 |
|
The escalating trade tensions between the United States and China, largely fueled by the protectionist policies enacted during Donald Trump's presidency, have triggered a significant shift in the investment strategies of Chinese companies, particularly concerning their approach to the Indian market. Faced with the prospect of prohibitive tariffs pricing their products out of the lucrative American market, these companies are now demonstrating a greater willingness to comply with Indian foreign direct investment (FDI) norms, including the dilution of their stakes in favor of Indian entities. This represents a notable departure from their previous reluctance to cede control, highlighting the growing importance of India as a strategic alternative for maintaining global competitiveness. The article elucidates how the US-China trade war is inadvertently reshaping the landscape of international business and investment, creating opportunities for India to attract foreign capital and bolster its domestic manufacturing capabilities.
The primary catalyst for this change in attitude is the imposition of tariffs by the United States on a wide range of Chinese goods. These tariffs have rendered Chinese products significantly more expensive in the American market, thereby undermining their competitive advantage. Consequently, Chinese companies are actively seeking alternative markets to compensate for potential losses in the US. India, with its burgeoning economy, large consumer base, and strategic location, has emerged as an attractive destination for these companies. However, the Indian government has historically maintained a cautious approach towards investments from China, particularly in sensitive sectors such as electronics and telecommunications. This caution stems from security concerns, as well as a desire to protect domestic industries from unfair competition. As a result, India has imposed stringent FDI regulations, including requirements for stake dilution and technology transfer, which Chinese companies have often resisted in the past. The article notes that Reliance Industries has emerged as a key contender for a stake in Haier's Indian operations. Haier, seeking to expand its manufacturing base in India, is considering diluting a significant portion of its equity, possibly mirroring the structure of MG Motors where an Indian entity holds the majority share. This development underscores the growing acceptance of Indian FDI norms by Chinese firms.
The article further highlights instances of other Chinese companies, such as Shanghai Highly Group, exhibiting a renewed willingness to adhere to Indian conditions for expanding their presence in the country. Shanghai Highly, a prominent compressor manufacturer, has reportedly revived discussions with Tata-owned Voltas regarding a manufacturing joint venture and is now amenable to holding only a minority stake. This shift in attitude is directly attributed to the escalating tariffs imposed by the US, which have compelled these companies to prioritize market access over absolute control. According to Rajesh Agarwal, director at Bhagwati Products, a telecom and electronics contract manufacturer, Chinese companies are increasingly comfortable with owning minority ownership in Indian joint ventures or forming technical alliances. This acceptance of minority stakes is driven by the desire to retain access to the large Indian market and the potential for exporting goods under favorable tariff regimes. The production-linked incentive (PLI) scheme, recently introduced by the Indian government for electronic components, further enhances the attractiveness of India as a manufacturing hub by neutralizing production costs compared to China.
The Indian government, recognizing the opportunity presented by the US-China trade war, is strategically leveraging its position to promote local manufacturing and technology transfer. The government has indicated that it will favorably consider joint ventures with Chinese companies, provided that they involve minority ownership, a dominantly Indian board, and value addition or the introduction of new technologies that can enhance local production capabilities. Furthermore, the government is considering limiting Chinese companies to a maximum of 10% equity investment in electronics joint ventures, contingent upon the transfer of technology. This approach reflects a clear intent to develop a robust domestic manufacturing ecosystem and reduce reliance on foreign imports. The government's preference for electronics contract manufacturing partners or supply chain companies from China, as opposed to Chinese brands, further underscores its focus on building local manufacturing capabilities. The willingness to consider exceptions to the rules on Chinese equity for US or European firms relocating from China to India demonstrates a strategic alignment with broader geopolitical objectives.
However, the Indian government remains vigilant regarding capital flows from China, particularly in light of concerns about the redirection of Chinese exports to India and other Asian markets to circumvent US tariffs. The tightening of FDI rules in 2020, following the Covid-19 outbreak and border tensions with China, reflects this cautious approach. Economic think tank GTRI has cautioned domestic exporters against using India as a conduit for re-routing goods originating from high-tariff countries like China to the US. Instead, GTRI emphasizes the importance of building genuine value addition and supply chain transparency to ensure the long-term sustainability of export growth. The article also highlights instances of Chinese firms approaching Indian exporters to fill orders on their behalf and help them retain their American customers. This underscores the extent to which Chinese companies are seeking ways to mitigate the impact of US tariffs, even if it means relinquishing some control over their supply chains.
The Canton Fair in Guangzhou, one of the world's largest trade fairs, witnessed several Indian firms being approached by Chinese companies seeking assistance in supplying goods to their US customers. In exchange for these sales, the Indian firms would receive a commission from the Chinese businesses. This arrangement allows Chinese companies to maintain their relationships with American customers while circumventing the direct impact of US tariffs. The article draws a parallel to the previous instance when Chinese exporters, targeted by Trump's initial tariffs, turned to Southeast Asian countries like Vietnam to establish factories or re-export goods to the US. However, with the US now imposing tariffs on countries like Vietnam, Indian exporters may see a further increase in orders diverted their way. The crucial difference is that India maintains restrictions on Chinese investment, making it difficult for these firms to set up operations or ship goods through the country to the US. Instead, Indian firms are being approached to supply goods to US companies under the brands of Chinese firms or through co-branding arrangements. This complex interplay of trade policies, investment regulations, and business strategies underscores the profound impact of the US-China trade war on the global economy and the opportunities it presents for countries like India to reshape their economic landscape.
Source: Thanks to Trump, Chinese firms are warming up to India