Coronavirus impact | Will India be an alternate to China in the expected supply chain reorganisation?

Two countries, Vietnam and Mexico, which swiftly rose in the production calculus of the US companies during 2019, may well offer a clue to the future as the coronavirus pandemic pushes companies and countries to rethink their priorities.

From 2018 to 2019, US manufacturing imports from China declined by 17 percent, a total drop of roughly $90 billion. However, China's loss wasn't entirely a gain for its Asian competitors.

"US manufacturing imports from other Asian low cost countries (LCCs) increased by $31 billion in 2019. Similarly, manufacturing imports from Mexico rose $13 billion," points out one of the recent reports by Kearney on reshoring by US companies.

Buried in the report was an even more significant clue -- the second installment of the Kearney China diversification index (CDI), which tracks the rebalancing of US manufacturing imports from Asia away from China to other Asian LCCs.

While China's loss was certainly accelerated in 2019 due to the trade war, it was part of a longer term trend. Though still the factory of the world and the US economy, this was the sixth year in a row that it lost market share to its Asian neighbours.

The fine print reveals that of the $31 billion that shifted away from China in 2019 versus 2018, almost half ($14 billion) was retained by Vietnam. The report, however, adds a caveat: not all Vietnam's gains are a true, permanent or strategic relocation of production.

"There is ample evidence of the practice of transshipment, where Chinese producers, seeking to dodge tariffs, ship goods to Vietnam with the intention of then reshipping these same or slightly modified goods to the US as ?Vietnamese? products," the report says.

Mexico, the nearshore destination for the US, too may have also gained from a similar transshipment strategy but that is only part of the story. These transhipment gains for Vietnam and Mexico may well be reduced over time as oversight increases.

The recently ratified United States-Mexico-Canada Agreement (USMCA) appears to have quickened the manufacturing shift to Mexico of some goods especially those with relatively simple supply chains and lower technical content.

The case for Mexico is really strong for US manufacturers due to its geographical proximity (75 percent less time to market as compared to Asia) and very competitive wages (just 14 percent of US wages).

Even with assembly of components sourced from the US, Mexico can save US companies 20-30% of their manufacturing cost in the US. The report shrugs off a resurgence of US manufacturing as highly unlikely due to structural impediments such as  dearth of skilled labour and high productivity costs.

The authors of the report, believe that "Asia will settle on a new steady-state equilibrium in which the production mix across the Asian LCC countries is akin to the 2019 distribution."

Against this backdrop, the Covid-19 shock to the global supply chains comes at a unique time. India has, in the past few years, tried to up its game. It climbed up the ladder on ease of doing business rankings, introduced a nationwide Goods and Services Tax, cleaned up its insolvency regime and then added the icing on the cake by slashing its effective corporate tax rates to a simple and transparent 25.17% and even lower (around 17%) for new manufacturing companies.

As the authors of the Kearney report say, the crisis will push companies to fundamentally rethink the criteria they use to shape their supply chains. Countries too are seeking alternatives. Japan is offering its companies $2.2 billion to move out of China and back to Japan and a tenth of the amount to move to other countries. It is a narrow window of opportunity before new supply chains get forged.

Low-cost and diversification of risk do not remain the only criteria. Resilience has now been added to the decision matrix. Vietnam and Mexico offered the first two. Perhaps India can offer resilience too.