China Plus One Strategy: Can India Benefit?
Coined in 2013, China Plus One (C+1) is a global business strategy in which companies avoid investing only in China and diversify their businesses to alternative destinations. Officials and companies in Japan and the United States had begun mulling a diversification strategy away from China as early as 2008. However, it was only towards the end of the last decade, when US-China trade tensions were at their peak, that C+1 gained steam as an alternative strategy for transnational corporations (TNCs).
In late July 2022, a grouping of 18 economies, including India, the U.S., and the European Union, unveiled a roadmap for establishing collective supply chains that would be resilient in the long term. The roadmap also included steps to counter supply chain dependencies and vulnerabilities. This can also be viewed as a part of the overall China plus one strategy.
In India, some investments influenced by the C+1 strategy can be observed. Apple’s contract manufacturer Foxconn has begun making the iPhone 14 in India in September 2022. Apple Inc.’s Taiwanese contract manufacturer Pegatron Corporation also has started assembling the latest iPhone 14 model in India. It has been reported that Apple’s contract manufacturers in India – Foxconn, Wistron, and Pegatron – are in an expansion phase, adding more assembly lines to their facilities to offset a slowdown in iPhone manufacturing in China. Meanwhile, Vedanta has tied up with Taiwan’s Foxconn to make semiconductors in India. And Tata Motors is partnering with Japan’s Renesas Electronics to design and develop semiconductors.
Analysts believe that the push factors behind the C+1 strategy range from the diminishing cost advantage of China in recent years to growing geopolitical distrust between China and the West. In addition, foreign technology companies have been exiting or downsizing their presence in mainland China because a strict data privacy law, China’s Personal Information Protection Law, came into effect in November 2022. The law specifies, among other requirements, companies must now get permission from the Chinese authority to send personal user information abroad. The new regulation has raised compliance costs and created uncertainty. Furthermore, companies that break the restrictions are liable to face hefty fines.
Offshoring (relocating a business process from one country to another), though primarily aimed at cost reduction, also helped to improve efficiency. Lean supply chains are far more susceptible to external shocks, and recent events, including the COVID-19 pandemic and the Russia-Ukraine war, have encouraged many companies and international governments to rethink their offshoring strategies.
One of the supply chain solutions that has been considered is on-shoring – bringing manufacturing of key components back within the borders of the country where the company is operating. While it does not necessarily eliminate all risks, on-shoring does reduce the impact of geopolitical concerns and disruptions due to manufacturing components being shipped over long supply chain routes.
Another solution, seriously deliberated upon by the American and European TNCs is friend-shoring – that is, developing relationships with key suppliers around the world to prevent supply chain disruption. Friend-shoring is supposed to minimize the risks associated with foreign sources of supply by working with like-minded trading partners in trusted geographies.
The U.S. and its allies are keen to pursue a friend-shoring strategy, intending to confine commerce to a circle of trusted nations. Promoters of friend-shoring see it as a chance to revamp global supply chains to reduce their reliance on countries with autocratic governments and non-market economies, namely China and Russia. They argue that it is a compromise between full-fledged globalization and isolationism, and between offshoring and domestic production.
Undoubtedly, the shift from offshoring to friend-shoring will raise supply costs. However, consumer surveys suggest that only about a quarter of U.S. and E.U. consumers are willing to pay more for goods produced with inputs from allied or friendly countries, and data of U.S. consumers suggests that they will only pay 1% to 5% more.
C+1: An Extension of the ‘Make in India’ Initiative
India’s China plus one strategy can be seen as an extension of its ‘Make in India’ initiative which began in September 2014. The initiative aims to encourage businesses all over the world to invest and manufacture their products, in India. The main goal of the initiative is to turn India into a manufacturing powerhouse similar to China. Under this initiative, the manufacturing sector was estimated to contribute 25% of the national GDP by 2022 from barely 15% in 2014.
It is claimed that to align with its stated goals of the ‘Make in India’ initiative, the government has established a transparent, predictable, and easily understandable policy framework for foreign direct investment (FDI). In addition, the FDI policy regime has been constantly liberalized over the years. The government’s task was to guarantee that India remained a positive and attractive location for investment.
Recent data, however, suggests that this initiative has failed to attract substantial investment to revive the manufacturing sector in India. B. Nagarjuna made an analytical study on the impact of the Make in India initiative on FDI inflows, by collecting data on FDI inflows for 12 years from 2009-2010 to 2020-2021 and divided it into two groups: 2009-2010 to 2014-15 as a period ‘before Make in India’ and from 2015-2016 to 2020-2021 as a period ‘after Make in India’. The study reveals that while average FDI inflows are greater in the period after the ‘Make in India’ than that of the period preceding it but there has been no significant difference in FDI inflows as a percentage of GDP between the two periods.
If we further examine recent data on FDI inflows from April 2000 to June 2021, we find that the highest share of the top investing countries’ FDI inflows came from Mauritius (28%), followed by Singapore (22%), the U.S. (8%), the Netherlands and Japan (7% each), U.K. (6%), and Germany (2%). Only two countries, Mauritius and Singapore, account for half of India’s FDI inflows, which is not a good sign. It also conveys India’s inability to attract FDI from developed western countries. Indian Foreign Minister S. Jaishankar pointed to this issue in a recent Indo-Japan Conclave, in which he claimed that India’s friend Japan also prefers to invest in ASEAN and China rather than India.
Referring to the WTO’s statistical profiles on the global value chain, Amita Batra commented that Vietnam is a leader among South and Southeast Asian economies in seizing the opportunities arising from the regional shift in the global value chain. Between 2010 and 2018, Vietnam showed a dramatic development of the foreign value added (FVA) component of its gross exports and thus its GVC integration. As against less than 5% for Asia and India, Vietnam registered an annual increase of 17.3% in the FVA component of its gross exports over this period. This helped Vietnam to register significant gains in its share of global merchandise exports. From a low of 0.5% in 2010, Vietnam’s share increased more than threefold to 1.6% in 2020, making it the 20th largest goods exporter in the world. India’s share, in contrast, has remained stagnant at 1.6% during this period. Vietnam seems poised to consolidate its position as the most attractive destination for TNCs diversifying away from China.
The Finance Ministry’s Monthly Economic Review (November 2022) shows that manufacturing remains a major concern for the Indian economy. It has moved into negative territory since Q2 of FY2022-23. Production and sales of industrial raw materials have declined. Index of industrial production (-4%), cement production (-4.3%), fertilizer sales (-10.4%), and merchandise export (-12.1%) have deteriorated substantially in Q3 of the current fiscal year. In addition, the share of manufactured goods export in its total merchandise exports has declined to 71% in 2020 from 78% in 2000.
Recent unemployment data shows that over 52% of India’s population in the working-age group (15 years and above) is either not working or deciding to sit out of the job market. From April to November of FY22-23, 225 million Indians requested employment under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). This shows the wretched condition of the current labour market in the manufacturing sector.
Speaking at the closing session of the DPIIT’s webinar on ‘Make in India for the World’, held in March 2022, Piyush Goyal, Minister of Commerce and Industry, acknowledged this disappointment with the program and asked the industry to explore opportunities to increase the contribution of the manufacturing sector to 25% of GDP and set up 10 R&D labs or innovation centers to become a global leader in technology. The National Manufacturing Policy now aims to increase manufacturing’s share of GDP to 25 percent by 2025, instead of 2022 as previously.
Among other things, the Indian government has made major reforms to existing labor laws, declared the semiconductor mission, and announced a Production Linked Incentive (PLI) program to boost the manufacturing sector. In 2019, the government notified four labour laws instead of the 44 labour laws that existed in the country. The stated goal was to simplify domestic labour laws to attract higher investment that would create more jobs. The irony is that unless the domestic market is revived, investment is unlikely to flow into the country. India has fallen into a vicious cycle of poverty wages. Low wages attract investors but a lack of adequate domestic market forces them to leave Indian shores.
The government has unveiled a $10 billion subsidy scheme designed to lure semiconductor and display manufacturers to its shores, as part of the India Semiconductor Mission. A 2021 report by the Indian Cellular and Electronics Association (ICEA), states that the foundries in Taiwan account for over 75% of the chips that mobile devices made in India require. The number is 60% if all chips are considered. Taiwan had over 90% of the world’s most advanced semiconductor manufacturing capacity.
To enhance India’s manufacturing capabilities and exports, Union Budget 2021-22 announced the Production Linked Incentive (PLI) scheme for 13 key sectors for a five-year period. So far, the PLI scheme for large-scale manufacturing of laptops, tablets, servers, and other IT hardware has generated little interest from both domestic and foreign companies. Despite the government allowing over a dozen companies to participate in the PLI scheme, the total investment was only about Rs.1230 million in June 2022, well below the projected investment of Rs.25000 million.
While PLI has provided the much-needed catalyst for electronics manufacturing, there is still a long way to go to create Indian brands and manufacturing from the ground up. What qualifies as manufacturing is mostly the assembly of kits imported from China and the ASEAN region. A majority of the components used in electronic items are not manufactured locally in India. According to industry experts, PLI helps India with assembly line manufacturing. The next phase of the PLI should focus on making components locally. Also, merely assembling imported components for multinationals would not help develop a global Indian brand.
According to the Ministry of Electronics and Information Technology, the domestic hardware electronics manufacturing sector faces a lack of a level playing field with competing nations. The sector suffers from 8.5% to 11% disability. These disabilities are not going away anytime soon. The lack of a component ecosystem is a major challenge for electronics manufacturing.
Industry experts believe that for India to have a chip manufacturing facility, the ecosystem must first emerge. In their opinion, semiconductors are highly complex products to design and manufacture, and therefore a lot of knowledge transfer and hand-holding needs to take place.
Need for an Alternative Approach
In order to attract foreign direct investment, most developing countries (including India) adopt a strategy called the ‘race-to-the-bottom’ approach, where they offer various incentives (such as tax rebates and direct subsidies) to foreign companies. As a result, foreign companies appropriate most of the benefits associated with their investment.
As an alternative strategy to attract foreign direct investment, Charles P. Oman suggested using the ‘beauty contest’ approach. Rather than offering incentives, this strategy advises the host country to make itself more attractive by educating its labour force, upgrading infrastructure, strengthening macroeconomic fundamentals, and ensuring the rule of law.
To attract and retain quality foreign capital, India needs to shift away from incentive-based policies and must invest in education, health care, and basic infrastructure. It is well known that educated and skilled workers will attract quality capital in the high-end sector where knowledge spillover would be higher.
In 2014, Raghuram Rajan, then Governor of the Reserve Bank of India, proposed a ‘Make for India’ approach that would produce for the domestic market. He also proposed offering budgetary incentives for household savings to ensure that the country’s investments are largely financed from domestic savings. Needless to say, large-scale production for India’s vast domestic market will help local companies achieve economies of scale and overcome the current cost disadvantage of around 10 percent compared to their global peers.
 Bhaswar Kumar, What is the China-plus-one strategy? Business Standard, July 26, 2022, available at https://www.business-standard.com/podcast/international/what-is-the-china-plus-one-strategy-122072600052_1.html.
 Apple adds a new iPhone 14 supplier in India in shift from China, The Economic Times, November 4, 2022, available at https://economictimes.indiatimes.com/industry/cons-products/electronics/apple-adds-a-new-iphone-14-supplier-in-india-in-shift-from-china/articleshow/95291584.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst.
 In tech cold war, India’s semiconductor manufacturing takes early steps, The Economic Times, November 15, 2022, available at https://economictimes.indiatimes.com/small-biz/trade/exports/insights/chip-war-china-taiwan-strife-gets-indian-manufacturers-scrambling-for-alternatives/articleshow/95134773.cms.
 Bhaswar Kumar, op. cit.
 The rise of onshoring and friendshoring, Adam and Company, July 12, 2022, available at https://www.adamandcompany.co.uk/insights/onshoring-and-friendshoring/.
 John Coykendall, Flying To “Friendly” Shores: Rethinking A&D Supply Chains, Forbes, June 20, 2022, available at https://www.forbes.com/sites/deloitte/2022/06/20/flying-to-friendly-shores-rethinking-ad-supply-chains/?sh=36cefc833996.
 Sonnet Frisbie, Jumping on the ‘Friend-Shoring’ Bandwagon Will Yield Marginal Revenue Benefits for Most Companies, Morning Consult, July 7, 2022, available at https://morningconsult.com/2022/07/07/friend-shoring-marginal-revenue-benefits-most-companies/.
 Nagarjuna, B., The Impact of Make in India on Foreign Direct Investment: An Analytical Study. SEDME (Small Enterprises Development, Management & Extension Journal), 49(1), 2022. Available at https://journals.sagepub.com/doi/full/10.1177/09708464221084181.
 S. Jaishankar raises investment concerns, btTV, India Today, December 19, 2022, available at https://www.facebook.com/IndiaToday/videos/1236876750515651/?extid=NS-UNK-UNK-UNK-IOS_GK0T-GK1C&mibextid=2Rb1fB&ref=sharing.
 Amita Batra, India in the GVC diversification strategy: A reality check, Business Standard, January 4, 2023, available at https://www.business-standard.com/article/opinion/india-in-the-gvc-diversification-strategy-a-reality-check-123010401296_1.html.
14] Dipankar Dey, Resilient, but inequitable, Millennium Post, December 31, 2022, available at https://www.millenniumpost.in/sundaypost/in-retrospect/resilient-but-inequitable-503959https://www.millenniumpost.in/sundaypost/in-retrospect/resilient-but-inequitable-503959.
16] Shiva Arora, Urban unemployment rate drops for fifth quarter to 7.2%: NSO survey, Business Standard, November 24,2022, available at https://www.business-standard.com/article/economy-policy/urban-unemployment-rate-drops-to-7-2-in-september-quarter-plfs-122112401337_1.html.
 Monthly Economic Review, November 2022, Department of Economic Affairs, Government of India.
19] Goyal asks industry to raise manufacturing contribution to 25% of GDP, Business Standard, March 3, 2022, available at https://www.business-standard.com/article/economy-policy/goyal-asks-industry-to-raise-manufacturing-contribution-to-25-of-gdp-122030301201_1.html.
20] IBEF, Manufacturing Sector in India: Market Size, FDI, Govt Initiatives, available at https://www.ibef.org/industry/manufacturing-sector-india#:~:text=Between%20April%202000%2DJune%202022,inflows%20worth%20US%24%2019.90%20billion.
21] Dipankar Dey, With lasting ramifications, Millennium Post, December 25, 2021, available at https://www.millenniumpost.in/sundaypost/in-retrospect/with-lasting-ramifications-462936?infinitescroll=1.
 Surajeet Das Gupta, Taiwan makes 75% of all chips used for Indian mobile market, Business Standard, August 17, 2022, available at https://www.business-standard.com/article/economy-policy/chips-from-taiwan-dominate-india-s-mobile-market-shows-icea-data-122081600997_1.html.
 Ravi Dutta Mishra and Gulveen Aula, PLI scheme for IT hardware reworked after lukewarm response from firms, Mint, December 25, 2022, available at https://www.livemint.com/economy/pli-scheme-for-it-hardware-reworked-after-lukewarm-response-from-firms-11671987552023.html.
24] Shelley Singh, Electronics makers got the right push from the PLI scheme. But it is mostly an assembled story, The Economic Times, September 28, 2022, available at https://economictimes.indiatimes.com/prime/economy-and-policy/electronics-makers-got-the-right-push-from-the-pli-scheme-but-it-is-mostly-an-assembled-story-/primearticleshow/94463153.cms.
25] The disability number represents how much more expensive it is to make in India compared to other competing nations on account of lack of infrastructure, poor supply chains, logistics, high cost of finance, inadequate availability of quality power, limited design capabilities, and lack of R&D spend. See https://www.meity.gov.in/esdm/pliithw.
26] Perspective: Semiconductor Industry & India, SANSAD TV discussions, May 16, 2022, available at https://www.drishtiias.com/loksabha-rajyasabha-discussions/perspective-semiconductor-industry-india
 Charles P. Oman, The Perils of Competition for Foreign Direct Investment, Foreign Direct Investment versus other Flows to Latin America, OECD Development Centre, 2001, available at https://www.oecd-ilibrary.org/finance-and-investment/foreign-direct-investment-versus-other-flows-to-latin-america_9789264192522-en.
Dipankar Dey is a faculty member at Techno India School of Management Studies, Kolkata. Views expressed here are personal.
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