Can India convert anti-china sentiment into an opportunity post COVID-19?

Chatter among global investors remain that India as an investment destination has consistently disappointed both optimists and pessimists. It's like an elephant that walks at its own pace and doesn't really bother about anybody's expectations.

India shares its border with china in the north-east and had always had a rather intriguing relationship with its neighbouring industrial powerhouse. Even after coronavirus hit the world, India has been very careful with its stance against China, at least officially. It comes as a surprise though, considering the western countries launched a full-fledged verbal attack on the Dragon, in the backdrop of the corona virus pandemic spreading throughout the globe. With increasing number of people getting infected by this deadly virus, the anti-china sentiment amongst western media is consistently rising. This sentiment is acting as a binding force amongst the western countries and its political class, which up until now has been happily toeing Beijing's line in major geo-political initiatives. This new found bond between these major western players has a common thread- they are all some of the biggest trading partners of China. The pandemic has brought them together on mutual grounds, particularly global trade and commerce.

In the past, many companies took advantage of the relaxed world trade environment and China's ability to produce merchandise at remarkably cheaper prices and speed. They somehow grew over-dependent on China to such an extent that when China shut down after the corona virus discovery in Wuhan, Companies with their supply chain embedded in China were stuck between a rock and a hard place. They simply blanked out and did not understand what to do? Should they wait for China to come back to normalcy after it controlled the virus or look for other sourcing destinations. A direct and immediate fallout will be on businesses with complete dependence on china for their core supply chain. They will now be under immense pressure to re-examine their dependence on china. In the past as well, many of the companies have diversified their supplier bases outside china to hedge the risk of putting all eggs in the same basket. Take the example of Vietnam, its share of global footwear exports grew from almost nothing to 12% in fifteen years, almost all of it at China's expense. Same can be said about Bangladesh emerging as the garment factory of the world in happier and cordial times. Bilateral trade deals played a major role in these outlier stories.

China has been very keen to move away from low end manufacturing and wants to focus on high end engineering and services, as a strategic move to change its image from a low-cost manufacturing hub. Rather it wants to position itself as a technology leader for the world bringing breath-taking innovation in the field of AI and IOT among other major breakthrough services as 5G. It has also made significant investments in its Belt & Road initiative. China is also focusing on converting itself into a consumption driven economy, which explains their significant efforts to boost domestic consumption in the backdrop of coronavirus pandemic and Chinese consumers have started consuming in extremely innovative ways. In other words, China wanted to move from making T-shirts and shoes for the world to making semiconductors and computer chips. It is also eyeing to be the next financial powerhouse by replacing USA, it has made significant efforts to develop its digital currency called e-RMB. It is also trying to take full control of Hong Kong by proxy by introducing the Hong Kong national security law arbitrarily which might threaten the special status of Hong Kong. Much of what Vietnam and Bangladesh have achieved in all these years can be attributed to this psychological shift in China's understanding of itself as a transforming power. It has been happy to let go of the low-cost manufacturing of footwear, garments etc, to other low-cost manufacturing countries like Vietnam and Bangladesh. In fact, it can be argued that this rise in other low-cost manufacturing hubs, happened with China's blessings.

China was also aware of the fact that while the low-cost manufacturing will shift to other countries, these countries will not be able to design and develop the infrastructure to produce these goods from scratch. For example, Vietnam and Bangladesh still are doing most of the assembly work while the raw materials and semi-finished goods are being imported from China. In a sense, China still controls the lifeline of these industries in other countries and might pull the plug, if it so desires. It was merely a shift of assembly centres of the final product for wage cost arbitration. These shifts did not de-risk the business's supply china dependence on China. China is still interested in keeping this advantage to them, this also explains their decision to arrange the 127th Canton fair completely online this time around.

Let's understand this with numbers. In the instance of Bangladesh, its apparel export stood as $32 billion in 2018, which constitutes around 6.5% of the world's share. But, to export this amount of finished goods, it had to import 50% of the textile and garment's raw material and components from China. Same has been the case with Vietnam which has been importing raw materials and outsole from China to assemble footwear to export. This meant, the retailers and businesses buying from these factories, the supply chain dependence on china was intact. In the post coronavirus world, it is extremely important for the brands therefore to re-examine this dependence of the supply chain on china. For instance, in the case of apparel, it will bother the buyers that China commands nearly 30% of the global export of textile raw material that goes into making of the final product.

Businesses will now seek separate decentralized supply chains and more localized approach will be preferred. Rather than assembly shops, businesses will seek totality in offering or as we call it, in supply china terminology, 'vertical integration'. For India to replicate any of it, the first stage will be for India to understand and appreciate the challenges that any smaller country will face to implement the entire supply chain infrastructure within their borders, anywhere close to the Chinese have done. This will require huge investment in the field of raw material, intermediate goods processing, backward integration, vendor ecosystem also knows as a cluster, training human resources, logistics etc. If we take a simple example of apparel, India currently has its competency in export worthy cotton and not polyester, which it lags at scale, currently at one-tenth that of the Chinese.

The view remains, not many countries except India have the wherewithal of building an integrated value chain alternative to china. What India lags behind is in pushing swift land, labour reforms and policy changes, that is needed sooner rather than later. Unless India can push ahead with these reforms, the world will not be able to see the opportunity to take advantage of the same. Take apparel industry for instance. It will take rejuvenating textile factory hubs for cotton-led textiles, ramping up polyester based and specialty textile manufacturing. Only then, can India seize this opportunity and would be able to offer itself as a sourcing destination of choice and compete for jobs, economic growth and social development. The same concept can be imported into the footwear industry as well. India already has export worthy footwear units that can be scaled up, also it has a vibrant raw material base and leather processing industry to process finished leather. It is also home to some of the best talent in the industry. In this case, India will have to pivot towards a liberal mindset and do away with the existing cow protection laws and come up with constructive ways to incentivize the industry. New footwear manufacturing parks at scale in low cost states with ample labour supply. This way India can up its game in footwear exports, especially leather. In synthetic footwear, it will take various radical efforts to compete, since raw material is an issue as we discussed.

The same concept can be used in various industries like toys, lighting, electronics etc. If India can catch a share of this churn that the world trade is about to go though, it will help India significantly improve its standing on crucial economic drivers that has been plagued by unemployment and underdevelopment, for all these years.

Indian government will have to be proactive when it comes to bilateral trade agreements as well. This churn and de-risking of supply chains will also include shifts in strategic industries of the future away from China like EVs, semiconductors, IOT, telecommunications, consumer electronics, pharmaceuticals etc. Individual countries will have different parameters to choose their supply chain partners for these strategic industries and that is where bilateral trade deals become really significant. Given India's position in the IT services exports, it is evident that India has developed a trusted and reliable partnership with many western partners. In a few such opportunities, countries may seek complete development of domestic supply chains and it is perfectly fine. But their willingness to partner with India will depend on the factors we discussed earlier, such as bilateral trade agreement, strategic interest and trust. India will need to examine this on a case to case basis.

India needs to move swiftly and take advantage of this altered worldview while remaining firm with China, reiterating this churn wasn't a part of any deeper plan and India was acting in its own self-interest. While the world needs to believe that the supply chain shift happened due to a fallout with China and India just came to the world's rescue. India will have to drive structural reforms to create many sunshine industries that can lift the country out of its abject poverty, by indulging in heavy lifting and acting as a deal maker of sorts.

Conclusion:

While India does have a chance to convert this altered worldview into an opportunity, but it will need significant work in the areas of land and labour reforms. Major policy changes will have to be done to move away from a highly regulated industry to a more liberalized one. Government will also have to keep itself from making frequent policy tinkering that leads to negative impression among investors regarding the stability of the investment climate in the country. Last but not eh least, India will have to make significant investment in its public infrastructure. It will have to build, ports, highways, SEZs and so on. If India can achieve all this in such a short time, leaves much to be desired.