The People’s Republic of China- the world’s 2nd largest economy with a nominal GDP of $14 trillion has been tongue-tied in a trade war with the United States of America to surpass the latter and claim the title of the undisputed global superpower. But this claim to fame has been disrupting the world economy leading to a global slowdown. And China’s economic structure has been undergoing major changes due to the aforementioned phenomenon.
One such change is the shift of production from China to other Asian nations like Vietnam, Taiwan, South Korea, and India. With global giants like Samsung and Apple Inc moving production out of China, the scenario in Asia is about to transform in the coming years. The discussion regarding this phenomenon would be incomplete without focusing on the other aspect – as to why a void formed due to this fundamental shift in Production shall benefit Vietnam more than India.
Why is there a shift in Production from China?
China has been through a long journey from being one of the weakest nations to one of the strongest. The economic growth escalated mostly due to the reforms in the 1970s led by the then-Communist Party leader Deng Xiaoping. However, the recent turn of events has been causing distress to the economy.
Day 1- July 6, 2018, the US imposes a 25% tariff on 818 Chinese imported goods and hence began the series of retaliation between the two nations.
Further, the US has been exploiting its position by urging its trade partners to avoid trade with China and there has been a reciprocal response from the Beijing government. This trade war also represents a conflict of ideologies- Capitalism vs. Communism.
Adding to this, the anti-government protests in Hong Kong since April 2019 have instilled fear amongst the corporate as well as the local businesses especially affecting the tourism sector, financial sector, and the professional services sector. Thus political instability and the trade war are the two major factors that will shape the future of the Chinese economy.
What will replace “Made in China”?
India is the world’s 7th largest economy with a nominal GDP of $2.5 trillion. Despite being a developing market and a lucrative destination for investment, it has been observed that the production shift from China is being transferred to a relatively smaller economy that is ranked 45th in the world which is Vietnam.
There is a multitude of reasons that explain why investments are being driven towards Vietnam rather than India.
Firstly, the infrastructural developments in Vietnam are way ahead than that of India due to which corporates find it easier to set up production in the former country. Along with that, Vietnam has made huge investments in healthcare and education since the “Đổi Mới” reforms in 1986 whereas India’s total expenditure on human capital is as low as 7.5% of its GDP. Secondly, the factories in China have been set up for decades along with a global supply chain that consists of established middlemen, wholesalers and distributors. And so to completely shut down operations and alter the supply chain is a costly as well as a time-consuming affair. Therefore, Vietnam’s close proximity to China’s manufacturing hub of Shenzhen makes Vietnam a thriving destination for business as the manufacturing process can be smoothly routed through China. Thirdly, the Vietnamese Dong (currency) is relatively stable as it is pegged to the USD through an arrangement called the Crawling Peg system under the Fixed Rate regime whereas the Indian Rupee is volatile because it is a free-floating currency. The exchange rate system in Vietnam is a close resemblance of the Chinese economy which has been pegging the Yuan to the USD since 1994 to boost exports.
Considering the corruption scandals in India that have shaken the entire nation and distorted the banking system, foreign businesses are quite skeptical to commence manufacturing process. Although the Reserve Bank of India has cut off interest rates by 135 bps in a span of 8 months and the constant reassurance from the RBI Governor regarding the health of the banking system, the doubts regarding the profitability of the business is still prevalent. Hence the other reason for a production shift to Vietnam is the economic slowdown in India. However, the economic slowdown pertaining to the Indian economy and global economic instability cannot be seen as mutually exclusive events.
Moving ahead, the astronomical costs of starting a business in India have added more restrictions. There are 12 procedures required to initially set up a business which can cost about 50% of the income per capita and take up to 27 days on average to complete the setup which is way over than the prescribed limit of 12 days by the Organization for Economic Co-operation and Development (OECD). In comparison to this, there are a total of just 8 procedures required for setting up a business in Vietnam. Ergo, the ease of doing business is a major contributor to this movement in production.
Lastly, the manufacturing hub of Vietnam- Ho Minh Chi City offers a benefit of synergy since the factories are adjacently situated which in turn aid in producing a larger output.
Recently, Finance Minister Nirmala Sitharaman announced a cut in the corporate tax rate from 30% to 22% and this move is certainly a positive step to align with its counterparts in South-east Asia. The shifting dynamics in Asia are definitely going to change the world economics and it will be interesting to witness which country shall replace China or instead, would China still emerge victorious amidst these turbulent changes.