Covid-19's supply chain reaction is set to leave India a winner
Making the shift further west
Thinkers are increasingly exercising grey matter on the cause and effects of large events that signal wholesale disruption to the status quo.
The Covid-19 pandemic and its second-order effects will be the subject of considerable analysis for years to come, but its impact on the status quo best encapsulated by the slogan "Made in China" is particularly pertinent.
Following decades of globalisation and integration, the relevance to all business owners and professional investors of any transition is obvious, but as specialists in Indian equities it feels particularly acute.
China's southern neighbour has, despite having advantages such as favourable demographics, failed to assert itself as a similarly meaningful player in the global manufacturing supply chain.
Could this be about to change and what does this mean for a stockpicker in India? We do not know what the future will look like, but certainly sense it will be different.
Away from China?
With a 28% market share, China will remain a core part of global manufacturing, but as investors it is the direction of travel that concerns us.
And, anecdotal observations suggest that economic policy makers and multinational executives are having a mindset shift away from scale and efficiency - something that suits China - to risk mitigation in the form of diversification and decentralisation, so that black swan events such as pandemics are less disruptive.
In February, car manufacturers such as Hyundai and Fiat Chrysler had to halt production in their plants in Korea and Serbia as they were not able to get requisite parts from China.
Simon Lin, chairman of iPhone producer Wistron Inc recently told analysts that the company aims to have 50% of its capacity outside of China by 2021, while multinationals registered in Japan are reported to be receiving government assistance to move operations from China.
Further west, in the UK at least two dozen MPs recently wrote to the Trade Secretary Liz Truss proposing an amendment to the current trade bill to tackle dependence on China.
Across the pond, Huawei is now grappling with potential sanctions from the US Department of Commerce.
The case for India
From India's perspective, the question is whether it is likely to benefit from this geopolitical shift or let the opportunity slip by.
Since 1991, successive governments have slowly unwound the systemic rent-seeking culture that created wealth for those with access at the expense of everyone else.
This momentum accelerated in 2014 as the party in power obtained and retained parliamentary majorities, and as such a transparent rules-based system has been implemented from areas such as monetary policy to resource allocation and insolvency resolution.
Recent reforms have caused considerable short-term economic friction, but India has over three decades slowly transformed its extractive political institutions to being more inclusive, with the bulk of changes happening following periods of crisis.
Tax rates for new manufacturing units are now the most competitive in Asia and old generation large-scale corruption has become much riskier.
However, land acquisition, labour mobility, and contract enforcement remain obstacles.
The government has articulated that it intends to help the economy recover from the pandemic using structural reform in these areas to capture the aforementioned mindset shift in manufacturing away from efficient centralised powerhouses to more decentralised but less fragile hubs.
As such, it understands that how we produce things is as important as where they are produced.
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