While India may start seeing disruption in the next few weeks, the crisis could also seed opportunities.
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Scientists around the world are still making sense of the outbreak of the novel coronavirus in China. While there are still a large number of unknowns, and a race for a cure is on, multiple experts have said it is likely that the outbreak could turn into a global pandemic (the World Health Organisation has not classified the outbreak as a pandemic). Harvard epidemiologist Marc Lipsitch has estimated the virus could infect 40-70% of the global population (while this might technically be true, what really matters is how many of those infected will show symptoms and, at the moment, nobody is able to say for sure). Gabriel Leung, chair of public health medicine at Hong Kong University, told The Guardian on February 12 that the virus could infect 60% of the global population. With a fatality rate between 1% and 2%, the world could be staring at an alarming situation unless the spread is contained. As of Saturday, 66,492 cases were reported in China. The number of deaths stand at 1,523. The disruption in business is beginning to be felt globally.
According to analytics firm Dun & Bradstreet, at least 51,000, including 163 Fortune 1,000 companies around the world, have one or more direct (or tier-1) suppliers in the impacted region (China’s Hubei province) and at least five million companies have one or more tier-2 suppliers in and around the epicentre of the outbreak.
An uneasy calm is prevailing across businesses in India even as realisation dawns that the outbreak has the potential to derail bilateral trade worth $87 billion — China exports $70 billion worth of goods to India. Exports from India include organic chemicals, cotton, ores, plastic items, salts and so on. Imports range from electrical machinery, nuclear machinery, optical and medical instruments, vehicles and accessories to iron and steel. China is India’s second largest trading partner. The country accounted for 13.7% of India’s total imports in 2018-19 while 5.1% of India’s total exports went there, according to ministry of commerce data.
India’s reliance on China is spread across sectors.
Indian pharma industry is dependent on Chinese imports to make medicines — the APIs (active pharma ingredients) come from China. The $30 billion domestic smartphone market, world’s second largest now, will see major disruptions as it is heavily dependent on imports.
India has an abundance of sunlight throughout the year but can’t convert it into grid electricity without Chinese gear. Solar power parks are dependent on Chinese imports. A whopping 80% of solar cells and modules, which absorb sunlight to generate electricity, used in India are imported from China-based manufacturers, including Trina Solar, Jinko Solar and China Solar. Over the past 8-10 years, cheap Chinese imports made Indian solar panel makers uncompetitive and several local players had to shut shop.
Apart from these, a whole lot of sectors such as toys, furniture, computers, cars and white goods are dependent on China. A supply crunch in smartphones, TVs and electronics will impact ecommerce sales dearly. These items comprise about half of the gross merchandise value of $31 billion ecommerce sales. Some 40% of the 160 million smartphones sold annually are sold online.
The viral outbreak comes at a difficult time for the Indian economy and could make the slowdown worse. Coronavirus could further slow down the already struggling economy. While S&P has estimated the crisis would slow China’s GDP growth this year to 5%, no formal estimates of the impact on India are available. A supply shortage of components that go into the manufacturing of a wide range of goods will likely be the first manifestation of the disruption. This could translate into shortages of finished products, higher prices, assembly lines shutting down, end of online discounts and job losses.
“There’s some breathing time as manufacturing units had stocked up for the Chinese bi-annual holiday (the Chinese New Year). But that will give a buffer of just three-six weeks,” says George Paul, CEO, Manufacturers Association for Information Technology (MAIT). As a routine, Indian companies stock up inventories in September-December every year ahead of the Chinese New Year in February and hence there’s no immediate panic. Tepid consumption growth in India has made things easier.
World’s factory The coming days will see some stress if factory closures continue in China. Wuhan, the epicentre of the crisis, is home to some of the world’s largest computer factories. Hubei province, whose capital is Wuhan, is home to some of the world’s largest auto component makers. China is the world’s factory — it makes around 90% of the world’s 300 million computers a year, 70% of the 2 billion phones and 80% of the 110 million air conditioners sold globally.
On the telecom network side, 25% imports are from China. Rajan S Mathews, director general, COAI (Cellular Operators Association of India), says: “The handset makers will be impacted more as almost 80% of the components come from China.” India sources network gear, including antennas, microwave equipment, routers and base stations, from Nokia, Ericsson, Cisco and Indian maker Tejas, besides Chinese companies. For Reliance Jio, South Korea’s Samsung is the main supplier.
In smartphones, “70% of the bill of materials is accounted for by imports from China,” says Shashin Devsare, executive director, Karbonn Mobiles. India is dependent on chipsets, displays and batteries from China.
Stress in Q2 Any device that needs component integration in a semiconductor foundry, which is nearly all modern electronics, is dependent on Chinese or Taiwanese capacity. Navkendar Singh, research director, devices, India & South Asia, IDC, says: “Q1 (of the calendar year) will not be a problem. If coronavirus is not under control soon, Q2 could see supply and manufacturing disruptions.” There could also be a delay in new launches.
“We have raw material till March 15,” says Eric Braganza, president, Haier Appliances India. White goods makers depend on imports from China for motors, compressors, glass doors (like in microwave ovens) and other parts which are assembled to make finished products in factories in India. Haier has a plant in Pune, which started in 2007, and is setting up another in Greater Noida later this year with an investment of Rs 3,000 crore.
Opportunity spotting Chief Economic Advisor Krishnamurthy Subramanian, speaking at a seminar at IIM-Calcutta last week, said the coronavirus outbreak in China provides an opportunity for India to expand exports.
“It’s very hard to say how this will manifest in terms of India’s trade relations with China. If we go by the experience of SARS (outbreak), India was not affected that much,” he said. Complexities in the Indian manufacturing ecosystem make it difficult for India to quickly take advantage of the disruption in global trade, although good tidings have been emanating from India’s high-tech factories in recent years.
The dependence on China has decreased, though only slightly, over the last five years. From importing finished products, India is now assembling products and developing the ecosystem here as well. Investments from Chinese companies are helping boost the local ecosystem.
Huaiyuan Yang, vice-president, UCWeb Global Business, says, “We are committed to a localisation strategy — at the product level, on content, on language and for recruitment.”
Smartphones camera modules and antennas too are made locally now. Chinese companies are also expanding their manufacturing facilities in India. SAIC, the company behind MG Hector, is planning to invest Rs 5,000 crore in India. Half a dozen new models are in the launch pipeline. Great Wall Motors is buying GM’s Talegoan (new Pune) plant and plans to invest over Rs 2,000 crore in India. Lack of a complete ecosystem means automakers have to depend on imports for several parts, including catalytic convertors, sensors, displays and other hardware. Smartphone maker Realme, which has 14 products in India, has licensed manufacturing to Oppo and says its phones are made locally.
Even Chinese ecommerce player Club Factory is ramping up its India presence and offering sops to attract local sellers to its platform. Vincent Lou, founder and CEO, Club Factory, says: “We are not a cross border business and all our sellers are registered Indian sellers.” It’s offering sops to sellers, besides investing in local talent, warehouse, technology and marketing.
Chinese companies like partially state-owned TCL Corp and TV maker SkyWorth have spelt out plans for manufacturing in India. Ankur Pahwa, partner, EY India, says: “Chinese investments in India have increased 5x to 6x in the last few years. The current crisis could accelerate Make in India.” Besides, the higher import tariffs on components and finished products announced in Budget 2020 could boost local manufacturing.
In fact, not so long ago, local companies such as Micromax, Lava and Karbonn were among the leaders in the handset market, but now four of the top five players are Chinese companies and Indian companies don’t even figure in the top 10. Chinese brands have cornered 70% of the market. “Indian companies took advantage of the duty structure then but failed to plough money in either research or innovation. They ate a free lunch,” says Paul of MAIT. Also, the critical components across all devices are semiconductors and chipsets. Despite four policy initiatives, India has been unable to attract semiconductor manufacturers. High cost of capital (a facility that makes silicon wafers, called fab, needs at least $1 billion in investment) and expensive land are issues. Countries such as China, Taiwan and Vietnam are willing to give sovereign guarantees on water and power.
“India just can’t compete, other destinations are cheaper and local governments offer more sops,” says an industry veteran who wished not to be named. He points out the glacial pace of change in India and the inability to react to market situations. For instance, coronavirus resulted in a spike in demand from China for N95 masks, but the government here placed curbs on exports, while even France accelerated production and supplied 10 million masks.
Analysts from S&P estimate that the Chinese economic slowdown due to the coronavirus outbreak could peak in the first quarter before a rebound begins in the third quarter. When SARS struck in 2003, China’s contribution to global GDP was just 4%, compared with around 18% now, and Chinese companies were much less integrated into global supply chains. However China’s ability to bounce back is also immense, compared with India’s ability to scale up its game.
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