Why India has to plan a marathon and not a sprint in attracting global supply chains
The Covid-19 pandemic has hit the global economy at an unprecedented scale and speed. Essential preventive measures led to the shutdown of offices, the stoppage of factory outputs, and disruption to global industries and their supply networks. Major industries including automotive, plastics and rubber, electronic equipment, pharmaceuticals, and medical equipment have been considerably affected. According to the World Bank, Global Value Chains (GVCs) are responsible for more than two-thirds of the world trade. The unfolding pandemic is deeply impacting the global manufacturing exports, reducing them by about US $230 billion due to significant supply chain disruptions.
International borders are closed for most countries, and businesses are reeling under the pressure of limited availability of raw material and workforce, in the face of lowering demand. The critical international flow indicators, such as merchandise trade and foreign direct investments, are expected to witness declines in the range of 13 to 32 per cent and 30 to 40 per cent respectively in 2020-21 according to Harvard Business Review. As per a March 2020 survey conducted by the Institute for Supply Chain Management, nearly 75 per cent of companies reported supply chain disruptions due to coronavirus-related transportation restrictions.
The pre-Covid era had many global players looking to diversify their supply chains to mitigate the impact of escalating trade wars. The US-China trade took a toll of US $84 billion in the second half of 2019. Later, when China adopted strict measures to contain the spread of the contagion, the slowdown in this global manufacturing hub had a cascading impact on the world trade. UNCTAD estimates that manufacturing slowdown in China can lead to a US $50 billion decrease in exports across global value chains.
The rapid spread of Covid-19 led various supply chains to be significantly disrupted, exposing the dependence of companies on a single country as a focal in their value chain. Therefore, there is a growing sentiment of partially relocating manufacturing operations to other viable destinations. Sovereign governments have come forward supporting this relocation strategy. Japan, for example, has set aside ¥243.5 billion (US $2.26 billion) of its record economic support package to enable manufacturers in moving their operations and supply chains out of China.
China's vast consumer base has driven its success in attracting global players to set up operations in the country. Global investors are looking for the best return on capital, access to skilled labour, robust infrastructure, which can support operations at a competitive cost and regulatory certainty.
As India fights its own battle with Covid-19, there is an emerging opportunity for the country to position itself as a preferred alternate destination. Many Indian states such as Uttar Pradesh, Haryana, Punjab and others are gearing to woo investors looking to shift their manufacturing facilities. The country's large workforce and consumer base are critical attractions for investors.
We should be enthused by the opportunity. India will see many good wins, including significant investment decisions in technology space that were thus far not forthcoming. Having said that, we also need to moderate our expectation of a tsunami of investments coming through. This is because fundamentally nothing has changed in the reasons why companies chose China or Vietnam over India in the first place. India must address some of the structural challenges in a time-bound manner to ensure that we don't lose interested investors to competing destinations such as Vietnam, Thailand and Indonesia.
During a recent discussion with the CEO of a Fortune 500 company having substantial operations in China, we asked if China is concerned about the chorus of relocation discussions. His answer was very relevant. He essentially stressed on three points — 1. China focusses on what global companies want - infrastructure, speed and cost of doing business. Those have not changed; 2. He himself has not seen any big companies moving out; and 3. China always knew with rising incomes, certain industries (mostly the ones not eco-friendly) will move out.
Without getting into whether the opinion is representative or the extent of opportunity, we believe there is an opportunity for India. It is an interesting point of view which should at the very least tell us that while we formulate strategies to engage global companies looking for alternative markets, it is pertinent to remain focussed on the fundamentals of investments — market, regulatory certainty, cost of doing business, and world-class infrastructure.
Matching China's agility and speed to suit investor requirements is the need of the hour, and it should be possible in the short term. Tesla's Shanghai-based giga-factory was built in record time: 168 working days. We need multiple such examples for India. We also need to create deep-rooted supply chain linkages within the local ecosystem and develop a robust common infrastructure that global players require. The country's investments in infrastructure will have to be expedited to leverage this opportunity and bring parity with global benchmarks, in terms of cost and access to a seamless power supply and multi-modal logistics. The development of industrial parks that can enable the plug and play model across industries, providing access to low-cost power and logistics can enhance India's competitiveness.
India has made global headlines of a steady increase in the World Bank's Ease of Doing Business (EoDB) rankings. However, this is also an opportunity for India to create a customised EoDB framework which can create impact at the grass-root level, which is entirely focussed on the cost of doing business. Many of our frameworks can be seen as compliance or input-oriented, as opposed to reality, and 200 per cent focused on outcomes. In line with the government's focus on easing the challenge for MSMEs, there is a need to create a framework that can provide support at the district level. Such a framework will also call for a renewed evaluation mechanism of the country's administrative arm, linking performance to impact made in the region, than just the number of announcements, media headlines, MoUs or notifications issued and money spent.
In my view, the uncertain regulatory framework in India impacts most global companies looking to set up manufacturing operations in the country. We do need laws that protect large investors from localised regulatory changes that fundamentally alter business viability.
When it comes to attracting investments, India needs to focus on cooperative federalism to drive the next phase of growth and position itself as a key hub in the global value chains. States should not compete to show how much more they can give, but should proactively engage with potential companies, trade associations, business chambers, and work closely with the government. They should focus on creating an ecosystem that attracts investors, which make projects viable and leverages states' inherent strengths.
As Olympic Gold Medalist Emil Zatopek once said, "If you want to run, run a mile. If you want to experience a different life, run a marathon." India has to prepare for a marathon, and not a sprint.
Also read: How a changing global order will emerge in the post-Covid world