Can China Plus One Strategy Put India on an Upward Growth Trajectory?
This article is authored by Arvind Kothari, the founder of Niveshaay Investment Advisory, a SEBI Registered Investment Advisory Firm. Arvind has been practising Equity Research and Investment Advisory for the last 8 yrs and has previously worked with ICICI Bank as an Industry Research Analyst before founding and successfully running Niveshaay Investment Advisors.
China, known as the ‘World’s factory’ has been the centre of global supply chains in the last few decades owing to favourable factors of production and a strong business ecosystem. The rise in the contribution of Chinese manufacturing since the early 2000s from 3.4% to ~13.6% in 2015 and then a drop to 13.1% in 2019 is clearly reflected in the total global merchandise trade. The recent decline in this share is attributed to higher labour costs, stringent environment, compliance costs, and other challenges. Around 30% of global manufacturing ($4 tn) happens in China.
The trend of diversifying the supply chain started in 2017 with China following stringent environment norms leading to production cuts during winters followed by changing geo-politics, trade war, and willingness of large companies/MNC to de-risk their supply chain. COVID-19 escalated the adoption of this strategy. Now, this trend looks structural and persistent. This trend is now named as China plus one strategy.
So, what is China-Plus-One?
Companies contemplating diversifying their dependence on China is a strategy known as “China-Plus-One”. Now many MNCs are adding new operations in other developing Asian countries like India, Vietnam, Thailand, Bangladesh and Malaysia, and are welcoming new manufacturing opportunities. A strategy that is an answer to having efficient supply chain management. Sometimes, one thinks, is it a mere coincidence of such unrelated events happening together or nature is conspiring that India should take advantage of the situation and establish its mark in the global manufacturing sector.
A survey by UBS suggests that 20–30% of manufacturing will be leaving from China. India is likely to be the next best candidate to benefit from this altered situation owing to its competitive advantage in various industries, favourable factors of production, conducive business environment, and incentivising government policies.
The government also clenched on the situation and took further steps in the same direction by introducing PLI schemes for multiple sectors like textiles, electronics, raising import duties on some products, and so on. Before COVID-19 too, the government had taken measures like reducing corporate tax rates, Atmanirbhar Bharat, and others to incentivize domestic production.
Which sector would benefit and why?
Let’s dig into this in detail.
Low-cost manufacturing and good infrastructure played a huge role in making China what it is today. Now, China would probably make a transition to high tech and value-added products. This would benefit other countries that have low-cost manufacturing facilities like India. Sector benefit:
1. Textile sector
Macro Tailwinds: Resulting in more exports from India
- Ban on Xingjiang (China) Cotton by US (80% of China’s cotton originates from this region)
- Decentralisation and consolidation trends: Decreasing market share of China
- Adoption of China plus one strategy
Why India is in an advantageous position?
- Second largest employer after agriculture (labour intensive: India has cheap labour comparatively)
- Contributes 5% to India’s GDP, 7% of industrial outputs in value terms, 12% of the country’s export earnings. Therefore, it will always be in the focus/priority of the government’s industry benefit list
- Abundance of raw material
- Presence across the entire value chain
- Second largest manufacturer of textiles and clothing in the world
These points are important to be competitive in long term.
It is important to understand how the industry works and find out which aspect of the value chain holds the most value and can provide us with great returns.
Identify a company that is into either:
Spinning business/ Backward or forward integrated player is a preferable play or;
- Organized
- Export market share is amongst the highest
- Large players enjoy better control over the supply chain and are able to mobilize working capital better
- Can command an additional premium for value-added service resulting in improved margins
Exports (Apparels) or;
- US markets are stronger
- China +1 strategy
- Consolidation in the supplier base
Home textiles (Exports)
- India has a good market share
- China is losing market share and India is gaining market share
The Indian textile industry is expected to grow at a CAGR of 10% in the next 5 yrs. On the other hand, the growth rate of global textile is low. The growth for Indian companies would come from gaining market share which has been started to be visible in the quarterly results.
ii. Stringent environment norms in China along with trade war to limit production. Sector benefit:
2. Metals sector
China governs the global price mechanism of many metals. Any change in demand and supply there changes the investment scenario and business environment in the rest of the world.
