India to gain from supply chain shift

As multinationals seek to diversify their supply chain risk away from China, experts say that India has an edge over Mexico, but carries its own significant risks as an alternative supply option and is not the next China. UK-based Oxford Economics said that its Market Compass tool confirms there is no single “next China” capable of replicating its distinct advantages as a global manufacturing hub, including its big domestic market, large and skilled labour force, and infrastructure quality. However, the analysts added that other countries can offer “compelling propositions” as alternative manufacturing hubs for companies looking to diversify their production footprint and reduce their China exposure. Singapore is seen as an important contender and ranks above India in the Oxford Economics index. But it has limited capacity due to size. “Our tool suggests India is a strong contender, as it is third overall in our ranking of manufacturing attractiveness thanks to its macroeconomic stability, abundant labour, and large domestic market. Holding India back is its low productivity per worker and poor education levels, but it is still the top-scoring emerging market,” said the consulting and research firm. Mexico recently replaced China as the biggest trade partner for the US and is often seen as a key winner in the nearshoring trend. However, it only ranks 36th out of 41 countries in the Market Compass given its greater exposure to risk scenarios such as higher-for-longer rates in the US, its poor security environment, and depleted capital stock, said the firm. “Companies that are focused on accessing the US market, not concerned with FX volatility, and have the ability to offset security and labour costs may prefer Mexico. Alternatively, India may be a better fit for firms looking for low labour costs and a relatively macro stability,” it said. Oxford Economics points out that multinationals are increasingly under pressure to diversify and de-risk their supply chains. It says that two key priorities in this process are diversifying away from overly concentrated supply chains and from an overreliance on China. “A key takeaway of the Market Compass results is that there is no single ‘next China’ that can offer all the advantages that contributed to its rise as a global manufacturing hub, which is confirmed by China’s overall first place and wide lead against a pack of 40 rivals. But there are pockets of opportunities for other countries. India scores surprisingly well, at third overall, behind Singapore,” states Oxford Economics. “We find that neither India nor Mexico can beat China in the quality of its infrastructure, or the sheer abundance of qualified labour and size of its domestic market. But both manage to outscore or come quite close to it in two of the five dimensions we analysed: riskiness and the business environment,” it added. The analysts said that while India and Mexico are relatively insulated from a scenario of increased tensions between China and Taiwan, when it comes to risk exposure more broadly, India seems to be the safer alternative to China. The firm notes that India’s currency has shown “remarkable stability” as compared to other emerging market economies in recent months, and even years, and it forecasts continued broad currency stability. This is thanks to Indian assets’ rising appeal to global investors, reduced macroeconomic and political volatility, and targeted central bank interventions. In contrast to Mexico, the BJP’s slimmer-than-expected victory in this year’s national elections suggests Prime Minister Narendra Modi and his party will be subject to more checks and balances, ringfencing more radical policy proposals and the consolidation of a one-party rule,” added the analysts. Labour costs are also a big factor in the shift in sentiment from China to India, said Oxford Economics. “China is no longer a synonym of cheap labour, and the gap is likely to widen during the next five years. India’s edge on labour costs over China is only comparable to that of Vietnam and Indonesia, and cannot be matched by Mexico,” said the firm.

India to gain from supply chain shift

Chinese risks tempt multinationals to look at Indian option

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