India needs to get it right on attracting—and retaining—the US giant, & then get its component base to relocate.
The hardening of US-China tensions with the Senate passing a bill to bring US oversight to Chinese firms who seek to list on US exchanges and raise capital there—even arms sales have been approved to Taiwan—presents yet another opportunity for India to woo US firms manufacturing out of China. Indeed, while the rhetoric is going to heat up as the November elections in the US draw closer, this can even go on after the elections.
Though India has lost valuable opportunities in the past—the textiles market China vacated decades ago went to countries like Bangladesh and Vietnam—it may have finally got it right with the new policy on export incentives for the manufacture of mobile phones that was announced in March. But, it has been two months since and the detailed guidelines have still not been made public. It is important to ensure that the policy is implemented seamlessly—pay firms their export incentives on time and ensure that all state government permissions are given quickly—since India has a lot riding on it.
Under the package, each big player—like Apple or Samsung—is expected to scale up to around $35-40 bn of annual exports within 2-3 years. While the domestic value addition is unlikely to be more than 20-25%, $35-40 bn of possible exports from each major player has to be juxtaposed against the burgeoning trade deficit in electronics. From $17.1 bn in FY08, this rose to $45.1 bn in FY19 and will increase even faster in the future. Getting higher local value addition can take several decades, but large exports from India by firms like Apple and Samsung are a good way to bridge the trade deficit; in any case, with mobile phone usage increasing the way it is, imports of components will keep rising at a fast clip.
Indeed, to increase value addition as well as employment opportunities, India should try to now attract Samsung’s and Apple’s large component base; each one of Apple’s 30-odd big suppliers have a turnover of over a billion dollars a year. Apple’s global merchandise business is around $230 billion right now, and 90% of this is serviced out of China. Getting more of Apple’s vendors in India then means India can hope to supply iPads, Macs and other Apple merchandise over time.
While an incentive scheme like the one for mobile phone manufacturing will be called for to woo component suppliers—the existing MEIS scheme will end in December—it is important to keep in mind that India is not the natural choice for anyone wanting to exit China. At the end of 2019, a study showed that of the 56 firms that shifted out of China, only three came to India; 26 went to Vietnam, 11 to Taiwan and eight to Thailand.
Indeed, with Vietnam already exporting around $47 bn of mobile phones already, it has a headstart over India in terms of a readymade ecosystem of component suppliers and vendors. Indeed, were India’s famed bureaucracy to make implementation of the package difficult—by quibbling over the price of the phone being exported etc—it is important to keep in mind that shifting out won’t be difficult as the operations planned right now are essentially assembly lines and capital-light. Rather than announcing grandiose plans of how India is reaching out to 1,000 US firms operating out of China, it would make more sense to concentrate on the top 40 or 50, ensure their ancillaries also come to India and, more important, try to ensure that Indian firms integrate into their global value chains.