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- China’s zero-covid-19 policy is pushing companies to diversify supply chains away from the country.
- They were already moving out due to geopolitical tensions and Trump-era tariffs.
- But it is not easy to completely replace China’s supply chain ecosystem in any country — even one as vast as India.
China’s zero-covid policy may just be doing what Donald Trump failed to fully accomplish during his presidency — shifting global supply chains away from China for the first time in 40 years.
Trump imposed tough tariffs against China in 2018 and 2019 to counter what he called unfair trade deals with the US, prompting retaliation from Beijing and triggering a trade war.
And while many companies have begun to discuss moving their supply chains out of China as a way to distance themselves from geopolitical risks, it’s really the pandemic — and China’s zero-covid-19 policy — that has made it important that its supply chain doesn’t depend from one country.
“Geopolitical tensions alone may not have led to this level of realignment of supply chains, but COVID certainly provided that extra vision, that extra charge, that extra fuel to the fire,” Ashutosh Sharma, director of research at market research firm Forrester, told Insider. .
Tech giant Apple is the latest example of burnout from over-reliance on Chinese production lines, with iPhone production hit by China’s relentless pursuit of zero-virus COVID. Apple is now accelerating its effort to shift its production from China to other Asian countries. But where to go?
Apple’s biggest supplier to Foxconn is India, as are other chipmakers, after the Biden administration in October imposed export controls on shipping equipment to Chinese-owned factories that make advanced logic chips.
“India has a large labor pool, a long history of manufacturing and government support to boost industry and exports. Because of this, many are exploring whether Indian manufacturing is a viable alternative to China,” Julie Gerdeman, CEO of risk for supply chain management platform Everstream, said. Insider.
But that move is easier said than done.
India is the world’s largest democracy and that makes decision-making much more complicated
As a large economy with a young population, India has the potential to be a manufacturing powerhouse. But the South Asian country is also notorious for its bureaucracy and red tape.
“It’s far from a place where businesses can just walk in and set up shop without too much corporate compliance,” said Sharma, who is based in India. “I’m sure China has those issues too, but its ability to move quickly on those compliance requirements is much greater than in India, because India is much more democratic and there are simply too many stakeholders to satisfy here.”
India was ranked 63rd in the World Bank’s list of 190 countries ranked on their ease of doing business in 2019. Although this was an improvement from its 142nd position in 2014 when Prime Minister Narendra Modi took office – it still lagged behind Cinema, which was in the 31st position in 2019 — last year the index was compiled before the World Bank scrapped it after a data-rigging scandal. Data irregularities improved China’s position in 2018, according to a World Bank audit published in December 2020.
India also has a history of protectionism, which makes it less competitive in terms of attracting large investments.
“China manufactures on a large scale, while most factories in India are small and medium-sized because of federal regulations and protections designed specifically for small and medium-sized businesses,” Gerdeman said.
China has built a manufacturing ecosystem over 4 decades
Indian Prime Minister Modi has been working to attract foreign direct investment, or FDI, since he took office in 2014, sending FDI to a record $83.6 billion last fiscal year, according to government data.
India certainly has advantages in terms of demographics, geography, the infrastructure that is there, much of which has been built in the last few years,” Sharma said. “Obviously it can scale, but what it doesn’t have are all the pieces of the puzzle.”
What he means is that China has managed to build a value chain so extensive that almost everything needed to make a product can be sourced and sourced domestically, allowing for cheap, large-scale production. In contrast, India does not yet have this capability, which takes years to build.
That’s because manufacturers always start factory operations with an assembly line before developing local finished goods supply lines in a “backward integration” process, Sharma said.
“That supply chain takes time to build, because even when you’re sourcing it internally, the quality isn’t as good at first, your scale isn’t as high, and you run into those problems.” So yes, it can be done, but it takes time,” he told Insider.
The once-burnt, doubly-shy companies will not go all-in on India this time
In any case, companies are unlikely to flock to India as they have to China as it has proved too risky, experts say.
And it’s not just Foxconn and Apple that went all-in on China and are now suffering as a result: US sportswear giant Nike, Japanese carmaker Toyota and South Korean tech titan Samsung are all among the many companies experiencing prolonged supply chain problems due to their reliance on a manufacturing giant.
“They want to diversify their sources,” Sharma said. “If you look at Foxconn and Apple, they have already shifted a significant amount of production to India and I’m sure to other countries like Vietnam and a few other places. This is precisely because they want to diversify, not to depend on one country, like China, in several locations.”
This means more complex supply chains, but they will be diversified from the raw material stages onwards, he said.
“If they can build two or three reliable places to source from, they will still have alternative sources even if something happens to one location in the future,” Sharma said.
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