The events of the COVID-19 pandemic highlighted the risks of long, thin supply chains and the just in time approach to manufacturing. At the heart of this strategy has been China’s dominance as the world’s manufacturing hub. Beijing’s continued draconian lockdowns continue to impact these supply chains, so the clamour for an alternative has been rapidly gaining favour. India is the key candidate to fill that role in an approach that’s been dubbed China+1. 

India’s inevitable rise 

In some ways the swing of capital and investment from China towards India has looked inevitable. Ever since the Trump era, Chinese and American nationalism and the associated sabre-rattling has grown louder. This has also clearly been exacerbated by the acute geopolitical events of this year: the Ukraine war and Chinese military drills around Taiwan. Cue India. As a democracy, the country’s appeal has broadened in relation to its eastern neighbour’s increasing authoritarian stance with which it already has a tense relationship due to border disputes. In addition, India’s knowledge base and demographic advantages put it forward as the main alternative to China.

 

With the backdrop of geopolitical tension, alternative supply chains, particularly in “friendly” nations has never been more important for western companies. In fact, they have already begun to invest in India: Apple, for instance, recently announced it will manufacture the iPhone 14 in India, with the intention of producing 25% of their devices outside China by 2025. India has also been courting manufacturing companies to set up in the country. The Indian government has publicly stated its desire to step up the manufacturing value chain, with incentives on the table for manufacturers to set up production facilities. 

China’s self-sufficiency drive 

For China, we expect the authorities to stoke the fires of nationalism as President Xi seeks to retain his likely third term in power. Significant resources have already been committed to support it. More than $150bn, for instance, has already been spent on accelerating China’s chip industry, while 2021’s 14th “Five Year Plan” sets out in detail China’s four pillars for greater self-sufficiency. Furthermore, the Chinese regime is acutely aware that the weaponization of the US dollar through the US sanctions regime leaves China at risk of being locked out of international payments; for a country that is invoiced for almost 75% of its receivables in US dollars, the prospect is frightening.

 

As China turns inwards so India has leapt at the China+1 opportunity with gusto, announcing the “Make in India” campaign to attract investment. The $10bn in incentives for chip manufacturing for example has attracted interest from companies from Singapore to Israel. India’s distinct geopolitical advantages are only becoming more important. The longer China’s lockdowns endure and the more investment that is sunk into Indian investment, the more likely India will benefit long term. 

It’s happened before  

We’ve seen shifts in global manufacturing bases in the past. First, with Japan, when it became a manufacturing powerhouse in the second half of the 20th century, and more recently in the rise of the Asian tiger economies of Singapore, Taiwan and Korea. While cost drivers were likely more prevalent, transitions away from these hubs were executed without much fanfare. However, none were as central to global manufacturing as China.

 

The transition of activities towards India may actually mean there is a situation where the world maintains two key manufacturing hubs, India and China, for a period of time. China+1 made live. Notwithstanding significant changes in the global regime, the current economics of globalisation dictate that eventually the cheapest manufacturing hub, in this case India, should win out. The coming demographic shifts in India – young, urbanising, and upwardly mobile – compared to China – older, urbanised, and with a developed middle class – also supports an inevitable shift in favour of India. 

The value of active minds: independent thinking

 

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

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