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Japanese Investors’ Exodus From China: Boon To India – Analysis

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Prime Minister Shinzo Abe’s mammoth financial relief  to rescue the  Japanese investors in China, advising them to withdraw their investment and shift to Japan and other nations,  is a first attempt by any nation in the world to isolate China, which eclipsed the whole world by corona virus pandemic. The attempt signifies a bid to dwarf over dependence on China for supply chain and open new opportunities for alternative sources,   despite the fact that it will trigger new row between the two nations. It unleashes opportunity to India to be the part of the alternatives and   become China+1 strategic  partner. India is the fifth biggest destination for Japanese investors in ASEAN nations, and Japan is the third biggest investor in it.

The financial bonanza of US$2.2 Billion to the Japanese investors to withdraw from China is an wake up call for the nations who are excessively dependent on China for global supply chain. India is no exception to it. More than one-third of imports of its electronic and electrical items are  from China. Faster growth of mobile phone manufacturing is a case in point. From just two mobile manufacturing in 2014, India has 268 units for manufacturing mobile phones and accessories in 2019. A large number of manufacturing units depends on China for supply chain. 

India is on the brink for  transition in manufacturing practices. Failing of Make in India pitched for transition in the manufacturing practices. Underpinning the necessity, Economic Survey 2019-20 advocated  India to be the global hub for assembly. It asserted for “integrating Assemble in India for the world into Make in India” in the survey. In other words, a new outlook should be given to Make in India in Modi 2 period, keeping an eye on global supply chain

Make in India lost the steam in Modi 1. India continued to rely more on resource base industries, such as textiles, steel, basic metal and others under the campaign. Development of modern industries, such as electronics and electrical, were also put in loop. But, not much focus was given on the  development  of value chain supply. These industries are component base and warrant for a close knit between assembly and component makers, known as supporting industries. As a result, traditional industries, which were emphasized as pillars for Make in India, failed to attribute to the success of Make in India. Globally and domestically, modern industries developed faster than traditional industries, owing to surge in demand in digitization and automation.    

Given the situation and with the unprecedented outbreak of Corona Virus,  two lessons are advocated. First, foreign investment has become the necessity for manufacturing and Make in India, as the domestic investment was lagging and second, over dependence on China for supply chain should be tapered of.        

According to UNTACD report in April 2020, Corona Virus would cause 40 percent drop in FDI flow in the world. It said that lockdown in most of the countries will have devasting impact on all economies, independent of their links to global supply chain. With the rapid spread of Corona Virus, global supply chain has largely been disrupted, causing fall in demand.  The twin shock of health pandemic and global recession will be catastrophic for developing nations. 

In India, domestic investment was sluggish owing to fear for the resurface of demonetization. Nevertheless, foreign investors were unperturbed and continued to pour cash in the country, relying upon country’s high  growth trajectory amidst the global recession. Eventually, FDI became the major source of investment in the post demonetization.

Against this backdrop, Japanese Prime Minister Shinzo Abe’s financial stimulation to the Japanese investors in China for China + strategy can prove propitious for India to attract the Japanese investors. 

To nip the bid of Corona effect, Mckinsey advocated six steps to override the disruption in supply chain.  Of these three are important. First, it suggested identification of critical components and alternative sources. Second, estimate available inventory of components, including after sales stocks, as a bridge to keep production running and enable deliveries to customers. Third, identify and secure logistic capacity. 

In the case of first  step, that is, to find alternative sources, India can be a springboard to increase the hope for the investors to shift their manufacturing facilities. India has overridden China in terms of low cost manufacturing and has the advantage of using greater ability of Indian IT services. Already in automobile industry, Japanese investors forayed in using Indian IT talent and are assertive to develop Indian skill, keeping an eye on the country as automobile hub. 

India has already established its powerhouse of manufacturing, when a Chinese daily rang alarm bell two years ago for losing its competitiveness.  Foreign investors were on the spree to dislocate their manufacturing facilities to low cost countries. To this end, India and Vietnam became the attractive destinations. 

The decision of the world’s biggest smart phone manufacturer, Apple Inc, USA, to vacate production chain in China and shift to India is a case in point. Foxconn, the Taiwanese MNC as contract manufacturing of Apple, decided to invest US$5billion in India. With Apple shifting, other tech giants shifted to India, perking up India’s rank to the second position in global mobile phone manufacturing.

Like Japan, India has vowed to curtail its over dependence on China. Paradoxically, after Modi government came in power, India turned friend from a foe to lure Chinese investment. Its main objectives were to reduce burgeoning trade deficit by  increasing Chinese investment. The outbreak of Corona Virus led the country have volta-face to the investment bonhomie  and yearned for a second thought over Chinese investment. 

India has restricted Chinese FDI through automatic route. It apprehended Chinese investment after the Corona Virus outbreak a predatory movement to take over weak Indian companies. India is also charting out to a strategy to reach global investors  to invest  in selected sectors to reduce import dependence. According to sources, Invest India, the government investment promotion agency, has identified 1, 000 global companies, whom it was reaching out to as a part of “ China+1” strategy.                      


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Subrata Majumder

Subrata Majumder

Subrata Majumder is an adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

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