By Karishma Malhan | Edited by Atiyah Krishnan
Have you ever heard of the proverb, “Don’t put all your eggs in one basket”? That is exactly where the idea of the “China plus one” strategy came into play. This refers to the global business strategy by which corporations diversify their investments in the business sector and replace China with suitable alternative countries. Over the years, we have seen “Made in China” tags on nearly every product that has ever come into our hands. However, China, once known as the “Factory of the World,” is today diminishing in importance in the industrial sector.
China has become one of the world’s fastest-growing economies ever since the introduction of economic reforms in 1978. The Multinational Corporations (MNCs) were instantly drawn in by China’s economies’ attractive features like cheap labour, abundance of natural resources, low taxes, and lower regulatory compliance. With its huge population of 95.62 crores in 1978, the annual wage of a worker being only $1004, it was a primary reason why China was the foreground for investments. China accommodated the West and eliminated any risks in the environment by revamping the economy with the introduction of free market principles. It was known for its health, employment, and loose environmental policies that helped the manufacturing sector grow exponentially, making China today the world’s largest producer of steel, cement, and fertilizers. All these factors enabled China to expand and become the world’s second-largest economy after 35 years.
After 30 years of high concentration of businesses in China, corporations realised that depending solely on China’s unpredictable market would be unwise in the long run. Due to heavy investment from foreign companies and China’s increasing manufacturing capacity, many countries started to depend directly and indirectly on China. Directly, through the ‘Made in China’ goods that were sold across the world, and indirectly, in the sense that raw materials used to produce Indian goods were imported from China. This vicious cycle of global trade with China at its centre led to the EU and USA realising that such dependence on a single country could cripple the global economy in the future. Hence, in 2013, the China plus one business model was coined. This model existed in Japan and the US but was expanded at a faster rate much later. US-China trade tensions in 2019 were a contributing factor, but the main push was accelerated by the outbreak of the COVID-19 pandemic. China’s Zero-COVID policy led to the disruption of industries and the supply chain. It is losing ground to its Asian neighbours in key consumer categories like clothing, accessories, travel goods, and furniture and is also facing declines in its share of exports, from minerals to office technology. Vietnam, which is close to China and has cheap labour, has been considered an alternative and is rapidly expanding in these categories.
Source: Loriannlarocco. (2022, October 25).
The Zero-COVID policy included mass testing, tracking, and strict isolation. Bans on dining in restaurants, curbing the power of China’s technology leaders, and cutting down speculation in real estate are reasons why the effect of the low-cost manufacturing advantage in China is reducing. In auto sales, China sold 1.18 million units in April 2022, down 47.6% as compared to the previous year (China Automobile Manufacturers Association). This is the result of the termination of production in the factories and problems in supplying parts. The prices of Chinese goods are also increasing rapidly, as observed from the China producer price index, which reached its all-time high of 13.59 percent in October 2021. The important raw materials, like coal supplies, have been consumed for meeting carbon emission targets.
An increase in labour, transportation, and freight costs, along with technological companies threatening to shut down or already downsizing their roles due to the introduction of China’s personal information protection laws, a strict data privacy law that has replaced the earlier loose regulations, have all made China look less desirable for investment.
India, on the other hand, is becoming a more appealing destination for foreign investment day by day. Its strategic location, wide domestic market, and skilled and low-cost labor, all topped by the “Production-Linked Incentive Scheme” introduced in 2020, have attracted several Asian mobile phone manufacturers. Flagship projects like the Vadhavan Port, the first deep-water port in India, the port of Rotterdam, and suggestions for other trans-shipment ports are contributing to a large expansion in Indian trade by reducing dependency on other Asian ports. Apple is now looking to shift 25% of its production of iPhones to India by 2025 and manufacture the iPhone 14, which would be a major milestone and would then promote the “Made in India” scheme, giving India a more significant position within the global supply chain. India’s growth in the technical industry can be seen by the fact that in 2014, 92% of the mobile devices sold in India were imported, and in 2022, 97% of mobile phones would be manufactured in the country itself (The Hindu). The tremendous rise in India’s electronic ecosystem can be observed by its current valuation, which is $75 billion as of 2022, seven times what it was in 2014. India also takes the lead as the largest producer of cotton, and the “Make in India” campaign covering 25 economic sectors seek to promote entrepreneurship and will provide a huge opportunity to the budding start-ups, increasing their turnover and the profits of the country thereby. A driving force currently is the PM Gati Shakti project, a $1.2 trillion project whose major objective is to snatch factories from China by offering a one-stop solution for designing projects, easy approvals, and simple estimations of costs.
All these projects are a crucial part of India’s progress towards becoming the foreground for investments under China plus one strategy. In order to fully capitalize on its innovative efforts, India should partner with Vietnam and establish a mutually beneficial relationship. The GDP per capita of Vietnam is higher, and its debt-to-GDP ratio and inflation are lower, which is why it is preferred by foreign investors. Foreign businesses also prefer Vietnam due to its low currency fluctuation rate, whereas India has a “free floating currency,” with the exchange rates being determined by market changes. According to the export similarity index, Vietnam has the most similar export basket to China, which places it on a higher pedestal for replacing the export basket of China. (Vietnam Briefing)
Hence, although India’s market size is notably larger with cheap labour, Vietnam has other remarkable benefits, such as a healthier economy and a more stable market. Both countries can highly benefit from India’s large economy and Vietnam’s stable market conditions and extract millions of dollars in investment if they become allies. Though China cannot be removed instantaneously, India shows great potential in becoming the focal point of investment under the “China plus one” strategy in the upcoming years.
References
- Bureau, T. H. (2022, November 17). China-plus-one strategy puts India at a vantage position: Rajeev Chandrasekhar. The Hindu. Retrieved January 30, 2023, from https://www.thehindu.com/news/national/karnataka/china-plus-one-strategy-puts-india-at-a-vantage-position-rajeev-chandrasekhar/article66150108.ece/amp/
- How Vietnam and India complement each other. Vietnam Briefing News. (2022, October 25). Retrieved January 30, 2023, from https://www.vietnam-briefing.com/news/how-vietnam-and-india-complement-each-other-as-foreign-businesses-consider-their-china1-alternative.html/
- Kumar, B. (2022, July 26). What is the China-plus-one strategy? Business Standard News. Retrieved January 30, 2023, from https://wap.business-standard.com/podcast/international/what-is-the-china-plus-one-strategy-122072600052_1.html
- Lim, P. H. (2022, May 26). China’s strict zero-covid policy creates supply chain Chaos. VOA. Retrieved January 30, 2023, from https://www.voanews.com/amp/china-s-strict-zero-covid-policy-creates-supply-chain-chaos-/6591227.html
- Loriannlarocco. (2022, October 25). China, ‘factory of the world,’ is losing more of its manufacturing and export dominance, latest data shows. CNBC. Retrieved January 30, 2023, from https://www.cnbc.com/amp/2022/10/20/china-factory-of-the-world-is-losing-its-manufacturing-dominance.html
- Zero-covid policy batters China’s economy. Anadolu Ajansı. (n.d.). Retrieved January 30, 2023, from https://www.aa.com.tr/en/economy/zero-covid-policy-batters-china-s-economy/2590756
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