Earlier, supply chains were designed to keep costs low. In the post pandemic era, supply chains are being reworked to reduce the risks of future disruptions. The international community is looking to move towards relocating supply chains away from China to India and Vietnam.
China is the world’s largest goods exporter and has the twin challenges of overcoming vulnerability to the pandemic and ensuring that the trade war with the US, does not increase the vulnerability of supply chains.
There is an opportunity for low and middle-income countries to work with developed nations to move supply chains away from China.
China has the largest share of the world’s labour-intensive exports. It is estimated that China’s share of exports grew from 13.9 per cent in 2000 to 26.9 per cent in 2018. China’s economic development between 2000 and 2018 also came with higher standards of living.
Manufacturing wages in the three largest exporting provinces in China grew between 11 per cent and 14 per cent annually during the past two decades.
The pandemic was as a wake-up call for companies exclusively depending on Chinese suppliers. Diversifying suppliers is one way to bolster resilience, meaning that at least some production lines might have to permanently move elsewhere. But the practical aspects of moving supply chains away from China are complex.
According to a recent Q2 Barometer report by QIMA, Vietnam and India came emerge as alternative sourcing locations. Vietnamese reforms allow foreigners to own property as well as majority holdings in Vietnamese companies. Consistent economic growth has made Vietnam attractive for foreign investment.
QIMA global sourcing survey shows that 43 per cent of US-based respondents described Vietnam among their top three buying geographies as of early 2021 and around one-third of buyers globally.
The QIMA report also reveals that demand for sourcing from India is increasing, but challenges remain that the latest wave of Covid-19 cases could slow procurement from the country. India as a buying market is regarded just as highly for promotional products, footwear, and eyewear, jewellery and accessories. However, this “rebound for the moment appears dependent on how effectively India manages its ongoing battle against Covid-19.
Indian Government recently permitted up to 100 per cent FDI in contract manufacturing, with the focus on increasing the share of investments in manufacturing in total FDI. Additionally, an outlay expenditure of around US$ 1.85 billion on infrastructure development at essential ports in the country has been planned. The Indian government has further permitted up to 100 per cent FDI on projects related to ports and is offering a 10-year tax holiday about the construction and maintenance of ports and harbours, in a bid to spruce up investments.
The opportunity for India and Vietnam is obvious, but so are the challenges. India has the experience of being part of the US supply chain hub because of its IT sector. Supply chain shifts has to a multi-nation move. The US is planning creation of a ‘Economic Prosperity Network’ with friendly countries, which will work on similar standards on everything, from digital business, energy, infrastructure and so on.