February 28, 2024


Delighting finance buffs

Covid spillover: Firms shifting from China to Vietnam has a lesson for India

This was being talked about. Now some agencies working on the ground have started reporting that companies are shifting out of China. Covid-19 pandemic is not the only reason but it has certainly given the push to what US-China trade war began.

According to a report by Qima, a Hong Kong-based quality control and supply chain inspection company, there has been sudden surge in the demand for inspections and audits by North American and European buyers in South-East Asia and South Asia.

Such inspection and audit reports are used by companies to migrate to new areas. Qima reported 45 per cent surge in demand for South-East Asia (with Vietnam, Myanmar and the Philippines in the lead), and 52 per cent in South Asia, where Bangladesh remained a go-to destination for Textile and Apparel brands.

This demand surge was witnessed during January and February, when China was under coronavirus lockdown. It would not have been significant but for two other findings of the Qima survey.

First, as lockdowns began to lift in China in March, local manufacturing rallied, and inspection and audit volumes headed towards 2019 levels. However, this rebound was cut short and the week of March 23 saw inspection and audits volumes in China collapse again, down 19 per cent. It was helped by lockdown in America and Europe.

Second and more important, in a Qima poll of over 200 businesses with global supply chains, 87 per cent of respondents said coronavirus pandemic would trigger significant changes in the global supply chain. More than 50 per cent noted that they had begun switching to suppliers in unaffected regions.

This “shift” sentiment is in sync with the pre-coronavirus outlook emerging from US-China trade war, which does not seem to be ending soon, even if Donald Trump loses the US presidential election in November. The two countries have locked horns too intricately now to untangle them easily. China is additionally involved in trade rows with Australia and European countries.

This “shift” sentiment raised hopes in India that it would be able to attract much of the businesses due to its democratic polity and open market.

It was also reported in May that India has identified a land pool of 4.62 hectares to lure businesses from China. Some 1,000 US firms were approached with incentives for shifting their manufacturing plants in India.

Some states such as Uttar Pradesh formed a special task force for the purpose and also announced changes in labour laws drawing jibes from Chinese Communist Party’s mouthpiece Global Times. However, the companies that are moving are not heading towards India.

According to a study by Japanese financial group Nomura, the destination for these companies remains in the East and South-East Asia.

Nomura found that 56 companies moved its bases from China in 2018-19, Vietnam got 26 of them. Taiwan got 11 and Thailand eight. Only three companies came to India.

Qima report underscores that the companies are looking “safer” destinations which in post-Covid times also means the countries that have managed coronavirus pandemic better.

Vietnam, incidentally, has emerged as a model country in the fight against coronavirus pandemic. The country reported only 327 Covid-19 cases with no deaths.

For a country with almost 10 crore population, this is a commendable achievement. In India, West Bengal has a comparable population and reported 8,613 cases till Tuesday morning with more than 400 deaths. Bengal has been more daily cases than total caseload of Vietnam for past several days.

To make itself a more attractive destination, Vietnam on Monday ratified its trade deal with the European Union. This translates into removal of 85 per cent tariff by the EU on exports from goods manufactured in Vietnam, and phased removal of imports from European countries.

This explains why India is not the preferred destination for companies which are actually shifting or have plans to relocate out of China. India’s large market access is not the only determining factor for them even when the country is considered the closes rival to China.

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