India is Becoming Part of Global Supply Chains. Here are the Facts and Opportunities

Supply chain dynamics around the world are undergoing a major transformation.

The Covid-19 pandemic caused several bottlenecks in global supply chains, leading to logistical delays. This led to a new wave of diversification in supply routes and manufacturing hubs.

For the past few decades, American and European companies have invested heavily in China, attracted by its low labour and production costs, as well as the considerable and growing size of its domestic consumer market. However, this is now changing.

While China continues to be critical to global value chains, companies are gradually shifting their focus to countries like India.

All of this, in tandem with the rapid adoption of e-commerce, offers a unique opportunity for India to become a leading manufacturing and supply chain hub.

Here are the facts you need to know about the changing supply chain reconfiguration.

#1 The China-plus-one strategy

The gradual shift towards India, as a global supply chain hub, is not a new approach. It comes from a global business strategy referred to as China-plus-one. The term is not new and was coined way back in 2013.

According to China-plus-one strategy, companies must avoid investing only in China. Instead, they must aim to diversify their businesses to alternative destinations.

While the need for diversification was felt before, it only came to fruition after the pandemic.

In 2021, Australia, Japan, and India jointly launched the Resilient Supply Chain Initiative (RSCI) to diversify supply chains by developing well-planned industrial clusters.

In July 2022, a group of 18 economies, including India, the US, and the European Union, unveiled a roadmap for establishing collective supply chains that would be resilient in the long term.

The roadmap also highlights steps to counter supply chain dependencies and vulnerabilities.

#2 India is a well-integrated supply chain market but has a relatively less well-established manufacturing sector

India is regarded as an integral part of the global supply chain on the back of its diversified corporate environment and inexpensive and skilled labour.

Apart from this, the country enjoys strong macroeconomic fundamentals and access to vast resources with an expanding market of 1.3 billion people.

However, the country faces some roadblocks on its journey to becoming a global supply chain leader. When compared to other supply chain diversification options, such as the Association of Southeast Asian Nations (ASEAN) pact of countries, India has a relatively less well-established manufacturing sector and is less well-integrated into the regional economy.

Moreover, the country is stifled with underdeveloped infrastructure. However, the tide is turning.

#3 The government is leaving no stone unturned to put India on the global supply chain map

Along with earnest policy reforms in the logistics and infrastructure sector, the government is also targeting to ramp up manufacturing in the country.

In March 2020, the government approved a new incentive program called the Production Linked Incentive Scheme (PLI) specifically for Large-Scale Electronics Manufacturing.

However, in the course of two years, this scheme has been extended to fourteen sectors, including automobile, steel, and pharmaceuticals. The scheme will ensure efficiencies, create economies of scale, enhance exports, provide a conducive manufacturing ecosystem, and make India an integral part of the global supply chain.

Companies in the private sector are making changes following this. The Vedanta group plans to invest of US$15 bn over the next 5-10 years to make displays and semiconductor chips in India.

Dixon Technologies, one of India's leading manufacturers of electronics, under the PLI scheme, has set up a manufacturing facility to expand its mobile phone production capacity by 20 m units.

#4 There is a clear thrust towards reviving capital spending in infrastructure that bodes well for manufacturing sector

Just last year (2022) the government announced a capital expenditure target of Rs 7.5 tn for financial year 2023, up from Rs 5.6 tn announced in financial year 2022.

Despite having the world's second-largest road and rail network, the government is expanding its infrastructure including road, rail, and port connectivity.

The government has already ramped up its focus on improving logistics with a 15-20% reduction in transport costs and travel time following the introduction of the Goods Services Tax or GST nationwide. And now, with the introduction of the National Logistics Policy (NLP), it aims to further strengthen supply chains across the country.

Announced in September 2022, the NLP policy is a comprehensive effort to enhance the efficiency of the logistics ecosystem in India.

The NLP strives to change the way the logistics sector operates. It focuses on boosting infrastructure and connectivity, optimising resource utilisation, and encouraging private-sector investment. All this should culminate in declining logistics costs, from 14% of GDP to 9-10%.

#5 The government is also upbeat about bilateral trade pacts and Free Trade Agreements (FTAs) with several countries.

While the FTAs with the UK and Canada are in the pipeline, India has already signed trade agreements with UAE and Australia, furthering strengthening its position as a manufacturing hub.

Not to forget - India and the EU have also restarted talks for a comprehensive Free Trade Agreement after nearly a decade.

With substantial regulatory initiatives in tow, the government is undertaking concerted steps to ensure the country snags the position of a global supply chain leader.

India's logistics sector should grow from a US$ 410 bn market in 2022 to US$ 566 bn by 2027, implying a CAGR of 6%.

But this rising logistics tide that comes from the paradigm shift in the global supply chain is bound to lift many other boats.

Now that you know the important facts, lets look at the opportunities that this transition offers investors.

#1 The manufacturing sector will be a big beneficiary of this transition.

The recent developments testify to the growing confidence in India as a manufacturing hub in Asia. These include Apple Inc's decision to manufacture its iPhone 14 in India, Amazon's decision to set up its first production line for its TV Firestick in India, and IKEA's plans for a 48,000 square-metre shopping centre in the northern region.

In a recent development, a key Apple Inc. supplier has begun making components for AirPods in India. This marks a significant step in the US tech giant's push to expand production in the country.

VIP, the largest luggage manufacturer in the country is also gradually shifting its raw material sourcing from China to India, while ramping up its domestic manufacturing space.

Gokaldas Exports, one of the largest manufacturers and exporters of apparel in India, is capitalising on the China plus one opportunity by expanding its capacities across existing and new facilities.

#2 The pharmaceutical sector also shows promise in the wake of India replacing China as a global supply chain hub

India's pharmaceutical industry picked up steam following China's environmental crackdowns of 2017. Thereafter, it picked up during the pandemic when India proved more resilient to supply chain disruptions. All signs suggest the sector's upward trajectory is likely to continue.

India's government pledged US$1.3 bn to promote domestic drug production. Meanwhile, shakeups in the global pharmaceutical supply chain are making it look less appealing to have production limited to China.

#3 The chemical sector seems well-poised to fire

Chemical exports from India cover all major markets. The Indian chemical industry is expected to grow at a CAGR of 7-8% during 2020-25, to reach US$160 bn, accounting for 3% of the global chemical industry. This will be driven by demand from the aromatics, performance plastics, agrochemicals, and fibre intermediates end-use segments.

India is well-positioned to be an alternate source of supply to the global chemical industry with permission for 100% FDI in the sector, dedicated investment zones, availability of raw materials, and a large domestic talent pool.

According to a report by KPMG, Reliance Industries Ltd (RIL) has established almost a dozen petrochemical manufacturing plants all over India, which bring in revenue of over US$ 24.5 bn, while others like Galaxy Surfactants have established plants overseas that bring in revenue of approximately US$ 400 m.

#4 The upcoming years of transforming India will also see greater use of new-age technologies

The usage of drones and technology in logistics is already here. Along with AI (artificial intelligence), ML (machine learning), automation is key to optimising and automating core logistics processes.

The Tata group chairman, N Chandrasekharan firmly believes that this development is a huge opportunity for India. Here's what he had to say -

• We are extremely well placed to reimagine the future and reimagine every industry due to our tech- strength. This will really help us to fix the structural problems we have seen in this country.
  
  But this is not just about preparing for the domestic industry. This is also for playing a big role globally in every industry.

#5 The agriculture and the automobile sector will also experience a tremendous boost, thanks to savings and increased demand

Around 16% of India's agricultural production is wasted at different stages of the supply chain, according to the Central Institute of Post-Harvest Engineering and Technology.

So once the country optimises its resources on the back of a strong infrastructure network, the wastage will come down.

Continued investments in the infrastructure space requires the country to offer last mile connectivity. This is likely to propel the demand for automobiles in the near future, giving the sector a much needed boost. The Automotive Mission Plan 2016-26 targets 3x growth for the automotive industry and aims to establish India as a manufacturing base and an export hub. The plan also seeks to promote the advancement of the auto ancillary sector ecosystem in India.

Following this, automotive brands like BMW, Mercedes Benz, Ford, General Motors, Nissan, FIAT, John Deere, CAT among others have located their International Procurement Offices in India.

In conclusion

India may not have realised its potential for investments and growth in manufacturing, logistics, and supply chains. But today's new realities dictated by geopolitics and economics is undoubtedly transforming the playing field.

The government's policy thrust is adding impetus to India's competitiveness and is set on making it a global supply chain hub.

So, can the country manage to pull it off? Only time will tell.

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