Opinion | India’s gain could be China’s loss in the great supply chain reallocation

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Globalisation is being rewired, from how it operates to what it fundamentally means. Reshoring remains a dominant topic. Discussions at August’s Jackson Hole economic symposium in the US centred around structural shifts in the global economy, with speeches focused on the looming “great reallocation”.
Broadly speaking, data continues to highlight that companies have diversified their supply chains, with plans for much more to come. Supply chain localisation, amid trade tensions, geopolitics, energy security and the risk of supply chain disruptions, is likely to remain a key theme for the next decade.
The supply chain management strategies that prevailed before 2020 were focused on achieving cost efficiency. Firms scoured the globe for the cheapest suppliers, which in turn often resulted in widespread and complex supply chains that spanned national borders. Another goal was to keep inventories as lean as possible to minimise the cost of financing.
This move towards supply chain complexity evolved over decades, motivated in part by the rise of Japanese manufacturers whose exports were considerably more competitive than those of their rivals. One key element of this competitive advantage was the practice of “ just in time” inventory management, which subsequently became widespread.

Concurrently, policymakers’ commitment to pursue a more globalised economy, including efforts to bring down tariffs and remove barriers to capital flows, contributed to vertical specialisation. This allowed firms and countries to concentrate on certain links in the supply chain.

India, Vietnam to gain from supply chain shifts away from China

This trend was reinforced by a reduction in underlying transport costs, as well as advances in information and communication technology. Firms were increasingly free to seek out the world’s cheapest suppliers. At the same time, this process tightened global interdependence, especially between East Asian economies and the rest of the world.
These approaches were conditioned on the assumption that global links were reliable, predictable and cost-effective. However, the system’s vulnerabilities were highlighted by the pandemic and exacerbated by geopolitical tensions. As supply chain disruptions wove their way through the global economy, they forced companies and governments alike to rethink, reinvent and reinvest in their supply chains.
One highly ambitious home-shoring test case is 2022’s US Chips and Science Act, which is providing some US$280 billion in new funding to bolster research and development and the United States’ domestic semiconductor industry. The legislation spurred the Taiwan Semiconductor Manufacturing Company, the world’s largest chip maker, to invest US$40 billion in two factories in Arizona, with the potential of greatly boosting the US’ ability to craft large volumes of semiconductors.

Supply chain shifts have also resulted in investments outside the US. Notably, the technology supply chain has witnessed rising investment in areas outside China for several years now.

Smartphone and tech hardware assembly has been highly concentrated in China, but suppliers are working to introduce new production capacity, especially in Mexico, India and Southeast Asia, where nations such as Vietnam and Thailand should see a rise in areas of manufacturing such as wearables, electronic components and batteries.
Opinion | India’s gain could be China’s loss in the great supply chain reallocation - Informative Updates™


Biden tours new Taiwanese chip-making plant in Arizona, fans US-China semiconductor rivalry

Biden tours new Taiwanese chip-making plant in Arizona, fans US-China semiconductor rivalry

India is also well positioned to benefit from the pattern of shifting supply chains. The focus has been on indigenisation as the government has taken significant steps to increase exports and rationalise imports. This could help India address some of its long-standing issues, such as manufacturing’s low share of GDP, which has been stuck around 15 per cent for the past decade.
Additionally, the country is running a high current-account deficit. But India is projected to reach US$1 trillion in goods exports by 2028, representing a steep 17 per cent increase. In addition, New Delhi aims to increase manufacturing’s share of GDP to 25 per cent from the current 17.7 per cent by 2025. As part of that effort, it is addressing all its legacy bottlenecks linked to industrial production and is focusing on improving the ease of doing business.

Mobile manufacturing is one of India’s success stories. It fell to insignificant levels after Nokia’s India manufacturing operations shut down in the mid-2010s, but the government took measures to revitalise the sector. It introduced the Phased Manufacturing Programme and raised import duties on finished mobile phones.

India then followed up with import duties on certain components to promote the “assembly, programming, testing and packaging” model of manufacturing. It enjoyed some success through this initiative, with the number of mobile phone manufacturing plants rising from just two in 2014 to 105 in 2019. Production increased from US$11 billion in 2017 to US$30 billion in 2021, while exports in that time frame rose from US$200 million to US$4 billion.

Opinion | India’s gain could be China’s loss in the great supply chain reallocation - Informative Updates™
People work on a mobile phone manufacturing line at a factory in Noida, India, on October 23, 2019. Mobile phones have been one of India’s success stories as it tries to revitalise its manufacturing sector. Photo: Shutterstock
Other schemes with a focus on increasing scale and added value followed. India introduced the Electronics Manufacturing Cluster and a scheme to promote programmes for the manufacturing of electronic components and semiconductors in 2020, which essentially offered capital expenditure subsidies. This was followed by the Production Linked Incentive scheme to encourage local production, allowing for 4 to 6 per cent incentives on incremental indigenous production.

Reshoring, nearshoring and friend-shoring are undoubtedly in focus for the global economy, and opportunities are vast. However, supply chain rewiring is complex as it requires substantial investment and is likely to take years to bear fruit. Complexities flow from decisions made by firms about production, shipping and inventory management.

Producing requires setting production plans, finding suppliers, locating workers and the decisions of millions of people about whether to enter the labour force and, if so, what job to take. Geopolitics, incentives and labour market dynamics are at play and will collectively conspire to define the real winners of this great reallocation.

Ecaterina Bigos is chief investment officer of core investments (Asia ex Japan) at AXA Investment Managers

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