The key is to understand the reasons behind China’s rise to the top as a global manufacturer, which was highlighted in the first segment of this analysis: if companies decide to move their manufacturing plants and outsourced business operations from China back to the West, their objective of reducing costs cannot be achieved due to the high cost of labour and the tax implications. Therefore, companies would rather let their manufacturing plants remain in China than to move them back to the likes of the United States and the United Kingdom. This is where countries such as India come into play. 

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India has already emerged as a global hub for the software industry, and many technological giants such as Google have hired tens of thousands of Indian IT professionals in tech hubs such as Mumbai and Bengaluru. The country is now making the necessary regulatory changes to attract manufacturing companies as well. Some of these changes include:

1. Relaxing regulation regarding a company’s ability to fire employees;

2. Approving 100% ownership by foreign investors of a company based in India; 

3. Relaxing local sourcing rules that have historically prevented companies such as Apple from manufacturing their devices in India; and 

4. Reducing corporate tax rates for manufacturing companies. 

 

In addition to these measures, India benefits from its demographic characteristics as well: the young workforce, the low cost of labour, the close proximity to China that enables cheap imports and exports, the massive consumer base of over a billion people, and the strong economic growth expected in the next couple of decades, are some of the factors that make India a viable alternative to China. For many global companies, India is now the number one target market into which to sell their products and services, and it seems reasonable to move manufacturing to India to further reduce their costs considerably. This trend is very similar to what happened with China two decades ago: as China emerged as the most important target market for American companies, these companies were quick to move their manufacturing operations to China. 

 

The World Bank reported earlier this year that the ease of doing business in India had significantly improved over the last two years, which is yet another positive development. 

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Yet India is not alone in being an attractive new destination for companies: Mexico, Vietnam, and Thailand are also compelling alternative manufacturing hubs to China. 

 

Conclusion 

As Covid-19 wreaks havoc in global trade activities, the World Trade Organization expects a loss of approximately $50 billion in trade activities as a result of the manufacturing shutdown in China and has revealed in stark relief the current over-dependency on China. Many companies and governments are already forming plans to overcome this situation and diversify their supply chain operations across a few countries to avoid a similar setback in the future.

 

The increasing trade tensions between the United States and China is also playing a major role in this phenomenon, as companies seek to work around the tariffs imposed on China by shifting their manufacturing plants from China to other countries.

 

Contrary to the belief that these business operations will shift from China to the western world, there is good reason to believe that Asian countries such as India, Thailand, and Latin American countries such as Mexico and Brazil will be the main beneficiaries of this exodus due to in part to their broadly favourable demographic characteristics. 

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About the author(s)

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Harold Alby is a managing director and chief operating officer at Inova Capital. Justin Inniss is a managing director at Inova Capital.For more details on our insights please get in touch with us at Inova Capital AG on +41 415616905. Inquire about our ideas and nowcasting capabilities.