India must focus on capitalising on its economic gains in the diversification of global value chains away from China. The G20 forum, led by India this year, must be used for generating momentum for the same along with building resilient and sustainable supply chains.
The Covid-19 pandemic exposed the vulnerabilities in the globalised supply chain networks when production activities were suspended in the major manufacturing and assembling hub of the world, that is, China in 2020. This supply shock, thereafter, led to demand shocks around the world when nationwide lockdowns were announced elsewhere in Asia, Europe, Oceania and Americas. This economic gloom continues even in the current post-pandemic world with the aftermath of Chinese “Zero-Covid” policy of frequent and uncertain lockdowns leading to further global factory slowdown. The issue of sustainable, resilient and stable global supply chains continues to remain a moot point. The “China plus one” business diversification model has been floated around once again since the outbreak of the pandemic, especially in the geostrategic and geoeconomic realm of the Indo-Pacific.
Due to low production costs and large consumer base, China has attracted maximum Western and Japanese businesses leading to economic overdependence and high concentration of business interests in China alone over the last thirty years or so. Devised in 2013, “China plus one” or simply, “Plus one “strategy had been gaining momentum since 2008 when Western and Japanese MNCs were looking out for business diversification, that is, moving out of China to reduce dependence and thereby, expand operations outside China. However, this strategy became actually popular during the former US President Donald Trump’s reign who called out for “Make America Great Again” and initiated a tariff and trade war with China. As the U.S.-China trade tensions heightened, several firms were devising their respective ‘decoupling from China’ strategies and diversifying their businesses to other locations in Southeast Asia like Taiwan, Vietnam, Indonesia, Malaysia, Thailand and in South Asia like India and Bangladesh.
Japan has been one of the most pro-active proponents of the ‘China plus one’ strategy where “China-exit” subsidies were offered to various Japanese firms to relocate to ASEAN countries, Japan, India etc. so as to avoid supply chain disruptions- especially the ones experienced during the pandemic, in case of pharmaceuticals, critical medical supplies, semiconductors and other temporary trade restrictions. The diversification strategy is also being promoted due to the declining cost advantage of China, aggressive Chinese military and foreign policy in the form of “wolf-warrior diplomacy”, China’s data privacy laws and the huge mistrust between China and the West. De-risking supply chains has been a top priority for the Quadrilateral Security Dialogue (QUAD) nations during the pandemic when the Japan-India-Australia trilateral launched the Supply Chain Resilience Initiative (SCRI) in 2021 and the U.S. launched the Indo-Pacific Economic Framework (IPEF) in 2022. All four nations of the QUAD have significantly high trade exposure with China and are aware of the fact that absolute and complete decoupling from China is not a viable and feasible option. Yet, given the geopolitical tensions as well as the economic stresses of over-dependence on one nation alone, the QUAD nations are aiming to rebuild resilient global supply chains.
The year 2022 has been a momentous one for India, economically, as it became the fifth largest economy in the world and registered the highest-ever FDI-inflows and exports. India has been focussing its growth engines on the logistics and infrastructure sectors in order to be a network hub, rather than a node, in the global value chains. “China plus one” business strategy in the backdrop of the COVID-19 pandemic bestows India with a remarkable opportunity to integrate itself in high-end sophisticated and resilient supply chains, especially in the Indo-Pacific.
In this ‘resilient supply chain model’, India has an opportune moment at capitalising groupings like QUAD, SCRI, and IPEF to attract global value chains towards its own manufacturing and industrial sector to promote the vision of ‘Atmanirbhar Bharat’. The crucial thing is to recognise what worked well for China and how to increase India’s cost advantage by reducing infrastructural bottlenecks and enhancing export competitiveness. Considerabletrials, however, stand in the way of India gaining leverage in the “Plus one” diversification model. For example, despite the obvious and strong strategic partnership of India-Japan and India figuring in the list of top destinations for relocation of Japanese firms outside of China, there have been far fewer takers than estimated and expected. At a policy level, India has been insisting for entire supply chain relocation to the Indian businesses while the Japanese firms, persistent on high-end sophistication and precision, are reluctant and have been calling for a step-by-step approach of importing inputs from other nations first. Thus, many Japanese firms have been preferring other South and Southeast Asian nations over India in this regard. For complex manufacturing of high-precision products like medical devices and batteries, a phased approach is required so as to maintain the quality of finished products. So, India’s policymakers need to keep this in mind while demanding complete relocation of sophisticated supply chains. As the example of Japanese firms portray, policy clarity and a step-by-step approach for different product supply chains are necessary for India to transcend into a global manufacturing hub. Currently, India is being considered as an assembling hub more than a manufacturing one in the reconfiguration of resilient global supply chains.
The Production-Linked Incentive (PLI) scheme launched by the Government of India,under the purview of Atmanirbhar Bharat, provides the right push for local production and technology localisation in several sectors like automobiles and auto components, IT hardware and electronics, mobile and allied manufacturing, medical devices, pharmaceuticals, advanced chemistry cell batteries, drones, white goods, metals and mining, solar modules, textiles and apparel, electric component manufacturing etc. The PLI scheme supports not only the labour-intensive sectors but also boosts domestic production capabilities, thereby reducing import bills without venturing into excessive economic nationalism. India’s Bharatmala(for roads and highways), Sagarmala (to enhance the port modernisation and logistics sector), PM Gati Shakti National Master Plan (for multi-modal connectivity) along with the PLI scheme are steps in the right direction to maximise ease-of-doing business, infrastructure development and employment generation coupled with supply chain resilience.
These efforts need to be synchronised with the emerging trilateral and multilateral economic architecture in the Indo-Pacific like the SCRI and IPEF to aid trade facilitation, decarbonisation, digital economy, small and medium enterprises and most importantly, supply-chain resilience. Lately, there have been calls made by several European bureaucrats and firms amidst the Russia-Ukraine crisis for a “Europe plus one” strategy to come out of the gas shortages and electricity cuts. India again becomes an attractive destination for investment and diversification for these European companies based on its lower production cost advantages and favourable business climate.
Such “plus one” strategies provide ample scope for India to capitalise on the emerging economic architecture in the Indo-Pacific and partner with not only the other QUAD members but also Taiwan, South Korea, New Zealand, Pacific Island states, ASEAN countries and the European Union. Such multilateral collaborations will enhance the geoeconomic relevance of the Indo-Pacific mental map along with its already-acknowledged geopolitical significance. Policy flexibility, industrial clustering and technology will be the pillars of a future resilient global supply chain network. QUAD nations including India should lead the way forward, especially with India being the chair of G-20 in 2023 and ‘build back better’ in the post-pandemic economic recovery. India must catapult itself to a sourcing, manufacturing, and assembling hub in resilient, diversified, and sustainable global value chains.
The author is currently working as an Assistant Professor at the School of Internal Security, Defence and Strategic Studies (SISDSS), Rashtriya Raksha University, Gandhinagar. She is pursuing her Doctorate in Diplomacy and Disarmament Division at Centre for International Politics, Organisation & Disarmament (CIPOD), School of International Studies (SIS), Jawaharlal Nehru University (JNU), New Delhi.
https://www.financialexpress.com/defence/indias-g20-presidency-should-call-for-supply-chain-resilience-the-indo-pacific-construct-provides-the-way-forward/2986792/
