India’s gain could be China’s loss in the great supply chain reallocation
Machine operators clean solar panels at Premier Energies Solar on the outskirts of Hyderabad, India, on January 25. The recent trend of countries and firms trying to diversify their supply chains has been music to the ears of India, which has set itself ambitious targets for increasing manufacturing’s share of the country’s GDP. Photo: AP The pre-pandemic approaches to supply chains were conditioned on the assumption that global links were reliable, predictable and cost-effective Covid-19, geopolitics and labour market dynamics are driving firms and countries to reassess and look to new locations such as India, Mexico and Southeast Asia for diversification Globalisation is being rewired, from how it operates to what it fundamentally means. Reshoring remains a dominant topic . Discussions at August’s Jackson Hole economic symposium in the US centred around structural shifts in the global economy, with speeches focused on the looming “great reallocation”. Broadly speaking, data continues to highlight that companies have diversified their supply chains , with plans for much more to come. Supply chain localisation, amid trade tensions, geopolitics, energy security and the risk of supply chain disruptions, is likely to remain a key theme for the next decade. The supply chain management strategies that prevailed before 2020 were focused on achieving cost efficiency . Firms scoured the globe for the cheapest suppliers, which in turn often resulted in widespread and complex supply chains that spanned national borders. Another goal was to keep inventories as lean as possible to minimise the cost of financing. This move towards supply chain complexity evolved over decades, motivated in part by the rise of Japanese manufacturers whose exports were considerably more competitive than those of their rivals. One key element of this competitive advantage was the practice of “ just in time ” inventory management, which subsequently became widespread. Concurrently, policymakers’ commitment to pursue a more globalised economy, including efforts to bring down tariffs and remove barriers to capital flows, contributed to vertical specialisation. This allowed firms and countries to concentrate on certain links in the supply chain. India, Vietnam to gain from supply chain shifts away from China This trend was reinforced by a reduction in underlying transport costs, as well as advances in information and communication technology. Firms were increasingly free to seek out the world’s cheapest suppliers. At the same time, this process tightened global interdependence, especially between East Asian economies and the rest of the world. These approaches were conditioned on the assumption that global links were reliable, predictable and cost-effective. However, the system’s vulnerabilities were highlighted by the pandemic and exacerbated by geopolitical tensions. As supply chain disruptions wove their way through the global economy, they forced companies and governments alike to rethink, reinvent and reinvest in their supply chains. One highly ambitious home-shoring test case is 2022’s US Chips and Science Act , which is providing some US$280 billion in new funding to bolster research and development and the United States’ domestic semiconductor industry. The legislation spurred the Taiwan Semiconductor Manufacturing Company, the world’s largest chip maker, to invest US$40 billion in two factories in Arizona , with the potential of greatly boosting the US’ ability to craft large volumes of semiconductors. Supply chain shifts have also resulted in investments outside the US. Notably, the technology supply chain has witnessed rising investment in areas outside China for several years now. Smartphone and tech hardware assembly has been highly concentrated in China, but suppliers are working to introduce new production capacity, especially in Mexico, India and Southeast Asia , where nations such as Vietnam and Thailand should see a rise in areas of manufacturing such as wearables, electronic components and batteries. India is also well positioned to benefit from the pattern of shifting supply chains . The focus has been on indigenisation as the government has taken significant steps to increase exports and rationalise imports. This could help India address some of its long-standing issues, such as manufacturing’s low share of GDP, which has been stuck around 15 per cent for the past decade. Additionally, the country is running a high current-account deficit. But India is projected to reach US$1 trillion in goods exports by 2028, representing a steep 17 per cent increase. In addition, New Delhi aims to increase manufacturing’s share of GDP to 25 per cent from the current 17.7 per cent by 2025. As part of that effort, it is addressing all its legacy bottlenecks linked to industrial production and is focusing on improving the ease of doing business . […]
