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Home / Opinion / Columns /  The opportunity for India as supply chains reorganize

A global supply-chain shock started in China with the advent of the covid pandemic in early 2020. It has rumbled its way through trade and manufacturing across the world, with both supply and demand see-sawing over the past 18 months. As the pandemic subsides, strategies for sourcing, production and manufacturing are undergoing a marked change.

The pandemic exacerbated and exposed vulnerabilities that were already taking shape in prior years. The growth rate of global trade in goods had started slowing from 2008 onwards, from annual levels above 4% to 3% for the decade after. A US-China trade war and the rise of economic nationalism around the world caused global trade in goods to plateau in 2018. As global output recovers sharply in 2021 and 2022, so too will trade, but it will likely be many quarters before it catches up with its previous trajectory. Recovering from a sharp fall, world merchandise trade is expected to grow by 10.8% in 2021, exerting further pressure on containers, ports and supply chains.

As demand recovered this year around the world, supply and logistics chains collapsed, exposing shortages of many critical components like semiconductors, rare earths for industrial magnets, active pharmaceutical ingredients (APIs) for drug manufacturing, high-density interconnect circuit boards and precision castings. The pandemic caused a reduction in the number of shipping vessels, which in turn left containers stranded in inland depots and stuck at ports. This has led to a rise in freight prices, with some routes registering 500% increases. Inland trucking freight prices in the US have increased 36% year-on-year to keep pace with clogged ports in Los Angeles and Long Beach. In turn, the pressure on logistics chains has increased the working capital requirements and costs of small and medium enterprises, with payment cycles increasing by several weeks.

Global manufacturing firms are currently in a scramble to adapt to current supply chain issues but also transform their ‘lean manufacturing’ into ‘risk-adjusted agile’ supply chains. The first step in this process is a non-trivial requirement to map out supply chains in depth with a critical assessment of vulnerabilities to a single geography, sole supplier, etc. Newly-developed agile supply chains must be able to address vulnerabilities related not just to the global trade system, but also to extreme weather events that are becoming increasingly commonplace as a result of climate change. Just last week, a deadly storm cut off road access to Vancouver port, which was already reeling from a logjam in container traffic.

Toyota, a global leader of supply-chain management practices, had already modified the ‘just-in-time’ approach that it pioneered in the 1930s, to instead build four months of inventory for critical parts (about 1,400 of the 30,000-odd parts that go into a car). While Toyota weathered the pandemic’s initial quarters very well, lingering supply chain issues are beginning to slow its production. Other firms like Black & Decker have moved manufacturing closer to customers. Firms are looking for greater visibility and reliability in their supply chains and are adapting through stock-keeping-unit rationalization, promoting digital and autonomous suppliers, and converting their hitherto linear supply chains into agile networks. Some companies have begun to hold intermediate inventory as safety stock. Cutting-edge technologies include the use of 3D printing to reduce time taken to make moulds and complex metal shapes, and real-time tracking with internet-of-things devices that feed artificial intelligence systems for supply- network management.

For India, this presents a major opportunity and a challenge. Well designed and implemented schemes like the Production Linked Incentive (PLI) plan have drawn investment and firms to India. However, its continuing success will depend on dramatic improvements of India’s logistics capacity and capability, consistency in regulation and tax policy, and governmental non-interference in the conduct of business.

Nhava Sheva Port, India’s largest, ranks No. 35 on the global port capacity list and handles just a tenth of Shanghai port’s capacity and an eighth of Singapore’s. Other enablers, such as reliable and consistent electricity, inter-modal freight transfers and inland waterways, have an even longer path to traverse. Indian technology entrepreneurs can make a material contribution by building SaaS platforms to handle evolving and complex global supply chain networks.

China will remain a major pillar in the new interconnected supply chain world because efficiency and capital frugality will still be desirable to global manufacturing firms. As China turns its focus inward through its ‘dual circulation’ strategy and firms seek to improve visibility and reduce vulnerabilities, we will see a material change on the margin. Those countries that organize themselves to take advantage of this will benefit, but it will take rigorous planning, implementation and consistency. Direct manufacturing employment in the new age of digital and autonomous production may only be modest (an estimated 700 workers produce 100,000 Apple iPhones), but services that surround these units should be meaningful generators of employment. Contradictory policy objectives, like self-reliance combined with openness and retroactive vilification of globalized firms, will prove self-defeating.

P.S: “If you do not change direction, you may end up where you are heading," said Lao Tzu.

Narayan Ramachandran is chairman, InKlude Labs. Read Narayan’s Mint columns at www.livemint.com/avisiblehand

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