Workers assemble mobile phones at a Dixon Technologies factory in Uttar Pradesh, India, Thursday, Jan. 28, 2021.
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US companies increasingly see China as a risky bet for their supply chains – neighboring India stands to benefit as companies look elsewhere to shop.
61% of 500 US executives polled by UK market survey OnePoll said they would choose India over China if both countries could manufacture the same materials, while 56% preferred India to serve the supply chain needs within the next five years over China.
The survey found that 59% of respondents considered it “somewhat risky” or “very risky” to source materials from China, compared to 39% for India.
At least a quarter of executives surveyed in the independent third-party survey commissioned by Marketplace India Index in December do not currently import from either China or India.
“Companies are looking at India as a long-term investment strategy as opposed to a short-term pivot to avoid tariffs,” Samir Kapadia, CEO of the India Index and managing director of the Vongel Group, told CNBC in an exclusive interview.
Warming ties between the US and India, led by President Joe Biden and Prime Minister Narendra Modi, with the former’s “friendly support” policy aimed at encouraging US companies to diversify away from China, have also made India an attractive alternative.
The relationship between the two countries entered a new chapter with Modi’s state visit to the White House in June where a multitude of offers major defense, technology and supply chain diversification partnerships were signed.
US President Joe Biden, right, and Narendra Modi, the Prime Minister of India, at an arrival ceremony during a state visit on the South Lawn of the White House in Washington, DC, US, Thursday, June 22, 2023.
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“The US and China continue to sit in a rather chilly air. While there is a constant flow of iterations, talks, dialogues and agreements between the US and India,” Kapadia said.
India has seen a flurry of investment announcements in the country in the recent past.
Earlier this month, Maruti Suzuki announced it would invest $4.2 billion to build a second plant in the country. Vietnamese electric car maker VinFast also said in January that it plans to spend about $2 billion to set up a factory in India.
There are still risks
Despite the optimism, US companies remain cautious about India’s supply chain potential.
The survey found that 55% of respondents found quality assurance to be a “medium risk” they could face if they had factories in India.
In September, Apple supplier Pegatron had to temporary suspension of operations at its factory in Chengalpattu area near Chennai after a fire broke out.
Delivery risk (48%) and IP theft (48%) were also concerns for US companies looking at India.
Other companies looking to fully or partially relocate their supply chains to India may not be able to replicate appleIts rapid presence in the country, warned Amitendu Palit, senior researcher and chief researcher of trade and economics at the Institute of South Asian Studies.
“What Apple has done will not be able to be done immediately and as quickly by many other companies. Apple has the ability to build an ecosystem much faster than other companies, so timing has to be taken into account,” Palit told CNBC in a Zoom interview. .
Both Palit and Kapadia agreed that completely shifting supply chains away from China will not be possible.
“I don’t think China will ever be out of the equation,” Kapadia said. “The reality is that China will always be the cornerstone of US supply chain strategy.”
Investment in China remains strong and remains the “second choice” for investment after the US, said Raymund Chao, Asia Pacific and China president at PwC.
Vietnam the next best bet?
Similar to India, Vietnam has also been an option in the minds of investors when adopting a China plus one strategy.
Optimism in Vietnam’s market led to a more than 14% increase in foreign direct investment last year compared to 2022.
According to LSEG data, $29 billion in foreign direct investment was committed to Vietnam from January to November last year.
But Vietnam won’t be able to achieve what India can, Kapadia pointed out, explaining that the world’s most populous country has access to “a very large customer base that Vietnam doesn’t offer.”
“Companies are not making these decisions for cost arbitrage. They are making these decisions for cost savings and market access. You are not going to see the same benefit from going to Vietnam,” he added.