April 12, 2024

India wants to become the main manufacturing alternative to China. But first it must defeat Vietnam

Workers at the Lava mobile phone factory in Noida, India.

Hindustani times | Hindustani times | Getty Images

India wants to become Asia’s biggest manufacturer as companies withdraw from China, but first it must cut taxes and improve supply chain efficiency if it wants to dethrone Vietnam.

The US has pursued a “friendshoring” agenda as competition with China increases. The Biden administration has encouraged U.S. companies to shift electronics and technology production from China to friendlier countries, especially Vietnam and India in the Asia-Pacific region.

“Both Democrats and Republicans see China as a challenge. And every boardroom in the US is asking a CEO what their derisking strategy against China is,” said Mukesh Aghi, president and CEO of the US-India Strategic Partnership Forum.

Vietnam’s lead

India and Vietnam are attractive manufacturing alternatives for foreign investors and companies, in part because of their low labor costs. However, between the two, Vietnam is still far ahead, with 2023 exports totaling $96.99 billion, compared to India’s $75.65 billion.

“Vietnam is known for its ability to produce electronics. India is just getting started, so that gives Vietnam a competitive advantage,” said Samir Kapadia, CEO of India Index and managing director at Vogel Group.

While India’s relationship with the US has heated up, especially after Prime Minister Narendra Modi’s state visit to the White House in June, Vietnam has had a trade and investment deal with Washington since 2007.

Another key advantage for Vietnam is a simpler proposition compared to India, which, according to Aghi, “has 29 states and each state has policies that can be different.”

“Vietnam has the upper hand when it comes to economies of scale in manufacturing that mainly involves manual labor,” said Nari Viswanathan, senior director of supply chain strategy at software company Coupa.

Sectors that require intensive manual labor and have low profit margins, such as apparel manufacturing, will “not move the needle” for India, Viswanathan noted.

American tech giants are increasingly bringing part of their supply chains to the South Asian country. The Financial Times reported this in December Apple told component suppliers that it will source batteries from Indian factories for the upcoming iPhone 16. The company has been considering expanding its operations in India since 2016, when CEO Tim Cook visited Indian Prime Minister Narendra Modi. Googling will also start manufacturing Pixel phones in India in the second quarter.

Import taxes remain high

One hurdle to India’s industrial production ambitions is the 10% tariff on information and communications technologies. This is higher than Vietnam’s average tariff of around 5%, said Andy Ho, chief investment officer at VinaCapital.

India’s import taxes were intended to protect domestic producers, but lowering these duties will be part of the government’s efforts to attract foreign companies to produce goods in the country.

“2024 will be a year when Prime Minister Modi phases out many of these tariffs, but he will do so on a sector-by-sector basis, not a country-by-country basis,” Kapadia added.

For example, India in January reduced import taxes on certain metal and plastic parts used in mobile phone manufacturing from 15% to 10%. This benefits companies such as Apple and Dixon Technologies, which produces phones for Xiaomi, Samsung and Motorola.

“Given Vietnam’s stronghold in electronics manufacturing and exports to the United States, we will see the most early traction there as India tries to capture market share. This includes all types of plastics, metal components and mechanical items,” he said. Kapadia.

India’s electronics exports to the US stood at $6.6 billion between January and September last year, compared to $2.6 billion in the same period in 2022, according to a LinkedIn post by Pankaj Mahindroo, chairman of India Cellular and Electronics Association.

But VinaCapital’s Ho warned that cutting tariffs “is not a source of sustainable benefit in attracting foreign direct investment in the long term.”

“What foreign investors are more concerned about are things that are easy to do – especially the flexibility to hire and fire workers – than taxes and tariffs. This is Vietnam’s main source of long-term advantage over India,” Ho told CNBC. in an email.

Efficiency is key

Although India aims to be a developed economy by 2047, infrastructure is still lacking, leading to long shipping and road delivery times.

“A ship in Singapore can be unloaded in eight hours and on a truck to future factories, but the same ship in India will be stuck in a modified warehouse for days,” Aghi said, warning that these delays could undermine the South Asian reduce land. foreign companies.

“China is probably a decade ahead of India in terms of infrastructure, so the country needs to work harder to ensure that infrastructure continues to be built,” he added.

India’s interim budget estimates that the federal government will spend 2.55 trillion rupees ($30.7 billion) to improve India’s rail system.

“India is well on its way to modernizing systems in logistics to improve on-demand supply chain models for importers and exporters and this will bring all kinds of new roads and ports. I think this will be a priority before automation” , Kapadia said.

Vietnam’s warming relations with China

However, Vietnam’s warm relationship with China offers India an important advantage, Kapadia points out.

“Vietnam could not be closer to China in so many ways. And I think this will be on the minds of supply chain managers and American companies for the next 10 to 15 years,” he warned.

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Chinese President Xi Jinping visited Vietnam just three months after US President Joe Biden did, signing agreements with Vietnam in areas such as infrastructure and trade and security.

“[China and Vietnam are] Whenever they see each other, they continuously shake hands and hand over medals to each other,” said Kapadia.

“I think the bigger players will take into account some of the political calculations regarding China’s relationship with Vietnam, and delay their decision-making until India can prove that they can really compete in electronics manufacturing to date ”, he added.

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