Shifting epicentre — South Asia
While on the one hand this means challenges for a few economies like China that traditionally have had the lion’s share of regional trade, it also spells opportunity for South Asian nations looking to get in on the action. Issues ranging from compliance to local regulations, supply of human capital and raw resources are key considerations for companies planning on building new plants and expanding capacities in the region.
The relocation of manufacturing to under-penetrated economies such as Vietnam, Thailand, India and Indonesia is perhaps the most notable benefit for the region, which is bracing for a surge in FDI. Take the case of Vietnam. Touted as the “next China”, it is already making big gains. The country boasts of an improved regulatory environment, a cost-effective workforce and competitive advantage in textiles and electronics manufacturing over alternative sourcing destinations such as Bangladesh, Thailand, Indonesia and Cambodia.
Taiwan, too, seems to be profiting from this development, as computer production returns home. While moving production back to Taiwan is expected to increase costs, the industry’s highly automated production lines will more than compensate for the labour shortage.
Added to this, the recently concluded Regional Comprehensive Economic Partnership (RCEP) agreement is expected to further improve the region’s competitiveness in the global arena. Closer home, while sectors such as steel and dairy have rejoiced at India’s decision to opt out of the RCEP, the question remains whether non-participation is likely to deny Indian companies a chance at being included in regional and global value chains in the medium- to long-term.
India must gear up for the long haul
The India story remains real and relevant. The recently announced reduction in corporate tax rates has brought the country to a relatively competitive position among other East Asian countries. That said, if taxes payable on shareholder profit distribution are included, on an overall basis, India still continues to be a high-tax country.
For it to be a prime contender in the race to become an alternative investment destination, it needs to focus on four specific areas:
Domestic consumption-based growth: While export-oriented growth will play its role in helping the country gain global prominence and introduce new skills and efficiencies in the manufacturing ecosystem, building a strong narrative around domestic manufacturing will remain critical. Rural demand is increasing significantly and steadily on the back of productive jobs and enterprises. This will likely set off a “trickle up” effect, where higher disposable income will lead to more demand, thereby making the national market more attractive for foreign companies. We are already seeing some signs of this, with many global corporations expanding their rural India footprint.
Shift to capital- and technology-intensive exports: Technology transfer through intermediate goods is expected to improve India’s manufacturing exports and help Indian manufacturing companies integrate with global supply chains. The technological upgrade will lead to highly internationalised and competitive industries being able to sell their products to the developed economies.
Infrastructure development: While India enjoys a comparative locational advantage, there is a need to develop sustainable and resilient infrastructure to support economic development. The glaring investment gap needs to be funded through innovative approaches such as hybrid financing models. This will be a key determinant for foreign companies looking to bring down operational and logistics costs as part of theirrelocation strategy.
Skill development: There is a need to focus on upskilling and re-skilling the workforce, which can be achieved through partnerships with government, industry and academia. Such partnerships will be vital to redesigning industry-related curriculums, vocational and soft-skills training.
Cautious optimism is key
This expected shift in global sourcing, which initially began on the back of a few key “push” factors, has now emerged as a combination of both push and pull factors that will determine where businesses will place their next big bet. Asian economies are aware that there is a limited time frame available to capitalise on this opportunity. However, the risk of ending up with more demand for manufacturing than their capacity to handle is real. The key is to focus on securing the supply side, which will eventually take care of the demand, instead of going the other way around.
The writer is partner and chief operating officer-tax, KPMG in India