<p>Four decades ago, when the tiger economies of East Asia first opened up to foreign investment, they focussed on products where they felt they would offer competitive advantage. Thailand for instance, became a hub for automotive manufacturing, with large investments from leading companies. Malaysia focussed on electronic component production, where Kuala Lumpur and Penang evolved as centres supplying intermediary products across the region and the world. This concept of hub and spoke fitted ideally in a scheme of things where trade was open and the American led economic order created the essence of globalisation. As China began to welcome foreign investment, it brought several strengths to the table including, but not limited to, cheap labour, access to capital and massive dollops of state subsidies. With an abundant labour force and robust infrastructure, China over the coming three decades emerged as the factory of the world. Its attractiveness was further empowered by what was obviously a large domestic market.</p><p> All of this was possible because governments at that time truly believed in globalisation and a liberal trade regime under the auspices of WTO. Global trade jumped and economies prospered. Be that as it may, many countries that failed to open up on time, in terms of their policy structures or indeed were unable to provide adequate domestic infrastructure, lost out. None of this would have been possible without free and open trade. In recent times, specifically over the course of the last decade, ideologies appear to have rapidly evolved, where nationalism is replacing liberal values. America, the world’s largest economy and the dominant power, has gradually begun to restrict trade and, through the Inflation Reduction Act, is providing huge subsidies to incentivise domestic manufacturing. Higher import tariff in key segments, have forced multinational corporations to relocate production to the American heartlands. Several industries have been affected, but leading the pack are computer chips, automotives, electric vehicles and batteries. Other countries including China and the European Union, have followed suit. Consequently, the hub and spoke strategy where production took place in a certain location and distribution across an entire region no longer holds promise, as large economies such as America and India reinforce import tariffs. Trade is usually viewed as a substitute for domestic production.</p><p> The Make in India scheme is based primarily on two props. This is not dissimilar in structure to initiatives in other countries, including the United States. The first prop is on the premise of incentivising investment through subsidy and production linked grants. The second, is via the imposition of tariffs on imports that would safeguard local production. It follows, therefore, that multinationals that seek market access have no choice but to produce locally.</p><p> India’s advantage over many countries stems from the fact that its growing economy, digitisation and massive spends on infrastructure, over the course of the last seven years, has created a large consumption class comprising of hundreds of millions of people. India, for instance, is one of the world’s largest markets in sectors including aviation, automotives, consumer electronics and FMCG. If predictions come true, by 2030 it will provide annual growth and create new markets that exceed that of Germany, the United Kingdom and Japan put together. With import restrictions slowly but surely being imposed across different segments of industries, companies will have no choice but to invest in domestic production should they wish to sell in India.</p><p> Your columnist recently had the opportunity to engage with the Chairman and Board of one of the world’s largest building product companies. He learnt that India was effectively their third largest market after the United States and the European Union. By 2030, they expect India to provide the highest growth and become indispensable in their global strategy. On his travels to Asia, specifically Hong Kong and Singapore, your columnist has interviewed several Asia Heads of some of the world’s largest corporations. Whilst many of them continue to express concerns about the difficulty of doing business in India, they accept the fact that they now have no choice as the Indian market opportunity is seen to be far too lucrative to ignore. Consequently, over the next 5-7 years, foreign capital inflows to India will jump from existing levels. This is based on the simple premise that if you want to sell in India, you must make it there. The old hub and spoke strategy of producing in China and selling across the region is now under suspicion.</p><p> The government’s clamp down on imports, therefore, should not be viewed as being abrupt or unpredictable but rather a constituent of a carefully laid out plan to urge domestic investment. Several companies have recognised this and relocated their production centres to India. Apple, for instance, makes over a tenth of its iPhones in Madras and this figure will escalate rapidly in the coming years. The important lesson here is an obvious shift in policy, towards nationalism. Often the debate at headquarters is about the management of risk. Strategists need to consider whether the greater threat is the loss suffered, should the market fail to take off and the investment goes dud, or the loss in market share in what forecasters predict will be a unique future opportunity.</p><p> It is true that doing business in India comes with headaches. However, many of these are getting better. State governments, specifically amongst the progressive ones such as Tamil Nadu, Gujarat, Maharashtra, amongst a few others, have worked hard in dealing with bureaucratic meddling to ease things for industry. Over the past five years, many leading corporations have relocated some of their manufacturing to India and this is despite the challenges and the annoyance of shifting away from a hub and spoke model, which worked smoothly for several decades. When companies have to make a choice on where to produce, for instance, a pick between India and Vietnam, many have despite the odds, reluctantly picked the former. India is a large market and Vietnam is a small market, and that is a fact of life.</p>
<p>Four decades ago, when the tiger economies of East Asia first opened up to foreign investment, they focussed on products where they felt they would offer competitive advantage. Thailand for instance, became a hub for automotive manufacturing, with large investments from leading companies. Malaysia focussed on electronic component production, where Kuala Lumpur and Penang evolved as centres supplying intermediary products across the region and the world. This concept of hub and spoke fitted ideally in a scheme of things where trade was open and the American led economic order created the essence of globalisation. As China began to welcome foreign investment, it brought several strengths to the table including, but not limited to, cheap labour, access to capital and massive dollops of state subsidies. With an abundant labour force and robust infrastructure, China over the coming three decades emerged as the factory of the world. Its attractiveness was further empowered by what was obviously a large domestic market.</p><p> All of this was possible because governments at that time truly believed in globalisation and a liberal trade regime under the auspices of WTO. Global trade jumped and economies prospered. Be that as it may, many countries that failed to open up on time, in terms of their policy structures or indeed were unable to provide adequate domestic infrastructure, lost out. None of this would have been possible without free and open trade. In recent times, specifically over the course of the last decade, ideologies appear to have rapidly evolved, where nationalism is replacing liberal values. America, the world’s largest economy and the dominant power, has gradually begun to restrict trade and, through the Inflation Reduction Act, is providing huge subsidies to incentivise domestic manufacturing. Higher import tariff in key segments, have forced multinational corporations to relocate production to the American heartlands. Several industries have been affected, but leading the pack are computer chips, automotives, electric vehicles and batteries. Other countries including China and the European Union, have followed suit. Consequently, the hub and spoke strategy where production took place in a certain location and distribution across an entire region no longer holds promise, as large economies such as America and India reinforce import tariffs. Trade is usually viewed as a substitute for domestic production.</p><p> The Make in India scheme is based primarily on two props. This is not dissimilar in structure to initiatives in other countries, including the United States. The first prop is on the premise of incentivising investment through subsidy and production linked grants. The second, is via the imposition of tariffs on imports that would safeguard local production. It follows, therefore, that multinationals that seek market access have no choice but to produce locally.</p><p> India’s advantage over many countries stems from the fact that its growing economy, digitisation and massive spends on infrastructure, over the course of the last seven years, has created a large consumption class comprising of hundreds of millions of people. India, for instance, is one of the world’s largest markets in sectors including aviation, automotives, consumer electronics and FMCG. If predictions come true, by 2030 it will provide annual growth and create new markets that exceed that of Germany, the United Kingdom and Japan put together. With import restrictions slowly but surely being imposed across different segments of industries, companies will have no choice but to invest in domestic production should they wish to sell in India.</p><p> Your columnist recently had the opportunity to engage with the Chairman and Board of one of the world’s largest building product companies. He learnt that India was effectively their third largest market after the United States and the European Union. By 2030, they expect India to provide the highest growth and become indispensable in their global strategy. On his travels to Asia, specifically Hong Kong and Singapore, your columnist has interviewed several Asia Heads of some of the world’s largest corporations. Whilst many of them continue to express concerns about the difficulty of doing business in India, they accept the fact that they now have no choice as the Indian market opportunity is seen to be far too lucrative to ignore. Consequently, over the next 5-7 years, foreign capital inflows to India will jump from existing levels. This is based on the simple premise that if you want to sell in India, you must make it there. The old hub and spoke strategy of producing in China and selling across the region is now under suspicion.</p><p> The government’s clamp down on imports, therefore, should not be viewed as being abrupt or unpredictable but rather a constituent of a carefully laid out plan to urge domestic investment. Several companies have recognised this and relocated their production centres to India. Apple, for instance, makes over a tenth of its iPhones in Madras and this figure will escalate rapidly in the coming years. The important lesson here is an obvious shift in policy, towards nationalism. Often the debate at headquarters is about the management of risk. Strategists need to consider whether the greater threat is the loss suffered, should the market fail to take off and the investment goes dud, or the loss in market share in what forecasters predict will be a unique future opportunity.</p><p> It is true that doing business in India comes with headaches. However, many of these are getting better. State governments, specifically amongst the progressive ones such as Tamil Nadu, Gujarat, Maharashtra, amongst a few others, have worked hard in dealing with bureaucratic meddling to ease things for industry. Over the past five years, many leading corporations have relocated some of their manufacturing to India and this is despite the challenges and the annoyance of shifting away from a hub and spoke model, which worked smoothly for several decades. When companies have to make a choice on where to produce, for instance, a pick between India and Vietnam, many have despite the odds, reluctantly picked the former. India is a large market and Vietnam is a small market, and that is a fact of life.</p>
