India: US-China Trade War Boosts India's Appeal As A Manufacturing Hub

Last Updated: 26 July 2019
Article by Vasundhara Rastogi

As the US-China trade war escalates, hundreds of American companies are looking to shift their supply chains away from China to avoid any tariff backlash – with India as a potential benefactor.

In a recent media interview, US-India Strategic and Partnership Forum (USISPF) – a US-based advocacy group, said that it has been discussing plans to move capacity out of China with as many as 200 US companies and helping them set up an alternative base in India, post 2019 general elections.

But long before the trade war started in 2018, several top global brands such as Nokia, Adidas, Delta Electronics Inc., and Samsung had already begun shifting their manufacturing base from China to reduce costs and diversify their supply chain.

According to experts, the trade war has only accelerated the process.

Last week, the US increased import duties from 10 percent to 25 percent on US$ 200 billion worth of Chinese imports – demanding China to reduce the massive trade deficit with the US, which climbed to over US$ 539 billion last year.

For companies looking to offset the cost of tariffs on China made products, India offers an ideal alternative.

India's rising appeal as a manufacturing destination

A series of policy initiatives under the present government, structural reforms in tax and intellectual property rights, has sparked global optimism about the Indian manufacturing sector.

In July 2018, Samsung electronics opened a new factory in India, which it claimed to be the world's biggest mobile phone manufacturing plant. This year, Apple started assembling its top-end iPhones in the country through the local unit of Taiwan-based Foxconn. The company's other manufacturer – Wistron Corp – already produces older models of iPhones at a plant in Bengaluru.

Low labor costs and large population

India's manufacturing appeal lies in its large pool of engineers, a young labor force, wages that are half that of China's, and significant domestic consumption of manufactured goods.

Cheap labor cost is the biggest advantage that the country offers. India's average labor costs are lower than those in China and almost all of the countries in Southeast Asia, with the exception of Myanmar.

Besides, India has a huge buyers' market – Vietnam has only about 90 million people in its domestic market compared to about 1.3 billion people in India.

Access to natural resources

The prices of raw materials are quite cheap in India compared with other countries.

The country offers direct access to natural resources needed in production—notably, iron ore and aluminum, making it a viable manufacturing alternative to China in industries ranging from apparel to auto components.

Lower tariff on India made products

An active player in Asia, India has several free trade agreements (FTAs) inside and outside the region. India is also a signatory to the ASEAN- India free trade area that can provide companies access to one of the world's largest FTA's.

Government policies

The Indian government has initiated several reforms and policies to strengthen the manufacturing sector in the country.

A part of these efforts includes the Make in India program, which was launched in September 2014 to facilitate investment, foster innovation, enhance skill development, protect intellectual property, and build manufacturing infrastructure.

In addition, the government has made several bold moves to address key concerns on multiple fronts including the implementation of goods and services tax, and other economic initiatives in the power sector, land acquisition, and labor laws.

While some of these reforms are making a difference on the ground, a few are stuck at the implementation level and are yet to take off.

Moving your business to India

While India's manufacturing holds tremendous potential, the sector is still rife with complex government regulations, plenty of red tape, and inadequate infrastructure.

The key to overcoming these challenges is to understand India as a collection of states, rather than one uniform market. India has a federal governing system, which means that the government policies, industrial incentives, labor and logistics costs, as well as infrastructure development often vary significantly from state to state and industry to industry.

States such as Andhra Pradesh, Gujarat, Maharashtra, Tamil Nadu, Telangana, and West Bengal have launched their own industrial policies that promote, facilitate, and develop the manufacturing sector.

While Gujarat offers incentives and facilities for setting up production units in chemical, pharmaceutical, textile, and jewelry, Maharashtra is a popular option for setting up automotive and auto-component manufacturing. Uttar Pradesh and Tamil Nadu have emerged as major hubs for electronics assembly and manufacturing.

The inherent diversity and sheer size of India make it critical for businesses to establish a sound understanding of the economy prior to identifying the optimum location for setting up a manufacturing facility.

It is advisable for businesses to use a professional service with knowledge in the region to assist firms to plan-out their manufacturing strategy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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