The Re-Beginnan | Vol.2 | Issue 6
The second bout of disruption for businesses:India-China faceoff
“A gamut of companies importing parts or capital from China will have to find alternative sources quickly if tensions escalate,” said Aneesh Srivastava, Chief Investment Officer at Star Health and Allied Insurance Co.
So, what’s the tension?
No, it’s not the Coronavirus! While globally firms are reeling with the impact of coronavirus and trying to make recoveries, there’s another bout ready for the corporates to focus on. Clashes at borders are not new. But the Galwan clash is amongst the deadliest face-off that both countries have entered into over the last four decades.
15th June, 2020: Steep mountainous terrains of Galwan valley and the Indian and Chinese troops clashing for more than six hours leaving 20 Indian soldiers dead and unknown Chinese casualties.
The result — A classic case of business landscape impacting businesses infrastructure elements.
The faceoff witnessed rise in nationalism, boost to Make in India theory and increasing red tape policies. While India invoked section 69A of the IT rules and banned 59 Chinese apps (Tik Tok, We Chat, UC browser, etc.) citing threat to security and data, Beijing (3 days later) retaliated by blocking access to WION’s (India’s international news network) website in Mainland.
In a fresh move, Department for Promotion of Industry and Internal Trade (DPIIT) has asked e-commerce companies to display country of origin on all fresh listings by August 1, 2020 and for legacy listings by October 1, 2020. While the decision is pending to be taken, the objective is clear — reduce ties and dependency on Chinese originated products.
Our Solutions Leaders got in touch with Supply Chain executives of major textile manufacturing, specialty chemical, pharma and auto-component manufacturing companies to gauge the impact on imports. The key takeaway was not only the need in changing strategy to make India’s supply chain independent of Chinese dependence but also how the already imported Chinese origin products are stuck at the port for custom clearance impacting production schedule and cost on account of increasing demurrage charges.
Why such hullabaloo?
India and China, account for 37% of global population, are not only key markets for each other’s firms but for the global corporates as a whole. China is important to Indian supply chain with major sectors relying on imports from China for critical input material. India’s trade deficit with China reduced from $60 billion (2017–18) to $48 billion (2019–20) primarily on account of declining imports ($76 billion in 2017–18 to $65 billion 2019–19) and almost flat exports (~$16 billion in 2017–18 and 2019–20). However, China still ranks second in terms of overall trade value with India. Key supply chain exposure for Indian industry:
· 70% of APIs for pharma are imported from China;
· Compressors are imported from China which account for 30–35% of air conditioner cost;
· China is key supplier for sub-components used in tyre, engines and electronics of automobiles;
· Telecom industry’s dependence on China for 5G technology;
· 10–50% of the raw material depending on chemical and agro-chemicals product portfolio is imported from China;
· Solar modules and components are imported from China citing cost benefits.
The first bout — Coronavirus — has already put a lot of Companies under financial stress and if the tension between Indian and China does not de-escalate, Companies need to be prepared for the second bout (which may be fought parallel to the first).
The Big Question!
Will it be practical for India to cut ties with China immediately? Are we prepared with alternatives or capabilities to manufacture those imported products in India?
Nitin Gadkari, the Union minister, said last month, “It is a blessing in disguise for Indian manufacturing.” But is it really? Will companies with deeply integrated supply chains in China move out? If yes, then will they choose India? These are all relevant questions one needs to ask.
But the questions will be best answered with time. What Companies need to do is use this as an opportunity to devise a short-term response structure and build it as part of the corporate supply chain (upstream and downstream) culture.
The need for change — the response structure:
While the external factors influence business strategies and models, none have had the magnitude (in past few decades) of the current political scenario. As much as the Companies want to be in charge of their businesses, it’s only the infrastructure elements that the Management can control. Companies will have to be dynamic and reimagine their supply chain and incorporate following mitigating strategies:
Upstream supply chain:
- Re-perform critical material and vendor risk assessment factoring in for risks associated with geographic location.
- Manage the network effect. Identify suppliers’ supplier and their supply chain which could be disrupted on account of current political scenario.
- Relook at risk of single-source country and not just single-source supplier. Identify alternate suppliers/materials from other countries and diversify supply chain to limit geographic dependencies.
- Move towards inclusive decision making. Initiate dialogues with existing local vendors to understand capacity and capability to reduce dependencies on imports. Evaluate cost impact and work towards risk-sharing model.
- Build on contingency plans for supply chain. In the long run, explore possibilities of developing alternate BOM (with a view to diversify supply chain) as a disaster management strategy.
Downstream supply chain:
- Relook at customer portfolio and calculate wallet share basis geographic location. Include geographic and political risks as part of customer and portfolio risk assessment.
- Identify customers’ customer and their geographic base to identify any negative impact on your business.
- Perform continuous health scan and rework with customers to identify real demand.
- Rework with customers to explore localization and up-selling opportunities.
How SnuckWorks can help?
- Supply chain health scan and transformation study (geographic base heat maps, reimagine supply chain strategy, etc.)
- Feasibility studies (Capex investment, new market penetration, etc.)
- Cost rationalization projects
- Real-demand assessments
For further information on how we can support you and to connect with our Solution Leaders, write to us at communications@snuckworks.com
