For India to become the next manufacturing powerhouse, it must first learn from China – with or without the coronavirus

  • Keji Mao is a research fellow at the International Cooperation Centre of the National Development and Reform Commission (NDRC), China, and a China Forum Expert

    China’s economy has suffered an unexpected double whammy. The trade war unilaterally launched by US President Donald Trump first sent businesses on a frantic search for alternative supply chains, and now the Covid-19 pandemic has further disrupted global supply chains.

    These disruptions, together with talk of “decoupling”, have seen many look at alternative manufacturing destinations outside China. It was against this backdrop that India, superficially the closest comparison to China in terms of population and economic potential, came into play. 

    India could emerge as the next manufacturing powerhouse, to replace China. Yet, at the same time, it appears to be one of the worst-stricken economies in terms of supply chain disruption, especially now with a national lockdown in place to contain the spread of the coronavirus.

    Can India seize the opportunity to give China a run for its money in global manufacturing? The answer hides in a paradox: India needs China before it can replace China.

    When Prime Minister Narendra Modi launched the “Make in India” campaign in 2014, it was a policy melange that hardly differentiated between the industrial sectors in which India had comparative advantages and those where it had none. As a result, under “Make in India”, the share of manufacturing in terms of India’s gross domestic product even fell – from 15 per cent in 2014 to 14 per cent in 2019.

    While most industries registered either stagnant or modest growth, however, India’s cellphone industry stands out. The country’s tremendous market potential, plus dedicated industrial policies like the Phased Manufacturing Programme, have created nothing short of a miracle.

    The number of cellphone and accessories manufacturing units rocketed from a mere two in 2014 to over 260 in 2019. Today, India is the world’s second-largest maker of cellphones, with 95 per cent of them assembled locally.

    It was this “cellphone miracle” that encouraged policymakers to target development of industries where India has niche comparative advantages.

    This was suggested in the government’s 2019-20 Economic Survey, which recommended that India should draw a lesson from China, whose “export performance vis-à-vis India is driven primarily by deliberate specialisation at large-scale labour-intensive activities, especially in ‘network products’, where production occurs across global value chains operated by multinational corporations”.

    It seems that India cannot replace China before and until it learns from China.

    When Covid-19 struck China, many Indian policymakers and industry leaders saw opportunities rather than a crisis. Top officials called for meetings with industry representatives, while Deepak Sood, secretary general of the Associated Chambers of Commerce and Industry of India (Assocham), called for a clear strategy to fill the gaps in the global market and to compete effectively with China “even when the Chinese exporters are able to normalise their global supply chain”.

    As Chinese investment in Indian industries has surged in recent years, China has in effect become India’s “tutor” for industrialisation. For a wide spectrum of industries, China has not only sent India its technicians, managers, engineers and investors, but also supplied it with large quantities of raw materials, intermediate goods and capital goods.

    For example, the cellphone industry still imports around 75 per cent of the components from China, with only 12 per cent made at home. As a result, even before its own lockdown, supply disruption could see Indian manufacturers run out of critical components, including printed circuit boards, camera modules and semiconductors.

    An adverse shock in China could generate a tsunami in Indian manufacturing, with industries like electronics, medicines, textiles and autos bearing the brunt.

    Since the outbreak, the Indian government has held at least one round of detailed consultations to identify potential suppliers for 1,050 critical items. An analysis by the Commerce Department showed the situation was grim for pharmaceuticals, cellphones, electronics, home appliances and plastics.

    Moreover, despite efforts to boost India’s manufacturing, it consists mainly of assembly lines rather than industrial clusters, so it has some way to go to develop a fully fledged capacity comparable to that of China.

    Modern manufacturing has a sophisticated multi-tier structure: those directly connected to the assembly line are the first-tier suppliers, who have second-tier suppliers of their own, who may, in turn, have a third tier of suppliers.

    For example, as one commentator pointed out in Foreign Policy, Volkswagen has around 5,000 first-tier suppliers, each with an average of 250 second-tier suppliers, so it could end up with as many as 1.25 million suppliers.

    So even if the Indian government successfully attracted some manufacturers with their first-tier suppliers, it would still need to cultivate a suppliers’ network and forge industrial clusters.

    Furthermore, as Apple’s aborted idea of relocating its iPhone 11 production to India has demonstrated, one should not take assembly-line readiness for granted. Suppliers are able to build large-scale factories in China, employing more than 250,000 semi-skilled workers because the Chinese education system prepares tens of thousands of these battle-ready technicians and engineers.

    By contrast, India lacks the capacity to provide such skilled and semi-skilled workers. And these problems will linger as long as the Indian government balks at critical reforms for labour and land.

    While the Covid-19 outbreak has fed the Indian delusion of filling the vacuum China has left, it also reminds India that it still needs to learn from China before it can replace it.

    Fortunately, China wants to see a robust and prosperous manufacturing sector in India. At their meeting last October, President Xi Jinping and Prime Minister Modi agreed to explore setting up a partnership in manufacturing.

    Amid such havoc across global supply chains, maybe it is time for the world’s two largest countries to inject new dynamics through such joint initiatives.

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