When news broke out that German footwear production 'Von Wellx' will be shifting its production unit from China to India, people started speculating that India will be holding an edge over China in the upcoming time. Casa Everz Gmbh, the owner of Germany-based healthy footwear brand Von Wellx, informed that he will be shifting its entire shoe production of over three million pairs annually in China to India with an initial investment of Rs 110 crore, according to a top official of the company’s licensee Iatric Industries Pvt Ltd.
A new manufacturing unit will be set up with a production capacity of over three million pairs in Uttar Pradesh through a collaboration with Iatric Industries Pvt Ltd as part of an understanding with the state government.
However, it does not mean that India will be holding an edge over China. Against this backdrop, the Indian government’s plans to attract companies seeking to relocate manufacturing from China, reported by Bloomberg early this month, by developing a land pool of 460,000 hectares is destined to run into global headwinds.
A wholesale shift of supply chains from China is unlikely for the simple reason that it is the factory of the world; no other country boasts the dense supply chains for products ranging from apparel to smartphones to suitcases. While countries will want to stockpile key medical supplies and products such as N95 masks, moving production out of China is not feasible for most companies.
Moreover, the domestic market of the world’s second-largest economy has for some time now been a major factor for global companies to invest there. “China’s growth has become less intertwined with global supply chains in the last decade," said Jonathan Woetzel, senior partner with McKinsey and Co. in Shanghai. “That’s less a function of multinationals withdrawing from China and more a function of the relative importance of the China market."
Worries about overdependence on China abound but these are likely to result in companies increasing inventories to provide a cushion for disruptions or relocating some supplies to locations closer to home markets—Slovakia, say, for the EU—rather than move production in a big way.
Still, there are opportunities at the margin for countries with lower wages than China. This week, the Uttar Pradesh government’s decision, along with a few other Indian states such as Madhya Pradesh and Gujarat, to controversially suspend a wide swathe of labour laws appeared to have scored an early success when a German orthopaedic footwear brand said it was moving its China production to the Agra factory of Iatric Industries.
Universe of suppliers
Uniquely in the developing world, China combines a large domestic market that dwarfs India’s, middle-income wages and highly productive workers with the First-World infrastructure such as six-lane highways and ports that offer rapid customs clearance. As some electronic goods and components sometimes cross borders 20 to 30 times, speed is critical.
Add to this, a dense universe of suppliers, often managed by Taiwanese and Hong Kong companies who have been playing the globalization game for about half a century. Vietnam is the only country that comes close—it has among the lowest COVID cases in Asia.
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Tellingly, Vietnam’s exports in 2019 rose 8% to $264 billion, of which its exports of smartphones and spare parts—the country is a major production base for Samsung—amounted to $51 billion. On its current rate of growth, its merchandise exports will surpass India’s soon.
Opportunities missed and own goals scored by India over the past couple of decades will handicap the Narendra Modi government’s attempts to attract factories from China. For starters, the government has misdiagnosed China’s competitive edge. Land and flexible labour laws are important but only as part of a much larger matrix of factors such as electricity costs and logistics. Infrastructure, ease of business and tariff regimes matter at least as much, and these are all criteria on which India scores poorly.
New Delhi’s red carpet looks more likely to trip up new entrants, given that tariffs have been raised in the last four budgets—turning back a quarter of a century of trade liberalization since 1991—and this government’s apparent lack of interest in free trade agreements that have benefitted the exporters of Vietnam, Bangladesh, Ethiopia and Cambodia.
The Modi government abruptly decided to opt out of the Regional Comprehensive Economic Partnership (RCEP) last year after signalling it was keen on joining. Japan’s efforts to include India in a recent RCEP meeting were rebuffed by New Delhi, according to The Hindu. India has for some years now balked at a free trade agreement with the EU that would benefit apparel manufacturers because domestic lobbies make giving up hefty tariffs on luxury cars and wine difficult.
In the past, the Congress-led coalition sometimes seemed inconsistent on trade, but the Modi government has seemed fundamentally opposed to seizing the opportunities of global trade despite its Make in India programme—even more so after the Prime Minister’s speech this month about “being vocal about local."