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Offering fresh insights and analysis, our emerging markets professionals explore top-of-mind questions about investing across the asset class in our monthly Emerging Markets Monitor. Read what they have been discussing.

As the United States and European Union increase tariffs on Chinese exports and China becomes more difficult for investors to navigate, many companies are looking to move production away from China to more attractive alternatives. India, with its young population and growing economy, is becoming such a destination.

Some technology companies, for example, have been testing the waters in India despite complicated bureaucratic and regulatory processes, with the hopes of protecting supply chains against trade disruptions vis-à-vis China and Western nations. India, for its part, has deployed a series of performance-linked incentives worth up to $28 billion as a means of attracting foreign investors and global manufacturing firms.1 India’s total exports have been growing according to the United States Census Bureau, with a 25% increase in total exports to the United States from 2019–2023, particularly in electronics and semiconductors, suggesting this strategy is working to some extent.

In aggregate, India’s manufacturing sector has been slow to add capacity, but there are signs this is gradually changing—such as India’s mobile phone sector, which produces close to 98% of all phones used in India.2 While the sector is reliant on Chinese intermediate goods, it can be seen as evidence of a growing manufacturing sector.

China is still a manufacturing leader. It exports close to 15% of total global trade according to the World Bank and its current account surplus has recovered from pandemic lows to reach new highs. In our view, China appears to be successfully pivoting its industrial output toward more advanced manufacturing opportunities like electric vehicles (EV). In 2019, China exported close to $1.5 billion of EVs globally—in 2023, it exported $34 billion, and its capacity for EV exports continues to rise.3 While operating in China is becoming more difficult for foreign investors, many companies have long-standing relationships with Chinese producers. Plus, China continues to have competitive infrastructure and an effective labor force. Changing supply chains is expensive and time consuming. We think China will likely remain an important manufacturing destination for the foreseeable future, despite increasing trade tensions.

China Trade in Goods (Balance of Payments)

As of 10 May 2024

Source: Haver Analytics, State Administration of Foreign Exchange

In the 1990s and 2000s, companies and markets could rely exclusively on China to source low-cost goods for developed markets. That period of stability is ending. While we believe China is likely to remain a critical global exporter of goods, companies will need to become increasingly familiar with the industrial policies and geopolitical circumstances of multiple countries, including India and other would-be exporters of manufactured goods.

Companies that pursue diversified strategies across different countries are likely to be better insulated from geopolitical uncertainty. Building this familiarity, and relationships with investors and policy makers in these geographies, will be time consuming and expensive—but companies seeking to navigate trade have limited choices. The upside is that doing so can expose companies to new markets and geographies, expand their consumer base, and create better supply chain resiliencies.

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Notes


1 Reuters, 3 August 2023, “India Reviews Production Incentive Scheme Amid Overhaul Push”
2 The Times of India, 17 March 2023, “How Did India Become the Second-largest Mobile Manufacturer in the World?”
3 Atlantic Council, 29 February 2024, “China Has Become an Electric Vehicle Export Behemoth. How Should the US and EU Respond?”

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