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Introduction

The outbreak of the deadly coronavirus in the Chinese city of Wuhan has dramatically altered the social, political and economic lives of millions in as many as 205 countries. No one can even hazard a guess the kind of life the people shall lead in the future as social and economic norms are going to be reset, requiring adjustment in quick time. While a world-wide recession is feared, economic readjustments by countries in Asia have already begun. China where the virus originated and already consumed (and the number rising) a large population around the world has lost the trust of its major economic partners. The US-China economic frictions during the Donald Trump presidency predate the virus outbreak. Conspiracy theories are doing the round with both the United States and China blaming each other about the origin of the virus. That debate is another occasion to discuss.

Japan and South Korea Rethink Strategies

While accusations and counter-accusations seem never-ending, in Asia both Japan and South Korea, the two major Asian countries having close economic relations with China have started to reset ties with China. Japanese and South Korean companies operating in China are being encouraged by their respective governments to consider relocating business back at homes or to other neighbouring countries such as in Southeast Asia and India.

What it would mean in simple terms, China’s loss could be the gain for Southeast Asia and India. This article examines how India figures in the calculations of Japan and South Korea and can play the role of being the new the hub of global supply chain.

Japan’s Case

While making the announcement of an emergency in Japan on April 7, Prime Minister Abe Shinzo also announced an economic stimulus package worth whopping 108.2 trillion yen ($993 billion), equal to 20 per cent of Japan’s economic output, to cushion the impact of the epidemic on the world’s third largest economy. Out of the total amount, it earmarked $2.2 billion to help its manufacturers shift production out of China.1 Of this, 220 billion yen ($2 billion) is pledged for Japanese companies shifting production back to Japan and the remaining 23.5 billion yen for those seeking to move production to other countries.

Thus the first of many avalanches began for China. Why did the Abe government make this first move, risk offending its biggest trading partner? The disruption in supply chains amidst the growing scare of the Wuhan virus and the damages incurred when the coronavirus epidemic was at its peak in China led the Abe government to take this radical step. The impact of this decision on China is going to be huge. Japan’s decision will result in loss of a number of jobs in China.

The signal was already in the air when imports from China slumped by almost half in February as the disease closed factories, in turn starving manufacturers of necessary components. Japan felt frustrated that the Tokyo Olympics was postponed and it blamed China for its irresponsible handling of the deadly virus that caused a full-blown pandemic which in turn crippled the entire planet.

Historically, Japan does not share a pleasant relationship with China. The shadow of history and the territorial disputes have marred the Japan-China relationship for decades. Though Abe tried to mend ties with China at a time when US-China ties had nosedived over trade issues, the plan for Chinese President Xi Jinping’s visit to Japan, the first of its sort in a decade, had to be postponed when the virus spread like wild fire. When Abe decided to pull the plug by asking the Japanese companies operating in China to relocate back to Japan and elsewhere, things looked further bleak.

The Japanese decision to shut shops in China opens up opportunity for India, Bangladesh, and countries in Southeast Asia like Vietnam and Thailand. These countries eye now for this lucrative opportunity to lure Japan to their shores. India looks like the best bet for Japan given the cheap labour, a democratic system and a robust manufacturing ecosystem of which Japan already is a part.

As two ancient civilizations dating back to over 2,000 years, the historical roots are strong. India has a large middle class population of some 350 million and thus provides a huge market. It also enjoys comparative demographic advantage as 65 per cent of its population are below 35 years of age. There are nearly 1,500 Japanese companies registered in India. These companies have 5,102 business establishments spread across states like Karnataka, Tamil Nadu, West Bengal, Delhi and Gujarat. The news of Japan International Cooperation Agency’s (JICA) role in the development of metros in Delhi, Bangalore and other states is making waves. The Mumbai-Ahmadabad Shinkansen bullet train project is another path-breaking initiative that could define the future India-Japan economic relations. The southern state of Karnataka alone has around 530 Japanese companies working in it, up from around 200 five years ago.

Prime Minister Narendra Modi and Japanese Prime Minister Abe have forged a close bonhomie having met several times in summits and in third countries. Abe is attracted towards Modi’s new ideas such as Make in India, Digital India, Skill India, Clean Mission Initiatives and several others. These initiatives lay the groundwork where Japan could drop anchor in India.

South Korea’s Case

South Korea has too started thinking on similar lines and has started talking with Indian partners. China shall pay the price for all its misdeeds. Unlike Japan and even without government initiatives, South Korean companies have started planning to move units from China to India. Hyundai Steel and POSCO are already in talks with the Indian government.

South Korean companies are wary of the ongoing Sino-US trade frictions, which is further accentuated by accusations and counter-accusations regarding the origin of coronavirus. Because of this concern, several South Korean companies have begun to consider moving their units from China to India.2

Yup Lee, the Deputy Consul General for the Consulate General of the Republic of Korea in Chennai informed the press that the Korean government received requests from two iron and steel companies, some start-ups and one from the hospitality sector which wants to come to India from China. Some companies are at preliminary stages, while others have reached the advanced stage of discussions. The state of Andhra Pradesh has been identified as the ideal location to set up units. India is all set to become a manufacturing base for Korean companies for their global markets.3

Both Japan and South Korea have friendly relations with India. Business relations have always been devoid of any acrimony, the only exception of being the unpleasant experience of POSCO steel giant which had to withdraw from its committed project in Odisha over land acquisition issues. This has remained as the only aberration in India-South Korea relations in the economic domain. Even though South Korea responded positively first to India’s Look East policy than Japan, Japan had already entered the automobile sector into India in the 1980s even before India introduced the economic liberalisation policy in early 1990s. When Japan’s Suzuki decided to set up its first car manufacturing plant in Gurugram in the 1980s, South Korea preferred to focus on China, thereby making the mistake of putting all its eggs in one basket.

The plans of both Japanese and South Korean companies could be laudable but India too is not immune to the economic consequences unleashed by the COVID-19. India’s capacity to attract investment from the two Korean companies would depend on how soon the economy restarts.

Besides these two behemoths, there are a number of other companies which have evinced interests to enter India and make it the manufacturing base. The COVID-19 is unlikely to play the spoil sport.4 These two steel giants are looking for 5,000 acres of land and port connectivity. The bilateral trade volume between India and South Korea is $21 billion at present and both hope to increase this to $50 billion by 2030.5 With the new situation unfolding, this is easily achievable.

In fact, even before the COVID-19 broke out, Korean companies such as Lotte, Kia and Hyundai had started facing political risks, tariffs and losing market share as low-cost Chinese companies had emerged as stiff competitors. As a result, these companies had started losing revenue and making huge loss. The current situation is a good opportunity for these Korean companies to look at India as an alternative destination. On its side, India needs to adopt the right strategy and build consensus among States and Centre on important legislation to welcome the Japanese and Korean firms with open arms. The government needs to remove red tape, give one window clearances, ease land acquisition norms and revamp labour laws. These are seen to be the bottlenecks by potential investors for a long time and India needs to do its homework fast.

Many Indian lobbyists and industrialists are excitedly looking forward to attract other such companies that want to move from the Chinese market into India. This sentiment has only risen since the outbreak of novel coronavirus. The influential HDFC Bank chairman Deepak Parekh was expressing the sentiment of the business community when he urged the government to “make it easy for the Japanese to come to India rather than them going to Malaysia, Vietnam or Thailand. States have to take the initiative and offer them 2,000 to 5,000 acres in some special zone where they do not have to look for land or building approvals”.6

China’s Loss of World’s Trust

The world’s trust on China has substantially eroded over the manner it handled the coronavirus. From suppressing the virus when it first surfaced for six critical days7 to ridiculing the doctor who first alerted about the virus and subsequently died himself of the virus to fudging the number of fatalities and many more ways it dealt with the outbreak of the virus, China’s credibility as a responsible nation has been hugely dented. Japan has taken the lead to downsize its operations in China.

China may claim to have contained the spread of the COVID-19 but has already lost trust of the world, which it would find difficult to regain. It lifted the lockdown and opened up factories and retail hubs in a bid to move the halted economy. The truism, however, is that the post-corona era is going to be different and difficult for China. Japan and South Korea had many manufacturing units in China. In the process, China had emerged as a major manufacturing hub for decades. The outbreak of the virus and the manner in which China handled in the initial days not only dented China’s image but also sparked anti-Chinese hate campaign throughout the world.

Advantages India Offers

India enjoys many advantages as a manufacturing base for Japan and South Korea. It has a huge manpower, skilled and semi-skilled, available at relatively low cost. Indian government too is laying the roadmap and put a strategy in place that removes potential roadblocks in export manufacturing. Apart from the auto sector, other sectors where Japan and South Korea are likely to focus are pharmaceuticals and electronics where both have achieved sophistication and produce quality products at competitive prices. The mobile phone manufacturing has already made its presence. The focus will be to attract major companies like Apple and Samsung.

In July 2018, Samsung inaugurated the world’s largest mobile factory in India and Prime Minister Narendra Modi inaugurated Samsung Electronics’ new mobile phone manufacturing facility, in Noida. Samsung India also launched its ‘Make for the World”, whereby it aims to export mobile handsets produced in India, to overseas markets.8 With this facility, Samsung hoped to double its current capacity for mobile phones in Noida from 68 million units a year to 120 million units a year, in a phase-wise expansion. This is hoped to be completed late this year.

With the presence of Japanese and Korean manufacturing units in India, India can hope to kick-start its economy ravaged by the COVID-19. If all move as per plan, it can boost employment, revenue, and generate foreign exchange. Currently, the bulk of jobs are generated in the agricultural sector but if India achieves to be an export hub, the shift will be towards the manufacturing sector.9 In a competitive world, India however should keep in mind there are other nations such as Vietnam and Bangladesh which could be strong competitors and accordingly should always try to stay ahead of the curve.

Potentials for India to become centre of Supply Chains

Prime Minister Modi has stressed that post-Covid-19 India can emerge as nerve centre of modern supply chain. He said that the novel coronavirus outbreak has significantly changed the contours of professional life and these days home is the new office and internet is the new meeting room.10 Underlying the new business and life style models, he said “India with the right blend of the physical and the virtual can emerge as the global nerve centre of complex modern multinational supply chains in the post Covid-19 world”. Modi’s emphasis that “technology demolishes bureaucratic hierarchies, eliminates middlemen and accelerates welfare measures” shall give the Japanese and Korean partners added confidence to do business in and with India.

Indeed, the coronavirus is both a crisis and an opportunity. India has a great opportunity to emerge as an alternative sourcing destination. For decades now, China remained as the central to the global supply chain but with foreign firms withdrawing now, it has lost that advantage. While China’s export specialisation is concentrated on products such as electrical machinery, appliances and equipment, India’s exports are dominated by mineral products, chemicals and precious metals. The current disruption in China would reshape global supply chains. That provides an opportunity for India to capitalise other nations’ search for alternative supply options. 11 Indeed, the story of India in manufacturing exports has been one of unrealised potential as the focus overwhelmingly been to cater to the domestic market whose size is huge. As a result, there has been little compelling reason to look beyond to the exports sector. The new situation now can alter that thinking.

The Indian industry is already upbeat with the prospect of new business frontiers opening up or the prospects look good in the horizon. Mahindra Group Chairman Anand Mahindra is confident that global supply chain with less dependence on China to be positive outcome of COVID-19. 12 Earlier, he had criticised sub-standard masks and testing kits sent by China as humanitarian initiative. He urged the Indian businesses to fight hard to become a major node in global supply chain. At the same time, he urged China to do more stringent checks on the shipments, or it will only accelerate its “social distance” from the world.

India seems to have already done its homework to the satisfaction of overseas partners willing to set up bases in India. Even before the coronavirus hit Indian shores, investment into India’s supply chain infrastructure had already gained momentum. The introduction of the Goods and Services Tax (GST), liberalizing foreign direct investment rules, and increased government spending has helped spur growth in the sector. Rohini Singh writes: “India’s aspiration to become a global manufacturing powerhouse and the government spotlight on ‘Make in India’ also compels nationwide supply chain reform, prompting several federal and state-based schemes and investment incentives.”13

Changes in FDI Norms

Given the aggressive Chinese economic drive overseas with a long term goal of taking a controlling stake in many enterprises, the Modi government announced a decision on 18 April fraught with geopolitical economic ramifications amending its foreign direct investments (FDI) policy to put a blanket ban on investment through the automatic route by entities from countries that share a border with India.14 The move is seen as an attempt to ward off the threat of “opportunistic” Chinese takeover of Indian companies. The curbs, which were already in force for investments from Pakistan and Bangladesh, will extent to entities where Chinese citizens have “beneficial ownership” to ensure that the restrictions are not circumvented by routing investments via Hong Kong, Singapore or other countries.

The trigger came when stock and other asset prices started crashing following the coronavirus fear. The government had to intervene in order to protect its interests, especially in sensitive sectors such as fintech, digital infrastructure, e-commerce, pharma and specialty chemicals from predatory acquisitions. The government had to weigh between economic openness and national security and hence the tweaking in the FDI norms. When the Public Bank of China acquired 1 per cent of HDFC on behalf of China’s sovereign wealth fund SAFE through the foreign portfolio investment (FPI) route, alarm bells started ringing and the government had to intervene to protect its national economic and security interests.

India is not the only country erecting barriers against China’s aggressive economic drive. India’s moves coincided with similar barriers erected by other countries such as Australia, Italy, Spain and Germany to block predatory capital from China. According to a Gateway House report, Chinese tech investors have put an estimated $4 billion into Indian start-ups. The report said aggressive 18 out of India’s 30 unicorns are now Chinese funded. These investments could be small, but China via tech sector is embedded in Indian society and holds influence due to the nature of tech investments.15

As expected, China reacted saying the Indian government’s decision to ban Chinese FDI is in violation of WTO’s principle of non-discrimination and hoped India would “treat investments from different countries equally”. The Chinese embassy in New Delhi remarked that the new FDI norms by India “do not conform to the consensus of G20 leaders and trade ministers to realise a free, fair, non-discriminatory, transparent and stable trade and investment environment, and to keep our markets open”.16 This economic acrimony did not deter China to facilitate supply of medical equipment seen as crucial to India’s fight against the COVID-19. Between April 4 and April 19, as many as 24 flights from China carried 390 tonnes of medical supplies, including TRT-PCR test kits, rapid antibody tests, thermometers and personal protective equipments (PPEs).

India rejected the Chinese contention saying that it did not act in contravention to WTO rules as it has only specified a different approval process for investments from countries with which it shares land boundaries including China. India argued that all India has done is to put Chinese investments through government route instead of automatic route. 17

China has itself put restrictions for entry of firms including from India -- IT and pharmaceutical besides other sectors from other countries in its own interests. India has raised with China in the past both at political level as well as level of industry the restrictions of market access.

Concluding observations

The above explanation strengthens the argument made in the earlier section of this analysis. There is a clear message that for India welcoming Japanese and Korean enterprises to partner with Indian enterprises takes precedence over Chinese companies. As said, China has lost trust of the world and it would take huge challenge for the Chinese leadership to redeem its lost prestige. Prime Minister Modi has already spoken to Prime Minister Abe Shinzo and Korean President Moon Jae-in on phone and all three nations are on the same page. With the support of the Indian government, the Indian enterprises and other stakeholders ought to work together in welcoming the Japanese and Korean companies and create the right environment of making India as the new manufacturing hub and centre of global supply chains. This will be a win-win proposition for the three Asian countries.

Professor Rajaram Panda (VIF)
28 April 2020

Refrences

1. Abhijit Singh, “‘Pack up and get out of there’, Japan to spend $2.2 billion to get Japanese companies to exit China”, 9 April 2020, https://tfipost.com/2020/04/pack-up-and-get-out-of-there-japan-to-pay-2-2-billion-to-get-japanese-companies-to-exit-china/
2. Times of India, 14 April 2020.
3. “South Korean Companies Want To Move Units From China To India; Hyundai Steel, Posco In Talks With Indian Government”, 16 April 2020, https://newsinsider.in/south-korean-companies-want-to-move-units-from-china-to-india-hyundai-steel-posco-in-talks-with-indian-government/; Malvika Gurung, “South Korean firms want to ditch China, move manufacturing to India; Hyundai, Posco in talks”, 18 April 2020, https://trak.in/tags/business/2020/04/18/south-korean-firms-want-to-ditch-china-move-manufacturing-to-india-hyundai-posco-in-talks/
4. “Tap Japanese Cos, Parekh tells states”, Times of India, 12 April 2020.
5. Abhijit Singh, “BIG: Hyundai Steel and several other South Korean majors are all set to shut China factories and move to India”, https://tfipost.com/2020/04/big-hyundai-steel-and-several-other-south-korean-majors-are-all-set-to-shut-china-factories-and-move-to-india/
6. n.4
7. “China didn’t warn of likely pandemic for 6 critical days”, Times of India, 16 April 2020
8. https://news.samsung.com/in/samsung-inaugurates-worlds-largest-mobile-factory-in-india
9. “South Korea and Japan look to shift companies out of China; Advantage India”, https://metrosaga.com/south-korea-and-japan-look-to-shift-companies-out-of-china-advantage-india/
10. “India Can Emerge As Nerve Centre Of Modern Supply Chains In Post-Covid-19, Writes Modi”, 19 April 2020, https://www.bloombergquint.com/business/india-can-emerge-as-nerve-centre-of-complex-modern-supply-chains-in-post-coronavirus-world-pm
11. Sudhir Mehta, “India can be the next big global supplier”, 21 February 2020, https://www.thehindubusinessline.com/opinion/india-can-be-the-next-big-global-supplier/article30873229.ece
12. “Global supply chain with less dependence on China to be positive outcome of Covid-19: Anand Mahindra”, 18 April 2020, https://www.outlookindia.com/newsscroll/global-supply-chain-with-less-dependence-on-china-to-be-positive-outcome-of-covid19-mahindra/1807047
13. Rohini Singh, “Supply chain in India: On the brink of a revolution”, 21 March 2018, https://www.india-briefing.com/news/supply-chain-india-scope-investors-16384.html/
14. Times of India, 19 April 2020.
15. Palak Shah, “How China dominates tech investments in India”, 19 April 2020, https://www.thehindubusinessline.com/info-tech/how-china-dominates-tech-investments-in-india/article31380773.ece#
16. Times of India, 21 April 2020
17. Dipanjan Roy Chaudhury, “A new approval route, no WTO rules breach: India on Chinese investment block”, 21 April 2020, https://economictimes.indiatimes.com/news/economy/indicators/a-new-approval-route-no-wto-rules-breach-officials/printarticle/75262838.cms

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