• CALL US : +91-422-4225333
  • WAPP : +91-9952412329

The Southern India Mills’ Association

Committed to Foster the Growth of the Textile Industry

Can India capitalise on US-China trade war?

While China’s cost advantage is formidable, there are select sectors where India can be an alternative supply source for US firms
The US-China trade war has reached unprecedented levels. After having levied tariffs on imports worth $250 billion, US President Donald Trump has not toned down his rhetoric. He has threatened to impose tariffs on another $267 billion worth of imports, which should pretty much cover all of China’s exports to US. Either side is determined not to blink first. Trump wants China to capitulate while Beijing has made it clear that it does not intend to do so. The global economy is consequently feeling the chill. Amidst this development, is there a real opportunity for India to warm up to?
To answer this question, one needs to understand the evolving US-China relationship. Over the last few decades, the nature of their relationship was one of ‘nether friends nor foes’ and all they wanted was a ‘win-win economic engagement’. In other words, they were ‘co-operating rivals’. But that changed post the 2008 global financial crisis, which narrowed the gap between their economies.
In 2007, the US economy was four times that of China but by 2012, thanks to the great recession, it reduced to two-times. There is growing anxiety in the US about China’s growth. The Chinese, on their part, believe that the US is actively working to prevent their country from taking the rightful place in the world order. It is not just economic growth that has sowed seeds of discontent. China has been flexing its muscle militarily by spending heavily. China’s military, vexed at the US control over trade routes, has been trying to test its strength in the South China Sea. The two nations have had their share of skirmishes there. Also, President Xi Jinping’s Belt and Road initiative has unnerved the US which sees it as an attempt by China to play a larger role in the world. It is clear that China does not like the idea of a uni-polar world but the US wants to keep it that way.
That apart, the two nations do not see eye to eye when it comes to political values nor do they have common security interests. So this trade war is not just about trade. Going forward, their relationship would at best remain frosty.

De-risking operations
This puts US companies in a piquant position. Over the years, taking advantage of low costs, they have increased their dependence on China for their supply chain needs and manufacturing. Such is the depth of the arrangement that over 50 per cent of the products HP, IBM, Dell, Cisco, Microsoft and Intel or their suppliers use come from China. It is the second largest exporter of auto parts to the US auto giants (after Mexico). The list of sectors heavily dependent on China is long and US companies are realising the need to de-risk their operations — supply chain as well as manufacturing.
The US is already pushing ICT players to reduce their dependence on China. Investors are also beginning to question US companies on their fall-back plan if US-China relationship goes into a spiral.
This situation presents a clear opportunity for Indian companies. After all, the US and India see each other as natural allies. Former US President Barack Obama even described the relationship as ‘one of the most defining partnership of the 21st century’. Trump too wants a close relationship with India, a democracy with shared values. Not surprising that US companies have already started making enquiries about sourcing from Indian players, especially in the auto-component space.
But taking a share of China’s supply chain or manufacturing is easier said than done. Over decades China has invested a lot in upgrading its infrastructure. Also, the scale of manufacturing is such that it will be difficult for India to match in terms of cost. But the silver-lining is that the recent imposition of tariff by the US has levelled the playing field, at least in select sectors.
Competitive enough
These sectors have certain common traits that help them to be as competitive as those in China. They have good scale thanks to a strong domestic market in India. They have also built a solid supply-chain network (this is critical as India cannot grab a share of the ICT exports from China as it lacks proper supply chain, especially in semi-conductors). They also export a fair share of their production and, consequently, their quality is tested and is as good as anywhere in the world. Auto components, leather and textiles are some sectors that top the list.
The government must direct its ‘Make in India’ initiative on these sectors with suitable incentives. However, low manufacturing cost alone is not enough. Logistics cost, to move the manufactured goods from the factory to the destination, is critical. China excels here. India has been building roads, improving port infrastructure/connectivity to the hinterland through Sagarmala and Bharatmala programmes.
It is also trying to enhance coastal shipping and boost transportation through inland waterways. To rival China on logistics costs, it has to redouble its efforts. In developed markets, companies outsource 70 per cent of their logistics operations that can be outsourced to lower costs. In India it is just 35 per cent. Even though India’s steep climb in the recent ‘ease of doing business’ ranking is noteworthy, it still has a long way to go in reforming labour laws and the land-acquisition process which are essential for lowering costs further.
Indian entrepreneurs, for their part, must take advantage of the situation and invest aggressively. De-risking from China will remain a long-term strategy for the US and European companies. Higher exports will also help in neutralising domestic cycles that plague some sectors such as auto components.
It will be a difficult call for Indian entrepreneurs to make as many of them have been investing abroad to de-risk their investments in India. It is a leap of faith.
If they take it, India will not miss the manufacturing bus, as it did in the 1980s and 1990s that saw emergence of East Asian Tigers and China as manufacturing hubs for the world, yet again.