Prime Minister Narendra Modi talks about Atmanirbhar Bharat or a self-reliant India. US President Joe Biden made it clear in his campaign he aimed to “create millions of new manufacturing and innovation jobs” throughout America. It’s clear both Modi and Biden are looking over their shoulders and wondering how they can get the Chinese manufacturing dragon off their backs.

The Chinese are a major reason, but not the only one, why Modi and Biden are both talking about manufacturing closer to home. For the last few days, we’ve been treated to photos of pygmy tugboats trying to free the giant container vessel, the Ever Given, from the Suez Canal. It’s dislodged now but the ship backlogs could take months to clear.

Of course, the pandemic is the biggest reason supply-chain risk-management has vaulted to the top of corporate agendas and cost-cutting policies to concentrate and reduce supply bases are out of fashion. But the Suez blockage has been another timely prompt of the need to diversify suppliers. These unpredictable Black Swan events send out the same grim message. There are huge risks in being largely or totally reliant on just one supplier, whether in a next-door country (think India’s reliance on China’s raw drug ingredients) or in another corner of the globe (think computer chips).

Covid-19 has upset the global supply chain in more ways than one. For several months now, there’s been explosive North American demand for goods from China and other parts of Asia. The result is the cost of hiring a container has soared. One manufacturer found the price of a 40-foot container, normally costing $2,500, had hit $67,000. The squeeze on containers has exacerbated already existing shortages. Electronic chips, largely produced in China and Taiwan, have been in short supply due to the booming demand for PCs, laptops and mobile phones. Consequently, there aren’t enough chips available as the auto industry gears up production. In fact, Hyundai’s just suspended production at one of its South Korean plants due to semiconductor-chip and electrical-component shortages.

India wary

With the confrontation along the Line of Actual Control (LAC) in Ladakh soon after the global pandemic erupted, China suddenly became a foe on which we could not be overdependent. This has impacted huge swathes of Indian industry from pharmaceutical ingredients, on which India is massively reliant, to medical devices and auto components. That wasn’t the only factor at play, of course. India’s import bill for electronic goods has risen to almost $60 billion and needs to fall sharply. We add only around 7 per cent of the value even to made-in-India mobile phones. That’s because many components are still imported. So, it’s crucial to develop policies encouraging local manufacture even if it seems protectionist. (Guess where many of the components for products like phones come from? No prizes for answering China).

There’s a global-scale dilemma here. For almost four decades, countries around the world have opted to climb the value chain, abdicating large-scale manufacturing and letting the Chinese do the job. Along with cost, in many cases, there were other good reasons. Active pharmaceutical ingredients, for instance, are environmentally unfriendly and Indian companies found they were better off buying them from the Chinese which made them cheaply at scale.

Steel is another noxious polluter. So you’ve got a situation where the Chinese in 2020 produced 56.5 per cent of global steel. China made over one billion tonnes of steel while the second-largest-producer India manufactured 100 million tonnes. Cement’s much the same story. China made 2,220 million tonnes while second-ranked India produced 340 million tonnes. Then look at coal. Again, China produces around 50 per cent of the world’s coal.

The Chinese also have made extraordinary strides even in areas like shipbuilding where countries such as Britain once led the way. In January 2021, the Chinese had 48 per cent of the new ships on order compared to the South Koreans who had 43 per cent. Europe’s fallen out of the game.

Amazingly, although former US President Donald Trump slapped higher tariffs on Chinese products and tried to arm-twist manufacturers to move back to the US, China’s surplus with the US climbed 7.1 per cent to $316.9 billion in 2020. That was partly because after the pandemic began, work-from-home Americans began spending heavily on many made-in-China products like PCs and laptops. Moody’s found in 2019 that the US-China trade war cost the US economy nearly 300,000 jobs as farmers went bankrupt, business investment and manufacturing slowed sharply. Modi, of course, has been trying to boost India’s manufacturing sector from the day he took office, seeking to create a jobs bonanza for millions of unemployed young people. In his first term, it was all about Make in India to hike manufacturing to 25 per cent of GDP. That scheme’s morphed in his second term into Atmanirbhar Bharat. The added urgency of Atmanirbhar Bharat is spurred by the realisation it’s risky to be too dependent on China.

Still, if Washington hasn’t been able to do make significant progress in resolving the structural imbalances of the US-China trade relationship, can India move decisively away from China? Also, do we have the right conditions to attract global-scale manufacturers to move here? For something like mobile phones, our domestic market is so huge component manufacturers will shift here without a murmur. That’s maybe less likely for other products. Also, the government’s Atmanirbhar Bharat envisages India being a base for exports as has happened to some extent in the auto industry. Unfortunately, not joining RCEP (Regional Comprehensive Economic Partnership) means companies exporting from India to the region’s countries will face burdensome extra paperwork.

The Ladakh stand-off has dropped from the public eye for the moment. But it’s a live dispute and the Chinese could hit back at any point at India’s efforts to pull itself away from them. China has already shown the Australians how it can hurt them by refusing to admit ships from there to its ports for months on end. Now, it’s striking hard at Western companies like Nike, H&M and Burberry, which issued statements about using cotton from China’s Uighur region. H&M’s stores have shut in China and its products have vanished from Alibaba. For many of these companies, sales in Europe are still hard-hit and China was the one market rebounding.

Only time will tell whether the government’s decision to become more inward-looking and set its sights on the domestic market — which caters mainly to Indians with still very limited purchasing power, instead of the potentially much larger and more lucrative global market — will pay dividends.

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