Replacing China in global supply chain
May 4, 2020

Indian leaders want to replace China in the global supply chain. Feasible? How to go about it?

The Background

COVID crisis has awakened global business leaders to the weird situation they find themselves in - while their (mostly useless) email messages & WhatsApp chats and expense vouchers have multiple backups that can survive a nuclear attack, their most important activity - manufacturing what they sell, their very reason to exist, depends on China and often entirely on China without any backup!

But what can be done?

The great scramble to the exit door?

As always, if you are reading about something of this sort in the media, particularly the sort of newspapers and online portals that ordinary folks like us read, not the specialised industry ones that are practically unknown and anyway behind expensive firewall’s, you should assume either it is wrong or everyone and his grandma knows about it. May be both. Naturally the speculation is feverish, with talks of thousands of companies seeking alternatives and what not. As the stock picking experts say, when the taxi driver or your grocer talks about how great the stock is, it’s time to sell.

However, it is early days and it takes a lot more effort than rearranging the deck chairs in the Titanic to re-engineer your supply chains if you manufacture anything that’s not simple. Which is pretty much everything. That too when COVID is still not gone and travel is restricted. There’s only so much you can achieve over video conferencing.

For the rest of this article, let us assume that yes, companies are indeed switching or looking to switch. A credible an entirely realistic argument can be made that nothing of the sort is going to happen and it will be back to routine soon. That’s for another article. And let us also stick to manufacturing sector because services & others such as dot coms have their own dynamics and in any case, the goal is to create factory jobs to absorb our surplus working age population.

So it brings us to our main topic -

  1. Who are these potential investors?
  2. What are they looking for?
  3. What can India offer them and
  4. How to go about it

Who are these potential investors?

Many related questions pop to mind. What are they manufacturing? Where are they Headquartered? IOW, are they Americans, Europeans, Chinese, Japs or Koreans?

These questions are important because when a manufacturer sets up shop, he has to sell what he makes. It can be to an end customer or to some other manufacturer who needs it for his own production. The second one is crucial because that is exactly what makes a supply chain. And the links in the chain likes to stay close to each other. Most hi tech manufacturing - gadgets, to cite one example, involve hundreds of components coming from dozens of suppliers. It makes zero sense shipping one or two parts from, say, India, that is 3000 km away and where customs officers take 15 days to inspect, that is if they’re “taken care of” & ports let your container languish for three more weeks. And that is if the factory is not shut down due to labour strike, language agitation, some film star’s death and a million other mutinies. It can still be done, if the cost is sufficiently low and there are other benefits.

The WHO part of it is important too - a business owned by a Chinese entity has the least reasons to “defect”. Even when it comes to attracting Taiwanese, Japanese and Korean investors, India has a formidable cultural barrier to cross. For these companies, and their senior executives / owners that often make the choice or exercise the veto, Vietnam or any SEA nation presents attractive options. After all, they are dealing with people of same cultural continuum- Orientals, eating more or less same food for lunch, have a beer or drink at the same sort of bars after work, go to same sort of Karaoke bars or massage parlours and fool around with same oriental women. Sounds harsh and politically incorrect, but this is the reality of business. Why would they not choose Thailand or Vietnam? And go to distant India where they have to import their noodles and chop stick and condiments and everything else to live a “normal life”? That is if they are in a state where booze is still allowed and Talibanic laws are not in place! Talk to any of these executives (Send our babus to Singapore or Hongkong to meet them in a bar, and discuss after a few drinks, informally) and they’ll tell you what a punishment working in India is. You think they’ll recommend their boss that the next factory to be in Bihar and not Ho Chi Minh?

Obviously a detailed SWOT analysis is needed so we can go after the right sort of investors in the right sort of industries instead of wasting effort where they are least likely to show anything for the effort. They may find the answers they already should know.

What are they looking for?

Having found the right set of investors and industries, next is to offer them what they want. Land and labour reforms are the often heard mantra. It is as if hordes of investors are waiting with money at the gates, ready to crash in once we change some labour laws. IMHO that is BS. Land yes, because without that you can’t get going. Even here there’s a lot that can be done without wasting three years on another law.

When it comes to labour laws, there’s a lot of fake news. Procedural hassles and corrupt babudom, not militant labour is the biggest hurdle. No labour union will object reasonable reforms in these areas. In fact, they stand to gain. In fact, a lot of them may not even need laws, just cracking the whip at recalcitrant babus and getting them to cut red tape. Businesses will be most happy to provide more facilities to labour that cost much less than paying off hordes of corrupt babus blackmailing them using opaque laws and nonsensical procedures. There’s so much low hanging fruit! Instead of starting another long battle that NO government can win given India’s political realities, it’s best to go for sensible and clever reforms keeping contentious ones for the medium and long term. Unless PM Modi wants to waste the remaining 3 years of his term.

Considerably finesse and intelligence is needed in this area and frankly, we are skeptical given the noise over action nature of our netas. The best way to go about is to purge the babudom and bring outside talent that can offer useful advise and action plan. You simply cant reform from within. It’s like cleaning your room with water from your septic tank!

What can India offer them?

We have already listed most negative aspects of doing business in India. A reasonable question arises - how come so many are already here? Does that mean there’s no issues? Of course not! They’re here for the same reason poor Indian workers slog in Iraq not knowing if they’ll ever see their wives and kids - there’s money in it! Yes. Our HUGE domestic market and our raw materials and intermediaries are the biggest pull factor. We can play on those strengths. It is NOT our abundant labour - many SEA countries have that too. With far better work culture, productivity, language skills and far less of red flag waving.

How to go about it?

  1. Make a lot less noise & a lot more action! You are only waking up your competition by tom toming things way before anything useful is done. And the likes of Gadkari, even if well meaning, should not make statements of the sort they’re making - that companies “hate” China and are coming to India. No one wants to say that in public and companies will AVOID us because that may imply they “hate” China. Even if they do, in these politically correct times, it is disastrous to say that. And China IS their largest market and they’re no fools.
  2. Yes, a certain amount of marketing noise is needed but it has to be targeted. After all we are talking about businesses, not consumers
  3. Do a SWOT analysis and narrowly focus on winnable deals. Don’t fritter away efforts (or worse, incentive $$$) attracting something that makes no business sense to the other side.
  4. Leave it to a team of non-babus. Outside talent. Babus will screw it up, guaranteed! A high powered committee at Center & each state should do this, and their words should be final. You cannot have a Jt Secretary that has no skin in the game, doesn’t understand business and has done no productive work all his life, and is simply waiting for your term to end, wasting time on this.
  5. Pursue sensible, soft reforms, go for low hanging fruit in labour. Give something in return to labour so they back whatever reforms are quickly needed. Don’t go by media hype. Yes, we have labour issues, but that’s not the biggest issue.
  6. Use readily available Railway, PSU and defense land if private land is not available. That’s is available in plenty! But dont transfer ownership, 30 year lease is ample. That sidesteps a lot of battle. Genuine investors dont need more.
  7. End ALL tax terror. Severely punish babus that do this.
  8. Reform MCA and other such bodies, bring outside talent. There’s a lot of nonsensical paperwork brought by corrupt idiots that can go without any damage. Startup India is not enough if running it takes mountain of paperwork.
  9. Dont forget domestic industry! They are best placed to understand India, live its warts & innovate and grow. If only given the encouragement. And not harassment.
  10. Promise that there’ll be NO retrospective amendment of ANY law for next 25 years.
  11. Promise and provide compensation to businesses destroyed by rulings from NGT, Supreme Court etc that change laws at whim. We cannot be a banana republic.

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