Can India Overtake China As Global Manufacturing Hub? Unlikely

An employee works on Toyota car engines inside the manufacturing plant of Toyota Kirloskar Motor in Bidadi, on the outskirts of Bengaluru, 2015. Image used for representation.

(Photo: Reuters  / Altered by The Quint)

In the first week of March, the novel coronavirus was still mostly stuck in China. But, since the ‘factory of the world’ had got infected, economies across the globe began to feel unwell. Store shelves were emptying out. Businesses were running low on inventory. So, companies with big manufacturing units in China began to rethink their Beijing-bets.

Was it wise to be so overly dependent on one country for all your supplies?

Even before China caught COVID-19, Donald Trump’s tariff-hikes on Chinese products had made multinational companies nervous. A survey of American companies with operations in China showed than 7 percent of them were thinking of relocating to other countries. Some of them were probably toying with the idea even earlier as China’s wages had started rising over the past few years. The coronavirus outbreak would have made them even more determined to exit the country.

• It is not easy to replicate the China model.
• China has also planned its industrial hubs in such a way, that factories and their suppliers are clustered close to each other.
  
• India comes nowhere close when it comes to matching Chinese physical infrastructure.
  
• While China has a huge domestic market for consumer goods and durables, India’s domestic-demand has been faltering for several years.
  
• Foreign investors will now get the same access to government funds, land, tax-exemptions as domestic Chinese companies.
  
• India’s hopes of finally becoming the world’s manufacturing hub might turn out to be a case of great expectations.

Not Easy to Replicate China Model

Several pundits at home believe we are going to gain the most from the exodus from China. But is there any real reason for this optimism? Over the past two years, several companies have relocated their factories because of the US-China trade wars. Just about 5 percent of them came to India. Nearly half of them chose Vietnam, and another one-third went to Taiwan and Thailand.

It is not easy to replicate the China model.

Since the days of Deng Xiaoping, China has focused on getting foreign investors to set up factories there and sell their products to the rest of the world. It has spent the past four decades building a massive industry-friendly infrastructure – the largest expressway network in the world, the world’s largest high-speed railway network, seven out of the world’s top 10 cargo-ports, three out of the top 20 busiest cargo-airports, a high-tech telecommunications system, more than a quarter of the world’s total power generation.

India Can’t Match China In Infrastructure & Domestic Demand for Consumer Goods

China has also planned its industrial hubs in such a way, that factories and their suppliers are clustered close to each other. This cuts time and transport costs – two key expenses that entrepreneurs try to minimise. China also produces most of the world’s high-precision electronics and heavy machines, which is essential to maintain production standards. It has thousands of factories with US and EU safety certification.

India comes nowhere close when it comes to matching such physical infrastructure.

Our power-supply is erratic and expensive, we are far behind China when it comes to logistics and transport. Much of the equipment and raw material needed for manufacturing has to be imported.

While China has a huge domestic market for consumer goods and durables, India’s domestic-demand has been faltering for several years.

There is one thing in which China has gradually lost its advantage – cheap labour. In 2018, a typical Chinese factory worker was paid USD 5.5 per hour, which was double of what a worker got in Vietnam and more than 2.5 times what an Indian worker was paid. However, Chinese workers were 60 percent more productive than their Indian counterparts. They are also better trained and it is easy to find workers with a wide-range of skills in a single place. On top of that, Chinese workers have virtually no powers of collective bargaining, making it a sweatshop-owners’ heaven.

China’s Crime Rate Is Lower Than India’s – And That’s What Counts For Business

One oft-ignored subtext of China’s rise as a manufacturing hub is that it is an authoritarian state. Once the government clears a project it is very rare to run afoul of courts or face any protests from local communities, NGOs or unions. In India, on the other hand, democratic institutions are relatively robust, and governments find it difficult to take unilateral decisions.

China is as corrupt as India, according to Transparency International’s rankings for 2019. But it is a safer country, with less crime than India.

And, often that’s what businesses look for – how safe your operations are once you have paid-off the authorities.

In any case, China is not going to sit back as factories leave its shores. It moved last year, in the face of the higher US tariffs, to change laws governing foreign investors. The new unified law has come into effect from January this year, and it combines three separate sets of laws to make it easier for foreign investors.

Foreign investors will now get the same access to government funds, land, tax-exemptions as domestic Chinese companies.

They will also be allowed to raise funds by getting listed on the stock markets. Foreign investors will now be able to take out their profits as many times they want, in any currency of their choice. Foreign companies that invest in the ‘Encouraged Industries Catalogue’ will pay a lower tax rate, and get import-duty concession.

Why India Should ‘Make FOR India’ – Not ‘Make IN India’

The speed with which China’s factories have come back online after they were locked down, will also reassure companies and make them stay on. The Chinese government has surprised everyone by refusing to stimulate consumption through direct cash-transfers. It is possible that the Chinese government will not lose too much sleep if higher unemployment and lower consumption helps push down wages. It will be a temporary price to pay to keep China attractive to foreign companies.

That means, India’s hopes of finally becoming the world’s manufacturing hub might turn out to be a case of great expectations.

Raghuram Rajan once said that instead of ‘Make in India’, we should ‘Make for India’. That involves rethinking our investment priorities and producing goods and services for the vast majority of Indians who cannot afford to buy most things that we produce.

(The author was Senior Managing Editor, NDTV India & NDTV Profit. He now runs the independent YouTube channel ‘Desi Democracy’. He tweets @AunindyoC. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)