India wants to unseat China as the new ‘factory of the world’. But it won’t be easy
- For multinational manufacturers, the pandemic has driven home the importance of diversifying supply chains, with many now looking to India
- With its large economy and young population, India has the potential to be a manufacturing powerhouse. But its bureaucracy and red tape are infamous
“The geopolitical tensions in themselves may not have resulted into this level of realignment of supply chains, but Covid certainly provided that extra vision extra fillip, the extra fuel to the fire,” said Ashutosh Sharma, a research director at market research company Forrester.
“India has a large labour pool, a long history of manufacturing, and government support for boosting industry and exports,” said Julie Gerdeman, the CEO of supply chain risk management platform Everstream. “Because of this, many are exploring whether Indian manufacturing is a viable alternative to China.”
But the move is easier said than done.
India isn’t the easiest place to do business
As a large economy with a young population, India has the potential to be a manufacturing powerhouse. But the South Asian country is also infamous for its bureaucracy and hindering red tape.
“It’s far from a place where businesses can simply come in and open a shop without having too many company compliances,” said Sharma, who is based in India.
“I’m sure China has those issues too, but its ability to move fast on those compliance requirements is much higher than in India, because India is much more democratic and there are just too many stakeholders to satisfy here.”
India also has a history of protectionism, which makes it less competitive in terms of attracting large investments.
“China manufactures at scale, while most factories in India are small and midsize due to federal regulations and protections designed specifically for SMEs,” Gerdeman said.
India lacks ‘all the pieces of the puzzle’
India’s Modi has been working on attracting foreign direct investments, or FDI, since he took office in 2014, sending FDI to a record US$83.6 billion in the last financial year, according to government data.
“India certainly has advantages in terms of demographics, in terms of geography, in terms of the infrastructure that exist, much of which has been built in the last few years,” Sharma said. “It can obviously increase the scale, but what it does not have is all the pieces of the puzzle.”
What he means is that China has managed to build up a value chain so extensive that almost everything required to make a product can be sourced and acquired in the country, which allows for low-cost manufacturing on a large scale. In contrast, India doesn’t have this capability yet, which takes years to build up.
That’s because manufacturers always start factory operations with the assembly line before starting to develop local supply lines for the finished products in a “backward integration” of processes, Sharma said.
“That supply chain takes time for it to build because even when you are sourcing it internally, the quality is not that good initially, your scale is not that high, and you run into those issues. So yes, it can be done, but it takes time,” he said.
Companies are now wary of over-reliance
Companies are unlikely to flock en masse to India like they did to China because it’s proven too risky, experts said.
“They are looking to diversify their sourcing,” Sharma said. “If you look at Foxconn and Apple, they have already moved a significant part of production to India and I’m sure to other countries like Vietnam, and a few other places. That’s precisely because they want to diversify, from having dependency on one country, like China, to a couple of locations.”
This means more complex supply chains, but they will be diversified all from raw material stages, he said.
“If they can build two or three dependable places where they can source from, they will still have alternative sources even if something happens to one location in the future,” Sharma said.