China-focused supply chains moving out – particularly towards India

For all the heated rhetoric from politicians, experts and the media on any given fundamental economic issue, it takes years and years for real change to register. And sometimes the change never comes—as may well prove the case with predictions about, say, the death of cities thanks to Covid-19.

When it comes to shifting global supply chains away from China, which has long been the hope of hawks in the West, data points are starting to emerge to suggest change is indeed happening.

It was always going to be a tough sell to globalised companies to upend production and logistics systems that were assembled over years or decades with massive invested capital. But a series of events has powerfully reshaped incentives for managers, and there's now some evidence that it's having an impact. 

US manufacturers have more than doubled their construction-spending budgets in the past year. Mexico is seeing a surge in foreign direct investment (FDI) and in exports. Chinese companies themselves are diversifying out of China, propelling outbound foreign investment. Not everything lines up: India's FDI dropped in the fiscal year to March. But corporate announcements of new India operations are mounting.

China looks on the back foot and Beijing policymakers apparently have already realised the need to address the shifting dynamics. Change is afoot in China's economic policymaking.

This week, Japan's Nidec, the world's biggest manufacturer of electric motors, said it plans a new India factory that will more than double the output of cutting tools in the country. That a maker of such tools, used on assembly lines, is setting up shop on the subcontinent suggests a broader dynamic at work—the development of a manufacturing ecosystem.

And indeed, in May South Korea's Hyundai Motor unveiled plans to plough $2.4 billion to help construct such an ecosystem for electric vehicles in India.

It's not just capital that's on the move. India's electronics industry is eyeing overseas human assets to contribute to its rapidly expanding community. India's Vedanta Resources this week said it's seeking global talent to build and run a $4 billion factory in the display business.

Part of the backdrop for building these new manufacturing ecosystems is the series of shifts in incentive structures—some intentional and some accidental—over the past several years.

The Trump administration's trade war on China seemed to have little impact. But those tariffs were followed by the pandemic, which with its shutdowns and scramble for medical supplies illustrated the advantage of having diverse production sources.

Russia's war on Ukraine and the attendant severe cutback of energy flows to Western Europe, drove home the need to avoid over-reliance on one source of supply.

Escalating tensions between the US and China, with Washington pressing its allies to curb sensitive tech exports to Chinese customers, is another dynamic—one that's combined with Russian aggression to spur companies to consider what might happen if Beijing attacked Taiwan.

Chinese leader Xi Jinping's crackdown on private enterprises in China, and his intervention with some foreign companies in particular – with whatever intention in mind – served as an additional reason for investors to reconsider the nature of the Chinese market.

And now that China's underlying economic growth is only around 3%, the narrative is a whole lot different than when Western firms flocked to the country decades ago.

Chinese companies are also among the ones responding to altered incentives, in some cases moving their production to Vietnam or Mexico to get around concerns about geopolitics and potential sanctions. In the first quarter of 2023, outbound direct investment climbed by almost one-fifth from a year before, to about $40 billion.

Goldman Sachs economists predict the outflow will total $180 billion this year. With inward FDI expected to be unchanged at last year's $180 billion level, Goldman said it's expecting a net-zero investment inflow for China in 2023.

If sustained, that would mark an historic shift. China's enjoyed net inflows every year save one in World Bank data going back 40 years. No wonder Chinese leaders are on a charm offensive. Change is afoot.