By: Neeta Lal

With the trade squabble between the world’s two largest economies showing no signs of abating, and worse – with US President Donald Trump further ratcheting up the rhetoric of ordering American companies to start pulling out of China – American companies are scrambling to shift operations to other Asian nations and beyond. 

India is seeking to capitalize on the situation, hoping to lure multinationals out of China to set up shop and take advantage of Prime Minister Narendra Modi’s ‘Make in India’ initiative that got underway in 2014. But there are questions whether the country’s stumbling bureaucracy can get its act together to do so.

India’s deficient infrastructure scenario, complex labor laws, and bureaucratic approach scupper its emergence as a global manufacturing hub, an industry economist who declined to be named told Asia Sentinel. 

To leverage the interest of global corporations, India must transform itself into a world-class manufacturing hub. Creating a conducive business and regulatory environment, seamless road connectivity and transparency in ease of doing business will play a crucial role in achieving this aim. Otherwise, India may well find that the spoils of the trade war between China and the US have been shared by its far smaller Asian neighbors as it has been left looking on. 

While India’s bureaucrats dither, Vietnam, Indonesia, and Malaysia seem to be the primary beneficiaries of this rejigging of global manufacturing supply chains in the midst of extended turbulent trade relations. (US trade officials are already suspicious of Vietnam and considering additional tariffs there already. Read this related story.).

The trade war is now entering a period of rapid escalation, raising the hopes of Indian government officials. On August 23, Trump took to Twitter, ordering American companies to “immediately start looking for an alternative to China” and urging them instead to start making their products in the US However, Beijing has made it clear that it will not capitulate to Trump’s threats and demands that require major structural revamps in its own industry and economy. 

The standoff has resulted in an array of companies shuffling operations. Toymaker Hasbro, personal-care company L Brands, and fashion designer Steven Madden are contemplating substantially reducing their reliance on Chinese manufacturing in the next few years. NintendoSharp, and Kyocera have also announced plans to shift some production from China to Vietnam, as Reuters reported.

Similarly, iPhone-maker Apple has said it will move 10 to 15 percent of its manufacturing to India. Apple already has more than 3,500 authorized retailers and service centers across the country, employing more than 15,000 people. In addition, it plans to open two or three physical stores and one online single-brand retail one of its own, which is in line with its “global experience” centers for Apple-branded products only.

America’s other largest technology firms are taking their cue from Apple. Computer makers HP Inc and Dell Technologies are reportedly contemplating moving up to 30 percent of their notebook production out of China. 

“We’re seeing great opportunities in Vietnam, India and other territories like Mexico, ” Hasbro CEO Brian Goldner told CNBC recently. “We’re doing even more in the US. We brought Play-Doh back to the US last year. ”

Succeeding in India, a nation of 1.3 billion people, has become crucial for many corporations seeking large markets for their goods. On its part, India has responded with enthusiasm, especially over news earlier this year that 200 American companies are relocating their manufacturing from China to set up their bases here. 

The US-India Strategic and Partnership Forum’s President Mukesh Aghi told PTI news that an array of companies are consulting the forum about how to set up an alternative to China by investing in India. “There’s a large deluge of companies keen to not only manufacture in India but also who want to go after the domestic market. If you look at our member companies in the last four years, they have invested over US$50 billion in India,” he added.

Mark Linscott, former Assistant US Trade Representative for South and Central Asian Affairs too, has mentioned working with USISPF member companies to come up with a recommendation as to what India needs to do to enhance its exports and work up from that perspective.

While all this interest spells great news for India – currently in the throes of a slowdown and a high unemployment rate – there are questions whether the country is really prepared to receive these companies. 

Yes and no. Analysts say that while the eagerness among global corporations to work out of India fits in well with PM Narendra Modi’s right-wing BJP government, bottlenecks will need to be tackled before the presence of these companies can translate into tangible gains for the country.  

It was precisely to facilitate the entry of global companies that Modi launched Make in India” in 2014. The idea was to turn the country into a global manufacturing hub by offering incentives to foreign companies to open factories and attract foreign investors to invest into the Indian economy. This was viewed as essential to bolster GDP growth and create jobs for millions of youth who enter the job market each month.

Make in India is largely aimed at attracting capital and technological investment in India. The policy sets out 11 areas of concentration, including focus sectors, easing of regulatory environments and acquisition of technology and development. It identifies 25 specific focus sectors, including automobiles, defense equipment, and medical technology.

Be that as it may, the results of the five-year-old policy have been, at best, mixed. Just to give one example, despite excitement since 2015 over Foxconn investing US$5 billion in multiple assembly plants in the country, and construction of a world-class factory in Andhra Pradesh, the promised major investments have failed to materialize. 

The bureaucratic approach of former governments, lack of robust transport networks and widespread corruption prevent manufacturers from achieving timely and adequate production in the country, a source said.

However, government officials say that this isn’t the case. Says a senior bureaucrat with the ministry of commerce, “Manufacturing in India holds tremendous potential, namely low-cost labor, soaring domestic demand and the need for multinationals to diversify their production locations. India received the highest-ever FDI inflow of $64.37 billion during the fiscal ended March 2019.

India, the source said, has “also introduced path-breaking reform measures which resulted in Indian FDI amounts reaching a new all-time high.”

Examples of Japanese car maker Maruti Suzuki are also cited with which India has worked in the past. The Indian government helped the company set up a flourishing manufacturing ecosystem in the country as well as a global supply chain which unleashed multiplier effects across other industries.

Such examples are also buttressed by global surveys. The McKinsey Global Institute in an August 2016 report titled “India’s Ascent: Five Opportunities for Growth and Transformation”, observed: “India’s appeal to potential investors will be more than just its low-cost labor: manufacturers there are building competitive businesses to tap into the large and growing local market. Further reforms and public infrastructure investments could make it easier for all types of manufacturing.”

However, critics point out that of late India’s growth is mainly driven by the service sector and manufacturing has taken a backseat. American economist and Nobel Prize winner Paul Krugman on his visit to India last year said as much when he said that India needs to accelerate its manufacturing pace. 

“India’s lack in the manufacturing sector could work against it, as it doesn’t have the jobs essential to sustain the projected growth in demography. You have to find jobs for people. The right way to do that, in my opinion, is to create a manufacturing strategic plan for the nation and its states,” Krugman said. 

Commenting on the trend of American companies moving out of China to other nations, US-ASEAN Business Council CEO Alex Feldman said in an interview with Wired webzine that “…No country is up to the task of becoming a full replacement for China; any that see a surge in demand may eventually have to turn potential clients away.”