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Will India Be Able to Replace China as a Global Factory?

Former Managing Director of Ahmedabad Stock Exchange
Jul 1, 2020 6:38 AM 4 min read
Editorial

Speaking at the Fortune Global Forum in Guangzhou in China in December 2017, Apple CEO Tim Cook explained why Apple continues to favour China as its central base for manufacturing iPhones.

"China has moved into very advanced manufacturing, so you find in China the intersection of craftsman kind of skill, and sophisticated robotics and the computer science world. That intersection, which is very rare to find anywhere, that kind of skill, is very important to our business because of the precision and quality level that we like. The thing that most people focus on if they're a foreigner coming to China is the size of the market, and obviously it's the biggest market in the world in so many areas. But for us, the number one attraction is the quality of the people"

Cook revealed the number one reason why Apple prefers China for outsourcing the manufacture of its iPhones, AirPods etc. The number one reason for Apple to choose China is not cheap labour, but skilled labour.

As Cook further elaborated:

"I visited ICT - they manufacture, among other things, the AirPods for us. When you think about AirPods as a user, you might think it couldn't be that hard because it's really small. The AirPods have several hundred components in them, and the level of precision embedded into the audio quality - without getting into really nerdy engineering - it's really hard. And it requires a level of skill that's extremely high."

The Apple CEO was also all praise for the quality and the quantity of skill sets available in China. There's a confusion about China, he opined. The popular conception is that companies come to China because of low labor cost. "I'm not sure what part of China they go to, but the truth is China stopped being the low-labor-cost country many years ago. And that is not the reason to come to China from a supply point of view. The reason is because of the skill, and the quantity of skill in one location and the type of skill it is. The products we do require really advanced tooling, and the precision that you have to have, the tooling and working with the materials that we do are state of the art. And the tooling skill is very deep here. In the U.S., you could have a meeting of tooling engineers and I'm not sure we could fill the room. In China, you could fill multiple football fields."

He also gave full credit to the robust pan-China vocational education system:

"The vocational expertise is very very deep here, and I give the education system a lot of credit for continuing to push on that even when others were de-emphasising vocational."

In recent weeks, Prime Minister Narendra Modi spoke about the idea of “Atma Nirbhar Bharat” (self-reliant India).

But what does Atma Nirbhar Bharat really mean? What does it imply for future policy? “Atma Nirbhar Bharat” is not mere indigenisation for import substitution. The Prime Minister emphasised that his vision includes active participation in post-COVID global supply chains as well as the need to attract foreign direct investment (FDI).

COVID-19 has created a cold war kind of situation between the West (United States + Europe) and China. Reports suggest that US tech giants such as Apple, Microsoft and Google are moving their manufacturing facilities from China to other potential countries which offer cheap skilled workforce and low tax regime.

Consider the above speech of Tim Cook for a moment. Can any country quickly roll out a robust, highly skilled and a jumbo manufacturing ecosystem to easily replace China?

Indian policy makers are content to ease the license-permit raj a bit here and there and hope to attract MNC giants to relocate to India from China. But our policymakers are yet to articulate any long-term policy to develop the advanced and complex manufacturing skill sets, like that of China, in the Indian workforce. The Indian Government is yet to roll out a pan-India robust vocational educational system like the one that China has. China’s school education system since the 1970s taught theory and practice as a combined curriculum. In India's education system, mythology is being incorporated as an ancient science but it has no space for students to learn and apply their knowledge in real situations or for any hi-tech vocational skills.

Atma Nirbhar Bharat may remain mere wishful thinking, like "Make in India", if it does not incorporate all the essential and critical components required for India to become a part of global supply chains. "A scheme would be rolled out soon to enable investors fleeing China to set up base in India', the Government said in April-end. “During the meeting, the PM directed that the action should be taken for a more proactive approach to handhold investors, to look into their problems and help them in getting all the necessary central and state clearances in a time-bound manner,” the Government had said in a statement.

Will a tech giant like Apple be willing to jump ship to set up a manufacturing base in India based solely on the assumption that a state government gives it a fast clearance? Central and state government clearances are a mere hygiene factor. Faster government clearances alone will not motivate MNCs to relocate their factories from China to India. The more pertinent question to ask ourselves is: Has India equipped its labour force to challenge the Chinese skilled labour force? 

India has to do much more work in terms of revamping the education system, worker skill sets, intersection of different skills, availability of abundant quantity of different manufacturing skills at identified locations, logistics connectivity, a simplified and friendly tax regime etc. In order to replace China in the global supply chains. These are the most difficult tasks required to attract global manufacturing to India...and we are complacent and lacking in most of them, if not all. In the process, our demographic dividend has become a wasted resource and our much-hyped programmes like "Make in India" and "Atma Nirbhar Bharat" have remained mere slogans.

FIN.

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