Chinese whispers: This time it’s different

A direct and immediate fallout will be on businesses with deep supply chain linkages with China.

The rising graph of anti-China sentiments in the western media seems to be catching up fast with the number of people getting positively tested for Covid-19. What started as a trickle of dissent, with the WHO episode, is turning swiftly into a political glue that may bind the western political class and bring them on on many things in the world, particularly global trade and commerce.

One direct and immediate fallout will be on businesses with deep supply chain link- ages (crudely put, nearly complete dependence) with China. They will now be un- der intense pressure to re- examine their dependence on China. Though businesses in the past constantly evaluated their China dependence and moved around their sourcing bases. Take the case of Vietnam’s share of global footwear export that grew from zero to 12% in 15 years and this increase for Vietnam almost exclusively came at the expense of China. Same was the case for Bangladesh to emerge as the garment factory of the world during the same period. But such shifts were more cordial and in happier times. Bilateral trade deals, for instance the FTA of Bangladesh and Vietnam with EU, played their role.

Moreover, such shifts had China’s blessings for it was anyway keen to move away for low tech manufacturing like T-shirts and shoes to computer chips and semiconductors. But this time it’s different for a few reasons. Firstly, in the success stories of Bangladesh and of Vietnam, we often ignore that the movement of these factories into Bangladesh and Vietnam were merely shifts of assembly centres of the final product for wage cost arbitrage. These shifts hardly derisked the businesses’ supply chain dependence on China.

In the case of Bangladesh, for instance, its apparel export stood at US$32 bn in2018 (nearly 6.4% of the world’s share). However, Bangladesh imported 50% of the textile and garment components from China to make it happen. Same was the case with Vietnam, which had to rely on China for leather imports to make and export shoes. Therefore,from the perspective of the brand, the supply chain dependence on China was nearly intact. In the post Covid-19 world, the call will be for complete re-examination of this dependence of supply chain on China. In the case of apparel, for instance, it will now matter to the world that China commands nearly 30% of th eglobal export share of textile (that goes into making the final apparel).

Business will now seek alternatives to China in total￾ity rather than movement of assembly shops. If we take the case of textile and apparel as a proxy, the opportunity for India is to appreciate that it will be a tall order for many small countries to replicate the complete supply chain within their shores the way China has done it. Local production of raw material, intermediate processing capabilities, backward integration and vendor ecosystem, trained human resource, logistics and infra are all needed to manufacture both cotton-led and polyester-led fabrics/textiles that dominate world trade equally. India’s current competency that is export-worthy lies only in cotton and not in polyester and that too at a scale that is currently one-tenth of China’s.

However, not many countries are like India and have the resources to build an integrated value chain alternative to China. It is here that aggressive and swift policy push is needed that can motivate Indian and international business owners in the textile space to take advantage of this opportunity. It will imply rejuvenating textile factory hubs for cotton-led textiles and extend an encouraging welcome to South Korean and Japanese businesses to invest and ramp up polyester based and speciality textile manufacturing. Only then can we emerge as a worthy bidder to seize this opportunity as a prized source for jobs, economic growth and social development.

The same argument can apply to the world trade of footwear. India not only has export worthy foot wear units that can be scaled up, but it also has a vibrant leather manufacturing industry to manufacture finished leather (the raw material), talent pool and a healthy supply of bovine and goat population to support it. But Indian policy push on foot wear to seize this opportunity will have to shift towards a liberal and constructive out look towards existing cow protection laws, new foot wear manufacturing parks at scale in low cost manufacturing states and bilateral trade deals. In doing so, India can then aim to increase its share of global footwear exports that currently stand also at one tenth of China’s.

The same template can go on and on for categories like toys, lighting, electricals, tiles etc. Capturing a share of this shift in India’s kitty can become crucial economic drivers of states that have suffered from chronic under-development and unemployment. Secondly, this push to seek the de-risking of business supply chains from China will not merely rely on the whims of individual businesses as was the case in the past.

Earlier, it was the call of individual businesses whether to put all eggs in one basket called China as it happened in the case of toys or move parts of it as is the case with footwear. In the post Covid-19 world, governments in power in countries—be it Japan, South Korea or United States, UK, and EU—will sponsor this shift. Businesses will have limited room to escape this nudge. Therefore, it will do a whole lot of good for India not to let this opportunity slip away. But it will if India relies on businesses to create individual pitches to capture the share of this shift. Governments of the customer countries will seek guarantees from the India on smooth transition.

Therefore, Indian government will have to play an active match-maker on behalf of the businesses to do the trick. Thirdly, this nudge to de-risk business supply chains will also include shifts in strategic industries or industries of future away from China viz. EVs, semiconductors, IoT, telecommunications, consumer electronics, pharmaceuticals, waste recycling, etc. The parameters that individual countries may choose to define supply chain risks for such industries will be quite different from that of simple industries like footwear and toys. In a few such opportunities, countries may seek complete development of domestic supply chains and therefore not emerge as a customer for India. Their willingness to partner with India may then depend on one on one bilateral comforts and the geo-politics of the day. It implies that India will need a hard examination on case to case basis and make a long list of such opportunities.

It may emerge that for a few it may have to develop proprietary in-house capabilities primarily for the domestic market and for the exports to emerge as an opportunistic trade. For a few others, India may hit a jackpot on the strength of bilateral trade or on the diplomacy of give and take. India may require repurposing existing PSUs to pursue some of these opportunities or countries may demand Indian Government to become an active equity investor in a few others. Past track record of international businesses in these sectors in India may be scrutinized and/or covenants from the government may be sought to become a reality. Between textiles and pharmaceuticals and everything in between, if trade opportunities are expected to majorly (if not entirely) shift away from China over the next decade, India needs to put together a new template to seek a quarter of this shift in its kitty if not more. In doing so, assuming India creates an incremental export opportunity of USD 100 bn, in today’s terms this will translate into 3% of India’s GDP and this incremental export will take the pressure away India’s private consumption to drive economic growth. In the post Covid-19 world, the China factor is poised to dominate the geo-politics of the world going forward.

India urgently needs to take an aggressive and a proactive stance to make an opportunity out of this altered world view while at the same time keep China placated on the stance that the fall-out of the crisis is not of India’s making and that it is only reacting to it for its own interest. India will need to drive structural reforms to enable quite a few of these industries to emerge as “export champions” and democratize development and to take a holistic view that can see the big picture of geopolitics and commerce for a few others. But in doing so, the government will need to do the heavy lifting of creating the pitch book and being the deal maker because this time it’s different.

Ankur Bisen, SVP, Technopak Advisors, a management consulting firm and author of WASTED by Pan Macmillan India.