The Economic Times
English EditionEnglish Editionहिन्दीગુજરાતી
| E-Paper
Search
+

    Why factories leaving China aren't going to India

    Synopsis

    For one, India must abandon its overconfidence that investors will come simply for large population.

    Shutterstock.com
    In terms of FDI as a percentage of GDP, South Asia lags both the global average for least-developed countries and sub-Saharan Africa.
    By Irene Yuan Sun

    Vietnam seems to be the consensus pick for winner of the U.S.-China trade war, as Chinese and other manufacturers shift production to the cheaper Southeast Asian nation. If there’s a loser, at least in terms of missed opportunities, it may be the countries of South Asia.

    To understand why, remember that the trade war has only accelerated an important trend a decade in the making. Faced with rising costs, Chinese manufacturers must decide whether to invest in labor-saving automation technologies or to relocate. Those choosing the latter present an enormous opportunity for less-developed countries, as Chinese companies can help spark industrialization and much-needed economic transformation in their new homes.

    There may not be another such chance this generation. The only proven pathway to long-lasting, broad-based prosperity has been to build a manufacturing sector linked to global value chains, which raises productivity levels and creates knock-on jobs across the whole economy. This was how most rich nations, not to mention China itself, lifted themselves out of poverty.

    Yet the evidence suggests that South Asian countries are lagging behind in attracting manufacturing investment. It’s not just Vietnam that’s racing ahead. African countries, too, are making manufacturing a top priority. Ethiopia alone has opened nearly a dozen industrial parks in recent years and set up a world-class government agency to attract foreign investment. The World Bank has lauded sub-Saharan Africa as the region with the highest number of reforms each year since 2012.

    By contrast, in terms of foreign direct investment as a percentage of GDP, South Asia lags both the global average for least-developed countries and sub-Saharan Africa. While South Asia’s total GDP is more than 70% greater than Africa’s, the continent received three-and-a-half times the investment from China that South Asia received in 2012, the most recent year for which the United Nations has published bilateral FDI statistics. In the last five years, the American Enterprise Institute’s China Global Investment Tracker has recorded 13 large Chinese investment deals in Africa and only nine in South Asia.

    Bangladesh is a striking illustration of the problem. The country needs to create 2 million jobs per year at home just to keep up with its growing population. Yet, despite a world-class garments manufacturing sector, it seems unable to cut red tape and enact the reforms needed to attract investment to diversify beyond apparel. In the past few years, Bangladesh has fallen to 176 out of 190 countries in the global Ease of Doing Business country rankings. DBL Group, a Bangladeshi company, is investing in a new apparel manufacturing facility that will generate 4,000 jobs -- in Ethiopia.

    The fantasy, most common in India, that a country might somehow “leapfrog” from a rural, agriculture-heavy economy straight to a services-based economy is just that: a fantasy. South Asia can’t afford to lose this chance to grow its manufacturing sector.

    Attracting manufacturing investments will require, first and foremost, that governments in the region acknowledge the competition is passing them by. India, for example, must abandon its overconfidence that investors will come simply for its large population. Pakistan needs to stop relying on its government-to-government friendship with China. Chinese state financing of infrastructure won’t automatically lead to manufacturing investment, most of which is dominated by private Chinese companies motivated by competitive forces, not government diktats.

    Secondly, South Asian countries need to undertake a concerted, whole-of-government push to boost investment levels. Specifically, they need to create the conditions manufacturers need to thrive, from steady power supplies to efficient port operations and customs clearance.

    Moreover, they need to understand the specifics of these businesses. Factories have unique requirements depending on what they make. For example, cloth and clothing factories, despite their seeming similarities, have extremely different requirements: The former is capital-intensive, with huge amounts of power-hungry machinery churning out bolts of cloth, whereas the latter is labor-intensive and features rows of workers cutting and sewing.

    Countries need to analyze which manufacturing sub-sectors they are best positioned for, meet the requirements those manufacturers have in order to set up shop, and target the regions of China (and elsewhere in the world) where those types of manufacturers are to be found.

    The good news is that all of these measures are eminently feasible. And in many cases, the first steps are already being taken, such as with the construction of Bangladesh’s first deep sea port at Matarbari. The bad news is that unless South Asia moves faster, others may have already seized the opportunity to industrialise.

    (This column does not necessarily reflect the opinion of economictimes.com, Bloomberg LP and its owners)
    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds.)

    97 Comments on this Story

    Bipin205 days ago
    Answer to your headline is very simple, A girl wont resort to Amresh puri from prem chopra.
    Migtwentyonebis 207 days ago
    leave alone foreign business coming to rubbish india , indian business are moving out of india.
    Suresh Datta207 days ago
    One reason a lot of business is moving from China to Vietnam is that it has a land border with China. From the stories that we read in SCMP newspaper, many Chinese factory can dismantle their existing factories and ship them by treach thru land border in a week and rebuild the factory in another week to 2 weeks. Its costs very little money to move factories moreover there are many Chinese factories already set up in Vietnam which gives them more confidence.Secondly China has a well established raw-material base which is easy and quick to move to Vietnam. The over cost and logistics is far more low and convenient than India. Vietnam also had 20% corporate tax which was another incentive.
    Another reason is that many Chinese cos and people want to move their money out of China, with lower corporate tax of 20% in Vietnam provides another incentive.
    The only problem many Chinese cos will face and some are already facing is small cheap labour pool which will soon dry up and the cost will increase. India has not only cheap labour but also has the scale.With lower tax rate of 15% in India things will change eventually.
    The Economic Times