If you turn on your TV right now, you’ll probably see a story being told of the upcoming economic crisis with reports on collapsing economies and the inevitable recession. Many companies are beginning to shut down their doors giving rise to the highest unemployment numbers in history. But in the midst of all this, an industrial powerhouse has been born. India is quietly becoming the manufacturing hub of some of the world’s largest companies. However, the journey didn’t begin today.
Over the past decade, the country’s auto industry has quietly scripted one of the most inspiring success stories surpassed only by the double-digit growth of the Chinese economy. Over the course of two decades, the country now houses one of the world’s largest automobile industries with an output of over 3.8 million cars a year. According to the most recent figures Indian is well on track to catch up with Germany.
The auto industry is not the only one getting attention in India. In fact India seeks to raise manufacturing as a percentage of GDP from 17 percent to 25 percent and to create 100 million jobs within a decade. It should come as no surprise as manufacturing accounts for 29 percent of economic output in China and South Korea and 27 percent in Thailand. According to World Bank data, moving millions of workers from farms to factories has played a pivotal role in reducing poverty and raising living standards across East Asia.
So how is India taking over the global manufacturing industry?
India was the largest economy in the world for most of the two millennia from the first until the 19th century. For a continuous duration of nearly 1700 years, India was the topmost economy constituting 35 to 40% of world GDP. The combination of protectionist import substitution, Fabian socialism and Social Democratic inspired policies governed India. For some time after the end of British rule, the economy was then characterized by extensive regulation protectionism, public ownership of large monopolies and pervasive corruption and slow growth.
Since 1991 continuing economic liberalization has moved the country towards a market-based economy and by 2008 India had established itself as one of the world’s fastest growing economies. This rapid rise is in part because of the country’s shift from agriculture towards manufacturing. China has been the largest manufacturing superpower in the world due to availability of cheap labor and its population size, but it seems the cheap labor is not so cheap anymore, as revealed by a Bloomberg report which cited Indonesia as the country with the cheapest labor in manufacturing followed by India, Mexico, Thailand, respectively and China at number five. The United States came in at number seven making it slightly more expensive than Taiwan at number six. The same study concluded that Brazil is one of the most expensive countries to manufacture goods based on total labour costs, energy expenses, productivity growth and exchange rates. China, one of the largest manufacturing countries became a manufacturing powerhouse in the 1960s. Once Japan started exporting electronics and consumer goods, Japanese factories started to prepare the region around this time to produce components for its electronic goods because it was cheaper than making those themselves. By 2013, 23.3 percent of all global manufacturing outputs came from China. The Chinese manufacturing juggernaut has experienced many ups and downs over the past 50 years. For one, it is not nearly as cheap to manufacture goods in China as it was 20 years ago. Wages in China have risen 187 percent since 2005. The average Chinese factory worker earns about 27.5 dollars a day, and increasing wages also means the cost to manufacture goods has risen too. This invariably means that China is not the cheapest place to manufacture anymore.
So how is this helping India steal manufacturing jobs away from China? Companies love to pay less for the cost of production so they can maximize profits on their products. The Government of India in April reached out to more than 1,000 companies in the United States and through overseas missions to offer incentives for manufacturers seeking to move out of China. According to Indian officials, India is prioritizing medical equipment suppliers, food processing units, textiles, leather, and auto parts makers among more than 550 products covered in the discussions.
Apple is also exploring moving between 15 and 20% of its hardware production out of China. The company reportedly has a growing team looking into moving production and has asked key manufacturing partners like Foxconn and Pegatron to evaluate available options. This is believed to be powered by the unending trade war with the United States.
Apple has previously produced lower-cost iPhone models in India, and was reportedly considering shifting production of his more premium models to the country in order to avoid its tariffs on imported smartphones. Foxconn recently said that it has the capacity to move production of all US iPhones out of China if necessary. India and Indonesia are thought to be under consideration.
Around five million Chinese jobs reportedly rely on Apple’s manufacturing in the country, and apple employs around 10,000 people directly in China. It’s unclear how many of these jobs will be impacted by losing 15 to 30% of production. India offers competitive advantages with its lower wage structure and access to a vast labor market. For instance, the average minimum wage for contract workers in India is 148 dollars per month, or 10000 Indian rupees. To put this into perspective, minimum wage stands at 234 dollars in China.
So what does this mean for the global manufacturing landscape? India is the fastest growing multi-trillion dollar economy in the world and the fifth largest overall with a nominal GDP of 2.94 trillion dollars. India became the fifth largest economy in 2015, overtaking the United Kingdom and France. According to the IMF, India’s post-independence journey began as an agrarian nation. However, over the years, the manufacturing and services sector has emerged strongly.
