IMA Analysis

Monday June 1, 2020

China Supply Chain May 2020

Speaker:  Adit Jain,Editorial Director, IMA India May 2020

Rhetoric or Reality

Rahul Gupta sold Phoenix Lamps, a business he had built over two decades, for a tidy sum to a private equity firm and subsequently invested his takings in a fabrication plant for photovoltaic cells. The process is complicated and highly capital intensive – not to be confused with assembling solar panels – as operations are in a sterile environment resembling a space unit with fancy gear. His plant came into production quite rapidly and Mr Gupta instinctively believed his market opportunities were limitless, with a rising focus on alternative energy. But he miscalculated the China factor. Supplies from China drove down the price and despite winning an appeal for anti-dumping duties, the government chose not to impose tariffs to the extent others such as the European Union and the United States had done. Power developers having quoted shockingly absurd rates to win contracts, relying entirely on Chinese imports and most Indian fabricators went belly-up, wiping out tens of thousands of crores in asset value and severe job losses. Now India is entirely dependent on China, whose manufacturers will control prices to their advantage.

This is the sort of trap industries across the world are entangled in. Dependence on cheap imports have shut factories in many countries and the global supply chain is totally China-centric. The debate to decouple China began three years ago with the Trump administration promoting an ‘America First’ policy, seeking to bring jobs and production back to home markets. Post Covid-19, the urge to do something is much stronger. However, the question is whether such a thing is at all possible and, if so, at what cost? China, with its labour arbitrage, spanking infrastructure and superior logistics, is deeply entrenched in the global supply chain and most companies are overtly dependent on it for both intermediate and final products. It is in fact the largest exporter to 65 countries and firms like Hyundai and Apple cannot function without it.

The supply chain clusters of the sort that China offers are near-impossible to replace in a hurry, specifically in segments like automotives, consumer electronics, telecommunications, pharmaceuticals, medical equipment and advanced computing. According to Dun & Bradstreet, a business intelligence firm, 5 million companies have one or two crucial suppliers in China. Over half of them are ill prepared to disrupt this relationship for want of suitable alternatives. Companies like Apple, having moved some manufacturing to Vietnam and India still need to source vital inputs from the Chinese mainland. Equally, Nintendo having relocated the production of its gaming consoles to Vietnam, still lacks critical components. Whilst the shift in the production of apparel to Bangladesh, Vietnam and Ethiopia were possible, for higher value goods it would be harder. China’s value addition to global manufacturing is a staggering 30%.

A decoupling from China will involve a serious commitment by social and political constituencies as most governments will otherwise simply buckle under pressure from industry lobbying. As the chances of a Trump re-election diminish, so will the pressure to sustain the currently emphatic China decoupling policy. Moreover, China constitutes a significant opportunity for global corporations and trade restrictions will affect their market access in the Middle Kingdom. As businesses in poorer countries, without government support go under, imports from China may only grow, not lessen. The photovoltaic industry is no exception, others may follow a similar path.