Why are Companies Relocating From China to India?

Why are Companies Relocating From China to India?

Many companies have started shifting their base from China to India with the outbreak of the US-China trade war. This presents an opportunity for India to become the next big manufacturing giant.

China previously claimed to have contained the spread of Covid 19 with intense lockdown measures and its manufacturing activities resuming back to normal. However, after the pandemic, China’s manufacturing sector was never the same again. The international companies realised the risks of depending on a single supplier. Governments across the globe are encouraging their companies to expand beyond China.

Companies are now looking for alternatives for China and they are considering countries like India, Vietnam, Malaysia, Indonesia and Mexico. Lately, India has been receiving considerable attention from investors. 

Reasons why investors are betting on India?

1. Low labour cost 

This is one of the major reasons for companies moving to India. The average monthly wage for Chinese labour is between US$ 140 to US$ 340. Whereas in India it is as low as US$ 70 to US$ 200. Hence, it is significantly cheaper to manufacture the same products in India compared to that in China.

2. Low taxes

In 2019, the corporate tax in India was cut down from 30% to 22% and for new manufacturers, it reduced from 25% to 15%. This makes it the lowest corporate tax in the South Asia region. The implementation of GST and tax collection also makes it easier for companies to pay their taxes. Investors are drawn to this tax incentive to a great extent.

3. India’s huge market

India currently has the second largest population in the world. However, it will soon surpass China in terms of the population count. Reaching a market audience of just 5% in India is considered a huge achievement. This is because 5% of India’s population is more than the entire population of some other countries. 

Moreover, if companies are manufacturing their products outside India they are required to pay high import tariffs and bear transportation costs. This is a subtle move by the government as it encourages local manufacturing. Even multi-national companies like Tesla and Apple plan to manufacture locally and sell their final products in India.

4. Democracy

India is a democratic country. China is not. Western companies can easily adapt themselves to the Indian market law and order. In the case of intellectual theft, violation of any rules or demeaning of contract, companies can easily sue on another including the government. Whereas, the root cause of the trade war is the accusation on China, that it indulges in unfair trade practices. As a result, companies feel more secure doing business in India.

5. India’s growth in the past years

India has roughly the same population as China. It is the sixth-largest economy in the world and has lifted more than 300 million people out of poverty. In the past years, India’s growth was driven by the service-based industry like IT, banking and retail. Whereas, China’s growth was primarily driven by the manufacturing sector. But in the last couple of years, the manufacturing sector of India has grown significantly. 

Doing international business can be hugely profitable. Nations can benefit from each other’s specialisation and avoid wastage of resources and efforts. companies can expand their business by reaching foreign markets. Nevertheless, executing business overseas has its challenges. India for instance, offers a wide range of services but comes with its own set of problems such as – poor infrastructure, strict regulations, free-floating currency and a few political issues. 

India’s infrastructure is underdeveloped whereas China’s infrastructure was developed decades ago. Establishing a manufacturing base in India also means dealing with several obligatory practices and regulations. The Indian government has recently deregulated the licensing process as part of the ‘Make in India’ initiative enabling ease of doing business in India. Other major issues are volatile currency and political issues. 

India is changing policies to attract companies and boost the economy. The ‘Make in India’ initiative has also attracted many foreign investors in India. The Indian government has allowed 100% FDI into the nation and is ready to provide aid to companies that are planning to establish their manufacturing plant in India. 

Companies like amazon, apple and tesla are betting on the Indian market. These bets are not random guesses. It is simply a logical move. With increasing trade tensions, companies need to secure themselves and their supply chains. The biggest advantage India offers is its huge market size. As companies realise the need to reduce their dependence on the Chinese supply chain, India seems to be their next best alternative.