Driven by various trade disruptions (like trade wars, the pandemic, natural disasters, significant supply constraints, Brexit, the Ukraine war, and assertive industrial policies), many global firms have relocated some of their manufacturing from China in the past five years while others are planning for the same in the coming years.
India has great potential to develop as a strategic manufacturing and sourcing powerhouse as it has a broad manufacturing base, and is cost-competitive as well.
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In recent years, many multinational companies around the world have examined their heavy concentration in China. Factors like rising labour costs in China, the ongoing trade war between the United States and China, and concerns over China’s political and economic stability are driving the trend where firms are shifting some of their production (from China) and sourcing to different countries. On the other side, there are some countries that are rising up as attractive and popular destinations for businesses moving out from China.
Countries like Vietnam, India, Mexico, Indonesia, and Bangladesh are emerging destinations which provide- more affordable labour, a more stable political environment, growing scale & capabilities across various industrial sectors, and accessibility to major markets. These countries are fast emerging as the future export manufacturing hubs. Morocco and Turkey, along with other countries are also expanding their export manufacturing driven by competitive costs, abundant labour, and proximity to the European Union (EU) and other markets.
India, in particular, offers additional benefits, as it possesses an extremely vast domestic market.
India has evinced, that it wants to increase its economic and production output. Several measures undertaken by the government in this direction include – minimizing taxes and regulations on businesses, raising infrastructure spending on roads, ports, and airports, and facilitating international business investment into India. Efforts of the government to attract those businesses moving out of China appear to have been quite efficacious. On the world stage, India’s manufacturing success over the past five years has been remarkable.
The recent study report titled ‘Harnessing the Tectonic Shifts in Global Manufacturing’ by Boston Consulting Group (BCG) highlights India’s advantage in direct manufacturing costs as an export podium.
According to the BCG’s report, the average cost (including the factory wages, productivity, logistics, tariffs, and energy) of Indian-made goods imported into the US is about 15% lower as compared to the goods manufactured in the US. However, the goods manufactured in China give only a 4% cost advantage over the US-made products. In fact, goods made in China amount to be 21% more expensive when subject to US tariffs resulting from the trade dispute between them.
Some major observations of the BCG report
The BCG study report states that over 90% of the North American manufacturers who were surveyed have shifted some of their production from China during the last five years. About the same proportion intends to relocate their production in the next five years. These shifts are being driven primarily by the perpetual pursuit of low costs, keenness to reduce lead times, operate in a more stable business environment and improve flexibility to respond to any disruption (even if it is at the cost of a number of operating margin points).
In most countries, wage inflation has surpassed productivity gains during the last few years. According to the report Labor costs adjusted for productivity increased by 21% in the US and by 24% in China during the period 2018-2022. The productivity-adjusted labour costs increased by 22% in Mexico and by 18% in India. Despite this wage inflation, these two nations (Mexico and India) continue to be the most competitive manufacturing sources in the world.
Over the last five years (2018-2022), in inflation-adjusted terms, India’s exports to the US rose by US$23 billion, registering a growth of 44%. The US goods import rose by 18% from Mexico, and by 65% from the ten countries of the Association of Southeast Asian Nations (*ASEAN). However, China experienced a 10% decline in exports to the US during the period, according to the BCG study report.
(*Association of Southeast Asian Nations countries- Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam).
The study noted that India’s shipments of semiconductors and materials to the US witnessed a significant increase of 143% over the past five years. Export of auto components from India to the US grew by 65% while mechanical machinery exports to the US increased by 70%. The following table shows the change in US goods imports during the last five years (2018-2022).
Table: Change in US goods imports, excluding energy, during 2018–2022 (US$ billions, % change)
| Consumer electronics | Semiconductors and materials | Auto components | Mechanical Machinery | Total US imports | |
| Total imports | 218 | 55 | 255 | 164 | 2,643 |
| China | –3.0 | –1.3 | –5.0 | –10.8 | –55 |
| –2% | –29% | –12% | –28% | –10% | |
| ASEAN | 17.9 | 4.8 | 7.8 | 9.5 | 118 |
| 124% | 22% | 90% | 61% | 65% | |
| India | 1.2 | 0.1 | 2.6 | 0.9 | 23 |
| 392% | 143% | 65% | 70% | 44% | |
| Mexico | –0.1 | –0.1 | 12 | 2.9 | 58 |
| –1% | –5% | 17% | 21% | 18% | |
| European Union (excluding UK) | 2 1 | .0 1 | .5 2.8 | 2.3 | 69 |
| 8% | 61% | 8% | 7% | 17% | |
| Rest of world | 5.4 | 6 | 5.8 | 6.9 | 127 |
| 17% | 52% | 8% | 14% | 16% | |
| Total | 22.6 | 11.1 | 26 | 11.7 | 340 |
| 12% | 26% | 11% | 8% | 15% |
The report highlights that the new emerging destinations for relocation of manufacturing are beginning to expand their scales and capacities. India is rapidly developing as a manufacturer of engines and turbines; Morocco is emerging fast as a destination for automotive assembly and components; and Vietnam is developing as a centre for consumer electronics. Companies that enter these emerging manufacturing destinations early, may take advantage of the opportunity to establish capacity while labour, land, and other factors are inexpensive and readily available.
As regards India, the report states that India’s logistics infrastructure is unevenly developed, its environmental sustainability is not that robust, and it has fewer free-trade agreements with other nations except for members of the ASEAN. Nevertheless, India is very cost competitive and it has recently negotiated trade deals with Australia and the United Arab Emirates. Although India is just starting to emerge as a major exporter, it has a broader manufacturing base that supplies everything from electric vehicles and heavy machinery to chemicals and appliances to its domestic market.
Forging ahead
Each of the emerging locations has its own advantages and disadvantages. According to the BCG report, Mexico is a cost-competitive near-shoring location for the US market, but other key operating conditions are poor in some parts of the country. Southeast Asia is highly cost-competitive as well, but it is far from North America and Europe. In addition, labour availability can be difficult, and sustainability is a concern in the Southeast Asian region.
India has become one of the world’s fastest-growing economies, with its manufacturing sector making significant strides on the global stage in the past five years. For businesses that wish to move from China, India provides a workforce that is cost-effective and easy to train, as well as a domestic market with an expanding consumer base. Additionally, there is growing interest in trade and investment. Moreover, several countries and regional blocs, including the UK, Canada, the GCC, Bangladesh, Israel, the European Union, and the Southern African Customs Union, are in talks with New Delhi to negotiate trade deals.
