COMMENT: Why Trump's rants won't make a dent in Indian IT & pharma story
The Washington Post perhaps saw it coming when during the US presidential debates, the newspaper behind the Watergate expose, asked its readers to watch the Mexican Peso before calling the winner.
The Washington Post perhaps saw it coming when during the US presidential debates, the newspaper behind the Watergate expose, asked its readers to watch the Mexican Peso before calling the winner. Mexico exports 80 percent of its goods to the USA and imports 50 percent of its requirement from that country. It is USA’s third largest trading partner.
US President elect Donald Trump has been repeatedly talking of increasing manufacturing locally and reducing imports. Mexico with a high dependency on one country would obviously be the worst affected. No wonder then the Mexico Peso is trading at its historic low of 22.04 to the dollar yesterday.
In his pre-election rallies, Trump mentioned that Ford decided to shift manufacturing of a new small car plant from Mexico to the US and many other companies would soon follow, after he prodded them to do so.
Other geographies, however, haven’t been hit. This is because anyone who is interested in selling cars in the US has already set up a unit there. The high cost of manufacturing in the US acts as a dampener for using USA as a manufacturing base. Even the Ford unit that has agreed to set up a new unit in US is seeking sops from the government. GM, which has units stationed abroad, also hinted that it will head back to the US.
Further, US labour laws and strict emission norms are scaring away investments. More than half of US car exports are to Canada and Mexico, but 82 percent of cars built in Mexico are exported to US. Unless US eases business norms, manufacturers will go to countries where there is ease of doing business and low manufacturing costs. In automobiles, proximity to the market is not as important as are cost and ease of manufacturing.
The other point Trump made were planks on which he fought his election – healthcare and pharmaceuticals. In his maiden press speech after being elected, Trump said that the pharma industry is ‘getting away with murder’ by selling drugs in the US manufactured elsewhere at a high price.
Pharma stocks in India were to respond with a 1 percent fall.
There are two ways in which prescription drugs are bought in the US. One is through government channels known as Medicare and the other is through the open market channel. The US purchase of prescription drug touched USD 325 billion in 2015 out of which only 29 percent was through the Medicare route.
Indian companies will not be affected too much as their sales are largely to the generic market. Even those companies that are having their own brands are competing in the market place and thus have limited scope for keeping price artificially higher.
As for the Medicare route, sales take place only after bidding. Even if new norms come in, the room for price correction is limited, given the generic space Indian companies deal in.
Trump made it a point in his speech to mention his meeting with Jack Ma of Alibaba when addressing the point of local manufacturing. Trump said that he will be the greatest job producer that God ever created. Encouraging local manufacturing would be an opportunity for Indian companies to either set up shop in the US or acquire an existing company there to take advantage of the changing dynamics.
Trump also came down hard on US companies which outsource jobs. However, as the IT industry body Nasscom has shrugged off fears as it believes the US does not have the in-house talent for the software jobs outsourced. In any case, Indian companies are hiring locally whenever possible, using the talent in the US to take care of the on-site development of a project.
While Trump would like to make US a manufacturing hub and add jobs for the youth, one fact that had stood the test of time is manufacturing always migrates to the lowest cost base. In a world where goods are bought and sold in the cyberspace, Trump’s nationalization dream can only be implemented by disrupting global trade and imposing restrictions which can be challenged under WTO.
As for now India has little to fear from Trump’s speech. If anything, Indians would find more jobs if manufacturing picks up in US.