The Covid crisis hastened the adoption of China Plus One. Now, as another Covid wave in the East Asian country makes global corporations relive the pandemic nightmare, experts are observing a trend of “Minus China” strategy gaining ground among actors in the global value chains.
The world’s leading manufacturers are highly dependent on China — known as the world’s factory — for their sourcing and production operations. China Plus One — coined in 2013 — was all about these companies developing similar bases outside China simultaneously so that they are less reliant on one country. The Covid shutdowns, US-China trade war, supply chain disruptions and latest geopolitical developments forced corporations to adopt the Plus One strategy. The argument was that having other sourcing and manufacturing destinations would ensure their global operations do not get crippled if China faces a crisis.
Minus China, on the other hand, denotes manufacturers looking to move their operations out of China altogether. These corporations see this strategy as a prudent move in the face of the escalating crises in China.
Why Minus China is gaining ground
There are a host of reasons why Minus China is finding more traction. Most Western economies are distrustful of China. Beijing's recent threats to invade South Korea and its tacit support to Russia in the Ukraine conflict have widened this distrust. More recently, President Xi Jinping’s handling of the latest Covid crisis, the lockdowns and the protests against the government’s Zero Covid policy have raised red flags in many quarters.
The worst isn't over yet, though Covid restrictions have been relaxed. As the government has allowed travel, epidemiologists say, the whole of China is at risk now as the virus would spread to non-urban areas, too. Leading global epidemiologist and health economist Eric Feigl-Ding had said the country faced a “thermonuclear” Covid outbreak. This is a nightmarish scenario for global corporations that still remember factory shutdowns and long jams at ports in China.
Then there are problems related to labour issues, a ballooning real estate crisis and spiralling cost escalations. All these are diminishing the status of China as the world’s go-to manufacturing destination, experts say.
Global companies aren’t talking about Minus China as openly as China Plus One because most fear that making such statements public will sour their relationships with Beijing, and the repercussions wouldn't be pretty. So, the birth of this term has received little attention. But Minus China is being talked about in hushed tones in corporate corridors. Industry experts say that corporations are seriously considering the possibility of quitting manufacturing in China. They point to reports of Apple moving iPhone production out of China in the wake of violent worker protests.
Industry reports by research firms indicate several MNCs have moved out of China in recent years. Gartner’s survey of 260 global supply chain leaders in February and March 2020 found that 33% had moved sourcing and manufacturing activities out of China or plan to do so in two to three years. These firms cited various reasons: intellectual property (IP) theft, human rights violations in Xinjiang and the erosion of Hong Kong's autonomy, among others.
After the US-China trade war intensified, toy maker Hasbro announced it was moving its business out of China. Industrial tools and household hardware maker Stanley Black & Decker permanently closed its factory in Shenzhen in November 2021 after 25 years of operation reportedly because of rising labour costs. Companies like Dell had announced it would shift part of notebook production out of China. South Korea's Samsung Electronics shut its remaining smartphone factory in China in 2019. The big names in this bandwagon are not just IT and manufacturing firms, but even investment firms. On November 14, 2022, Blackrock, the world's largest asset manager, announced that it had "indefinitely" postponed the launch of its exchange-traded fund in China. The Financial Times attributed it to the escalating US-China tensions.
The advantage for India
Several of these firms, including Apple and Samsung Electronics, have increased their presence in India lately. The Modi government’s production linked incentive (PLI) schemes have helped attract many. Experts say with companies like Samsung and Apple, looking at India favourably, it would not be difficult to attract other companies.
Industry observers say China Plus One had itself encouraged the Indian government to make policies that attracted shifting companies. It had also raised the game of many MSME players — the backbone of the manufacturing and supply chain ecosystem. Vijay Kalantri, Chairman of MVIRDC, World Trade Center (WTC)-Mumbai, a trade facilitation body, had estimated a value addition gain of $20 billion for India because of China Plus One, “if India manages to attract 1% of the value chain of China's annual exports (both goods and services) of $2.01 trillion.”
If China Plus One could do that, imagine what Minus China can do.
With China completely out of the equation, global corporations would have to look at India for sure, say experts. China Plus One was about having bases in China and also a place such as, say, Vietnam. In such a case, these companies could ignore India. But if China is out of the equation, then these companies cannot ignore India. No other geography will give them a comparable domestic market, talent pool, educated workforce, emerging opportunities and so on, they argue.
Global business advisory Nexdigm had noted that China's business loss has been a gain for several South Asian countries, and India, Thailand and Malaysia are emerging as top manufacturing hubs in Asia. “India specifically continues to enjoy the benefit of its large population, which helps in cost-effectiveness across various parameters such as utilities, factories, manpower, etc. A vast population provides a very large domestic market, enabling manufacturing at scale to bring in required efficiencies,” it added.
The US’ effort to create supply chains that exclude China is gradually leading to a restructuring of global supply chains, says Ajay Srivastava, Co-Founder of Global Trade Research Initiative, a research and strategy consultant. “The relocation of some large manufacturing firms shows that India is in a good position to benefit from this trend.”
Steps to manufacturing supremacy
India can position itself as an attractive destination for foreign investors if it has free-trade agreements (FTAs) with major trade partners of China. The government should expedite the FTA negotiations with the European Union, which is the destination for 15% of China's merchandise exports. Already, India has signed trade agreements with UAE and Australia, that together account for 3% of China's merchandise exports.
But to become the next China for global manufacturers, India needs to take a leaf out of Beijing's template, experts say.
Rajan Ratna Sudesh, Deputy Head and Senior Economic Affairs Officer, United Nations Economic and Social Commission for Asia and the Pacific (South and South West Asia Office), says time is of the essence if India is to bring in reforms that can leverage on the happenings outside. “Infrastructure bottlenecks at border points, seamless connectivity and procedural burden to do business are some areas that need urgent attention,” he says.
One of the first things to do is to have a conducive business environment for firms to invest. The World Bank’s latest Ease of Doing Business ranking shows India has more room for improvement. The country’s economy, dominated by a large informal base, also needs to scale up manufacturing capacity in a big way. This is needed to cut production costs. Economies of scale give China-based manufacturers an enormous cost advantage across marketplaces.
According to the United Nations Statistics Division, China accounted for 28.7% of global manufacturing output in 2019: India comprised a mere 3.1%. Recently, the Department of Investment and Public Asset Management (DIPAM) Secretary, Tuhin Kanta Pandey, had said manufacturing comprised 16% of India’s GDP, and there was a need to take it to about 25%. “For this, we have to improve manufacturing,” he has said.
Policy consistency has been elusive
The first steps have to be more like giant leaps. Pouring money into some strategic segments is one way to start, says former WTO Director-General Pascal Lamy. “First, invest heavily in infrastructure: energy, transports, mobility, research. Second, open the Indian economy to more foreign competition in order to accelerate productivity gains in industry as well as in services and agrifood,” says Lamy in an email interaction.
Trade experts also emphasise that overtaking China in export and manufacturing will require employing a multi-pronged strategy — one that is economically holistic, not subjected to arbitrary U-turns, remains consistent and is driven ground-up.
According to Bhaskar Chakravorti, Dean of Global Business at the Fletcher School at Tufts University, an immediate issue for India is infrastructure. Access to logistics facilities, reliable transport systems, energy and water sources are essential for India to come anywhere close to China’s claim of being the world’s factory. “The second area where the Indian government needs to focus is on creating a consistent and predictable set of policies and tariffs as they relate to foreign firms. International companies can never be sure when the policies will be reversed or changed and tariffs imposed to favour national champions.”
Many stakeholders flag up the widespread variations in laws and their interpretations in India by the 28 states and 8 Union territories. In some cases, they say, there is a tug of war between the states and the Centre.
Bhaskar of Tufts University says businesses have to ultimately operate in a state. “While the central government plans FDI policy, the realities of operating happen at the state level. India works under a principle of competitive federalism — where the central government lets states compete to make themselves attractive to businesses. This leads to a fragmented system that can be confusing for international companies. The result is that different states have very different environments to facilitate the setting up and running of businesses.”
India has to promise seamless ease of doing business. China has been focusing on that for a few decades now. One factor that is favourable for India has been its democracy.
Lamy says: “Indian governance is over-bureaucratic, slow, cumbersome and should be streamlined. Yet, seen from Europe, we wish India remains a vibrant democracy, and not turn authoritarian, which entails an element of apparent and even real disorder. Diversity and differences are a richness which leads to more creativity and respect for human dignity. For a society to thrive in the long-term, power needs to be institutionally contestable and accountable, media needs to be free and courts independent. This is not just ideology, as results point to the same conclusion as seen in the case of Covid or the invasion of Ukraine.”
To be fair, the government has come up with a slew of attractive investment-friendly schemes to lure foreign businesses. Prominent among them is the flagship production-linked incentive (PLI) scheme. A recent analysis by Credit Suisse revealed that the scheme is skewed towards assembly-based operations for attaining peak revenue targets. It also said that while segments like advanced batteries are better placed to benefit from PLI, global companies are reluctant to enter other segments. This warrants policy tweaks.
Small firms need big help
An almost unanimous view among experts is that India should follow China’s example of helping small businesses scale up. Regulatory compliances are a key bottleneck for India’s MSME sector, which is responsible for over 48% of the country’s shipments. Easing business compliances and processes here will be key in pushing the country up the trade ladder and on a par with China.
Highlighting the compliance burden on MSMEs, Rishi Agrawal, CEO and Co-Founder, TeamLease RegTech, says an MSME deals with an average of 1,000 compliances annually, half of which carry clauses for imprisonment. “Labour laws account for 30% of acts and rules, 47% of compliances, and 68% of criminality in India’s employer compliance. Most of our labour laws were created in the colonial era when the country’s socio, economic and political context was different. The law of the land is fluid and changes over 4,000 times a year. If Indian entrepreneurs need to become competitive globally, they need an enabling regulatory ecosystem that is rationalised and simplified to eliminate redundancy and duplication. In addition, the deep-seated hostility and distrust in regulations where every 2 out of 5 compliances can send an entrepreneur to jail need an overhaul,” says Agrawal.
Until these issues are dealt with urgently, any hope of replacing China in the global value chains would be far-fetched.