Companies to desert China and come here? Dream on, India

While it is a trifle early to say if it indeed will happen, governments in countries like India are already dreaming of replacing China as the next manufacturing hub

Even before the C19 pandemic, following pressure from the Trump administration and the slapping of high tariffs, American companies had started to move out of China.

The coronavirus pandemic has done what the United States government has been trying for some time now: show up China in bad light. The debate is still on whether Beijing is the culprit behind the COVID-19 pandemic but one consequence being prophesied is that it will propel American manufacturers to pull out of China.

While it is a trifle early to say if it indeed will happen, governments in countries like India are already dreaming of replacing China as the next manufacturing hub. Top union ministers have indeed said as much, like Nitin Gadkari who said “India must look to convert world’s hatred for China into economic opportunity”.

In fact, top German footwear maker Casa Everz Gmbh a few days ago announced it was shifting its production base from China to India with a small investment of ₹110 crore in the first phase. Reports quoting government officials say around 300 companies making mobiles, medical devices, electronics and textiles are also planning to shift to India while 700 more may join the queue.

How much of this will convert to reality needs to be seen, but to expect a flood of companies into India is doubtful given the largely abysmal state of infrastructure and sub-par governance all around.

In comparison, China’s humongous transport network besides airports and sea ports exclusively for cargo, a top class communications network and topped by at least a quarter of the world’s electricity generation dwarfs any competition.

For India to be even imagining it can replace China as the world’s manufacturing hub betrays either genuine naiveté or a deliberate attempt at obfuscating reality. The bitter truth for Indians is that there is no comparison between the two countries. In 2010, there were 300,000 foreign companies in China. In India, at around that time, there were 3,254 foreign companies.

It’s not a walk in the park for a nation to transition from being poor and under-developed to becoming a veritable super power in seven decades as China has done from 1949 to the present. Though it may be hard for many to accept, the fact is that the Communist revolution under Mao Tse Tung enabled China to build its infrastructure massively and break feudal social relations to transform into a modern society. Healthcare was free for all until the early 1980’s. Education is still partially free.

When Mao was replaced by Deng Xiaoping in 1978 who then manoeuvred China through a unique path, mixing elements of capitalism and communism, it took the world by storm. The country offered readymade production bases complete with supply chain ecosystems that western industries could not resist. From a mere 100 foreign manufacturers in China in 1979, the figure shot up by 300 times in three decades.

Since then, there has been no looking back. Backed by a huge domestic market, an abundant supply of labour and the gargantuan infrastructure, China has attracted product manufacturers from around the globe, flooded the world with its own products and is now in the top rung of the economic scale jostling with big powers like the United States and Germany.

India, during the same seven decades has no doubt developed too but on an entirely different trajectory. It has remained a democratic country, stayed largely stable and has made nominal strides on its economic front. But, the economic side of its development comes with a number of qualifiers. The quality of governance is abysmal and there are no systems in place to handle a special situation – the latest being the total breakdown of administration during the lockdown in the treatment of millions of migrant workers who have largely been left to fend for themselves.

There is a silver lining, though. In the last three decades India has emerged among the top band of countries in the software side of the information technology industry. This has been made possible as software requires minimal infrastructure. The country, willy-nilly, benefited from its knowledge of the English language and an extensive educational system in that tongue to harness the rise in IT. In the first throes of the economic reform in the early 1990’s, private entrepreneurs made the most of an unexpected space to flourish in a largely unregulated market for IT.

The hardware side of the industry was however lost to India as that required a manufacturing ecosystem and a nimble government both of which are sadly absent in the country. For instance, in 2007, India, China and Vietnam were in a hot race to host global chip maker Intel for a fab unit. India lost out with Intel preferring the other two competitors. Intel blamed it on the delay in the announcement of India’s semi-conductor policy.

Inviting a multinational and asking it to make products in India is easy. But, a mere invitation gilded with sops is not enough to build a facility and then expect a manufacturer to start production. The standalone facility is only the hub. Supporting it is a robust supply chain. The production needs to be backed by high quality supply of reliable power and should be linked to a network of efficient transport systems – all of which work in tandem for the manufacturing to happen. Typically, the entire chain from raw material to finished product to distribution is expected to happen within the range of a few sq km. India, with a few exceptions, is nowhere near meeting this requirement.

In a curious turn, at least three BJP-ruled states recently suspended all labour laws for three years. The government may have calculated that in the absence of labour laws, it would be attractive for entrepreneurs to set up shop in these states as they can treat workers at their whim. Paradoxically, this is likely to backfire.

In the contemporary world, Western companies are under pressure at home to monitor working conditions in the country of manufacture. Multinationals companies shy away from states where there are no labour safeguards. For instance, global garment manufacture who use India as a sweatshop in recent years have, in many instances, forced local tailoring outfits to comply with international labour standards under pressure from activists in their own countries. Suspending labour laws, in this context, may therefore prove counter-productive.

Even before the C19 pandemic, following pressure from the Trump administration and the slapping of high tariffs, American companies had started to move out of China. But the beneficiaries have largely been Vietnam followed by South Korea, Taiwan and Bangladesh. India as a substitute does not figure in the top bracket.

It is probably time that the government smelt the coffee and woke up from its hallucination, and figure out how to get the basics right – starting, for example, with a better deal for migrant workers — before drawing up grandiose plans to invite the world’s big names to set up shop in India.

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