ANALYSIS: India Embraces Opportunity as Multinational Companies Shift Production out of China

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India, with the world’s largest population and a huge market, is benefiting from the global trend of “derisking” from China.

Market research firm IMA India released its “2023 Global Operations Benchmarking Survey” in May, which surveyed 100 business leaders representing international B2B (business to business) companies in India. It showed that 88 percent of CEOs preferred India over China as their top choice, despite facing infrastructure, legal restrictions, and skill-related problems as their major challenges in India.

The survey also showed that compared to service companies, many manufacturing companies chose India, Vietnam, or Thailand as alternative countries to China. This suggests that many multinational corporations (MNCs) actively explore options to mitigate supply chain risk.

“In the last five years, foreign MNCs have increased their on-ground presence in India, partly as a result of diversification away from China. In particular, the IT & ITES [Information Technology Enabled Services] companies are ramping up the share of their global workforce that is based in India,” said Suraj Saigal, research director at IMA India.

The survey revealed a global trend where countries prioritize cooperation with established partners rather than relying on international or regional trade agreements.

Business Confidence in China Declines

Important factors prompting these CEOs to consider alternative supply chain options include the Chinese Communist Party’s (CCP) growing geopolitical aggressiveness, dubious trade and commercial practices, and rising labor costs.

Another survey released by the European Union Chamber of Commerce in China (EUCCC) on June 21 found a significant deterioration of business confidence in China among European companies.

Business confidence in China is “pretty much the lowest we have on record,” stated Jens Eskelund, president of the European Chamber, during a press briefing preceding the report’s publication.

The shift can be attributed to slowing Chinese economic growth and rising costs.

Heightened security controls, the CCP’s protection of domestic companies, and the expansion of China’s anti-spying law are also shared concerns of foreign companies.

In April, Chinese police raided two advisory companies, Bain & Co. and Capvision, and a due diligence firm, Mintz Group, without providing a valid reason. Chinese authorities said foreign companies are required to obey the law but have not named any possible violations.

The American Chamber of Commerce China (AmCham China) said in its annual survey report in March that for the first time in 25 years, China has dropped out of the top three priority investment destinations for U.S. businesses, mainly due to the deteriorating U.S.-China relations and the impact of three years of COVID-19 lockdown measures, which have greatly undermined the Chinese economy and significantly eroded confidence in the Chinese market among U.S. companies.

India

In response to the waning confidence of multinational corporations in China, India has been proactively attracting foreign companies to invest in the country and foster the growth of its manufacturing sector.

Taiwan, which has long been under the military threat of the CCP, and the United States, the global leader in countering the CCP threat, have seen more companies moving their production to India.

U.S. President Joe Biden and India’s Prime Minister Narendra Modi (L) listen to the national anthems during a welcoming ceremony for Modi in the South Lawn of the White House in Washington on June 22, 2023. (Mandel Ngan/AFP via Getty Images)

According to a report released in October 2022 by the Montaigne Institute and the Taiwan-Asia Exchange Foundation, Taiwan’s direct investment in India accounted for 0.07 percent of total foreign direct investment in India between 2000 and 2017. But the “new awareness of geopolitical risks linked to China” has changed the situation, leading to a trend wherein both countries are expediting diversification away from China. Vietnam is also benefiting from this situation.

“As of April 2022, with more than 100 Taiwanese companies in India employing 65,000 Indians, Taiwan’s investment in India amounts to US$ 1.5 billion, and has risen to close to 1 percent of Taiwan’s outbound investment,” the report said. “The signing of the upgraded bilateral investment treaty in 2018 doubled Taiwan’s investment in India. In 2020-21, India’s Investment Promotion Department received 87 applications from Taiwanese companies in 17 sectors, including electronics, healthcare, information technology, manufacturing, power generation, e-commerce, and retail.”

U.S. companies are taking similar actions. Since last year, Apple has gradually shifted more production capacity of its iPhone series to India and started producing the latest iPhone 14 in the country. Moreover, Apple’s two foundries, Foxconn and Pegatron in Taiwan, have also expanded their presence in the Indian market.

This signifies a major shift in Apple’s strategy in India. Initially, Apple focused its production in India primarily for the domestic market. However, Apple’s current objective is to establish a strategic production hub in India for exporting to third markets, including Europe, the report said.

In the semiconductor industry, the Modi administration’s incentive policy has attracted Taiwan’s Foxconn and India’s biggest mining company Vedanta to set up a chip factory in India in a joint venture.Prime Minister Narendra Modi’s recent visit to the United States was fruitful. According to a joint statement released by the White House on June 22, Micron Technology Inc., the U.S. memory chip giant blocked by the CCP, plans to build a $2.75 billion memory chip assembly and testing plant in India, with India paying 70 percent of the cost.

In addition, U.S.-based Lam Research plans to train 60,000 Indian engineers through its Semiverse Solution virtual fabrication platform to accelerate India’s semiconductor education and workforce development goals, and Applied Materials company announced a $400 million investment to establish a collaborative engineering center in India, according to the White House statement.

India is also striving to become a manufacturing hub for electric vehicles. During his recent visit to the United States, Modi met with Tesla founder Elon Musk, who said after the meeting that Tesla will try to be in India “as soon as humanly possible.”

On the military front, India and the United States jointly announced an agreement allowing General Electric to partner with Hindustan Aeronautics to produce fighter jet engines for the Indian Air Force.