India’s ambition to lead Asia in manufacturing is met with significant challenges, including the need to lower taxes and enhance supply chain efficiency. 

Samir Kapadia, Founder & CEO of India Index, discusses the strategies India must adopt to surpass Vietnam and attract global manufacturers shifting from China.

The Shift from China: India vs. Vietnam

The U.S. has been actively encouraging its companies to move manufacturing operations out of China and into friendlier countries, with India and Vietnam emerging as prime alternatives in the Asia-Pacific region. This "friendshoring" strategy has become a focal point of U.S. foreign policy as competition with China intensifies.

“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.

Despite India’s growing appeal, Vietnam remains ahead in the race to attract foreign investment. Vietnam’s 2023 exports totaled $96.99 billion, significantly outpacing India’s $75.65 billion. This competitive edge is largely due to Vietnam’s established reputation in electronics manufacturing.

“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,” noted Samir Kapadia.

Vietnam's Head Start and India's Challenges

Vietnam’s strong trade ties with the U.S. date back to a trade and investment deal signed in 2007, giving it a head start over India. Additionally, Vietnam’s centralized policies, compared to India’s fragmented state-by-state regulations, make it a more straightforward proposition for foreign investors.

“Vietnam has an upper hand when it comes to economies of scale manufacturing where it’s mostly manual labor,” said Nari Viswanathan, senior director of supply chain strategy at Coupa. He added that sectors requiring intensive manual labor and low profit margins, such as apparel manufacturing, are unlikely to be significant growth drivers for India.

While U.S. tech giants like Apple and Google are beginning to shift parts of their supply chains to India, the country’s high import taxes remain a significant barrier to growth. India currently imposes a 10% import duty on information and communication technologies, compared to Vietnam’s average of 5%.

“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 observed. This gradual reduction in tariffs is aimed at attracting more foreign firms to manufacture goods within India.

Infrastructure and Efficiency: India's Roadblocks

India’s ambition to become a manufacturing powerhouse is also hampered by infrastructure challenges. Despite the government’s efforts to modernize the logistics sector, inefficiencies in customs and transportation continue to deter foreign companies.

“A ship in Singapore can be unloaded in eight hours and be on a truck to prospective factories, but the same ship in India will be stuck in a customs warehouse for days,” warned Aghi, highlighting the need for faster infrastructure development.

The Indian government’s interim budget has allocated 2.55 trillion rupees ($30.7 billion) to improve the country’s railway system, which is crucial for enhancing supply chain efficiency.

“India is well on that path of modernizing systems in logistics to enhance on-demand supply chain models for importers and exporters, and this factors in all kinds of new roads and ports. I think that will be a priority before automation,” Kapadia explained.

Vietnam’s Relationship with China: India’s Advantage

One area where India could gain an edge over Vietnam is in geopolitical positioning. Vietnam’s close relationship with China could cause concerns for U.S. companies looking to diversify their supply chains away from Chinese influence.

“Vietnam could not be closer to China in so many different ways. And I think that will concern supply chain managers and U.S. corporates for the next 10 to 15 years,” Kapadia emphasized. He pointed out that the frequent diplomatic engagements between China and Vietnam, including recent visits by both U.S. President Joe Biden and Chinese President Xi Jinping, may lead some companies to hesitate in committing fully to Vietnam.

“I think the bigger players are going to be factoring in some of the political calculus regarding China’s relationship with Vietnam and holding back their decision-making until India can prove that they can really compete in electronics manufacturing,” Kapadia added.

Conclusion: The Road Ahead for India

India’s journey to becoming Asia’s top manufacturing hub is fraught with challenges, from high taxes to infrastructure inefficiencies. However, with strategic tariff reductions, continued infrastructure development, and leveraging its geopolitical advantages over Vietnam, India could position itself as a viable alternative for global manufacturers.

As Samir Kapadia’s insights highlight, India’s path to dethroning Vietnam will require a concerted effort across multiple fronts. Success in this endeavor could not only reshape the manufacturing landscape in Asia but also strengthen India’s role in the global supply chain.

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