 "Foxconn")
By Mihir Sharma
India has grand plans to become an electronics manufacturing hub. Given that level of ambition, we need to be prepared for setbacks — such as the news this week that Taiwan-based Foxconn would not, in the end, build a semiconductor factory in the western Indian state of Gujarat.
This was a huge disappointment. Getting some semiconductor fabrication to happen onshore was a crucial part of India’s plans to create a homegrown, end-to-end electronics manufacturing supply chain. Those plans, it turns out, may have been both too ambitious and not ambitious enough.
They are not grand enough because, even if the government’s targets for export growth are met, we will still be some distance behind smaller countries such as Vietnam. A recent study by India’s handset makers pointed out that Vietnam’s mobile phone-related exports were more than nine times India’s in 2021; even Thailand exported nearly four times as much.
And they are overly ambitious because meeting even current targets would require electronics exports to grow between 65% and 75% a year. This is, of course, far quicker than they’ve ever expanded before. Even if India’s mobile-related exports grow consistently as fast as they did in the previous record year of 2015, the manufacturers point out, it will take us the better part of this decade just to reach the level that Vietnam is at now.
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How can India both raise and meet its ambitions? For manufacturers, the answer is clear: by opening up to trade and offering a more stable policy environment.
Every country in the emerging world, including India, has “focused on attracting investment through subsidies, facilitating trade, and improving operational conditions for investors and domestic producers,” the report says. Only India has simultaneously put higher tariffs in place, raising costs for almost every input into the electronics supply chain.
Pricier inputs mean that Indian phones cost more, even if producers substitute domestic suppliers for foreign ones. Had India satisfied itself with Vietnam-level tariffs, the handset manufacturers calculate, “Indian mobile phones would on average be more competitive by about 4%.”
The rare sight of Indian manufacturers asking for less, not more protection should shake policy makers out of their fixation on tariffs. The Foxconn fiasco should make them question the emphasis on subsidies.
The Taiwanese company’s pullout from its deal with the Indian corporate group Vedanta this week comes almost a year after it signed an agreement with the Gujarat state government. The facility in Gujarat, the home state of Prime Minister Narendra Modi and a stronghold of India’s ruling Bharatiya Janata Party, would have been India’s first semiconductor plant, and eligible for billions of dollars in federal funds.
Foxconn’s reasons for not proceeding with this particular project were vague, and the company insists that it remains committed to manufacturing in India and to finding a partner possessing the advanced know-how required for such a complex undertaking.
Yet, what’s clear is that manufacturers and investors want not just financial incentives that are in the same ballpark as those offered elsewhere, but also policy stability and trust. Semiconductor fabrication plants, for example, require exceptionally reliable water supplies. Handset assembly needs to be near efficient ports. And all electronics manufacturers want to see low and stable tariffs on key inputs.
Subsidies alone are never going to be strong or remunerative enough to overcome India’s commercial and competitive disadvantages. Government diktats won’t make end-to-end supply chains spring into existence overnight. In fact, given the diffuse nature of modern manufacturing, onshoring an entire supply chain is probably impossible for any developing country.
India can begin to correct its mistakes by moving quickly on various free-trade deals, such as with the European Union. It will also have to commit to a trade policy that looks more like Vietnam’s or Thailand’s — open to investment and to imports.
In other words, India will have to reverse course if it is to have any hope of achieving its own ambitions, let alone raising them. If it doesn’t shift focus from industrial policy to openness and efficiency, the chances are that India will not even supplant Vietnam, let alone China.
To contact the author of this story:
Mihir Sharma at msharma131@bloomberg.net
© 2023 Bloomberg L.P.
