8 Undigested Thoughts on business relocation

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  1. Shifting manufacturing location

Imagine a Factory in china manufacturing 30000 Units a day with 1100 Workers on 15 Assembly Lines. How easy is it to shut down the factory and open a new one in India?

It would take at least 18 months lead time – meaning 18 months during which Production will fall completely. They have to start building a factory in India first, then start production in India, reduce production in China and slowly transfer the entire production to India.

Let us take a simple case of an Apple Ipad Pro 2020 – Cost per Unit in China is $ 464.00. The Same cost in India would be $ 705.00, Vietnam $ 552.00 and Mexico $ 829.00

Lets take a Reebok Dive Shoe, a Cost per unit of $ 27 in China would cost around $ 48 in India which means a Shoe selling for $ 70 in US markets would cost around $ 125.

Same shoe for almost double the price. This means that the Retail price of $ 780 in US will shoot upto $ 1240 in India, $ 979 in Vietnam and $ 1355 in Mexico.

Thats it everything stops right there

As on this day – THERE IS NO COUNTRY ON EARTH WHERE YOU CAN MANUFACTURE A PRODUCT AT A CHEAPER PRICE THAN CHINA. The Cheapest Price in India is at least 55% more expensive.

 2. Why is India so expensive compared to China?

(a) Supply Chain. In India over 80% components for manufacture have to be imported from China. If India Boycotts China then this has to come from South Korea or Taiwan which will be at least 40% more expensive.

(b) Land is 10 times cheaper in China.

(c) Logistics and Distribution are 10 times better in China which means that EOS is better and Per Unit Cost is cheaper.

So no matter what Trump Says, Pence Says, Pompeo Says – The Companies want Cheap Manufacturing Costs and Land and Labour and all of it is best only in China.

Even Vietnam cannot replace China in this. China has a huge labor force that Vietnam lacks.

  1. India has already rolled out an incentive scheme for the mobile manufacturing units in india.

Other sectors under consideration are medical equipment suppliers, food processing being studied.  The idea is to target to grow its manufacturing sector to 25% of gross domestic product by 2022 from 15%. The need to create employment is now even more urgent after the pandemic left 122 million people jobless and forced India to shut down all major cities.

  1. There’s abundant capital in the U.S. that’s looking for geographies outside. Companies realize that while large supply chains in China may have been economical, there’s no point in keeping all eggs in one basket

5. As the trade war rages between US and china, tariffs are making exports from China more and more expensive for US markets. Many firms have been doing their sums and looking for new locations to re-site their manufacturing operations.

Out of 56 companies that relocated their production out of China between April 2018 and August 2019, only three went to India and two to Indonesia. This was the finding of a study by Nomura, a Japanese financial group. Out of the 56 firms, 26 relocated to Vietnam, 11 went to Taiwan and eight to Thailand.

6. Re-locating manufacturing means, overcoming the high initial set-up costs, other factors to consider are infrastructure, communications and connectivity. Having good and cost-effective warehousing, transportation and other logistical support is essential. That is just the start.

There is also the challenge of finding the right skilled manpower and thereafter putting the new workers through training specific to their production process. Further considerations include governmental support, a favourable tax regime and legal framework, and the ease and speed of starting a business in a new country.

India and Indonesia both have the ideal demographics to be global manufacturing powerhouses to rival China which at the moment makes one-fifth of the world’s goods. First of all, they have the second and fourth-largest populations in the world with India’s population expected to surpass China’s by 2030. They also have a relatively young population. while India has a median age of 30, Indonesia’s median age is 31 compared to China’s median age of 40.

7. Furthermore, India’s labour cost is half that of China’s. So why are India and Indonesia not receiving their fair share of factories relocating from China? The reasons are,

  • They are both performing below their full potential with regards to FDI (Foreign Direct Investment) in manufacturing and hence they are both nicknamed “sleeping giants”.
  • FDI is a good indication of external investor confidence in the success of economic reforms and prospects as they are a sign of how willing foreign corporations are willing to commit to long term investments in a country. FDI is necessary for a developing economy to create jobs, absorb excess labour supply and plug financial gaps. But India today pulls in a miserly 0.6 per cent of GDP in manufacturing FDI. Indonesia is a only slightly better at one per cent.
  1. The most common factor determining why they move to a particular location is the ease of doing business. in Vietnam, there is a single point of contact, a person who takes care of everything from the government side.
  • India and Indonesia need to further liberalise trade, spend more on infrastructure construction, reform land and labour laws and offer tax breaks for foreign investors. Legal reforms, liberation and favourable taxes are holding back the attractiveness for manufacturing to come to India.
  • The good news is that both countries are aware of this and making moves in the right direction. However, India needs to do more. For example, provide more tax incentives for investing in the desired type of manufacturing it hopes to attract – like high tech and electronics manufacturing for export. It must also make it easier to import components so that more of the assembly work can be done in India.
  • Infrastructure, as both countries are heavy dependence on-road transportation but if modern rail and water transportation are more readily available, it can save businesses significant costs and time.
  • The culture of manufacturing which is prevalent in countries like Germany, Japan, China and South Korea is missing in India. We need strong and readily available vocational training programmes to equip those interested with the necessary skills and attractive enough for the best workers wanting to joining this sector. India produces 20 STEM (Science, Technology, Engineering and Mathematics) graduates per 1,000 citizens, while the figure is 34 for China.
  • What is heartening for India is that companies like Samsung and Apple are already making some of their mobile phones in India. Apple which has already been manufacturing iPhone components and older models in India expects to start building the newer iPhone XS and SR in India this year. The Samsung factory in Noida is one of its biggest in the world and 30 per cent of what it makes is exported. India plans to increase manufacturing share of GDP to 25 per cent by 2025.

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