While Covid-19 has been wreaking havoc across the globe, there has been an unprecedented wave of backlash from the major economies and global corporations, which has put China’s position as the ‘largest factory of the world’ under jeopardy.
USA President Donald Trump not only threatened to impose new tariffs, on top of the current tax of 25 percent on some $370 billion worth of Chinese goods exported to the US, but he also plans to cut off ties with China, as he continues blaming it for the spread of coronavirus.
Japan also recently unveiled a $2.2 billion compensation for its manufacturers to move out of China.
With the evolving context, global business analysts are now posing the question, if not China, then who? Where will the factories be relocated mostly – India, Vietnam, Bangladesh, or somewhere else in Southeast Asia? Or to Mexico?
Is it finally time for ‘Made in India’ to go global?
On May 12, Narendra Modi announced a stimulus package of 20 trillion rupees ($266 billion) to stabilise the stuttering economy reeling from coronavirus.
Modi hopes this will also make India more attractive to global corporations, placing an overarching focus on land, labour, liquidity and laws.
In an aggressive move, India also declared a new incentive program called the “Production Linked Incentive Scheme (PLI) for Large Scale Electronics Manufacturing” in April this year.
The plan targets manufacturers of mobile phones and certain electronic components by offering them financial incentives to start or build their domestic manufacturing capacity.
In addition to declaring incentives or easing the policies, India also started pitching to more than 1,000 American companies through overseas missions to incentivize their shift from China, Bloomberg reported.
And, the move is reaping results. Apple is reportedly moving around 20 percent of its current Chinese production to India. India’s The Economic Times reported that Apple is in talks with government officials on making up to $40 billion worth of iPhones over the next five years in India.
Also, 200 more American corporations had already sought to move their manufacturing bases from China to India in mid-2019, as per the US-India Strategic and Partnership Forum.
Meanwhile in a much-debated move, three states of India – Uttar Pradesh, Madhya Pradesh, and Gujarat – suspended most of their labour laws in a bid to spur private investment.
Though the move created a wave of debates, the states hope that the measures will make a large number of corporations from Japan, USA, Korea and other European nations shift their production from China to India.
Will Vietnam gain the most?
It appears that, Vietnam, with physical and ideological proximity to China, has been making the most of the exodus of the big corporations from China, a trend that started months back from the inception of the US-China trade war.
In fact, Vietnam’s extremely efficient response to Covid-19, success in flattening the curve and reopening business at lightning speed have received accolades globally.
With zero official deaths in a nation of 96 million, Vietnam’s agility and resilience is now much revered among investors.
In a strategic move, the country is inviting foreign companies, giving manufacturers access to ASEAN free trade areas and preferential trade pacts with countries throughout Asia and the EU, as well as the USA.
Vietnam is an integral beneficiary of more than a dozen free trade agreements, including the 11-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership and a newly signed one with the European Union last year.
Analysts refer to this as the expansion of “China plus one” or “China plus two” strategies, where foreign firms maintain some supply chains in China but diversify operations to other countries, especially those geographically near China, like Vietnam.
Stats do not paint a pretty picture for Bangladesh
It’s a fact that Bangladesh’s economy has already been under stress, much before the coronavirus cast its ominous shadow over the country.
In the first eight months of FY 2020, i.e. July 2019 – February 2020, remittance was the only positive indicator that grew by 20.1 percent yearly.
Both exports and imports registered negative growth. Private sector credit growth declined to 9.2 per cent in January and remained lower than the 14.8 per cent target for FY2020 set by the central bank.
The indicators are much worse for the banking sector, which is battling high non-performing loans, low profitability, and liquidity crisis.
Now, in such a volatile context, what is the prospect for Bangladesh to grab the opportunity if the companies really move out of China?
The prospects do not seem very promising, judging by the ease of doing business index by the World Bank, which measures an economy’s performance across an entire sample of 41 indicators.
Number of research has shown that ranking in the ease of doing business index is positively associated with foreign investment.
In 2019, Bangladesh’s jump from 176th to 168th position was widely touted. But, in truth, the jump wasn’t that satisfactory, if we consider the ranking of the country for the last 10 years.
In 2010, Bangladesh’s ranking in the index was 118 while India was positioned at 139, much behind Bangladesh, and Vietnam was at 90.
In 2019, Bangladesh looks like it has taken an absolutely wrong turn, with a position of 168, whereas India has significantly jumped to the 63rd position and Vietnam also improved to the 70th position.
The affect is quite obvious in the figures of foreign direct investments (FDI). While, India and Vietnam are moving in an upward trajectory, FDI in Bangladesh still remains in almost stagnant trend.
Though, the World Investment Report by UNCTAD in 2019 shows that FDI flows to Bangladesh rose by 68 per cent to a record level of $3.6 billion in 2018, that was mostly driven by significant investments in the power generation and labour intensive sectors and by the mammoth $1.5 billion acquisition of United Dhaka Tobacco by Japan Tobacco.
In addition, the net FDI to GDP ratio also remains quite low at around 1 percent of the GDP, much lower if its’ being compared with Vietnam where the ratio is 6.3 percent of the GDP.
Meanwhile, Indonesia has offered 100 per cent tax holiday for five years on investment above $7.0 million to $70 million.
Thailand announced a package of incentives in September last year, including a 50 percent tax cut for companies to relocate production from China.
Malaysia also plans to offer 1 billion Ringgit ($238 million) worth of incentives for five years for multinational firms in high-end technology and manufacturing.
Simply put, based on the above context, country’s core dependency on the RMG sector, lack of skill in the ICT and manufacturing sector, which coupled with stringent corporate tax rate, unavoidable bureaucracy in starting business and lack of initiatives to lure the big corporations make the country far less attractive for FDI.
The country may avail the FDI of the bottom of the value ladder of different sectors, however, becoming the apple of the eye for the ICT, electronics, big manufacturing facilities, and heavy industry may not be a reality for us yet.
