India’s overt plans to replace China as the “factory of the world” appear to have ramped up in recent weeks.
This comes amid growing concern from global manufacturers following violent clashes over Covid lockdowns at Apple’s most important iPhone assembly plant in China.
The company is now facing a shortfall of iPhone 14 Pros during the holiday shopping season because of the production issues. The phones start at about US$1,000, “suggesting that could represent at least $6 billion in lost revenue,” according to Bloomberg.
Against this backdrop, and a general sense of growing unrest in China, it’s hardly surprising that Apple and other major manufacturers have been eyeing opportunities in the world’s second-most-populous country and near neighbor.
Seemingly hoping to capitalize on the situation in the People’s Republic that has been affecting global supply chains, Indian authorities have been rolling out generous incentives, including attractive subsidies for companies that migrate.
India is set to overtake Japan and Germany to become the world’s third-largest economy, according to recent reports by S&P Global and Morgan Stanley.
S&P’s forecast is based on the projection that India’s annual nominal GDP growth will average 6.3% throughout 2030.
Similarly, Morgan Stanley predicts that India’s gross domestic product is going to be more than double current levels by 2031.
However, despite this bullish news on India’s trajectory, we expect that it will be many years before India will replace China in the supply-chain stakes, for several key reasons.
First, wages are considerably higher in India – some estimates say up to three times – which outweigh the marginally higher production costs in China.
Second, the economies of scale that China still enjoys allow it to have the competitive edge.
Third, India is the only major country that is not part of either of the region’s most critical trade pacts (the Comprehensive and Progressive Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership), which, when put together, make up the overwhelming bulk of international trade and commerce in the region.
And fourth, there is a limited number of global manufacturers’ imports from China that will be severely hit by supply-chain issues arising from tensions triggered by geopolitical tensions. As such, a migration may be hard to justify.
It seems to me that the notion of India taking over from China as the “factory of the world” is, at this time at least, unlikely.
Could it be wishful thinking on the part of the Indians? Could it be wishful thinking from Western business and political leaders for closer trade links with a democracy instead of Communist China?
Either way, although stock markets dominated by global manufacturers have been spooked over the recent protests in China against the government’s zero-Covid policy, they should be prepared for an imminent sharp rebound as restrictions ease. This will be a hit to India’s aspirations.
Savvy investors will now be looking ahead and ensuring their portfolios are well positioned for this, despite India’s ongoing attempts to substitute for China as an investment destination.
Nigel Green is founder and CEO of deVere Group. Follow him on Twitter @nigeljgreen.