How can India benefit from China plus one strategy?

The Economic Survey report tabled in the Lok Sabha on Monday has explored in detail a strategy of reducing the dependence on China-led global supply chain, and what India stands to gain from the much-touted move of China-plus-one. Here’s what the Economic Survey 2024 says:

Over the last five years, a seismic change has occurred in the global manufacturing realm, with major multinational companies, including Apple and others, looking to ‘de-risk’ themselves from China, which was traditionally known as the ‘world’s factory’. This shift is primarily due to disruptions caused by COVID-19, growing tensions between the US and China, and rising costs of doing business in China.

As a result, several companies have adopted a ‘China plus one strategy’ to reduce their reliance on China for high-tech electronic products and components. This approach involves supply chain decisions to decrease their risk exposure to China.

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For example, over 90 per cent of manufacturers in North America surveyed by the Boston Consulting Group in 2023 moved some or all of their production to other countries like Mexico, Thailand, and Vietnam, suggesting a move away from China.

Can India benefit from this ‘China plus one’ strategy?

The appeal of India lies in its large domestic consumer market, which makes it attractive for companies to set up operations there. In the electronics sector, there is a focus on smartphone manufacturing and assembly. The government’s PLI scheme, including tax breaks and subsidies, plays a significant role in attracting companies. The rise in India’s domestic smartphone demand is also a key factor in companies’ decisions to invest there.

For instance, Apple assembled $14 billion worth of iPhones in India during FY24, constituting 14 per cent of its global iPhone production. Foxconn has started production of Apple mobile phones in Karnataka and Tamil Nadu. While India may not be an immediate beneficiary of the trade diversion from China, it has witnessed a substantial increase in its electronic exports over time.

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The PLI move, a game-changer

The implementation of the PLI scheme has been a key driver of this growth. For instance, India’s electronic exports to the US have transitioned from a trade deficit of USD 0.6 billion in FY17 to a trade surplus of USD 8.7 billion in FY24, underscoring a significant increase in value addition.

Within the electronics sector, the category that has experienced the most growth is mobile phones, with exports to the US rising from USD 2.2 billion in FY23 to USD 5.7 billion in FY24. As India looks to deepen its involvement in Global Value Chains (GVCs), it will look to the successes and strategies of East Asian economies.

These economies have typically pursued two main strategies: reducing trade costs and facilitating foreign investment.

Given that GVCs are designed to minimise costs, countries like Malaysia, Vietnam, and Taiwan have focused on lowering their trade costs over time. For India, improving logistical efficiency has been a key focus, as evidenced by a noticeable rise in India’s score on the World Bank’s LPI (as discussed in para 4.49).

Focus on investment facilitation

The second strategy, focused on investment facilitation, includes actions to increase and stabilise foreign investment. The PLI scheme, for example, encourages high-quality foreign investment by offering a market-linked incentive system for companies to comply with.

Over the medium term, India is focusing on integrating its value chain with that of the West, particularly in sectors like renewable energy and advanced technology, including artificial intelligence, semiconductors, and next-generation telecommunications.

This strategy is being pursued through agreements such as the Australia-India Free Trade Agreement and the US-India Clean Energy Initiative. As a result, the trading patterns within these sectors are starting to develop.

For example, the tariff classifications for environmentally friendly technology, such as solar water heaters, waste recycling devices, and wind turbines, show an increase in exports to the USA from USD 199.2 million in FY20 to USD 326.9 million in FY24105. Further, leading American and European companies in the renewable energy sector, such as First Solar, Vesta, and Scatec, have established their operations in India to take advantage of the growing demand for green technologies.

Will China-plus-one result in a total movement of trading relations away from China?

This may not be the case. Take, for example, nations like Mexico, Vietnam, Taiwan and Korea, which were direct beneficiaries of the US’s trade diversion from China. Even while these nations increased their share of exports to the US, they also displayed a concomitant rise in Chinese FDI.

Therefore, the world cannot completely look past China, even as it pursues China plus one. India faces two choices to benefit from China plus one strategy: it can integrate into China’s supply chain or promote FDI from China. Among these choices, focusing on FDI from China seems more promising for boosting India’s exports to the US, similar to how East Asian economies did in the past.

Moreover, choosing FDI as a strategy to benefit from the China plus one approach appears more advantageous than relying on trade. This is because China is India’s top import partner, and the trade deficit with China has been growing.

A lot depends on other factors

As the US and Europe shift their immediate sourcing away from China, it is more effective to have Chinese companies invest in India and then export the products to these markets rather than importing from China, adding minimal value, and then re-exporting them.

Further a recent research note from the Rhodium Group points out, “China’s dominance over so many product categories creates, first and foremost, a risk of economic coercion, where the government restrains access to crucial inputs for political leverage.”

The same brief also notes, “Brazil and Turkey have raised barriers to imports of Chinese EVs, but enacted measures to attract Chinese FDI in the sector.” European nations, too, have decided to follow a similar approach. Hence, it is imperative that India finds the right balance between importing goods from China and importing capital (FDI) from China.