India wants to be the top manufacturer in Asia as companies shift away from China, but first it needs to lower taxes and improve supply chain efficiency if it wants to dethrone Vietnam.
The U.S. has pursued a “friendshoring” agenda as competition with China increases. The Biden administration has encouraged American companies to move electronics and technology manufacturing operations out of China and into friendlier countries, particularly Vietnam and India in Asia-Pacific.
“Both Democrats and Republicans see China as a challenge. And every boardroom in the U.S. is asking a CEO what their derisking strategy from China is,” said Mukesh Aghi, president and CEO of the U.S.-India Strategic Partnership Forum.
India and Vietnam are attractive manufacturing alternatives for foreign investors and companies, due in part to low labor costs. Between the two, however, Vietnam is still way ahead with 2023 exports totaling $96.99 billion, compared with India’s $75.65 billion.
“Vietnam has been known for their ability to manufacture electronics. India is just getting into that game, so that provides Vietnam with a competitive advantage,” said Samir Kapadia, CEO of India Index and managing principal at Vogel Group.
While India’s relationship with the U.S. has warmed, especially after Prime Minister Narendra Modi’s state visit to the White House in June, Vietnam has had a trade and investment deal with Washington since 2007.
Another key advantage for Vietnam is a more simple proposition compared with India, which Aghi noted has “29 states and every state has a policy which may be different.”
“Vietnam has an upper hand when it comes to economies of scale manufacturing where its mostly manual labor,” Nari Viswanathan, senior director of supply chain strategy at
software firm Coupa.
Sectors that require intensive manual labor and have low profit margins such as apparel manufacturing are “not going to move the needle” for India,” Viswanathan noted.
U.S. tech giants are increasingly bringing part of their supply chains to the South Asian country. The Financial Times reported in December that Apple told component suppliers it will source batteries from Indian factories for its upcoming iPhone 16. The company has weighed expanding operations in India since 2016, when CEO Tim Cook visited Indian Prime Minister Narendra Modi. Google is also set to begin Pixel phone production in India by the second quarter.
Import taxes remain high
One hurdle for India’s manufacturing hub ambitions is the country’s 10% import duty for information and communication technologies.
This is higher than Vietnam’s average import duties of around 5%, according to Andy Ho, chief investment officer at VinaCapital.
India’s import taxes were intended to protect domestic manufacturers, but lowering those duties will be part of the government’s efforts to attract foreign firms to manufacture goods within the country.
“2024 will be a year of Prime Minister Modi winding down many of these tariffs, but he’s going to do it focused on an industry by industry basis, and not a country by country basis,” Kapadia added.
For example, India in January lowered import taxes for certain metal and plastic parts used in manufacturing mobile phones from 15% to 10%. That benefits companies like Apple and Dixon Technologies, which manufactures phones for Xiaomi, Samsung and Motorola.
“Given Vietnam’s stronghold over electronics manufacturing and exports to the United States, that’s where we will see the most traction early on as India attempts to take market share. This includes all kinds of plastics, metal componentry and mechanical
items,” Kapadia said.
India’s electronics exports to the U.S. reached $6.6 billion between January and September last year compared with $2.6 billion for the same period in 2022, according to a LinkedIn post by Pankaj Mahindroo, chairman of the India Cellular and Electronics Association.
