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US Blames China for Coronavirus Outbreak: Can India Benefit From the Shift in Global Supply Chain?

May 18, 2020 11:36 AM 4 min read
Editorial

A swelling chorus of voices around the globe is asking China to pay up for the damages incurred due to the deadly coronavirus outbreak. The United States-led by President Donald Trump is leading the troop (no surprises there!) 

As the death toll reaches 85,000 in the US and more than 36m Americans file for unemployment benefits in the wake of the crumbling economy, the US insists that the virus “has become a global pandemic because of the lies and malicious cover up of the Communist Chinese Government.”

 

US blames China for coronavirus outbreak

 

Bit Trouble in Little China

Subsequently, a top US Senator Thom Tillis has unveiled an 18-point plan to hold China accountable, protect the economy, public health and national security.

We discuss the US's plan to safeguard itself and throw some light on how India stands to benefit from the whole situation.

Senator Tillis’s 18-point plan is divided into five parts: 1) Protect America’s Economy from China, 2) Sanction China, 3) Investigate China, 4) International Accountability and 5) Expand America’s Military Presence in Asia to Counter China.

Of these, a suggestion with the most ramification is perhaps moving manufacturing back to the US and gradually eliminating supply chain dependency on China.

It is no secret that the Chinese economy thrives as a manufacturing powerhouse. A mind-boggling majority of products carry the “Made in China” tag.

Now we all know that this is primarily because of the availability of a cheap yet highly trained labour force in China that  brings down the production costs (the labor cost arbitrage model). But there is more to it.

China has come to be known as "the world's factory" because of its strong business ecosystem, well-financed infrastructure, a solid safety and quality control regimen, excellent transportation and communication points , lack of regulatory compliance, low taxes and duties, and competitive currency practices.

And therefore, moving manufacturing back to the US would be no cakewalk, even for the world’s most powerful economy.

 

A Resentful Manufacturer

Any talks of bringing the supply chain back to the US would, in most cases, require hefty capital expenditures. Entire new factories need to be built, or the existing ones would need to be expanded. Moreover, any shift in supply chain would mean that whatsoever profit companies are making due to lower costs in China would be erased as they shift gears out.

A Disgruntled Customer

And as per this report, prices of about everything from sneakers to bluejeans to toys to flip-flops to iPhones are likely to  go up 15% to 30% in the second half of 2020, if the manufacturing base is shifted from China.

 

Back to Base

Now with the coronavirus ravaging economies, the thought of shifting dependence on China as manufacturing or a supply chain hub has resurfaced, ever so strongly.

In fact, the Japanese Government recently earmarked $2.2bn of its stimulus package to aid Japanese manufacturers to shift their production lines out of China and back to Japan.

Taiwan Semiconductor Manufacturing Co - the world’s largest contract manufacturer of silicon chips, has said that it would spend $12bn to build a chip factory in Arizona.

And this is where South Asian countries like Thailand, Bangladesh, Vietnam and the Philippines with their low labour costs would figure in.

In fact, the US is pushing to create an alliance of ‘trusted partners’, including Japan, South Korea, Australia, New Zealand, Vietnam and India - dubbed the Economic Prosperity Network - to work with to move the global economy forward.

But will India be truly able to capitalise on this worldwide flight from China?

Prime Minister Narendra Modi’s latest address to the nation called for a “quantum jump” for the economy and promised “bold reforms to create a self-reliant India.” Today it is the need of the hour that India should play a big role in the global supply chain,” he said.

Six years ago, PM Modi announced his intention to turn India into a global manufacturing hub, raising manufacturing to 25% of the GDP by 2022. Instead, the World Bank estimates that between 2014 and 2018 manufacturing declined marginally, from 15.1% to 14.8% of GDP.

Except for a few modest exceptions such as smartphone assembly units by Samsung, Apple and a clutch of Chinese brands, global manufacturers have largely stayed away.

 

An increasing number of companies have picked Vietnam over India as they relocate production from China

 

A recent study by Nomura revealed that of 56 companies that relocated production from China between April 2018 and August 2019, only three picked India. Nearly half went to Vietnam.

Why? 

Hint: On the Organization for Economic Development’s FDI Regulatory Restrictiveness Index, India ranks 62nd of 70 countries surveyed. Vietnam came in at 53.

Moreover, Vietnam’s openness to foreign direct investment, a relatively educated workforce, and a reputation for business-friendliness has made it the preferred choice.

However, it is only 10% of the size of China. Therefore, even if you moved just 5%-10% of Chinese production into Vietnam, you're going to max out the capacity of their workforce. This would in turn increase prices, rents and eventually make it  difficult for products to be produced there at the same competitive prices as one was getting it from China.

India on the other hand is huge. And with an expansive demographic dividend.

As per officials, India’s Trade Ministry has sought detailed feedback from US companies on changes needed to make the country’s tax and labor laws more favorable to companies.

This could present India with a chance to finally push through long-stalled reforms on land, labor and taxes that have hindered investment for years.

Meanwhile, the Modi Government is ramping up its efforts to shore up US investments and improve ties through corporate tax cuts, a $3bn defense deal, massive public rallies and others.

FIN.

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