From China to Chennai
"It was the best of times. It was the worst of times; …" probably the most famous opening lines in all of English Literature, in Charles Dickens' widely acclaimed historical novel "A tale of Two Cities", asserted the author's belief in resurrection and transformation.
The world was armed with breakthrough technologies, high levels of industrialization and a thriving civilization. Enter Covid-19, and we are in a critical world which no one imagined would come by. The pandemic has torn things apart, forced new alliances and challenged the world order. It has shaken the core foundation of industries – from airline to food and beverage, to retail and manufacturing. Is the impact more profound and complex than the world has ever experienced? Does it require confronting the uncertainties head-on to redeem, to building the next normal? Yes, indeed.
As the world grapples with the crippling effect of the Covid-19 outbreak, a lot of questions come to the fore. What lies ahead for the world? While countries plan lifting lockdowns and gradually open up, predictions are rife that China which hereto enjoyed being the world's manufacturing capital will see a decline as companies move their manufacturing activities to other countries. Will India be one of them? Will Chennai, India's Automobile, Healthcare, IT/ITeS, & Pharma capital be the forerunner?Definitely, with Government of India's latest move to open up even the strategic sectors to private players and, in keeping with the federal government's unambiguous cum ambitious message, the Government of Tamil Nadu (GoTN) continues to push for the state's development.
Debates about whether "V-shaped" or "U-shaped" or "W-shaped" and often conclude with the probability that, it will not be what it was before. Increasing health concerns and the pressure on its infrastructure, the unraveling of global supply chains, long term economic and geopolitical shifts, amidst the low rates of forecasts for the global economy, all painting a gloomy picture, is bound to change the way businesses operate and strategize.
A recent Harvard Business Review concludes that current forecasts, while inevitably rough at this stage, call for a 13-32% decline in merchandise trade, a 30-40% reduction in foreign direct investment, and a 44-80% drop in international airline passenger traffic in 2020. Most of the run-up in trade integration since the end of World War II should remain intact. Covid-19 looks like a "bend but won't break crisis" for globalization.
Consumerism, the new religion of the global economic growth model, saw the world requiring massive scale production, over the last 20-30 years. Fueling as well as satisfying this hunger China, from the time it implemented the Open Door Policy in 1978, has been moving up the value ladder to become the world's largest exporter, supplying one-third of the market of intermediate goods globally and earning the mantle of "manufacturing leader of the world". That China has accounted for 12% of the world's GDP growth rate is largely attributable to its manufacturing capacity.
Wuhan, now the epicenter of the Covid-19 pandemic, the sprawling capital city of Hubei province and the most populous city in Central China, has been the manufacturing hub for 2-3 decades. Heavily invested in by both domestic and foreign players, the city is home to auto majors including General Motors, Honda, Nissan, Peugeot Group and Renault. The China Passenger Car Association (CPCA) forecasts a 10% decrease in sales for the first half of the year and 5% decline for the whole year. Optical electronics, another major industry of Wuhan, saw computer shipments from China to the USA dropping by 64%, and monitor and TV by 66% in first two weeks of March, as per a report from S & P Global Market Intelligence. Iron & Steel – another major industry or pharma, biotech and environmental protection – the fast growing sectors, are no exceptions. For the first time in 30 years, China has decided not to set a growth target due to "great uncertainty" sparked by the coronavirus pandemic as the Chinese economy shrank 6.8% in the first quarter of 2020.
The exit China chant was already on the cards even before the on set of Covid-19. Concerns were growing over the worlds over reliance on China. The country was moving away from being the cheapest place to manufacture due to its gradually tightening policies, including the environmental regulations, resulting in increasing wages. Lack of a robust IP protection has been another concern. Add to these, President Donald J. Trump, in 2018, started imposing tariffs and other trade barriers on China citing 'unfair trade practices' etc.
China's decision of not informing rest of the world about the outbreak of Covid-19 causing huge number of avoidable deaths and turmoil the world over deepened the trust deficit, adding fuel to the fire.
The strict lockdown measures following the virus outbreak, brought the industry in Wuhan to a sudden halt blocking supply chains thereby leaving companies in lurch, with little ability to substitute supply of intermediate goods on an urgent basis, was the last straw. The excessive dependence acted as a wake-up call.
No doubt, there have been various analyses stating that the pandemic would be an ideal opportunity to decouple from China. While this would make an excellent political statement, it is altogether another proposition for businesses to leave lock stock & barrel. Consider these:
China offers world-class infrastructure at a price that cannot be easily beaten. This fact has not changed.
For deeply invested brands like Apple – Foxconn alone manufactures iPhones in 29 factories in the province of Zhengzhou and 50% of Apple's suppliers are based in China – it would be impossible to exit the country. But still, Apple has asked its major suppliers to assess the cost implications of moving between 15% and 30% of their production capacity from China to other countries in Southeast Asia.
With China's phenomenally huge middle class market, expected to touch 1.4 billion consumers by 2030 according to the UN Population Division report, companies will continue to produce for and sell to China's domestic market.
However, the bottom line is that while we cannot expect a full abandonment of China as a preferred manufacturing destination, it does mean China's days as the ultimate manufacturing hub for the Western world are over. The exit China mantra grows louder with each passing day. Countries are looking at alternative manufacturing destinations.
India enjoys numerous advantages and would definitely be amongst top choices for an alternative manufacturing destination. The entry level salary for workers in India ranges between INR 12,000 (US$157) and INR 15,000 (US$196). India also offers other advantages such as lower operating costs, evolving infrastructure, special economic zones that offer duty free exports among other benefits, incentives for domestic manufacturing and business-friendly policies. India's thriving relationship with US too is an advantage as companies do not have to worry about restrictive tariffs.
As N Venkatram, CEO, Deloitte India says in an article in ET datelined 26th May 2020, "the clear differentiator for India, as it was for China two decades ago, is its large domestic market. …..This is the India that is on global companies' radar as they consider de-risking their manufacturing in an evolving new world order- the post Covid-19 era". According to the World Economic Forum, India is expected to be the third largest consumer market by 2025, just behind the US and China – "India's top 40 cities will form a USD 1.5 trillion opportunity by 2030, many thousands of small urban towns will also drive an equally large spend in aggregate. In parallel, there will be an opportunity to unlock nearly US$1.2 trillion of spend in developed rural areas by improving infrastructure and providing access to organized and online retail."
With China losing its tag as preferred manufacturing hub, around 1,000 foreign companies are already engaged in discussions at various levels with the Indian authorities to redirect their businesses from China to India. According to top government sources, at least 300 of these companies are actively pursuing production plans in sectors such as mobiles, electronics, medical devices, textiles and synthetic fabric. Japan has announced an economic stimulus for its companies to shift production out of China, not only back to Japan but to other countries as well. Many more countries like South Korea and USA are keen to follow Japan, which also is expected to benefit India.
Since USA increased pressure on Beijing for its lack of accountability in its role in the coronavirus epidemic, the Government of India (GOI) has reached out to over 1,000 US companies urging them to move operations from China to India. The recent years have also seen companies in India making rapid strides largely in industries such as Information Technology, Automotive, and Pharmaceuticals. India has the fastest growing smart phone market with a consumer base of more than 50 million in 2019. With all its geopolitical and demographic advantage, India is keen to tap its potential to develop the skill, scale, and the speed required to take over leadership of manufacturing for the world market. Recognizing India's entrepreneurial talent, the federal and state governments are already working hard to support businesses in India to maximize country's economic potential and emerge as a strong contender on the economic world stage.
The GOI, in the year 2014, launched the "Make in India" (MII) program under the aegis of Prime Minister Mr. Narendra Modi to rebrand India as the manufacturing hub of the world. Along with MII, other initiatives such as Ease of Doing Business, Skill India, Digital India, etc., introduced by GOI have touted India's Manufacturing Gross Value Add (GVA) to reach USD 1 Trillion with an increased share in world exports from 1.6% to 3.4% and a reduction in dependence on imports by a minimum of 10%. Additionally, 25 strategic sectors were identified under the MII initiative as opportunities for investment with a concerted plan to initiate policy reforms to further buttress manufacturing capacity in these sectors. The MII continues to provide an impetus to several sectors presenting a wide scope for investments opportunities in terms of partnerships, collaborations and investments in India. This and the rollout of the Goods and Services Tax (GST) have led India to be on a well laid out path to become one of the most open economies in the world for large-scale inbound investments.
While the present crisis has presented India with overwhelming challenges, it has also given rise to opportunity. There are many other factors working to support manufacturing in India. India has a stable government committed to economic reforms. The economy is sound and among the fastest growing in the World. India's strong demographic advantage (India's average age is 27 vs 37 of China) supported by a strong, empowering and modernizing educational infrastructure is poised to provide an assured pipeline of trained manpower for years to come. There have been a series of incremental and high impact policy measures which have served to improve the ease of doing business in India resulting in India climbing up by 70 places in World Banks's Ease of Doing Business and 30 places in world competitive index in last three years. According to a study conducted by Deloitte, India is expected to jump six ranks to No. 5 in the 2020 Predicted Manufacturing Competitiveness.
The manufacturing industry in India is at the cusp of a great upward curve. Due to geopolitical reasons global investors have begun to show renewed interest in India. The GOI has seized the initiative to allow higher levels of investment from abroad in diverse sectors including railways, defense, civil aviation, pharmaceuticals, single brand retail and technology. In a major push to domestic manufacturing, the government slashed the general corporate tax rates to 25.17 per cent in 2019 with further reduction in corporate tax rates for new manufacturing companies to 17 per cent, making it the lowest in South East Asia.
India has great opportunity to attract businesses leaving China. As Ms. Nisha Biswal, President, USIBC, puts it "While we haven't seen a huge shift towards India so far, the Centre and a number of state governments have made a significant push to engage global businesses and work with them to create opportunities for investment. I'm confident that the forward-looking opportunity remains enormous, if India can capture even a slice of a growing market. India has made important improvements in the ease of doing business, new manufacturing incentive schemes, policy enhancements, and investment in infrastructure." However, other developing countries such as Thailand, Vietnam, Indonesia, etc., are also competing.
To stay ahead, India has already started working swiftly to introduce further measures that promote ease of business to encourage switch to India, like:
Working on the reforms meant to help India capture opportunities emerging in the post-coronavirus world, on the 30th April 2020, the Prime Minister is said to have announced at a meeting with his ministers that the idea is to make India 'a global manufacturing hub' at a time when supply chains have broken down and the world is looking at China alternatives to shift production bases. Focused on improving the ease of doing business, the GOI is constantly working on relaxing regulatory norms further, removing bureaucratic hurdles and providing fiscal incentives to both domestic and foreign investors. Detailed discussions have taken place with states to evolve their strategies and to be more proactive in attracting investments.
GOI has already identified 461,589 hectares land pool (twice the size of Luxemburg) to lure businesses moving out of China.
As part of the stimulus package, the GOI on 16th May 2020, announced structural reforms in coal (mining opened to private players), minerals, defence production (Foreign Direct Investment cap up from 49% to 74%), airports & civil aviation (freeing up air space), power distribution, space and atomic energy. Definitely, a move in the right direction.
On 18th May, 2020, the Finance Minister, Mrs. Nirmala Sitharaman, said that the GOI will soon announce a policy that will pave way for the entry of private players even in the strategic sectors hitherto reserved for state-run entities.
As reported in the Financial Press, as recently as on 25th May 2020, the GOI, keen to send a strong signal to investors, is weighing options to push labor reforms and is likely to supersede the ordinances recently issued by some states to temporarily suspend many labor laws to ensure uniform regulations that offer flexibility to new and existing businesses across India.
So, the answer is yes – India is well placed to attract foreign firms looking for alternatives to China or pursuing China +1 strategy.
Tamil Nadu is a major state in India situated at the South-Eastern extremity of the Indian Peninsula and is one of India's most developed states with a large-scale skilled labour force and an excellent road and rail network, seven airports, 4 major ports and 22 non- major ports.
Tamil Nadu: India's investment corridor to the world
Figure 1: Connectivity (Road/Air/Sea) in Tamil Nadu
Tamil Nadu is gradually becoming a global servicing hub and the ideal destination for discerning global investors. Tamil Nadu is known as the economic powerhouse of the country and is well known for its diversified industrial base. Tamil Nadu is home to the highest number of factories in India with over 37,220 units. The state leads as an industrial leader in several sectors such as automobiles, pharmaceuticals, electronic, textiles, leather products and chemicals, among others. India's first planned Defense Corridor is also fast taking shape in the state.
Figure 1: Connectivity (Road/Air/Sea) in Tamil Nadu
Figure 2: Tamil Nadu's GSDP at constant prices (USD billion)
Tamil Nadu contributes 8.2% of India's GDP. The robust economic growth of the state is predominantly attributed to the stellar performance of its industry and service sector. In 2013-14, the Gross State Domestic Product (GSDP) of Tamil Nadu grew at a compound annual growth rate (CAGR) of about 7.2%. With cumulative FDI inflows of over 15.9 billion USD from 2000-01 to 2018-19, Tamil Nadu accounts for 7% of FDI inflows into India. In 2018 – 19, manufacturing exports from Tamil Nadu rose close to USD 30.5 billion. Sustained growth of the industrial sector has always been the top –priority of the state government. The state provides a gamut of sector specific policies and is dynamically updates those policies periodically to meet investor requirements.
Figure 2: Tamil Nadu's GSDP at constant prices (USD billion)
Figure 3: Tamil Nadu Government's Sector Specific Policies
Through these policies various fiscal incentives are provided which include capital subsidies, land cost subsidies, SGST reimbursements, Stamp duty exemptions, electricity tax exemptions, skill development and employment incentives and special packages for MSMEs and Startups.
Some of the key achievements of the state of Tamil Nadu are:
The second-highest contributor to India's renewable energy capacity – 12%, with a total installed capacity of 30,255 MW.
Its contribution to the national Industrial Output in Automobile industry stands at 25%. Makes it the largest contributor to the sector in India. To day, Tamil Nadu is the only state in India to attract seven automobile giants- Ford, Hyundai, Mitsubishi, Daimler, Nissan, Renault and BMW. The State is also a preferred choice for over 350 large auto components manufacturers, accounting for more than 35% of India's auto-components.
The 2nd largest cluster for electronic manufacturing services and 3rd largest manufacturer of electronic hardware in India; the electronic industry in Tamil Nadu has grown at a CAGR of 30% from 2008 to date.
Many Fortune 500 companies such as Motorola, DELL Computers, Samsung, Foxconn, Sanmina-SCI, Flextronics, and Siemens besides several component suppliers have setup manufacturing facilities in the state.
The State turns out the largest number of skilled manpower in India every year and is a pioneer in promoting technical education in the private sector. The State also houses several Defense Public Sector Undertakings specializing in defense manufacturing.
The growth of numerous major factories in the state has enabled establishment of several big supporting industries including numerous SMEs in building their manufacturing capabilities to form sustainable supply chains.
In keeping with the country's ambition, the Government of Tamil Nadu (GoTN) continues to push for the state's development, by ensuring support for building public private partnerships, augmenting B2B sourcing, providing special incentives of assistance for clusters and equity support for promoting various industrial parks apart from its already existing ecosystem through its one-stop-shop, the Tamil Nadu Industrial Guidance and Export Promotion Bureau. Chennai pushed for and got the country's first planned Defense Industrial Corridor within 18 months of it being conceptualized and advocated.
The latest Industrial Policy 2019 of the state facilitates end-to-end online services, MSME friendly processes, simplified and transparent registration and inspection. The state government provides regular stakeholder consultation to understand gaps and changing industry requirements in regulations and policies. Introduction of a grievance redressal mechanism and enhanced technology adoption for paperless delivery and time bound service has increased accountability of the government. The state government has also taken to form Geographic Information Systems through a "Plug and Play system" which identifies land earmarked for industrial use across the state and details of infrastructure like electricity, roads and water available as well for ease of setting units in the state. As India forges its way out of this crisis, Tamil Nadu and specifically Chennai may well be poised to become the next powerhouse for manufacturing in India as the world leaves China for greener and safer pastures.
Chennai, the capital city of Tamil Nadu, located on the Coromandel Coast off the Bay of Bengal. It is the biggest cultural, economic and educational center of South India. Chennai has the fourth largest Gross Metropolitan Product in India. Chennai is known as the Detroit of Asia as it accounts for 60 % of India's automotive exports. The city has emerged as an important center for banking and finance in the World Market. Chennai boasts a transaction volume serving 900 million people across the world through back office operation. Several large financial companies and insurance companies are headquartered in Chennai. The city serves as a major back-up center for operations of many banks; including World Bank and financial companies of the world.
Growth potential of the Greater Chennai Region:
Figure 4: Sector-wise Investment Scenario in Manufacturing in Chennai
Figure 4: Sector-wise Investment Scenario in Manufacturing in Chennai
The industrial ecosystem in Chennai has 12 industrial clusters surrounding the greater Chennai region.
Figure 5: Map of Industrial Clusters in the Greater Chennai Region
Chennai also encourages international trade through International bilateral trade associations like Indo Japan Chamber of Commerce, Indo-American Chamber of Commerce, Korea Trade Center, Japan External Organization, Indo- German, Indo-French, Indo-Italian and Taipei World Trade Center, among others.
While China's challenge is to diversify its trade away from the United States, Tamil Nadu's challenge is to make itself more friendly to foreign manufacturing investment. The state is positioning itself strategically, to well emerge the winner, by setting up dedicated committees to come out with a plan of action to directly engage with the firms that might want to diversify out of China.
Tamil Nadu Government is now working to provide the following: (i) all help and facilitation to revive the existing industries, (ii) to attract new investment, (iii) to simplify the governmental procedure and promote ease of doing business and (iv)to improve liquidity for business by ensuring easy availability of credit. The Tamil Nadu government was also said to be working on "300-400 leads" of foreign companies from France, Germany, Japan, South Korea, Singapore and Taiwan, to get them invest in the State. The global consultancy, PwC was helping the government in pulling in investments into the State, in this regard.
What next for Tamil Nadu & Greater Chennai region?
The Chief Minister in his recent address stated that a special incentive package will be provided for Defence manufacturing, health, and pharmaceutical sector, textiles E-vehicles and ESDM. The High Tech Aerospace Park at Sriperumbudur (near Chennai) with advanced research and testing facilities with an aerospace friendly ecosystem is also another opportunity to bring in investments into the state.
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