China Plus One Strategy

In News

• Companies contemplating diversifying their dependence on China is a strategy known as “China-Plus-One”.

More about the Strategy

• China as the ‘World’s factory’:
  • China, known as the ‘World’s factory’ has been the centre of global supply chains in the last few decades owing to following
    • Favourable factors of production and 
    • Astrong business ecosystem. 
  • Beginning:
    • When large manufacturing entities in the U.S. and Europe moved production to China in the 1990s, they knew they got a low manufacturing-cost base and also access to a big market for a large number of products. 
• Issues during pandemic:
  • During the pandemic, there were a lot of disruptions in many of the economies. 
  • When the large economies came out of the pandemic, there was a sudden demand.
  • China’s Zero-COVID Policy meant that there was industrial lockout and supply chains were not able to supply consistently. There was also the container shortage.
• Evolution of China+1 strategy:
  • Zero-COVID policy, supply chain disruption issues, high freight rates and lead times from China – the confluence of all these factors have resulted in a China+1 strategy for many global companies. 
  • As the Chinese economy is shutting itself, global companies are exploring other manufacturing locations. 
• Alternative supply chain: 
  • 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. 
• Benefits for India:
  • 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.

Following are the potential sectors that can benefit from China plus one strategy

• Textile:
  • Textiles in the second largest employer after agriculture in India. 
  • It is a labour-intensive sector as India has cheap labour comparatively.
  • It 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.
  • Other benefits:
    • Abundance of raw material
    • Presence across the entire value chain
    • Second largest manufacturer of textiles and clothing in the world.
• Metals:
  • India has a competitive advantage in steel and aluminium on account of an adequate supply of raw materials and a growing market for finished goods.
  • The PLI scheme for the specialty steel industry will apply for a 5-yr period from 2023-24 onwards. 
    • It is expected to bring in an investment of approximately Rs. 40,000 cr and capacity addition of 25 mn tonnes for specialty steel.
• Chemicals:
  • With a 35% market share in global exports, China is slowly losing its momentum due to changes in trade dynamics and stringent environment norms. 
  • These changes in China will help India increase its global market share from 3% to 9% as expected in the coming decade.
  • The Indian chemical industry grew by 11.7% CAGR over CY 2015-20 and is valued at around $32 bn. It is expected to grow at a CAGR of 12.4% in the next 5 yrs.
• Pharmaceuticals:
  • Indian Generic medicines has 20% share in global supply by volume.
  • China and India are the sources of 75-80% of the APIs imported to the US. 
• Semiconductors:
  • U.S.-China tensions over Taiwan, and the supply chain blockages owing to the Russia-Ukraine conflict have led major economies to enter the chip-making sector with a renewed push.
  • Indian government also recently announced the PLI and DLI schemes as major steps towards building a semiconductor ecosystem in the country.

Suggestions & Way Ahead

• Establishment of the global supply chain:
  • The establishment of the global supply chain was built over a period of time. The experience of some of these companies in India is relatively less. 
• Understanding the expectations: 
  • There are specific expectations of quality in every country. So, a good bit of time has to be spent in understanding these quality expectations of global customers in different geographies.
• Balancing domestic supply:
  • Also, Indian firms will have to continue to support global companies even if domestic demand goes up. 
  • It will have to be a long-term separate business that they are committing themselves to.
• Various initiatives by Indian government:
  • The government also clenched 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. 
    • The PLI scheme is a big push towards manufacturing locally and localising technology, strengthening our own manufacturing. 
  • Before COVID-19 too, the government had taken measures like reducing corporate tax rates, Atmanirbhar Bharat, and others to incentivize domestic production. 

Source: BS