L&T, Siemens: Nine Indian firms to gain from $550-bn Chinese export shift

Larsen & Toubro (L&T), Siemens, Whirlpool and Havells India are among the nine Indian companies that are likely to benefit from an escalation in trade tensions between the US and China, as the latter looks to shift manufacturing out of its country, says a recent report by Credit Suisse. 

The report, co-authored by Neelkanth Mishra, their co-Head of Equity Strategy, Asia Pacific and Equity Strategist, India, along with Akriti Swaroop and Abhay Khaitan, estimates $350-550 billion worth of exports to move out of China with the major impact likely to be felt now, and could be even higher if the other countries improve absorption capacity.

“In the near-term, tariffs would only raise prices in the US and shift exports from China to other countries (possibly at lower prices). But over the next five years, we estimate that as the Chinese manufacturing workforce, already down 20 million since 2015, shrinks a further 9-15 million. The shift would be in labour-intensive sectors: apparel and textiles, electronics assembly, footwear, toys and furniture,” the report says.

To understand and estimate impact of trade war, Credit Suisse surveyed 100 global firms from 13 countries (2019 sales of $1 trillion), and dived deep into trade data, macro-economic trends (including demographics) and sectoral drivers.

 

Findings suggest that most firms surveyed would now prefer to shift manufacturing out of China even if the US reverses the tariffs. High cost and low availability of labour, manufacturers said, were the two key reasons to shift, besides incentives offered by other countries such as tax holidays. 

“Nearly two-thirds of the firms surveyed have already started to diversify production away from China, or are planning to. 91 per cent of these companies said they would do so even if the US were to reverse the tariffs, confirming the hypothesis that there is a structural shift away from manufacturing in China,” the report said.

Geographically, most firms plan to move production to Vietnam and India, followed by Taiwan, Mexico, the European Union (EU), Thailand and Indonesia. “Among countries, Vietnam should gain the most; Bangladesh a pure-play on apparel, and India has seen good import substitution in electronics but is struggling to grow apparel exports,” Credit Suisse’s findings suggest.

Brace for impact

That said, Credit Suisse expects the real impact of trade war to be felt now. The first three lists (of tariffs) mainly consisted of intermediate goods sold to corporates and around 80 per cent of the finished goods sold to consumers come under tariffs only now, Credit Suisse believes. 

Policy uncertainty aside, one reason production has not yet shifted out of China, Credit Suisse believes, is that capacity there is also for the growing domestic demand and other non-tariff-affected export markets.

“The few such goods in earlier lists saw prices rise post the duties, with lower demand, and shifts in production. The pressure to shift manufacturing away from China is likely to rise now,” the report suggests.