- September 1, 2022
- Posted by: Anish
- Category: Feed
A Kearney survey in March 2022 found that 92% of American manufacturing executives were positive about bringing factories home, compared with 78% the previous year. Among CEOs, 70% said they were assessing, planning, or completing the relocation of operations to regions near the U.S., such as Mexico, Canada or Central/Latin America.
Apart from traditional destinations in Asia for relocating manufacturing from China, Mexico is becoming a new alternative, offering proximity to the U.S., lower labour costs and access to preferential tax treatment under the U.S.-Mexico-Canada free trade agreement.
Inflation is still a major concern for ordinary Americans and the Federal Reserve. And experts say it’ll likely be a couple of years before prices really come down from the highs, they’ve seen in 2022.
There’s been a lot of talk of shifting the manufacturing supply chain away from China. Other countries want to cut their dependence on the world’s biggest factory floor, wary that Beijing is wielding too much power over the global economy. Rebuilding manufacturing and replacing China, though, isn’t all that easy. Constructing highways and production lines that work like clockwork, with tightly knit networks of suppliers, is a gargantuan task.
Countries from the US to Vietnam and Indonesia are all trying to present themselves as alternatives. The $53 billion Chips Act was an attempt by the White House to reclaim chip manufacturing, as is the national blueprint to build a lithium-ion battery supply chain by the end of the decade. For electronics, Vietnam has been hailed a viable option. Even Indonesia, the biggest producer of nickel, a critical component of electric vehicle batteries, wants to move up the ladder and capture the value-add from a global shift into EVs.
Parts of the supply chain may shift away from China, but for now, no country can come close to building the intricate network of factories across such a broad range of sectors. Switching agreements and suppliers isn’t an overnight process, nor is setting up operations that have been in place for years.
Vietnam makes a good test case. Just as Apple Inc.’s suppliers such as Hon Hai Precision Industry Co., better known as Foxconn, plan to expand capacity there, sending industrial land prices to new highs, global manufacturers are finding that Vietnam can be easily ensnared by shortages. Right now, building materials like aluminium window sills — which are abundant in China — are hard to come by there.
This is because Vietnam, along with the rest of Asia, imports a lot of basic industrial products such as chemicals and plastic, from its northern neighbour. Even though its economy has been open since March, as long as China continues with Covid-zero lockdowns, the Southeast Asian nation will continue to suffer from supply chain bottlenecks.
Over the years, China’s ambitions to climb the value chain meant a shift of its production toward higher-end equipment and industrial goods. It has built out a vast manufacturing sector that supplies a significant portion of components, or intermediate goods, that go into final products. It is now the top global exporter of such parts in terms of value.
At the same time, Chinese manufacturers are increasingly setting their sights on Mexico/LatAm for bringing production closer to the American market, reflecting higher costs of Chinese exports under U.S. tariffs and pandemic-related disruptions of global supply chains.
Opportunity for Indian Businesses?
For Indian firms having large domestic markets is a boon . Economic Advisory Council to the Prime Minister (EAC-PM) has said that the country can become a 20 trillion-dollar economy at a sustained growth rate of 7 to 7.5 percent for the next 25 years. However, a number of trade and industrial policy initiatives to make the country a global production and exports hub such as the Production Linked Incentive (PLI) scheme would be vital to capture the manufacturing supply chain.
Manufacturing sector should be able to source inputs from the lowest cost suppliers anywhere in the world until it achieves a global scale (globalise), which implies temporarily suspending localisation requirements, removing duties on intermediate items, and accelerating integration through regional and bilateral FTAs.
Recently, Indian External Affairs Minister S Jaishankar, on an official visit to Brazil, Paraguay, and Argentina from August 22-27 quoted “India and Brazil are not only partners but can share best practices for their mutual growth and progress”. This is External Affairs Minister S Jaishankar first-ever official visit to South America.
India also expressed interest in partnering with Argentina for the development of infrastructural projects of transmission lines, roads and highways, railways and in renewable energy including solar, wind, small hydel or biogas. India also offered the expertise of its public and private sector companies, which could also bring attractive financing options, subject to domestic regulations in Argentina.