India’s coronavirus crisis threatens plans for post-pandemic supply chain shift from China

India’s coronavirus crisis threatens plans for post-pandemic supply chain shift from China

India’s second coronavirus wave has forced many small manufacturers to reduce operations or temporarily close factories

The outbreak is also putting pressure on India’s attempts to entice businesses away from China as part of a global supply chain shift

For Manpreet Singh, who runs a footwear export company near Mumbai, a new wave of Covid-19 infections that is ravaging India is more than a devastating case of déjà vu.

The world’s worst coronavirus outbreak has pushed public health services beyond breaking point, leading to the deaths of thousands of people each day. But it is also threatening to put many small exporters out of business, slow the country’s economic recovery and set back attempts to capitalise on supply chain shifts from China.

“This wave is much more infectious and spreading fast,” Singh said. “Business has been affected since last month. Until then we were working and getting back on our feet.”

Only 15 of the company’s 125 employees in three manufacturing facilities near Mumbai, India’s largest city, are currently working. The rest have chosen to stay in their hometowns.

On top of labour problems, small exporters like Singh are grappling with supply shortages and rising raw material costs, as widespread lockdowns hit freight networks across the vast country.

“Prices have increased more than 25 per cent and small manufacturers are either not able to cope or have temporarily or permanently shut down,” he said.

“Those that are open are asking for full payments in advance or cash and carry, which becomes difficult for any business.”

But it is not just small exporters that are feeling the pinch. Large companies in industries like textiles, cars and electronics are also operating at reduced capacity.

International car manufacturers like Honda, Suzuki and Yamaha Motors temporarily closed factories in May. Apple’s operations in India have also been hit, with suppliers Foxconn and Wistron Corporation suffering infections and factory shut downs.

The Indian government said on Sunday it would send an additional 5.1 million doses of vaccines to states over the next three days in a bid to control the spread of the pandemic. The country has fully vaccinated just over 40.4 million people, or 2.9 per cent of its population.

If the effects last into the summer you will see some multinationals movingCameron Johnson

However, with the health care system in disarray, questions have begun to emerge about what type of economic impact a prolonged outbreak could have, and how it might affect India’s attempts to entice businesses moving away from China.

Cameron Johnson, an adjunct faculty instructor at New York University and a partner at Shanghai-based management consulting firm Tidal Wave Solutions, said some multinationals with Indian operations had temporarily diverted orders to factories in China, Vietnam and South Korea, particularly for cars and home appliance parts.

“If the effects last into the summer you will see some multinationals moving, if it stops by the summer then not much,” Johnson said.

Other business consultants in the Indian market are less worried.

“Once the so-called second wave subsides, I don’t expect any long term impact on supply chains within India or in its international trade,” said Gunjan Bagla, chief executive of Amritt Inc, a California consultancy that advises American companies on doing business in the country.

A number of Chinese and Taiwanese businesses with factories in India or contracts with suppliers there said they were dealing with supply chain disruptions.

“My orders have been affected a bit, the situation is similar to last May; that is, the goods have been produced but not yet shipped. I now have 8 [million] to 10 million yuan worth of goods still in the warehouse,” said Xie Jun, a Zhejiang-based manufacturer who sources some fabrics from India.

Some companies made adjustments after the first wave of the pandemic, meaning they are better prepared the second time around.

“We had relocated some orders to our factories in China and Vietnam [last year]. Since then, a lower production ratio has been maintained [in India] to avoid delays in delivery there,” said a senior executive with a Taiwan-based manufacturer that has factories in China and India, who asked not to be identified.

“The current outbreak has resulted in roughly 10 per cent worker absence. We have in place careful social distancing measures for workers, disinfection and mask wearing. International manufacturing giants of our kind now make adjustments to supply chain distribution as early as we sense any change and trend in the pandemic.”

It is too early to suggest that there is a shift taking place from China to IndiaJagannath Panda

The pandemic and rising anti-China sentiment has triggered greater effort to develop India’s domestic supply chains, but a mass shift away from China was a “little overblown”, said Jagannath Panda, a research fellow at New Delhi’s Manohar Parrikar Institute for Defence Studies and Analyses.

“International companies and business communities are showing greater interest to connect with India, both as a supply management partner and supply creator,” Panda said.

“Yet, it is too early to suggest that there is a shift taking place from China to India. China as an economic power is still closely connected with global supply chain trends and we shouldn’t discount the Chinese market power and its economic diplomacy so early.”

He added the Supply Chain Resilience Initiative (SCRI) launched in April by Australia, India and Japan did not yet have detailed plans on how to reduce dependence on China.

Bagla, from Amritt Inc, said the evolution of supply chains from one country to another “takes a long time”. Many Western companies such as Apple were simply asking their current suppliers from Taiwan or elsewhere to set up or expand manufacturing in India.

“In the meantime, companies and entrepreneurs from these countries [of SCRI] often favour a ‘China Plus One’ approach and develop a second source in another country, be it Bangladesh or India or Mexico,” Bagla said.

Jason Chung, who helps Taiwanese-funded factories relocate to India, said he has not seen a change in long-term investment plans among firms he consults with.

“Taiwan’s new investment in factory infrastructure progress in Bangalore and Chennai has not been slowed down and still proceeds as originally planned,” Chung said. “The Indian government places great importance on these new relocations to India for foreign investment and the current situation has no impact.”

Analysts at London-based research firm TS Lombard said the economic impact of the current wave of new infections would likely be limited compared with the first wave.

A clear reading of the economic costs and prospects for recovery will not be known for some time, especially given underreporting of cases and deaths Lombard

“While the virus wave will significantly curb the hoped-for economic rebound this year, the impact of the various state lockdowns is unlikely to derail the recovery altogether. We revise down our [gross domestic product] forecast for 2022 to 9 per cent, below consensus,” said TS Lombard in a note published on Monday.

“But a clear reading of the economic costs and prospects for recovery will not be known for some time, especially given underreporting of cases and deaths, which remain at the 4,000 daily peak.”

According to Singh, unless the pandemic is brought under control soon, there are risks small family-run businesses like his could permanently lose clients to factories in China and Vietnam.

“We will lose about 50 per cent I guess,” said Singh.

“When compared with China, India does not have such high capacity. Most Indian exporters are family businesses or small and medium [sized] companies. In China, most companies are large manufacturing units with advantages of scale and volume. As of today, Vietnam is very competitive and India is still trying to catch up.”