural advantage because of its proximity to raw material sources in China. Besides, Vietnam’s business environment attracts manufacturers even though shipping cost from there to the US, South Korea and Japan is higher by 50–100% compared with India.

Ajay Srivastava says this shows how important it is to have an enabling environment. “It is crucial to maintain a stable policy environment without hastily implementing any disruptive changes,” he adds.