- China’s zero COVID policies are pushing companies to diversify their supply chains outside the country.
- They were already moving due to geopolitical tensions and Trump-era tariffs.
- But it is not easy to completely replace China’s supply chain ecosystem in any country, even as large as India.
China’s zero COVID policy is perhaps doing what Donald Trump failed to fully achieve during his tenure as president: moving global supply chains away from China for the first time in 40 years.
In 2018 and 2019, Trump imposed steep tariffs on China to counter what he said were unfair trade deals with the United States, provoking retaliation from Beijing and sparking a trade war.
And while many companies have started discussing moving supply chains out of China as a way to distance themselves from geopolitical risks, it’s really the pandemic — and China’s zero COVID policy — that has made the case. the importance of not depending on a single country for its supply chain. .
“Geopolitical tensions by themselves may not have resulted in this level of realignment of supply chains, but COVID has certainly provided that extra extra vision, extra fuel for the fire,” said Ashutosh Sharma, director of research at Forrester, to Insider. .
Tech giant Apple provides the latest example of being burned by an overreliance on Chinese production lines, with iPhone production hit by China’s relentless pursuit of zero COVID. Apple is now accelerating its efforts to move production out of China to other Asian countries. But where to go?
Apple’s main supplier Foxconn’s first choice is India, along with other chipmakers, after the Biden administration in October imposed export controls on shipping equipment to Chinese factories making advanced logic chips.
“India has a large pool of labor, a long history of manufacturing and government support to boost industry and exports. For this reason, many are wondering if Indian manufacturing is a viable alternative to the China,” said Julie Gerdeman, CEO of Supply Chain Risk. management platform Everstream, Insider said.
But moving is easier said than done.
India is the largest democracy in the world, which makes decision-making much more complicated
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 troublesome bureaucracy.
“It’s far from a place where businesses can just walk in and open a store without having too many compliances,” said Sharma, who is based in India. “I’m sure China also has these issues, but their ability to act quickly on these compliance requirements is much higher than India, because India is much more democratic and there are just too many stakeholders. to be satisfied here.”
India came in at 63rd position on a World Bank list of 190 countries ranked by their ease of doing business in 2019. Although this is an improvement from its 142nd position position in 2014 when Prime Minister Narendra Modi took office – it still lags behind China, which was in 31st position in 2019 — last year the index was compiled before the World Bank halted it after a data rigging scandal. Irregularities in data improved China’s standing in 2018, according to a World Bank audit released in December 2020.
India also has a history of protectionism, which makes it less competitive in attracting large investments.
“China manufactures on a large scale, while most factories in India are small to medium-sized due to federal regulations and protections designed specifically for SMEs,” Gerdeman said.
China has built a manufacturing ecosystem over 4 decades
Indian Prime Minister Modi has been striving to attract foreign direct investment, or FDI, since taking office in 2014, sending FDI to a record $83.6 billion in the last fiscal year, according to data from the government.
“India certainly has advantages in terms of demography, in terms of geography, in terms of existing infrastructure, much of which has been built in the last few years,” Sharma said. “He can obviously scale up, but what he doesn’t have are all the pieces of the puzzle.”
What he means is that China has managed to build such an extensive value chain that almost everything needed to make a product can be sourced and purchased domestically, allowing for low-cost manufacturing. large scale cost. In contrast, India does not yet have this capability, which takes years to develop.
Indeed, manufacturers always begin factory operations with the assembly line before beginning to develop local supply chains for finished products in a “backward integration” of processes, Sharma said.
“That supply chain takes time to build, because even when you source internally, the quality isn’t that great initially, your scale isn’t that high, and you run into those issues. So yeah, it can be done, but it takes time,” he told Insider.
Once scorched, twice-shy companies aren’t going all out on India this time
In any case, businesses are unlikely to flock to India en masse as they did to China, as it has proven too risky, experts said.
And it’s not just Foxconn and Apple that have bet everything on China and are now suffering: US sportswear giant Nike, Japanese automaker Toyota and South Korean tech titan Samsung are all among the many companies that are experiencing protracted supply chain issues due to their reliance on the manufacturing giant.
“They are looking to diversify their supply,” Sharma said. “If you look at Foxconn and Apple, they’ve already moved a significant amount of production to India and I’m sure to other countries like Vietnam, and a few other places. It’s precisely because they want to diversify, being dependent on one country, like China, in a few places.”
This means more complex supply chains, but they will be diversified from raw material stages, he said.
“If they can build two or three reliable places where they can get supplies, they will always have alternative sources even if something happens to a place in the future,” Sharma said.
businessinsider
