- China’s zero covid policy is pushing companies to diversify supply chains outside the Asian country, although they began to do so because of geopolitical tensions and the Trump era tariffs.
- But it is not easy to completely replace the ecosystem of China’s supply chain in any country, not even in one as immense as India.
China’s zero covid policy may be provoking what Donald Trump did not fully achieve during his term as President of the United States: to move China’s global supply chains away for the first time in 40 years.
In 2018 and 2019, Trump imposed strong tariffs on China to counter what he described as unfair trade agreements with the United States and which Beijing responded with reprisals, thus starting a trade war.
And although many companies began to talk about moving supply chains out of China to distance themselves from instability due to geopolitical tensions, it was really the pandemic, specifically China’s zero covid policy, that’s what. It highlighted the importance of the risk of relying on a single country for supply chains.
«Geopolitical tensions itself would not have caused this level of supply chains adjustment, but the covid-19 It has undoubtedly helped to highlight the dangers of relying solely on the Asian giant, as an additional fuel to fire,» he says to Business insider Ashutosh Sharma, research director at Forrester, market research company.
The tech giant, Apple, is the clear example of how the excessive dependence on Chinese links in the supply chain has affected iPhone production, which has been curbed by the relentless persecution against the covid. Apple is accelerating the transfer of its production from China to other Asian countriesBut where?
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Apple’s main supplier, Foxconn, and other chip manufacturers have chosen for India, after the Biden administration imposed last October controls on the export of equipment to Chinese advanced chip factories.
«India has a large labour reserve, a long history of manufacturing and government support to boost industry and exports. For all that, many are studying whether Indian manufacturing is a viable alternative to China,» explains to Business insider Julie Gerdeman, delegate adviser to the Everstream supply chain risk management platform.
But it’s easier said than to do it.
India is the world’s largest democracy, and that makes it very complicated decision-making.
As a great economy with a young population, India has the potential to become a manufacturing giant. But the South Asian country is also sadly famous for its bureaucracy and its cumbersome procedures.
«It is not much less a place where companies can come and open a store without having many bureaucratic complications,» says Sharma, who resides in the Asian country.
«I’m sure China also has those problems, but its ability to move forward quickly on those compliance requirements is much greater than in India, because India is much more democratic and there are too many parts involved to meet.»
In 2019, India ranked 63 on a list of the World Bank of 190 countries classified according to their ease to do business.
Although that result is much better than the 142 position I had in 2014, when Prime Minister Narendra Modi took office, he was still behind China, which was ranked 31 in 2019, the last year that the index was developed before the index was developed before the World Bank suspends it after data manipulation scandal. The irregularities in results put up positions to China in 2018, according to an audit of the World Bank published in December 2020.
India also has a history of protectionismwhat makes it less competitive in attracting large investments.
«China manufactures on a scale, while Most factories in India are small and medium due to federal regulations and protections specifically designed for the pymes,» Gerdeman says.
China has built a manufacturing ecosystem over 4 decades
India’s Prime Minister Modi has been working for attract foreign direct investment (FDI), since taking office in 2014, earning a record of $83.6 billion in the last fiscal year, according to Government data.
«India certainly has advantages in terms of demographics, in terms of geography, in terms of the infrastructure that exists, much of which has been built in recent years,» Sharma says. «Obviously, it can increase the scale, but what It doesn’t have all the pieces. of the puzzle.»
Even if India is ready to be the centre of global production, China has managed to build such an extensive value chain that almost everything necessary to manufacture a product can be obtained and acquired in the country, which allows a low-cost large-scale manufacturingOn the other hand, India does not yet have this capacity, which takes years to develop.
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This is due to the fact that manufacturers always start factory operations with the assembly chain before starting to develop local supply chains for finished products, in a «backward integration» of the processes.
«That supply chain takes time to buildbecause even when you supply yourself internally, the quality is not so good at first, your scale is not so high, and you find those problems. So yes, it can be done, but it takes time,» she explains to Business insider.
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In any case, Companies are unlikely to come to India in mass as they did to China, because it has been shown to be too risky, according to experts.
Not only Foxconn and Apple bet hard for China and now they suffer the consequences: the American giant of clothes sports sports Nike, the Japanese manufacturer of cars Toyota and the South Korean titan of the technology Samsung are among the many companies that are experiencing prolonged problems in their supply chain due to its dependence on the manufacturing giant.
«They are looking to diversify their supply sources,» Sharma points out. «If we look at Foxconn and Apple, have already moved a significant share of production to India and I’m sure Vietnam is on the list of countries to diversify, among other places. They just want to move from dependent on a single country, like China, to a couple of locations.»
This means More complex supply chains, but they will all be diversified from the raw material stages, he says.
«If you can locate 2 or 3 reliable places from which to be supplied, you will continue to have alternative sources, even if something happens at one of the locations,» Sharma adds.