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Trade wars trigger relocation of production bases

Relocation of production bases is likely to support transnational manufacturing practices. Transnational manufacturing is the new era in world manufacturing. It is focused on GVC (Global Value Chain) value-added manufacturing in the lure of low-cost production. To this end, labour-intensive industries in developing countries have worked well for transnational manufacturing through the GVC network.

Subrata Majumder 

The global trade war between US and China may prove to be a boon for India and South East Asian countries. The turmoil has triggered relocation of the production bases from China to other emerging nations like India and South East Asia. With the trade war intensifying, resulting in the erosion of low cost production base in China due to high tariff by Trump administration on almost all products, the big firms are scouting around for another low cost hub outside China.

MNCs, having bigger footprints in China, are now considering to shift their production bases to low cost countries like India, Vietnam and Indonesia. Relocation is of two types, according to one consultant. One group intends to shift part of their production bases and another group contemplates to shift the whole of their production out of China.

Leading Japanese media Nikkei Asia carried a report headlined “Southeast Asia, India and even US benefit as increased taxes add to wage concerns”. It said that “Southeast Asia and India have become safe heavens from US President Donald Trump’s barrage of tariffs”. Eventually, footwear, garments and electronic industries have become the target areas for some Taiwanese companies to relocate production bases, according to a survey. The survey showed how the Taiwanese companies were relocating their production bases to India and South East countries to counter the trade war.

Feng Tay Enterprises, a Taiwanese firm, which manufactures footwear and supplies to Nike and Adidas, stopped adding capacity in China and has set up production bases in South East Asia and India. The company was unnerved by the trade conflict and it has only around 10 percent of production left in China. According to its director Joe Lin, the company’s production in China would drop further with the simultaneous increase in capacities in South East Asia and India. Its second unit started production last year in India, with an intention to increase capacity further.

These cases exemplify the strength of India as a place for global manufacturing in view of the global relocation process. It spawns ample opportunities for FDI. The biggest advantages are its vast domestic market and sustainable growth, which excludes it from the pressure of export dominated growth, unlike Vietnam.

Indeed, China emerged as a big investor in India. It has become the catalyst for the start-ups in India and the driving force for the growth for electronic manufacturing industry. Chinese private equity players were on an investment binge in Indian start-ups. Last year, they invested $2.95 billion, which was five times more than the $579 million invested in 2016, according to Venture Intelligence. IT and IT enabled sectors were the focused areas of Chinese private equity investors.

Similarly, Chinese companies played a key role in establishing a strong platform for manufacturing mobile phones in India. Domestic manufacture of mobile phones clocked 397 percent growth in between 2014-15 and 2016-17. Almost all the leading Chinese manufacturers, like Xiami, Oppo, Huawai, One Plus, Cooplad, ZTE and Gionee have set up their manufacturing units in India. China also intends to invest in Indian infrastructure heavily. Last year, China’s Sany Heavy Industry planned an investment of $9.8 billion in India, while Pacific Construction, China Fortune Land Development and Dalian Wanda planned Investments of more than $5 billion each.

Firms in developed countries have established a transnational manufacturing network, combining their high tech knowhow with lower wage labour in developing countries. Eventually, production has become increasingly fragmented across the borders through the growing prevalence of GVC for production of components and parts in low wage countries. South East and East Asia emerged as potential partners for this new pattern of production. India trailed behind in this race. Inadequate availability of skilled workforce, lackluster infrastructure and limitation of scale of production were major deterrents for India to be a potential partner in GVC.

With China losing the low cost advantages in value chain manufacturing because of trade conflicts, which will eventually curb China’s export power, India has the opportunity to join the stream for low cost value chain manufacturing, vacated by China and strengthened by relocation of production bases. Known as the place for labour intensive industries and assigned as contract manufacturer for footwear and electronic items by the Taiwanese firms, relocation of production bases will likely rejig India’s potential for the transnational manufacturing practices.

India has an edge over the South East Asian countries like Indonesia, Thailand and Vietnam, which have perked up as potential areas for relocation of production bases. Though the wage level in these countries is more or less similar to India, they are behind India in offering a vast domestic market. These countries are export based economies. To this end, given the trade war squeezing export opportunities, the investors should have second thoughts on relocating to countries other than India.

(The author is a political commentator.)

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