BRAND CHINA IN CONUNDRUM: HAS INDIA’S MOMENT OF RENAISSANCE ARRIVED?

Background:

Two things define supply chains: Availability and Price. World War II was based on destroying the enemies supply chain: The US crippled Germany’s oil and ball bearings, Germany wanted to break the supply chain from US to UK using submarines, US wanted to cripple Japan’s supply chain to southeast Asia. The country that possessed most of the elements or components to construct the means of war and finished products were not vulnerable to enemy attack until shipped or in combat. US thus had an advantage in World War II.

The Post World War II idea was that free trade, diffused supply chains, securing supply chains, intertwined economies would increase mutual dependence and avert war and that worked to a great extent as there was no world war since 1945. But for this to sustain, supply chain depended on trust that neither side would disrupt the supply chain to seek control over the other. The two largest economies US and China had tensions which led to friction short of war as supply chain was business dependent and a political matter. The two countries were not interested in free trade but advantageous trade. The current global system has massive physical and political complexity and in an event like Covid 19, each one may act differently and undermine the interest of other nations. The supply chains can shift but not quickly.

China’s Image Dented Globally

Apart from trade war and supply chain tensions between US and China, the two are engaged in fierce competing barrages about the origin of outbreak of coronavirus. An increasingly prominent narrative in the US is that not only did the pandemic originate in China, but that China withheld key information for weeks that could have enabled other countries to adopt measures impeding the spread of the deadly virus. China has embarked on a massive campaign/ information war to change the global narrative and perception by controlling public opinion to revive its global image amid the pandemic. China is using “Generosity Politics and Diplomacy” as a tool to change public opinion by sending doctors, PPE’s, Face masks, ventilators, testing kits and tons of other medical equipment to Italy and other countries affected by pandemic. This diplomacy failed as lot of testing kits and other supplies were returned to china as they lacked “Quality”. In China, the pandemic and its disastrous handling in the initial phase of disease control, threatens social and political stability. China’s image of regime’s efficiency and its image has been severely dented in the eyes of the Chinese population and even more seriously, in the eyes of the world. This is emergency for the Chinese regime.

Diplomatic Pressure mounts on China

Diplomatic pressure is mounting on China over its management of Pandemic and Foreign Direct Investment (FDI)

1.   US President Donald Trump signed into law the Taiwan Allies International Protection and Enhancement Initiative Act of 2019 on 26 March’20 under which the US government is legitimately seeking to establish a diplomatic presence in Taiwan and help Taiwan  gain participation in International Organisations as well as level up its economic ties with Taiwan.  

2.   At a White House press conference, President Donald Trump criticized china on several fronts and said China should face consequences if it was “knowingly responsible” for the coronavirus pandemic.

3.   German Chancellor Angela Merkel urged China to be as transparent as possible about coronavirus outbreak. She urged for more information about the early days of the outbreak, which originated in Wuhan.

4.   European Commissions Chief Ursula von der Leyen has backed the calls from Australia and the US for an independent investigation into the origin of COVID-19 pandemic and asked China to join the investigation.

5.   Australia is planning to raise the issue of the independent probe over COVID-19 at the World Health Organisation (WHO) meet on 17 May’20 and support Taiwan’s entry into WHO.

6.   Japan has earmarked $ 2.2 billion to assist domestic companies to shift production from China back home or diversify production bases into South East Asia.

7.   White House National Economic Council Director Larry Kudlow said the US should “pay the moving costs” of every American Company that wants out of China.

8.   If US and Japan, the worlds biggest and third biggest economies respectively, move away from China, it will have a huge impact on China’s economy and other countries may follow.

9.   US state of Missouri has filed a law suit against China’s Communist Party (CCP) and other Chinese officials and institutions alleging that during critical weeks of the initial outbreak, the Chinese authorities deceived the public, suppressed crucial information, arrested whistle blowers, denied human to human transmission, destroyed critical medical research, exposed millions to the virus and hoarded Personal Protective Equipment (PPE) causing a global pandemic. China dismissed the lawsuit citing absurdity and violation of sovereignty.

10.  Germany’s largest tabloid newspaper, Bild, sent an itemized bill to China to pay Euro 149 billion.

11.  Alarmed by People’s Bank of China raising its stake from 0.8% to 1.01 % in HDFC Bank, India changed its FDI policy from automatic approval to government approval route for any country which shares land boundary with India.

12.  The European Commission (EC) has singled out the issue of Foreign Direct Investment (FDI) screening as part of the EU’s overall response to COVID-19 and issued guidance to Member States on 25 March 2020 to protect critical European assets and Technology.

Impact of COVID-19 Pandemic on supply chains:

The COVID-19 pandemic feels like a war. People are dying. The medical professionals are on the front lines. Those in police, public distribution system, essential services, public utility services are working overtime to support the effort. People are fighting the pandemic confined in their homes. The pandemic has hit major industries: automobiles, pharmaceuticals, medical equipment and supplies, electronics, hospitality, tourism, consumer goods in an unprecedented scale and speed. This has caused closures of businesses, manufacturing and their supply networks.

As per World Bank, Global Entrepreneurship Monitor (GEM database), Industrial production in China  has fallen by 13.5% in January and February combined, compared with the previous year . This fall is due to various factors including shortage of parts, shortage of labour workers trapped due to shut down, slow recovery of transportation network, emergency regulations and restriction on movement.  Since China is world production hub and at the heart of Global Value Chains (GVC’s), this initial decline in production and trade seen in China will have a strong impact on countries further up and down the supply chain since most of the countries have imposed restrictions on movement to combat the spread of virus.

Global manufacturing Original Equipment Manufacturers (OEM’s) are scrambling to find alternative solutions, including quickly shifting orders to secondary or tertiary suppliers to make up the missed delivery from primary suppliers and moving core business priorities back to their own factories. Since the pandemic epicentre has shifted toward US and Europe, the knock-on effects have begun to multiply. We are in a completely different new era now and globalization as we have known it in the past is over. It is still too early to quantify fully the effects of the supply chain disruptions due to pandemic but there are severe implications for international production networks.

China is fishing in Troubled waters:

As the world combats the COVID-19 pandemic, which has reached over 200 countries, infected 3.4 million people and killed about 2,39,000 people, China continues to intimidate and harass in South China Sea (SCS). China is exploiting ASEAN countries preoccupation with the pandemic in the hope that its actions will provoke little or no reaction, further strengthening its hold in the SCS. China will continue to harass new oil and gas exploration and all fishing activities by its neighbours until it becomes too risky and expensive for Southeast Asian civilians and governments to do anything without china’s approval. Chinese companies are also on a shopping spree to buy strategic stakes or majority control in US and European companies as asset prices fall due to pandemic.

1.   China announced the establishment of “Xisha District” and “Nansha District” in so called “Sansha City” to manage Vietnam’s Paracel and Spratley islands, Macclesfield Bank and surrounding waters.

2.   A Chinese vessel also sank a Vietnamese fishing vessel with eight men on it in the Woody Island, part of Paracel

3.   Chinese survey vessel Haiyang Dizhi 8 was spotted around 158 km off Vietnam’s coast, inside its Exclusive Economic Zone (EEZ). It then followed exploration vessel West Capella belonging to Malaysian state oil company Petronas after entering Malaysia’s EEZ.

4.   There is a report, confirmed by US Assistant Attorney General for National Security John Demers that US hospitals and research labs are being targeted by Chinese cyber cell as china seeks to obtain knowledge of progress in developing a vaccine for COVID-19.

5.   China Overseas Shipping Company, COSCO owns 90% of the only terminal operator in Belgium. COSCO has 51% stake in and managerial control of port terminals in Valencia and Bilbao in Spain. They also have minority stakes in other terminals in Antwerp, Las Palmas and Rotterdam according to December 2019 study by Netherland think tank.

6.  China has threatened to stop importing wine and beef from Australia if the Morrison government continues to push for an inquiry into the origin of the global coronavirus outbreak.

7.   FM Mihaly Varga announced that Hungary and China have signed a loan agreement to finance the construction of railway link between Budapest and Belgrade.

INDIA TO EMERGE AS THE NEW NERVE CENTRE OF SUPPLY CHAIN POST COVID-19

INDIA HAS THE RIGHT COMBINATION OF FACTORS:

1.  Despite being the world’s second most populous country, with more than 1.3 billion people,the extent of impact of Covid-19 is relatively contained if one looks at published numbers in western countries.

2.   Recent criticism on china and trust deficit could result in marked shift in economic flows.

3.  Past 5 years have seen structural reforms such as Insolvency and Bankruptcy Code, GST,relieving banking system of corporate loans.

4.  India is a growing economy, compared to contracting ones in most other countries. IMF predicts India’s growth rate to bounce back to 7.4% in 2021.

5. India can escape recession due to its fewer linkages with global supply chains and dependence on domestic consumption as the primary driver of GDP growth. This should help India retain its position as one of the most attractive FDI destinations in the world.

6.  Indian Meteorological Department has said the monsoon rains this year will be normal. This is excellent news for the Indian economy as almost 60% of the Indian population depends on monsoon for sustenance. Good monsoon is a critical driver of the Indian economy as rural demand accounts for about 45% of the total consumption demand of the Indian economy.

7.   The COVID-19 pandemic is leading to a widespread rejigging of global supply chains. The Shinzo Abe government in Japan has allocated $ 2.2 billion from its $ 1 trillion stimulus package to finance relocation of Japanese factories out of China.

8.  Before COVID-19 pandemic, at the height of trade war with China, President Donald Trump had ordered US companies to move their factories out of China. US giants like Apple, toymaker Hasbro had announced plans to reduce dependence on china supply chain. Apple has already announced that it will invest $ 1 billion along with its partner Foxconn in India.

9.   India’s large domestic market makes it an attractive FDI location as companies can build economies of scale in the local market and then leverage this to export their products around the world.

10.  Manufacturing plants will shift closer to where demand is. The biggest strength of Indian economy is that two-third of the economy is driven by domestic demand. India is one single market of 1.3 billion customers.

11.  Corporate tax lowered for new contract manufacturing companies @ 15% (plus surcharge and cess) which is a good incentive for companies to shift their manufacturing base in India.

12. Massive improvement in the country’s ranking on the World Banks’s Ease of Doing Business Index.

With the right combination of factors in place, Government of Gujarat and Uttar Pradesh are planning to offer incentives to attract manufacturers who are looking to shift base from China. On 30 April PM Modi organized a meeting to deliberate potential reforms to ensure robust and self-reliant defence Industry, reduce dependence on imports and take forward “Make in India” to build indigenous capabilities and laid emphasis on positioning India among the top countries of the world in Defence and Aerospace sector. INDIA’S MOMENT OF RENAISSANCE, INDEED, HAS ARRIVED.