China, the world’s second-largest economy has recently witnessed a wave of mass withdrawals by major foreign companies towards India. Alphabet announced that it is considering transferring some of its production of the Pixel phone to India, while Apple revealed its plan to manufacture iPhone 14 phones in India as part of its efforts to diversify its production and stop its dependence on China.
These moves have raised questions about the reasons for the exit of major companies from China to India in particular, with concerns, on the other hand, regarding India’s ability to receive these investments, especially in light of the obstacles facing foreign direct investment in the country.
Logical Motives
The reasons that prompted companies and institutions to exit the Chinese market varied, including the country’s severe measures to confront the coronavirus pandemic, the escalation of trade disputes with the United States, restricting the freedom of foreign technology companies. All these factors prompted several international chambers of commerce to conduct opinion polls of major foreign companies’ executives on investment in China. The American Chamber of Commerce in Beijing reported that 44% of the companies participating in the survey revealed shrinking investments or postponing investments decisions due to health restrictions and lockdown decisions. One in ten people said that if restrictions continue for another year, it will push them to move their operations outside the country.
Another survey by the EU Chamber of Commerce in China showed that about 23% of Western companies are considering moving their business outside the country due to lockdown policies or political disputes. In addition, 16% of these companies said they intend to move to Southeast Asia, while about 19% announced plans to move to Europe, and about 12% to North America. The majority of companies expressed a feeling of distrust concerning business in China, with foreign industrial companies operating in China experiencing profits fall by 16.2% during the January-April period, compared to a decrease of only 0.6% of Chinese private companies’ profits, while state-owned enterprises achieved a 13.9% increase in profits during that period. These motives can be as follows:
• Zero Covid policy: China has adopted a zero Covid policy aimed at completely eliminating the coronavirus pandemic with no signs of easing such policy in the near future. The most prominent features of this policy are lockdowns, quarantines and strict tests along with travel and movement restrictions. As of May 2022, China has imposed restrictions on travelers to undergo PCR tests within 24-48 hours of their flight, in addition to antibody tests. Passengers must be vaccinated within 14 days of entering the country, and proof of negative test results and vaccination records must be provided upon arrival. Arrivals are screened at the airport with the need to complete a mandatory quarantine of at least 14 days. Furthermore, companies– with the exception of suppliers of basic commodities and food– have been forced to temporarily close until local authorities confirm that there are no new infections in the area.
These strict and restrictive policies have affected the practice of business in the country, cast a shadow on companies’ productivity, and exacerbated the difficulties of obtaining the necessary manpower to conduct business, as well as difficulties in securing the necessary supplies for production due to the disruptions of the transport and logistics sector, which raised the indirect cost of production, resulting in uncertainty among foreign investors as the pandemic highlighted the fact that it is not possible to rely on only one manufacturing center.
• Demographic factors: The demographics in China have raised concerns among foreign companies operating in the country due to the increasing likelihood of a decrease in the number of available labors, as the birth rate in the country fell for the fifth consecutive year to 7.5 births per thousand people for 2021, which is the lowest level recorded since 1949. The fertility rate of Chinese women has declined at a continuous pace over the past years, as shown in the figure below:
Figure 1: Fertility rate per year (births per female)
Source: World Bank
In addition, the National Health Commission revealed that the country’s population growth has slowed significantly and will begin to decline between 2023 and 2025. The elderly population is expected to make up about 29.83% of the total population, which means that the problem of population aging is beginning to loom. Thus, the decline in population and the proportion of young people in the total population is likely to affect the size of the labour force, as shown in the following figure:
Figure 2: Evolution of the Population Pyramid in China (1990-2050)
Source: Population Pyramid of China, https://population-pyramid.net/en/pp/china.
The above graph shows that the percentage of youth in the total population declined from 28.891% in 1990 to 17.466% in 2022, while the percentage of the population in the labor force increased from 66.865% in 1990 to 69.125% by the end of this year. The aging rate in the country increased from 5.244% to 13.409% during the same period, while expectations indicate a decline in the proportion of the youth population to 11.447%, and the percentage of the population in the labor force to 58.726%, compared to the increase in the rate of aging to 29.827 by 2050. In addition to the possibility of a decline in China’s workforce, foreign companies have reported that the cost of labor in China is higher than in neighboring countries due to the country’s high level of income and reduced labor supply, which increases the cost to those companies.
• Political tensions: Ongoing tensions between China and the United States over technology transfer and intellectual property rights are in the rise. Washington accused Beijing of using telecommunications equipment to spy on other countries’ networks. In addition, the two countries are constantly imposing tariffs on each other’s products, pushing companies, especially Americans, out of the country. The potential dispute with Taiwan following the visit of US House Speaker Nancy Pelosi has also raised concerns of investors and companies operating in the country, as the visit prompted China to take several restrictive military and economic measures against Taiwan.
• Regulations: Chinese regulatory policies that directly target certain industries have prompted a number of foreign companies to leave the Chinese market. Yahoo announced the suspension of its services in China, and Epic Games decided to withdraw the video game “Fortnite” from China due to the difficulties imposed by the commercial and legal environment in the country, especially after imposing the strict law regulating data privacy, which determines how companies collect and store data. The law states the need to obtain consents for data collection and processing, and provide ways for users to cancel the sharing of their data, impose restrictions on cross-border data transfers, and impose large fines in case of non-compliance with the law that can reach 50 million yuan ($7.8 million), or 5% of company’s annual revenue.
Can India become a World Factory?
Foreign direct investment flows to India recorded an all-time high of about $81.97 billion in the year 2020/2021, with the technology sector accounting for the largest proportion of investments directed to the country with a share of about 25%, followed by the services sector at 12%, and then the automotive sector with an estimation 12%. This came in light of the country’s promotion of the “Made in India” initiative, which aims to put India on the world map as an international manufacturing hub. Despite India’s desire to receive foreign investment from China, there are several obstacles it may face to achieve this goal, the most important of which are:
• Difficulty in conducting business: India suffers from difficulty in conducting business, as land acquisition and ownership laws are one of the most prominent obstacles facing foreign investors in India, which also contributed to reducing their enthusiasm. The Indian government is the largest landowner in the country. While the Chinese government has provided special incentives for foreign investors such as providing tax incentives or easiness of land ownership systems, India has been experiencing a drastic slowdown in developing its own land ownership system. Thus, the government should simplify its current land tenure and offer incentives to private banks and public funds to help set up manufacturing units with foreign companies.
In addition, government approvals for projects take a long time, with the time required to start a new business about 17.5 days compared to only 8.5 days in China. The Indian government has imposed new restrictions on investments since April 2020 requiring its prior approval for foreign investments coming from countries that share land borders with it.
Based on these procedural complexities, India has only approved about 80 of the 382 investment projects received by the government from Chinese companies as of late June, demonstrating the challenging business environment facing Chinese investment and companies doing business in India.
• Protectionist policies: During the recent years, India has been adopting a protectionist trade policy with the aim of controlling the trade balance deficit and maintaining the stability of the currency value. The authorities have strengthened the import control policy, which has witnessed a sharp increase in recent months, with the increasing likelihood of targeting non-essential imports through increased customs duties, which would raise the price of some imported goods necessary for some industries, hence increasing the production cost and inhibits the profits growth. In addition, both exporters and importers in India face ever-changing and unpredictable tariffs and laws, thus they have to deal with multiple levels of bureaucracy before goods are easily transported across borders.
• Lack of infrastructure: In addition to the abovementioned factors, India will not be able to maintain the sustainability of foreign investments without repairing its infrastructure and developing its ports. For example, it takes more than 20 days to ship goods produced at Mundra Port, India suffers from traffic congestion that may hinder road transport and delays in rail freight traffic, in addition to the need of new companies and factories of about 45 days to get electricity. The challenge is not only the difficulty of securing electricity needed to do business, but also the frequent increase in electricity costs and cuts. Accordingly, India needs to develop its own shipping lines, increase public-private cooperation, as well as port development and technology.
•Weakness in Research and Development (R&D): India’s R&D spending is among the lowest worldwide; its share of GDP is about 0.7%. compared to high rates in other Asian economies. This is due to the concentration of Indian authorities on addressing grave problems such as combating poverty and hunger, controlling the spread of diseases, and raising the quality of life of individuals. R&D also faces other constraints such as raise funding for this sector، and delaying the disbursement of funds allocated for its development in the State’s Public Budget. R&D in India also relies on grants, creating a situation of dependency in which the quality of scientific research is hindered. Moreover, the sector suffers from a shortage of skilled personnel due to disproportionality between educational curricula and labor market requirements, as well as brain drain and weak private sector participation in total R&D expenditure.
In conclusion, it is clear that the Indian market has gained a strong momentum during the past months due to the exceptional circumstances in the Chinese economy as a result of political tensions with the United States, and the strict domestic policy towards the coronavirus. Therefore, the Indian government will take serious steps to maximize the benefit from the current wave of investments through legislative reforms to investment laws, coordination between the government and the private sector, and the development of infrastructure to enable foreign investments, especially in technology.
