by Vijay Govindarajan and Gunjan Bagla

America’s relationship with the two most populous countries in the world, China and India, is undergoing a stark, rapid and perhaps permanent transformation. In April, a Pew Centre survey found that two-thirds of Americans say they have an “unfavourable” view of China; according to Pew it was “the most negative rating for the country since the Centre began asking the question in 2005.” But if China is falling in attractiveness, what is filling its place?

The answer, it seems, is India, where on the same day the Pew survey was released, Facebook, Inc. announced that it invested $5.7 billion into India’s largest telecom company, Reliance Jio, instantly valuing Jio to being among the top five companies in India, were it an independent entity.

That this investment happened during a time when both California and India were locked down with COVID-19-related “shelter-in-place” orders raised eyebrows in boardrooms and capital markets across the globe. Global deals between two large publicly traded entities typically require much travel, face to face contact and joint public appearances, but Mukesh Ambani, chairman of Reliance, made this major announcement all alone from his home.

While the Facebook-Jio deal is largely digitally driven, we believe that 2020 could mark an inflection point in the bilateral trade of goods between the United States and India. The shift can be attributed — at least in part — to the stresses from COVID-19 and the tariffs imposed on Chinese goods by the Trump administration. Following our article on India as an attractive manufacturing destination, we look at India as a sourcing partner for goods, becoming a partial replacement for imports from China.

Exodus From China

Companies in the United States, Canada, Europe, and Australia have been hit with supply chain shocks as the flow of materials from China was disrupted by the pandemic. CEOs are confidentially asking their supply chain teams to develop additional sources that are completely independent of China. In addition, in the United States there is pressure from employees who are wary of travelling to China, from customers who are concerned (rationally or not) about the safety of foods and other items from the country, from investors who worry greatly about over-dependence on any one country, and increasingly from politicians as well as State Department leaders who want companies to rapidly decouple from China.

More than 20 years ago, electronics companies from Taiwan led the way into mainland China, but now in the wake of COVID-19 as Bloomberg reported in March 2020, “electronics makers are past the point of no return in their gradual migration from China.” Chinese billionaire Cao Dewang, of Fuyao Glass Industry echoed a similar thought in response to the pandemic, saying that “the global industrial chain will reduce its dependence on China.”

Why India?

In 2019, the United Stated imported a staggering $452 billion of goods from China. Only five low-cost countries have GDPs larger than that: India, Mexico, Indonesia, Brazil, and Thailand. India is the biggest economy among these candidates and has the largest untapped potential for filling part of the supply chain vacuum that is created by exodus from China.

In a recent virtual meeting with the American Chamber of Commerce in India, Thomas Vajda, deputy assistant secretary for South Asia was quite blunt. “India can quickly become a favourable jurisdiction for more of the industrial activities that are happening currently in China,” he told them according to The Economic Times.

Dr. Mukesh Aghi, CEO of the trade group, U.S.-India Strategic Partnership Forum, declares “While U.S. companies are looking for alternatives to China, India becomes a natural destination. You have an English speaking workforce, highly skilled, the cost of labour is cheap and more important it is a growing market of 1.3 billion people whose disposable income is growing.”

Already, “The United States is India’s top trading partner, ahead of China today,” adds Nisha Biswal, President of the U.S. India Business Council (USIBC), which is part of the U.S. Chamber of Commerce in Washington. Indeed, she says, a lot of top American companies have their biggest or second biggest bases in India.

What Can You Buy From India?

Traditionally American executives have thought of India as a source of spices, textiles, apparel, jewellery and handicrafts.

While India does export billions of dollars of these products to the United States, India has moved much further up in the value chain. The cabin of Marine One, the presidential helicopter is fabricated for Lockheed Martin’s Sikorsky unit in India, according to Aghi and he goes on to add “The Ford EcoSport is manufactured in Chennai, India for the U.S market.” NASA’s Jet Propulsion Laboratory in Pasadena, California is collaborating with the Indian Space Research Organisation on the most expensive imaging satellite ever to be launched, NISAR. This probe will be built and launched in India and will study hazards and global environmental change more accurately than ever before.

India exports shrimp, processed foods, and agricultural products to the United States. Aghi says that 3.2 million Apple iPhones built in India will be exported from the country. Biswal of USIBC asserts that India can supply medical devices, energy efficient green transportation, power semiconductors, switches, and rectifiers for American needs. India already provides almost 40 percent of the generic drugs sold in the United States, produced at factories inspected and approved by the U.S. Food and Drug Administration.

We call this phenomenon “India Inside,” where much of what is imported from India goes unnoticed by both American consumers and the media, but is nonetheless crucial to the fabric of the U.S economy. In particular we are confident that factories in India can scale up volume production to meet the domestic Indian, American, and global demand for devices, disposable and drugs to diagnose, treat and vaccinate against COVID-19.

Unlike export-driven China, India’s companies grew rapidly by serving pent-up domestic demand since the economy liberalised in 1991. In the process, Indian managers and entrepreneurs acquired the management skills and quality standards to expand globally, but they first turned to markets in the Middle East, ASEAN, Africa and Eastern Europe.

According to detailed current data from India’s Ministry of Commerce, Indian companies export billions of dollars each in categories as diverse as: furniture, medical and surgical instruments, electrical machinery, ships and boats, vehicles, boilers, parts made of plastic, steel and aluminium, organic and inorganic chemicals and more. We believe that many of these Indian suppliers are ready for first world markets. American companies can source these and other goods from their Indian corporate counterparts; unlike in China, these suppliers are not affiliated with the government.

China Plus One

How do you go about sourcing from India? We recommend an incremental approach in bringing on Indian suppliers; we call this “China Plus One.” Carefully select some low-risk or high-reward programs to try out in India, while maintaining your Chinese base. Work with multiple Indian partners as you get started. Very soon you can fine tune and amplify your successes.

What you learned in order to succeed in China may not serve you well in India, so it is important initially to approach India with humility and curiosity. Indians love America and American culture but react strongly to what they perceive as American arrogance. Despite Prime Minister Narendra Modi’s efforts to improve the ease of doing business, India still poses obstacles due to practices relating to both land and labour. Foreign companies wishing to build their own factories occasionally feel discouraged by these factors. But here are some ways that most American companies can overcome these challenges:

First, in order to leverage India as a source of supply, most American companies don’t need to invest in land and buildings, and they don’t need to hire employees in India. In our experience it is often best to start out as a buyer than as an investor. This gives more flexibility, reduces overhead, and limits initial risk.

Second, keep in mind that India is a diverse country with a federal structure. Many rules that affect industry vary from state to state. Some of India’s 28 states are more eager to help local and global entrepreneurs than others. The states of Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Tamil Nadu, and Telangana are generally reputed to be friendlier toward local and global companies. But for specific industries and sectors, it is fine to do business in other states, as long as you do your due diligence. One of us (Bagla) has successfully taken clients to Uttar Pradesh for high-end floor coverings, such as rugs, and to Himachal Pradesh and Uttarakhand in the Himalayan foothills for personal care and consumer health products.

Third, when you do business in China, you know you need a language translator. While Indians do speak English, you still need a cultural interpreter and business guide helping you. While the U.S. Department of Commerce helps American companies to sell to India, they are not set up to guide companies who want to source from India. Someone inside your company who has current experience in doing business with today’s India is ideal (and not just any employee who just happens to be of Indian origin). Alternatively you can turn to external trusted advisers who specialise in U.S.-India business.

Finally, accept that India is a messy democracy and that the flow of goods can still be a challenge. Success in sourcing from India takes time and patience. Mukesh Aghi of USISPF is optimistic: “As new roads are built, harbours are expanded, and airports are enlarged, logistics will get more efficient.” In the meantime you may find that Indian companies are quite enterprising and can often encapsulate these complexities from their overseas customers.

Today, India permits 100% foreign direct investment in most sectors, so you don’t have to share your intellectual property or trade secrets with a local partner. Many American companies have had factories in India for decades and some have invested recently, such as Amway’s $100 million plant in Tamil Nadu.

As one of the top Asia-facing executives at a major American retailer put it to us, “Given amount of dependence on China, the only alternative country that can have the scale, the skills and the space to service American demand effectively is India.”