Why suddenly all the companies are moving out from China?
What made them do this after 35 years of business in China?
Why they think that China is a problem for them?
China is a country which is also known as a manufacturing hub. Chinese manufacturing industry began to grow in late 1970s because the Western world was moving towards service economy and therefore the Western countries were facing problem with continents.
Increase in labour cost also standard of living was elevated and all of this lead to high manufacturing cost. Due to this the investors were attracted towards China. As China had an enormous manpower and also very low labour cost.
The Chinese government also started to build special economic zones where massive factories and ports can be built. This boosted the manufacturing and attracted many Fortune 500 companies to China during the 80s.
As in China an equivalent products were manufactured with very low cost. In 2010 one-third of all products on planet were manufactured in China and that made China the second largest economy after US.
But now many companies are moving out why? what is the reason?
Reason number one: trade war between US and China.
Trade war was started in 2018 when US imposed tariffs of 25 percent on Chinese goods. Basically U.S. accused China as they were importing only 100 billion dollars of products from us.
On the opposite hand, US is importing nearly 500 billion dollars of products from China. Yet trade war is not just an import and export thing. But US has also accused China for not playing fair.
Chinese government treats Chinese companies differently as if they need better access to the markets than the other Western competitors. Sometimes Chinese come get lands free of cost. Plus, they have very low tax. These factors make Western companies hard to compete with Chinese competitors.
US also accused China for stealing their technology from defence sector to the electronic and telecommunication system . China has copied a lot of reverse-engineered western products and technologies. Recently u.s banned Huawei. U.S accused Huawei for spying an American communication networks. U.S. took this as a national security threat.
Also American government is pressurizing their companies to maneuver their manufacturing out from china. Nearly 50 American companies are already removed from china and remaining are on their way.
Reason number two: global supply chain disruption.
Many countries are hooked in to china for supply of products . Due to the recent lockdown in china to control the covid-19 pandemic different products from the markets have wiped out completely. China is also number one country for manufacturing pharmaceutical medicine and equipment’s. Yet in this pandemic china is not able to fulfil the demand.
So this has made other countries think and alter their mind about dependency on one country for goods. Recently japan has offered the japanese companies a 2.2 billion package to assist them to maneuver out of china.
Reason number three: increase in labour cost.
In the 90s average labour cost paid to a Chinese worker was about 150 dollars per year. But now it has tremendously increased to nearly fourteen thousand dollars per year and that is a massive multiplication.
This makes manufacturing more expensive in china. Due to this, companies cannot make profits. If they were making in the past this made them think of relocating their manufacturing facilities.
Also in 2016, China saw a decrease in manufacturing output for first time in history. Samsung which is a South Korean company and second largest smartphone manufacturer in the world they have now closed its manufacturing completely in China and shifted into India step by step.
Reason number four: china’s aggressiveness.
As china has grown to the second largest economy they need also grown their regional military power. Recently china had a conflict with Vietnam, Malaysia, Brunei and Philippines within the south china sea. As the south china sea is strategically important to china as their 30 percent of world trade goes through this region.
And it’s been estimated that this region consists of 11 billion barrels of oil and 190 trillion feet of gas . This shows how china is putting pressure on small countries using their military power.
Also china is using their economic power to grab the African markets for natural resources. Countries like Zambia, Djibouti and Congo face big challenges to pay back Chinese debt.
The Asian Country Sri Lanka failed to pay Chinese debts. So Sri Lanka leased their Hambantota port to China for 99 years. Internationally this is call is debt trap diplomacy. U.S. Japan South Korea and the European countries are thinking to move their manufacturing facilities out from China. Also some economists say that in 20 years from now China will not be the only manufacturing giant in the world.
Companies in China shifting to India. What is the reason behind choosing India for manufacturing? Is this a chance for India to become subsequent big manufacturing giant?
China claims that they need stopped the spread of Covid-19. After the intense lockdown Chinese manufacturing sector has started to reopen. But after this pandemic China’s manufacturing sector won’t be an equivalent because it was before. In the recent covid-19 pandemic, companies need to know that they can’t depend upon one supplier for his or her products.
Also governments across the world are encouraging their companies to maneuver out of China. Companies are now looking for alternative for China and they are considering countries like India, Vietnam, Malaysia, Indonesia and Mexico.
The investors always thought a Vietnam is the best for manufacturing due to its low labour costs but there is a country which has been driving a lot of attention lately and that is India.
India features a bunch of reasons why investors might be looking forward thereto for manufacturing.
Reason number one: low labour cost.
This is one among the main reason behind companies occupation India. The average monthly wage for a Chinese labour is between 140 dollars to 340 dollars and in India it is as low as $70 to $200. So it is significantly cheaper to manufacture any products in India compared to china.
Reason number two: low taxes.
Last year in 2019, the corporate tax in India was cut down from 30 percent to 22 percent and for new manufacturers it is 15 percent from 25 percent. Back then this is lowest corporate tax in the south Asia region. Right now also implementation of GST and tax collection makes easier for companies to pay their taxes. All this reforms attracts more investors in India.
Reason number 3: India’s huge market.
India has second largest population in the world. Even if you sell your products to 5% of people in this country it will be more than the entire population of most of the countries. Also if companies are manufacturing their products outside India they have to pay extra for export taxes and transportation.
Reason number four: democracy.
India is a democratic country. So most of the western companies can easily adapt themselves for Indian markets. Unlike china and India companies have fair competition in markets and they can easily sue anyone including government. So companies feel more secured in India than china.
Reason number 5: India’s growth in the past years.
India has roughly same population as China. Also India is fifth largest economy in the world and India has lifted more than 300 million people out of poverty in last 18 years.
Unlike China India’s growth did not come with rise of manufacturing industry but it came with its service based industry like IT, banking and retail.
But from last few years manufacturing sector of India has grown significantly. According to some sources India’s manufacturing sector is increasing 8% per year.
There are many reasons why India can be the next manufacturing hub but along with that India has some problems they need to work on. Because of these problems companies around the world are concerned
Problem number one: poor infrastructure.
Although India is functioning on its infrastructure it’s not good as china or maybe Vietnam. Companies in china were established decades ago. Also they need good access of worldwide supply chain in china.
Problem number two: ease of doing business.
If companies want to open manufacturing in India they need to travel through 12 procedures and this needs nearly 27 days. Also the corruption in India has been a serious concern for multinational companies from an extended time.
Problem number three: currency.
India’s currency rupee is very volatile because of free-floating currency but countries like Vietnam have more stable currency because of crawling peg system that means value of $1 in Vietnam does not change suddenly and this is beneficial for companies.
Problem number four: political issues.
Building an exclusive economic zone or a manufacturing plant requires a lot of land and during acquisition. Many oppositions’ can be made this can become a political. So this kind of thing is also a big issue for companies.
But from last couple of years’ the Indian government is taking some actions to solve these problems. Also India is changing policies to draw in companies and boost the economy. The make in India initiative has also attracted many foreign investors in India.
India is also planning to make dynamic push to the make in India initiative after the lockdown. Yet Indian government is prepared to offer complete support for companies that are getting to move in India. So this will be a chance for India to become subsequent big manufacturing hub.