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Diversification from China won’t happen overnight; infra a big hurdle for India, says Moody’s Michael Taylor

Updated : August 12, 2020 02:59 PM IST

India needs to upgrade infrastructure, its roads and ports, to tap opportunities from large multinational companies looking to diversify their supply chain in the backdrop of the COVID-19 outbreak, said Michael Taylor, managing director and chief credit officer (CCO) for Asia Pacific Region at Moody’s. Poor-quality infrastructure is a big hurdle for India as the country aims to encourage local manufacturing and it is a big factor when countries consider diversification, Taylor added.

“In terms of human capital, in terms of having a highly skilled workforce, that is obviously very important in terms of existing productive capacity which allows companies to build on that existing productive capacity, but probably most important of all is infrastructure and this is an issue that from a sovereign ratings perspective we have identified as a major issue for India over many years now. The need to upgrade infrastructure, the need to improve roads and ports is very important and that is really where the opportunities are going to lie in future—to see some of the opportunities created through this diversification,” Taylor told CNBC-TV18.

Taylor also believes that the shift from China that was already underway will be further accelerated due to COVID-19.

“If you go back a couple of years to the start of the US-China trade tensions, already at that time companies were looking at the option of diversifying out of China and that has been going on for the last couple of years. A lot of CEOs will talk about a China plus One strategy, moving productive capacity out of China elsewhere in the region. What we expect from COVID is that it is going to give that trend a bit more of a push. So we will see this trend accelerating over the next couple of years,” he said.

Taylor, however, highlighted that manufacturing diversification out of China will be a very gradual process and won’t happen overnight.

“It is a long term trend, it is not going to happen overnight. There are a lot of factors which go into that decision about location and many of those factors are mean that China is going to continue to have a dominant role in manufacturing over the next few years at least,” he said.

Furthermore, it is important to remember that a lot of capacity in China is for the Chinese market, Taylor noted.

“We have seen quite a strong rebound in terms of economic activity, especially manufacturing activity in China. But something that is important to bear in mind as well is that a lot of that manufacturing is no longer for export. China’s domestic market has grown very substantially and it is now a very important market for a lot of the multinationals that are in China because they are manufacturing not necessarily for export, but for the China market. So, as we see the recovery in China, a lot of the production that is created in China is going to the China market,” he said.

Taylor also believes that countries like Thailand, Vietnam, Taiwan, and Malaysia stand to benefit the most.

“Countries like Thailand and Vietnam have a head start. They are close to China in the sense of a lot of productive capacity that exists in those countries already is very similar to the productive capacity that exists in China. They have similar kinds of wage costs, maybe slightly lower than China nowadays, but the wage costs are closer and in terms of infrastructure. So, it is relatively easy in a country like Taiwan or Malaysia to get your products to port, put them on a ship and ship them off to the final destination,” he said.

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