In response to escalating geopolitical challenges, an increasing number of global companies are prioritizing supply chain diversification. This strategic move aims to insulate businesses from the risks associated with overreliance on a single country or region. As part of this trend, major organizations are emphasizing the advantages of ‘friend-shoring,’ which involves strengthening local supply chains in key economies. Morgan Stanley, a renowned financial institution, has identified India, Mexico, and Southeast Asia as the best-suited regions for this transition.
According to a report by Morgan Stanley economists, these economies stand to gain substantial economic and industrial benefits as supply chains migrate to their regions. The report highlights the tremendous growth potential in India’s manufacturing base, with the sector expected to triple by 2031. This expansion is projected to increase India’s share of GDP from approximately 16 percent to 21 percent within the same time frame. Similarly, Mexico is anticipated to experience a net gain of around 30 percent in exports to the United States over a five-year period. The rise in investment and manufacturing activities could potentially elevate Mexico’s potential GDP from 1.9 percent to 2.4 percent in the next five years, as per Morgan Stanley’s analysis.
While supply chain de-risking is viewed as a necessary yet challenging and expensive process, it is expected to span a decade or longer. The shift towards diversified supply chains will likely involve the implementation of more protectionist policies. Despite this, many companies are expected to retain a significant presence in China. At the country level, India and Mexico are poised to be the primary beneficiaries of this transition, as stated in the report.
Several large corporations have already taken proactive steps to strategically restructure their supply chain investments. One notable example is Apple’s partner, Foxconn, which plans to invest $700 million in a new plant in India. This move aims to mitigate risks arising from tensions between the United States and China. The new production site in India is projected to generate around 100,000 new jobs, surpassing the current workforce of 200,000 at the Zhengzhou Plant, according to Morgan Stanley.
To expand their production footprints and reduce dependency on China, more companies are adopting a ‘China+1’ or even ‘China+N’ strategy. This approach involves diversifying production across Southeast Asia, Mexico, and India. Additionally, companies are re-shoring their operations in instances where production is highly capital-intensive or can be automated, as outlined in the report.
It is important to note that the structural shift in global trade witnessed during the 1990s and 2000s was largely attributable to the rapid development of modern China. This unique event, which played a pivotal role in reshaping the global economy, cannot be easily replicated by other emerging market economies such as India, Indonesia, or the Philippines. The report emphasizes that China’s emergence in the global economy was an exceptional occurrence that enabled the country to close the value and volume gap between 1990 and 2010.
While the process of de-risking supply chains from China is expected to be gradual, a significant portion of tech hardware production is likely to flow to Southeast Asia and India instead of North America. Currently, China accounts for $4.9 trillion in manufacturing GDP out of the global total of $14.2 trillion (34 percent). Consequently, an estimated $846 billion of manufacturing output is potentially at risk due to the potential loss of international production and exports. This accounts for approximately 6.0 percent of the global total.
Morgan Stanley’s report suggests that in the event of this shift, some countries stand to experience substantial growth gains. Notably, the United States, India, and Southeast Asia are expected to secure a larger share of global manufacturing output. India, in particular, could witness an 11.8 percent expansion in its manufacturing base within one year, considering the low starting point.
In conclusion, global companies are recognizing the need for supply chain diversification to navigate geopolitical challenges effectively. ‘Friend-shoring’ and the strategic expansion of production footprints in countries such as India, Mexico, and Southeast Asia offer numerous economic benefits and contribute to a more resilient global supply chain. While China’s historical contribution to global trade is unparalleled, the process of de-risking supply chains from the country will be a gradual transition. Nonetheless, the potential gains for countries like India and the United States are substantial, and the shift towards diversified supply chains is poised to reshape the global manufacturing landscape.
Source of this News: Business Standard
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