Attract Foreign Companies Exiting China To Achieve PM Modi's 5 Trillion Economy
| Major General Dilawar Singh - 15 Apr 2020

The COVID19 pandemic has affected businesses across the world and lawmakers are intensifying efforts to move their supply chains out of China. India, with huge manpower, existing availability of few like manufacturing units, strong national leadership in PM Narendra Modi and his team which has already improved ease of doing business rankings provides a reasonable opportunity to such companies. However, the concern is that unless India moves faster, others may have already seized the opportunity.

By Maj Gen Dilawar Singh

New Delhi, 15 April 2020: No doubt the criticality today is saving of lives of fellow citizens in view of the COVID 19 pandemic, claiming huge numbers and causing innumerable loss of lives. However, in order to sustain the lives so saved, post lifting of lockdown, there will be a greater criticality staring at these citizens, namely the livelihood. The State of economy, as it is prevailing, and the aspiration to build a five trillion economy make it imperative to pull all plugs to ensure its revival and set a pace that is essential. This necessitates inviting maximum foreign investments and increase foreign exports.

If planning and preparation for grabbing the opportunities are not done immediately, the available opportunities may cease to exist.

The delay in informing the world about the pandemic and few other related incidents have created a certain impression about the ambition and designs of China.

A large number of countries now feel that time has come to reduce dependence upon China for manufacturing and a strong need to create self-reliance of critical needs and where feasible shift manufacturing out from China to other suitable countries.

After three decades of building up manufacturing bases in China, costs had started rising even before the trade war, with examples like a 25 per cent tariff on the lighting products which helped accelerate a shift that was set in motion 18 months ago – moving production bases out of China to Thailand, Bangladesh and other countries.

This was the situation playing out in boardrooms around the world,  January 2020 as international companies accepted the reality that the US-China phase one trade deal was unlikely to improve the situation for their Chinese-based operations

Rising labour and environmental costs, an increasingly regulatory environment, the threat of more and higher tariffs, along with a sharp increase in the perception of risk associated with living and working in China meant that the manufacturing exodus that began at the end of the last decade would continue.

Although it was well known  that the “Goldilocks Zone” provided by China’s industrial heartlands for the last 30 years – in which the combination of costs, quality, human resources and infrastructure which was the main attraction – could not be matched in India, Bangladesh, Indonesia, Malaysia, Mexico, Thailand, Vietnam or anywhere else.

It is being felt that with some companies having already landed that Vietnam is already full, now, you have to wait in a queue. Right now, there's no waiting in Thailand, but it will too get full soon.

The trade war tariffs, resulted in China falling behind Mexico and Canada to drop from first position to be the third-largest trading partner with the USA.

A 22 per cent fall in Chinese exports to the US from a year earlier, including items like cellphones was seen last year. Instead the US started buying more goods from the countries to which Chinese-based manufacturers are fleeing.

With the U.S.-China trade war last year and the outbreak of the new coronavirus, American technology firms Apple, Microsoft and Google have reportedly looked to move more production of their hardware products out of China,  the world’s second-largest economy.

Google and Microsoft are accelerating their efforts to shift production of hardware to other parts of Asia, the Nikkei Asian Review reported last week.

Besides the above mentioned, many companies have been seriously exploring supply chain risk mitigation strategies. When corporates want to move out and make investments, they can for which specialists act as the bridge as they work closely with local governments and businesses to make it happen. Given the post-outbreak of pandemic and the apparent  momentum — this could all play out more quickly than we expect.

The coronavirus pandemic has affected businesses across the world and lawmakers intensifying efforts to move their supply chains out of China.

UBS’ Evidence Lab’s sixth US CFO survey findings released recently suggest over 76 per cent of respondents are looking to shift supply chains as a response to protectionist policies such as trade tariffs.

66 per cent of the respondents said they are moving production facilities, too, as a response to protectionist policies, 10 per cent of the respondents are considering India for new incremental investment, compared to 14 per cent in the past two surveys. At the same time, ASEAN countries have seen some pick-up from 11 per cent in the last survey, to 15 per cent in this survey. It appears that respondents looking to make an incremental investment in India have declined

Japan has earmarked ¥243.5 billion of its record economic support package to help manufacturers shift production out of China as the coronavirus pandemic disrupts supply chains between the major trading partners.

The extra budget, compiled to offset the devastating effects of the pandemic, includes ¥220 billion for companies shifting production back to Japan and ¥23.5 billion for those seeking to move production to other countries. With the current robust Indo Japanese relations and an unprecedented friendship between the heads of the two countries, Narendra Modi and Shinzo Abe, the opportunity is real and strikable.

The companies would like to move to countries with:

(i) Working environment almost as good as China;

(ii) Manufacturing costs which are similar as in China;

(iii) An attractive long-term investment climate in terms of Ease of Doing Business;

(iv) Sound institutional quality

(v)  Transportation costs

(vi) Transaction costs

(vii) Emerging Market spectrum

(viii) Currency volatility

(ix) The market size (GDP).

(x)  The skill quality, discipline, optimum output and employee behaviour

(xi) Other aspects of sustenance and profitability and quality of governance.

India has the manpower, but skill levels fall short and government rules are relatively restrictive.

The good part is that India has improved its ease of doing business rankings in the recent past, under Modi's initiative, second that all of these measures mentioned above are eminently feasible. The concern, however, is that unless India moves faster, others may have already seized the opportunity

 India would do well to abandon its overconfidence that investors will come simply for its large population. India will have to be seen as a country with not only better ease of doing business but also having better rule of law enforcement, better justice dispensing system and with greater labour reforms. The current out break of pandemic will also impose need for better health care system with an effective management in place. Unless we go scouting and inviting, demonstrating better opportunity, sustainability and accomodation, it may not be possible to get success in getting more companies to India.

India now needs to intensify a strategic push to undertake a concerted, whole-of-government push to boost investment levels and create the conditions manufacturers need to thrive, from steady power supplies to efficient port operations and customs clearance. Moreover, there is a need to understand the specifics of these businesses. Factories have unique requirements depending on what they make. This needs a all-in-one agency to overcome barriers, cut time constraints and facilitate smooth shifting in of the incoming companies.

 Ethiopia alone has opened nearly a dozen industrial parks in recent years and set up a world-class government agency to attract foreign investment. This has given it huge success.

The first set of companies leaving China started moving about two years ago, whereas, the second set of companies started moving out in mid-2019. The third major phase will start immediately as the Covid situation stabilises.

India has not yet been able to take major advantage of the opportunities of the first and second set of companies moving out of China.

The prevailing situation indicates that the existing indigenous industrial activity is unlikely to be able to increase the production, industrial expansion or job creation.

The rising rate of unemployment and the current state of the economy, hence,  have only two solutions. One foreign investment and additional industrial establishment and the second solution is job creation and better labour reforms including a transformational quality improvement of skill development.

The existing administrative setup inspite of its best efforts has made a small dent and has been able to get a very small success in getting the companies shifting out of China to India.

The coming few months are the last opportunity to get a larger number of the third and last set of companies moving out of China to India.

An effective option to get results is to set up an "Empowered Taskforce of Professionals" under the direct watch of PM Modi, with a clear mandate, responsibility, authority and resources to ensure that we are able to create the desired policy framework, incentives, homebound clearances, tax breaks and all essential provisions to ensure success and profitability of the incoming companies to a degree that all the emerging and new companies from US, EU and other regions look at India as the best option.

To construct a world class environment for foreign manufacturing companies, we need a greater integrity and honesty of purpose. A DNA change is not so quick. Yet, we can probably start on war footing, creating an Appex body out of people with proven record, people like Ratan Tata could  Narayan Murthy, Azim Premji, Sridharan of Metro, and many such men of mettle alongwith strong younger professionals who are both expert and passionate.  This kind of a  steering group could surely create a system that may yield results. The Government should support this wholeheartedly. A definite number of experts are willing to contribute their efforts towards Nation Building at this critical juncture.

Image - Modi-Abe & US-China Trade Deal File Pic, Courtesy- SCMP, ZEE News


(Major General Dilawar Singh, an ex-Infantry officer, who has served six tenures in Terrorist areas, commanded two Counter-Terrorist Battalions, is the only officer to have received three citations therein; He was in charge of Army Finance for the Indian Army and headed the financial research team. He is currently the Senior Vice President of the Global Economist Forum, ECOSOC, UN, is the director of a Global Chamber  and also heads a global youth initiative engaged in developing Patriotism & Nation-building among the youth)

Disclaimer: The opinions expressed in this article are the personal opinion of the author. The facts and opinions appearing in the article do not reflect the views of Indian Observer Post and Indian Observer Post does not assume any responsibility or liability for the same.



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