Home MarketsAsia India wants to become the main manufacturing alternative to China. But first he needs to beat Vietnam.

India wants to become the main manufacturing alternative to China. But first he needs to beat Vietnam.

by SuperiorInvest

Workers at the Lava mobile phone manufacturing plant in Noida, India.

Hindustan Times | Hindustan Times | fake images

India wants to be Asia's top manufacturer as companies move away from China, but it first needs to cut taxes and improve supply chain efficiency if it wants to dethrone Vietnam.

The United States has pursued a “friendship” agenda as competition with China increases. The Biden administration has encouraged American companies to move their electronics and technology manufacturing operations out of China to friendlier countries, particularly Vietnam and India in the Asia-Pacific.

“Both Democrats and Republicans see China as a challenge. And every boardroom in America asks a CEO what their strategy is to reduce China risk,” said Mukesh Aghi, president and CEO of the Forum. of Strategic Partnership between the United States and India.

Vietnam's advantage

India and Vietnam are attractive manufacturing alternatives for foreign companies and investors, due in part to low labor costs. Between the two, however, Vietnam is still far ahead with exports in 2023 totaling $96.99 billion, compared to India's $75.65 billion.

“Vietnam is known for its ability to manufacture electronics. India is just entering that game, giving Vietnam a competitive advantage,” said Samir Kapadia, CEO of India Index and CEO of Vogel Group.

While India's relationship with the United States has improved, especially after Prime Minister Narendra Modi's state visit to the White House in June, Vietnam has had a trade and investment agreement with Washington since 2007.

Another key advantage for Vietnam is a simpler proposition compared to India, which Aghi said has “29 states and each state has a policy that may be different.”

“Vietnam has an advantage when it comes to economies of scale in manufacturing, where labor is primarily manual,” said Nari Viswanathan, senior director of supply chain strategy at software firm Coupa.

Sectors that are labor-intensive and have low profit margins, such as garment manufacturing, “are not going to move the needle” for India,” Viswanathan said.

American tech giants are increasingly bringing part of their supply chains to the South Asian country. The Financial Times reported in December that Apple told component suppliers that it will source batteries from Indian factories for its upcoming iPhone 16. The company has been considering expanding its operations in India since 2016, when CEO Tim Cook visited Indian Prime Minister Narendra Modi. Google Production of Pixel phones is also scheduled to begin in India in the second quarter.

Import taxes remain high

One hurdle to India's manufacturing hub ambitions is the 10% import tax on information and communications technologies. This is higher than Vietnam's average import duties of around 5%, according to Andy Ho, chief investment officer at VinaCapital.

Taxes on imports from India were intended to protect domestic manufacturers, but reducing those tariffs will be part of the government's efforts to attract foreign companies to manufacture products within the country.

“2024 will be the year when Prime Minister Modi removes many of these tariffs, but he will do so on an industry-by-industry basis, rather than country-by-country,” Kapadia added.

For example, in January India reduced import taxes on certain metal and plastic parts used in the manufacture of mobile phones from 15% to 10%. That benefits companies like Apple and Dixon Technologies, which makes phones for Xiaomi, Samsung and Motorola.

“Given Vietnam's stronghold on electronics manufacturing and exports to the United States, that is where we will see the most traction early on as India tries to gain market share. This includes all types of plastics, metal components and mechanical items” Kapadia said.

India's electronics exports to the United States reached $6.6 billion between January and September last year, compared to $2.6 billion in the same period in 2022, according to a LinkedIn post by Pankaj Mahindroo, president of the Electronics and Cellular Association of India.

But VinaCapital's Ho warned that reducing import duties “is not a source of sustainable advantage in attracting foreign direct investment in the long term.”

“What tends to worry foreign investors more is the ease of doing business – especially the flexibility to hire and fire workers – than taxes and tariffs. This is the main source of Vietnam's long-term advantage over India,” he said. Ho to CNBC in an email.

Efficiency is key

Although India wants to be a developed economy by 2047, its infrastructure is still poor, causing long shipping and delivery times by road.

“A ship in Singapore can be unloaded in eight hours and be on a truck heading to potential factories, but the same ship in India will be stuck in a bonded warehouse for days,” Aghi said, warning that these delays reduce the attractiveness of the South Asian nation for foreign companies.

“China is probably 10 years ahead of India in its infrastructure, so the country needs to work harder to ensure that infrastructure continues to be built,” he added.

India's interim budget estimated that the federal government will spend 2.55 trillion rupees ($30.7 billion) to improve India's railway system.

“India is on the path of modernizing logistics systems to improve on-demand supply chain models for importers and exporters and this takes into account all kinds of new roads and ports. I think it will be a priority before automation,” Kapadia said.

Vietnam's warm relations with China

However, Vietnam's warm relationship with China offers India a key advantage, Kapadia noted.

“Vietnam couldn't be closer to China in so many different ways. And I think that's going to worry American supply chain managers and corporations for the next 10 to 15 years,” he warned.

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Chinese President Xi Jinping visited Vietnam just three months after US President Joe Biden and signed agreements with Vietnam in areas such as infrastructure, trade and security.

“[China and Vietnam are] They constantly shake hands and give each other medals every time they see each other,” Kapadia said.

“I think the larger players will take into account some of the political calculations surrounding China's relationship with Vietnam and delay their decision-making until India can demonstrate that it can actually compete in electronics manufacturing to date,” he added. .

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