Smallcap Beneficiaries in the China Plus One Megatrend

In March 2019, a video on actual coverage of an explosion of explosion at Chinese chemical plant went viral. It was nothing short of some high-octane action scene from a Hollywood movie.

It took over 900 firefighting men and over a day to douse the fire. But not before it had claimed many lives and inflicted grave injuries on unsuspecting civilians.

As per media reports, the blast is said to have led to tremors of magnitude 2.2 earthquake. It cut many old people and kids with flying glass shards. It rendered the air and water toxic, and houses uninhabitable. About 4,000 workers and residents had to evacuate.

The plant, set up in 2007, was found to have 13 safety problems after an inspection last year.

These included leakage, poor site management, shortage of operating procedures, and technical specifications posted in the benzene tank area, as per the reports.

And this wasn't a one off event.

Similar explosions in China leading to loss of lives and panic over the last few years had already shaken the Chinese government under the President Xi Jinping.

Since late 2016, Chinese chemical companies were being subject to strict environmental tests. It has led to a closure of many plants in China. Almost 70% of the chemical companies were said to have failed the environmental tests.

In the past, such inspections were a mere formality. Not anymore. The pressure and intent were severe this time. The officials who failed to ensure controls were dismissed. Some were even been handed over to the police.

Reduction of environmental pollution became one of the top priorities of the Chinese government. Chinese chemical companies had two options - stop production or upgrade to ensure environmental compliance. A lot of these companies even needed to relocate to dedicated industrial parks.

As such, a lot of small-scale chemical producers had shut down. For bigger players, the costs went up. The approval cycles for permissions to set up these plants got much longer.

Now a lot of these Chinese chemical companies were catering to global demand.

But tough measures over that phase led to drying up of supply of a lot of critical chemicals. This has caused a sharp surge in prices for affected chemicals and at times supply interruptions for the end user industries.

This made the global end user industries of these chemicals look for alternatives. Some of the beneficiaries of this move were Indian chemical companies that rushed to fill the supply gap with great rigor.

But that good run could not last for very long.

Indian chemical companies have struggled to put up the capacity to use with China offering products at throw away prices.

The trigger for China plus one was internal issues in China forcing global companies to look for alternatives.

But the China plus one emerging post Covid has different makings.

Post Covid, not just the companies, but governments too are looking to rewire supply chains. The decision is not driven by costs or availability issues from China. It's a proactive stance to avoid overreliance on a single economy that has proved unreliable.

India, along with other emerging and Southeast Asian economies, has been a beneficiary.

But what is making this shift a story with long legs is policy measures - focus on indigenization, and PLI schemes.

The companies in the electronics manufacturing supply chain have been big beneficiaries. Dixon Technologies has been the much celebrated star of this story.

But there could be more companies that benefit.

For instance, as per the management of TCPL Packaging, the iPhone represents a huge opportunity as Apple seems to be serious about expanding its presence in India and broader its vendor base.

Another potential beneficiary is Faze Three. The company and supplies home textiles other than sheets and towels that include floor coverings, top of the bed (TOB) textiles, curtains, and other value-added products. It's a supplier to global retail chains such as Target, Walmart, Bed Bath & Beyond and so on.

Historically, China has dominated these categories. With manufacturing costs increasing in China, ban on Chinese cotton, emergence of a level playing field on tariffs and the government intent to make up for the lost opportunity in technical and manmade textiles, the timing could not have been better.

Even a small diversion to India, could open up a billion-dollar opportunity for domestic companies like Faze Three.

If Tesla enters India, companies like Valiant Communications, Sundaram Fasteners, Samvardhana Motherson International, Suprajit Engineering, Sona BLQ Precision Forgings, and Hindalco Industries could be benefit.

All in all, China plus one and the replugging of supply chains could be a long term phenomenon this time.

Watch this space.

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)