India Gaining Popularity over China as a Near-Shoring and Sourcing Destination

Most importers have been affected by supply chain disruption in recent years. Zero-Covid in China, exploding shipping costs, component shortages, the invasion of Ukraine, political tensions between China and the West, and the impacts of Covid on Western economies causing effects like high inflation, and more; all of these factors have had an effect on supply chains.

In 2019 it’s arguable that many observers wouldn’t necessarily have foreseen India as the recipient of a lot of China’s former trade in 2023, but here we are, and India’s popularity as a sourcing destination for key components and assembly is on the up-and-up. European countries are also starting to see India as an appealing near-shoring destination. Why so?

Reuters Events created the whitepaper: A generational shift
in sourcing strategy (A global deep dive into near-sourcing, nearshoring
and reshoring in the post-pandemic world) in partnership with Maersk. There are some interesting stats and learnings which speak for India’s increasing popularity in particular. So the data you see here is courtesy of this whitepaper.

Why are importers rebalancing their supply chains?

The disruptions mentioned earlier have given many importers pause to consider if their supply chains are resilient enough. Even Apple, such a famous supporter of manufacturing in China, is diversifying its supply chains and shifting more of its business away from China to India and Vietnam. The production of their main money-maker, the iPhone, is being moved over mostly to the Southern provinces of Tamil Nadu and Karnataka.

According to the whitepaper, the top 5 reasons businesses are changing their sourcing strategies are:

1. Shorten the supply chain to increase flexibility: 65%
2. Limit reliance on single sources of materials: 57%
3. Limit risk across operations: 56%
4. Shorten the supply chain to reduce transit time: 48%
5. Increase control over operations: 45%

Note that cost isn’t on this list. It’s clear that importers were most affected by delays and risks because the strategies are shifting more to reducing supply chain risks and becoming faster and more flexible. The automotive industry is a great example of an impacted industry, stories of delays due to component shortages are extremely common.

This graphic also demonstrates the acute impact delays had on importers who are now exploring other sourcing locations in the past few years:

Could it be that having too many eggs in China’s basket came back to haunt them during the long zero-covid period when disruption was more commonplace? That’s certainly one reason businesses are trying to diversify supply chains and reduce the risks of delays occurring again in future.

Which countries are the most attractive new locations to source from?

If Western importers are not getting the results they need from China, or are ‘bugging out’ due to the shadow cast by geopolitical tensions, where are they looking at?

The whitepaper shares this graphic showing which countries are most interesting to source from for the businesses polled:

It may be surprising that the USA, Germany, and the UK feature here, but businesses in those countries have been actively trying to reshore in order to be nearer to their customers where possible. Producing domestically can be particularly appealing to high-tech and high-margin products, especially for highly engineered products that are not made in large series.

Poland and Turkey are becoming more popular destinations for assembly and other activities for Europe as well, which makes sense due to their proximity and relatively low costs (in comparison to Western Europe and the USA).

After all, shorter supply chains provide:

• Faster deliveries from suppliers
• The ability to communicate clearly and effectively in the local language
• Convenient visiting times to suppliers’ facilities
• Satisfied customers who can get products faster than before
• The ability to send the goods back to the factory quickly in case of quality issues

India, Vietnam, Indonesia, and Mexico make up around 60% of the interest in new countries to source from. If we address Vietnam. It provides many of the same benefits that China used to for outsourcing to suppliers in the Far East, with potentially lower costs and fewer political risks, so for importers who require East/South-East Asian supply chains it makes sense.

However, there are various issues with Vietnam. Large amounts of FDI have been pouring into that country for longer than India, so for many smaller businesses, sourcing suppliers who aren’t already fully engaged is a challenge. Its workforce is not in the hundreds of millions, so wages are rising fast. And its shipping routes may be seriously disrupted in case of war in the South China Sea.

Mexico is more relevant for American businesses. Its proximity to the States and relatively low costs are obvious selling points.

By the way, 9% still selected China as a critical destination to source from these days. It’s useful to note that for many SMEs, sourcing from China is now mainly back to normal following the end of zero-covid, especially for non-American businesses that are manufacturing products that are not classified as high-tech and/or could have security concerns (such as complex electronics including cutting-edge semiconductors, cameras, etc), which, frankly, includes the vast majority of B2B and B2C products.

This brings us to India…

India: Ready to capitalize?

As we wrote earlier in 2023, the USA became India’s number 1 trading partner in 21/22. So it shouldn’t come as a surprise that interest in near-sourcing and shoring there remains high. While near-shoring to Mexico or European/Europe-adjacent countries is attractive, when it comes to outsourced sourcing and assembly in Asia, South Asia’s giant, India, is attracting a lot of FDI as companies scramble to stake their claim to its growing industries.

A common worry, though, is: “Does India have the suppliers I need?”

Indeed, the graphic about potential barriers that importers see to adjusting their sourcing strategy to new countries like India shows that this is the top concern and competition to source from there, a lack of labor, expertise, infrastructure, and facilities or equipment also feature:

These are all genuine concerns for importers looking at a new sourcing destination, especially if they have been ‘spoiled’ by China’s very mature infrastructure, labor and sub-supplier pool, facilities, and more.

However, unlike Vietnam, India has a very large population (like China), a somewhat mature chemical industry, and is geographically closer to Europe. Supported by government policies that strongly support manufacturing expansion, the electronics, automotive, industrial machinery, and textiles industries are growing fast, including sub-suppliers of various components and materials. So, every month that passes, India becomes a more attractive proposition for importers because they can piggyback on existing suppliers. For example, an automotive sub-supplier of plastic enclosures likely has the capability, expertise, and facilities to produce enclosures for consumer electronics, as long as the volumes are interesting business-wise.

I went on a fact-finding mission to India in the summer of 2022 where my goal was to assess if there is already a decent pool of reliable material and component suppliers to choose from. I was pleasantly surprised as you can read here and here.

Need help with sourcing from India (or Vietnam)?

Concerns about if new destinations have reliable and suitable suppliers are normal. Our sourcing team, including India-based staff, can support you to find suppliers who are a great fit for your needs. Here’s the solution we offer: New Supplier/Factory Sourcing  – take a look and get in touch to discuss your needs and get a quotation if you like.