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Workers in a textile workshop in Dongguan, Guangdong province, China.  (Photo: Bloomberg)
Workers in a textile workshop in Dongguan, Guangdong province, China. (Photo: Bloomberg)

India is chasing an elusive China dream

  • India’s attempts to attract factories from China have underestimated the Middle Kingdom’s competitive edge
  • Post covid-19, companies will increase inventories or relocate some supplies to locations closer to home markets rather than move production in a big way

BENGALURU : A decade ago, as China’s labour costs began to rise by double-digits in industrial provinces such as Guangdong, the Hong Kong-based Epic Group rapidly expanded its garment factories in Bangladesh to take advantage. Today, Epic, which makes casual shirts, lounge and work clothing, and now masks and scrubs, has 25,000 workers working in Bangladesh and a couple of thousand each in Vietnam and Ethiopia. Orders from its retailer customers in the US are communicated electronically to its warehouses and back to Epic’s factories in Asia.

Until last year, the company, founded by Ranjan Mahtani after he left Mumbai to make a career in Hong Kong in his late teens, had no investments in India. Last year, Mahtani progressed rapidly with permissions to set up a factory in Jharkhand that was to open last month. Epic was about to lease land when the covid pandemic struck.

“I haven’t even looked at the blueprints," Mahtani said, as Epic has mothballed its plans. “The world is not just on hold, it is in a rewind situation. When there is a major shift like this, sometimes you go backwards. People will be looking for consolidation (of factories and production)," he added. The Bangladesh garment industry association estimates a loss of $3 billion in orders.

Against this backdrop, the Indian government’s plans to attract companies seeking to relocate manufacturing from China, reported by Bloomberg early this month, by developing a land pool of 460,000 hectares is destined to run into global headwinds.

A wholesale shift of supply chains from China is unlikely for the simple reason that it is the factory of the world; no other country boasts the dense supply chains for products ranging from apparel to smartphones to suitcases. While countries will want to stockpile key medical supplies and products such as N95 masks, moving production out of China is not feasible for most companies.

Moreover, the domestic market of the world’s second-largest economy has for some time now been a major factor for global companies to invest there. “China’s growth has become less intertwined with global supply chains in the last decade," said Jonathan Woetzel, senior partner with McKinsey and Co. in Shanghai. “That’s less a function of multinationals withdrawing from China and more a function of the relative importance of the China market."

Worries about overdependence on China abound but these are likely to result in companies increasing inventories to provide a cushion for disruptions or relocating some supplies to locations closer to home markets—Slovakia, say, for the EU—rather than move production in a big way.

Still, there are opportunities at the margin for countries with lower wages than China. This week, the Uttar Pradesh government’s decision, along with a few other Indian states such as Madhya Pradesh and Gujarat, to controversially suspend a wide swathe of labour laws appeared to have scored an early success when a German orthopaedic footwear brand said it was moving its China production to the Agra factory of Iatric Industries.

Universe of suppliers

Uniquely in the developing world, China combines a large domestic market that dwarfs India’s, middle income wages and highly productive workers with First-World infrastructure such as six-lane highways and ports that offer rapid customs clearance. As some electronic goods and components sometimes cross borders 20 to 30 times, speed is critical.

Add to this, a dense universe of suppliers, often managed by Taiwanese and Hong Kong companies who have been playing the globalization game for about half a century. Vietnam is the only country that comes close—it has among the lowest covid cases in Asia.

Tellingly, Vietnam’s exports in 2019 rose 8% to $264 billion, of which its exports of smartphones and spare parts—the country is a major production base for Samsung—amounted to $51 billion. On its current rate of growth, its merchandise exports will surpass India’s soon.

Opportunities missed and own goals scored by India over the past couple of decades will handicap the Narendra Modi government’s attempts to attract factories from China. For starters, the government has misdiagnosed China’s competitive edge. Land and flexible labour laws are important but only as part of a much larger matrix of factors such as electricity costs and logistics. Infrastructure, ease of business and tariff regimes matter at least as much, and these are all criteria on which India scores poorly.

New Delhi’s red carpet looks more likely to trip up new entrants, given that tariffs have been raised in the last four budgets—turning back a quarter of a century of trade liberalization since 1991—and this government’s apparent lack of interest in free trade agreements that have benefitted the exporters of Vietnam, Bangladesh, Ethiopia and Cambodia.

The Modi government abruptly decided to opt out of the Regional Comprehensive Economic Partnership (RCEP) last year after signalling it was keen on joining. Japan’s efforts to include India in a recent RCEP meeting were rebuffed by New Delhi, according to The Hindu. India has for some years now balked at a free trade agreement with the EU that would benefit apparel manufacturers because domestic lobbies make giving up hefty tariffs on luxury cars and wine difficult.

In the past, the Congress-led coalition sometimes seemed inconsistent on trade, but the Modi government has seemed fundamentally opposed to seizing the opportunities of global trade despite its Make in India programme—even more so after the Prime Minister’s speech this month about “being vocal about local."

“How do you square ‘self-reliant India’ with engaging with the world," said Shivshankar Menon, former national security adviser who was Indian ambassador in Beijing when China joined the World Trade Organization in 2001. Menon believes part of the problem is also that large sections of Indian industry are protectionist at home while enjoying the privileges to move and raise money abroad.

Menon believes India should concentrate on developing stronger trade and commercial relationships within its neighbourhood in South Asia while also engaging more with the nations of South-East Asia. India’s “emotional" competitiveness with China, evidenced in seeking to take advantage of a possible post-covid backlash against China, is a damaging distraction.

The earlier predictions

Similar predictions of a massive shift in production moving out of China to those being made today were made back in 2010. At that time China’s most industrialized province, Guangdong, sought to move up the manufacturing value chain by mandating that factories raise salaries for workers by double-digit levels annually for five years. The charismatic Guangdong party secretary at the time, Wang Yang, described pushing out the production of toys, shoes and other labour-intensive products and replacing them with manufacturing of products such as liquid crystal displays, high-speed trains and auto production as a move to “Empty the cage and let the right birds in."

With wages rising sharply because the push also coincided with labour shortages in southern China resulting from the one-child policy China had pursued since the 1970s, it seemed preordained that China would at last concede a large share of labour-intensive production.

Time and again, however, Hong Kong and Taiwanese entrepreneurs found ingenious ways to reduce their workforce and keep factories in south China, at most moving further north within China. They cited an ecosystem of suppliers and some of the most efficient ports in the world to explain their reluctance to move, even as the labour shortages intensified.

As this huge industrial policy gamble played out, I had a ringside view as south China correspondent for the Financial Times. At one massive job fair in Dongguan, agents for factories seeking workers chased after a young woman riding past their booths in a cycle-rickshaw, who looked as if she were Cinderella arriving at the ball.

Then, in 2012, on a factory visit to Milo’s Knitwear International, which made polo shirts, I saw what appeared to be sleeping compartments for astronauts. These were actually two dozen robots, supervised by two humans. The Dongguan factory had only 150 employees.

Despite some labour-intensive production moving to Vietnam and Bangladesh, a decade on, China still bestrides apparel and clothing accessories exports like a giant fending off Lilliputians.

In 2019, China’s exports in this sector totalled $94 billion. Bangladesh and Vietnam were distant seconds at about $29 billion each, India’s declining share has put it fifth with $11.4 billion—just ahead of tiny Cambodia (population 17 million).

Moreover, although the Chinese Communist Party ensures that the unions it controls make industrial action much less likely than even in Vietnam, in many respects, China ensures stricter labour protection and better social security provisioning than India does—as the ongoing crisis of migrants who worked as contract labour with few safety nets demonstrates.

The Chinese advantage

In macrocosm, China’s strengths in industry after industry and large local market makes a large shift away to India, whatever land for factories is on offer, impossible. Supply chains turn out to be harder to rip apart than pulling out railway tracks with bare hands, even when an intemperate White House is breathing fire. An American Chamber of Commerce survey in China released last month found the vast majority of US companies had no plans to move production outside the country. “China appears ahead of the global curve when it comes to restarting the economy," AmCham China president Alan Beebe said.

China + 1 as a sourcing strategy again goes back a decade or so but multinationals have had limited success diversifying away from China. Moving supply chains in electronics has made some headway, but here too, the shifts predate covid. Multinationals had started diversifying high-end production of servers, modems and routers and the kind of products needed for 5G telecommunications to other locations a couple of years ago. The US recently announced sanctions on supplying computer chips to Huawei and its affiliates, but India is not in a position to benefit.

By a wide margin, China remains a net importer of technology when measured by payments on intellectual property patents. The lucrative business of organic light-emitting diode (OLED) panels used in the manufacture of expensive smartphones has long been a specialization of Korean and Taiwanese companies, for instance.

China, however, dominates the manufacture of lower-value components for smartphones as well as of their assembly. Chinese smartphone giants such as Lenovo and Xiaomi now figure prominently on a list of the largest manufacturers in the world. Kathrin Hille, Greater China correspondent for the Financial Times in Taipei, who has for several years covered Foxconn, the largest contract manufacturer in the world for Apple, predicts that smartphone assembly is unlikely to move substantially from China.

“Foxconn has more than a million workers in China. If you ask manufacturers about moving to Vietnam or elsewhere in South-East Asia, they say they can’t build factories of more than 20,000 workers there," Hille said, pointing to Foxconn townships in Zhengzhou and Shenzhen in excess of 200,000 workers each. “It’s not just a question of population size. The model doesn’t work elsewhere."

Nagesh Sharma, who runs a sourcing company for children’s clothing made mostly in Africa and Jordan for American retailers, has come to believe the manufacturing export model doesn’t work for India for a number of reasons ranging from Indian factories’ lack of scale, erratic administering of rules and regulations, and poor logistics and infrastructure.

Since the lockdown exacerbated some of these issues, he, along with many other exporters, believes India might permanently lose market share to other developing countries. India’s exports for April declined by more, a staggering 60%, the government announced last Friday.

Sharma has recently had a client cancel an order he had sourced from a factory in Noida that was ready to be sent on a cargo flight from Delhi airport on 25 March, but remained marooned at the factory because moving across three states became an insurmountable hurdle. “This is a small story but it’s multiplied many times over. We are in for a bloodbath," he said.

Rahul Jacob is a former Hong Kong bureau chief for the Financial Times

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