‘Make in India’ Success will decide fate of ‘Boycott China’ Calls and ‘Aatmanirbhar Bharat’

There has been a strong anti-chinese sentiment prevailing in the country due to China’s initial handling of Covid-19 pandemic and the escalating border tensions between the two countries. PM Modi’s call for a “self resilient India” further strengthened these voices over last few weeks.

There have been several voices on the issue. Few voices very high on emotional quotient have been asking fellow Indians to immediately boycott Chinese products and delete Chinese apps. Then there have been voices which asked relevant questions like:

• “How does boycotting Chinese Products benefit India'”
• “Does this truly hurt China?”
• “Does India manufacture viable alternatives to many Chinese Products?”
• “What happened to ‘Make in India’ campaign?
• “Why aren’t global manufacturers investing in India rather than China”

Let us try to dwell further into the above questions and try to find some answers.

China is India’s largest import partner, but not a significant partner to China

• As of fiscal 2018-19, India’s imports from China were $70.3 billion or 13.7% of the total imports, which was the highest share among all nations.
• The imports from China were two times the imports from India’s second largest import partner – USA
• However, this formed merely 3% of China’s exports

Imports from China have been on decline since 2017

• The imports from China constituted 2.3% of India’s GDP as 2019 as compared to 2.9% in 2014
• Further, the rise in imports (on $ terms) during this period has been moderate at 3.2% CAGR

Trend in imports from China

Source: UN Comtrade, IMF

Share of different products imported from China

• Electronic Items constitute the highest share in imports from China with ~30% share followed by Nuclear reactors, Boilers and Mechanical Appliances (18% share)
• Further, out of India’s overall Electrical machinery imports, China’s share is around 40%; therefore India has high dependence on China in this category

Source: OEC

Do we have excess dependency on China in any product segment?

• India’s dependence on China in Bulk Drugs categories (raw material for pharmaceutical players) is high with ~68% share in India’s overall imports
• Further, across electronic product categories China is a major import partner for India: Consumer Electronic – 43% import share, Electronic components – 38%, Electronic Instruments: 30%
• China’s share in India’s imports of mobile phone components is a staggering 97%
• Therefore, India has very high dependence on China in all electronic items

It is important to note that India does not import only finished products from China. India imports many key raw materials from China due to substantial lower price offered as against manufacturing the same in India. For example, many Indian Pharmaceutical players procure raw materials or APIs from China in-order to reduce their overall manufacturing costs. This makes Indian players more competitive in the generic pharma space which enables us to gain market share in regulated markets of US and Europe. Therefore, in many cases, the end beneficiary of import is an Indian company as there is substantial value addition after import of raw materials.

One can argue that if the raw materials are also manufactured in India then the dependence on China will completely stop. However, supply chains evolve globally based on various factors including cost benefits, technological know-how, logistical ease etc. of every country. In case of pharma supply chain, China has been the major raw materials provider and Indian has been the supplier of end products i.e formulations (superior in value chain). Large scale manufacturing of commodities at low cost is China’s forte. The existing supply chain therefore benefits every stakeholder. However, Indian players have also been gradually looking to backward integrate and reduce their dependence on China. It is not a matter of knowledge or technical know-how in many cases, just business dynamics demand that companies import from China

High Growth for a country is preceded by period of high exports growth

A period of high growth for most countries is preceded by strong growth in exports. For India, the high growth in services exports especially during the first decade of 21st century led to a period of high growth. However, India directly leaped from agriculture to services, without witnessing a substantial boom in industrialization.

India should therefore concentrate on increasing its manufacturing base, provide impetus to exports and thereby promote growth rather than telling its consumer to consume domestic manufactured goods. As a country, India has been unable to attract many global companies to set up their manufacturing base in India though there has been some signs of change over last 4 years.

India’s export story yet to take wings

The exports from India have remain stagnated over the last five years. Though there has been a pickup post 2016, exports have witnessed a slump as a % of GDP

Trend in India’s Export

Source: DGFT

• The exports as a % of GDP dropped from a high of 18.1% in 2012 to 11.0% in 2019
• For a $13 trillion economy like China as well, exports constitutes around 19% of its GDP; among Asian peers, for Bangladesh this is around 16% and unusually higher for Vietnam at ~100%
• The drop in exports was primarily on account of drop in exports of minerals due to the mining ban imposed by Supreme Court in 2016 coupled with drop in global demand
• The mineral exports (HS Code – 27) dropped from around $64 billion in fiscal 2014 to $48 billion in fiscal 2019
• On the positive side, India’s export of Electrical equipment increased from $10.3 billion in fiscal 2014 to $12.8 billion in fiscal 2019

Overall, India’s exports has been very subdued over last five years which requires urgent course correction.

India and China have very different exports product portfolio

• Electronic and telecom equipment, machineries constitute major share in China’s export; for India, minerals, gems & jewelry, formulation drugs and organic chemicals are the leading products
• India’s exports to the United States constitutes Diamonds, Gems & Jewelry, Pharmaceuticals and textile products; for China, electronic equipment and reactors, boilers & machinery segment forms around 50% share

China’s share in global trade was ~17% in 2018, whereas India’s share was ~2.5%. Further, the competencies of the two countries are very different and perhaps it does not make sense to even have debate regarding India ‘replacing’ China as global manufacturing hub over short-run or next 5 years. Just like China cannot replace India as the ‘pharmacy to the world’, India cannot replace China in their area of competency

Exports from China have slowed down as well as global businesses look for alternate options due to high costs

• During 2013 to 2018, China’s exports grew at merely 2.4% CAGR as exports growth for flourishing electrical machinery and components (constituting ~29%) increased at around 2.5% CAGR
• The share of exports as % of GDP dropped from from around 23% in 2013 to 19% in 2018
• China’s export to Japan (constituting 6% of GDP) was in negative territory, as exports of electronic equipment as well as nuclear reactor dropped during the period
• Further, in 2019 the exports were further impacted due to its trade war with the US

As China’s economy prospered and wages increased, many global players started to scout for alternate options for their manufacturing bases due to increasing costs. Further, the US – China trade war further exacerbated the need for many players to shift units out of China.

China’s loss has been Vietnam’s Gain

• During 2013 to 2018, exports for Vietnam increased at 13% CAGR aided by a surge in exports of electrical machinery and electronic equipment
• The exports for the segment increased from $40 billion in 2013 to around $115 billion in 2018

This suggests that many electronic manufacturing players decides to set up their base in Vietnam as opposed to India or other developing country. But Vietnam emerged as a more favored location due to its proximity to China which meant the players shifting to the country do not have to completely re-align their supply chain. Also, the political system in Vietnam is similar to China which leads to less bureaucratic hassles for the companies.

Bangladesh continues to gain share (from India as well) in Textile segment

• The exports for Bangladesh as well increased at 8% CAGR during 2013 to 2018 driven the rise in textile exports
• The apparel exports grew from $26 billion in 2013 to $38 billion in 2018

Bangladesh has emerged as a favourable textile hub especially for the European countries due to its extremely economic manufacturing costs aided by very low wages  . Further, the FTAs (Free-Trade Agreements) with the European Union on account of its status as a Least Developed Country gives the country competitive edge over India. It is important to note that Bangladesh meets about 40% of its cotton requirement from India. However, Bangladesh has struggled to diversify its economy and textile remains the sole employment generator for economy.

What has India done till now to attract Investments

India has already taken some steps to reduce its imports and encourage local production of electronic items.

• Taiwan-based Foxconn (Hon Hai Precision Ltd) set up its first manufacturing facility/assembly line at Sri City (Andhra Pradesh) in 2015 for Chinese firm Xiaomi. In 2016, it set up its second facility for Apple
• Foxconn plans to further expand its production capacity for iPhones in India
• More than 95% of Xiami Mobile Phones sold in India are manufactured in the country, as per the company
• In-order to promote ‘Make in India’, the Government announced corporate tax rate of 15% for new companies set up in India post October 1 2019.

India’s exports of electronic items has picked up considerably

• India’s exports of components related to cellular network (HD Code: 851712) rose to $1.6 billion in fiscal 2019 from negligible amount of $212 million in fiscal 2018
• Further, during fiscal 2020 (from April 2019 to January 2020) the exports of these segment further rose to $3.1 billion

The Bigger Challenge – Manufacturing for the World

The global supply chain in the electronic space is strongly concentrated in China, Taiwan, Vietnam & South Korea. Therefore, though many global players are setting up facilities in India, the production will largely cater to domestic consumption. India has to strive further to make India a major destination as well. For example, Indian BIS Certification is not accepted in Europe which rules out the possibility of exports of electronic items to the region.

India is already known as the ‘pharmacy to the world’ with its strong presence in global pharmaceuticals market. Further, many specialty chemical players have also substantially benefited over last few years and ramped up their exports, as many Chinese facilities were closed down due to environment concerns.

As per our view, India already has lot of potential to increase its exports in the Pharmaceuticals, Chemicals space and minerals space. We should focus on further increasing our share in global trade segments where we already have strong presence.

India’s competition is with Asian peers such as Vietnam & Bangladesh, not China

It is important for us to note that the major factors which led to companies moving to China from the beginning of 21st century were low lead time in setting up the project, high availability of skilled labour, favorable labor laws, logistics support and large port infrastructure, etc. India will have to ask itself if it can provide all the facilities which global businesses enjoy in China.

Though India has made substantial improvement in ‘Ease of Doing Business’ report of World Bank (63rd Rank as of 2019), the land and labour laws have continued to be a major pain point for global businesses. Also, though India’s rank is better than Vietnam (70) and Bangladesh (168), preference for later two suggests that the decision of global businesses also depends on various political, economic and operational parameters. 

Vietnam emerged as the strong alternative and will continue to do so due to its proximity to China, minimum supply chain disruption, port infrastructure and similar political environment. Obviously, Vietnam does not have strong workforce as India. Bangladesh will be favored destination for textile due to low wage costs and free-trade agreements.

However, India has to ensure that if a global company sells large volumes of its products in India, the business should set up its unit in India atleast for domestic consumption to ensure reduction in imports and job opportunities. This should be our first stage to engage with foreign businesses across products. Once businesses enter our country, the supply chains will gradually strengthen with time and India may emerge as major base for exports over the long-run. In the meanwhile, India should aggressively develop its port infrastructure, logistics sector , provide a single window for all businesses interested to enter India and ramp up its campaigns such as “Skill India”. The large workforce availability will ensure that India always attracts interest for global players.

The mantra for global businesses should be : ‘First – Make In India For India and then gradually Make in India for the World’