How to lure companies out of China?

The shifting of production facilities out of China has become inevitable for many multinationals, given the state of unrest in that country and the rapid policy changes that could potentially affect industrial output.

Many companies have been lured to Vietnam and Indonesia by the balmy investment climate and ease of doing business in these countries. But now tech giant Apple has made it clear that India is going to be the destination for most of its fresh investments. From merely producing old variants of the iPhone at its Chennai factory, there are reports that it is now planning to manufacture the latest models as well as MacBooks and iPads.

Though volumes will take a while to ramp up, it marks a significant achievement as policies tailored to lure foreign investors are clearly succeeding in their aims. One of these is the production linked incentiveproduction linked incentive(PLI) scheme that entails providing subsidies into key economic sectors. The PLI scheme began in the electronics sector and was meant to provide an incentive for mobile handset manufacturers to set up facilities here. Till it was launched, India was largely carrying out assembly of handsets. The scheme lured manufacturers to set up actual production units in this country. The result of this initiative is that India now has the second largest mobile handset manufacturing industry in the world.

Under the programme, incentives are given on incremental sales of products in the selected sector. The proposal to lure tech giants to manufacture IT hardware had envisaged an incentive of one to four per cent over a four year period. But the IT Ministry is reported to be seeking a hike to five per cent which would raise the outlay from Rs 7,350 crore to Rs 20,000 crore.

While this would be a sizable increase, the fact is there are other factors to be considered by corporates before relocating rather than merely the PLI scheme, despite its attractive provisions. For instance, there is already a wide network of component and accessory manufacturers in China which would need to shift base too. Unless there is a rapid development of an entire eco-system of vendors, it would not be possible to entirely move production of the finished hardware. No wonder then Apple is not expected to relocate its entire production facilities to this country over the next five years. It may achieve 25 per cent of its output by 2025, according to a study by JP Morgan.

Despite this relatively slow pace, Apple's interest in moving to India will send a signal to other tech companies that this is a desirable investment destination for those seeking to relocate from China. Its collaborators including Foxconn, Wistron and Pegatron have already created over 1,50,000 jobs and the numbers are only set to rise as manufacturing operations are expanded in Tamil Nadu.

One of the reasons that Apple and other tech giants like Samsung have put their faith in this economy is the existence of a large domestic market, as is the case with China. Till recently, however, this was a price-sensitive market where Apple's premium products were not finding sufficient traction. The situation is now changing gradually with the tech behemoth adopting a more aggressive marketing strategy. Samsung, on the other hand, has found a more responsive mass consumer base in the country owing to the wider price range of its products. Besides, it has been established here for much longer and is an entrenched player not just in mobile phones but in the consumer goods sector.

It certainly looks as if the tide is turning in favour of this country in the competitive IT hardware segment. Though India is known to be a hub for software services and the country's exports are about 157 billion dollars annually, it has lagged behind in the hardware sector. Many of the leading manufacturers from Taiwan and China have been setting up assembly units here, but actual production has been slow to pick up due to lack of the surrounding components eco-system. This lacuna can only be overcome gradually as it takes time to expand manufacturing facilities.

Apart from mobile handsets where the policy initiatives of the past eight years have yielded results, there is a shortfall in other electronic sub sectors like tablets, servers, laptops, semiconductors and strategic electronics. Currently only one-third of laptops or tablets used in the country are assembled here as against 95 per cent of mobile handsets. PLI schemes have been launched in these sectors but it has to be seen whether they will be as successful as in the case of handsets.

As for semiconductors, the PLI scheme has resulted in major projects being launched with the focus being on the one by Vedanta in a tie-up with Foxconn in Gujarat.

The only cloud on the horizon as far as the expansion of the IT hardware sector is concerned, is the growing global recession. Demand has fallen and the tech industry has been retrenching manpower in large numbers both in India and abroad. The boom period for technology companies during the pandemic is over, at least for the time being. But the recessionary trends for the tech sector are likely to be a short term phenomena. In the long run, there is enormous potential for growth. India needs to capitalise on it by enabling ease of business for both domestic and global companies seeking to make fresh investments in the industry.