Investing in India: View from Taipei

There is opportunity but competition is stiff and India needs to liberalise trade policy

In Taipei earlier this month, I had the opportunity to interact with academics, think tanks, and business community representatives on the China plus one global value chain (GVC) diversification strategies and India’s potential as an alternative investment destination, particularly in the semiconductor and chip manufacturing sector. From the discussions, I was left in little doubt that there was a positive interest in the Indian economy, not just because of its good growth performance but perhaps, more importantly, owing to the propitious global and regional conditions. These include the intensification and persistence of the US-China trade and technology tensions and competition over the last five years, the geoeconomic fragmentation following the Ukraine crisis, the trend of friend-shoring in GVC diversification strategies, and India’s strategic placement in the Indo-Pacific. For Taiwanese firms, in addition, the growing regulatory pressure and ruling party control on large businesses within China is an added “push” factor for relocation. Simultaneously, enhanced bilateral relations with India over the past few years is a significant “pull’’ factor. However, these factors do not add up to a decisive advantage for India. 

For more than a decade, Vietnam has been the first choice for most large companies in their diversification strategy beyond China. The distinct advantage cited in the case of Vietnam is its participation in a network of free trade agreements (FTAs) as a member state of the Association of Southeast Asian Nations (Asean), with the European Union (EU), and mega regional trade agreements like the Regional Comprehensive Economic Partnership (Rcep), and the Comprehensive and Progressive Trans-Pacific Partnership, along with concomitant reforms in critical areas such as land and labour markets, and foreign investment. As regards India, though recent progress with FTAs is noted, the disappointment among regional investors due to its withdrawal from the Rcep after reaching the final stage of negotiations is apparent. It is also evident that India’s FTAs with the United Arab Emirates (UAE) and Australia are far less relevant than the “under negotiation” FTA with the EU to the export-oriented Taiwanese investors. This aspect acquires significance given that increasing production costs, including wage costs, potential infrastructure deficiencies, and a shortage of available land, are all contributing to a developing perception that Vietnam may soon reach a point of saturation in absorbing foreign investments and shifting supply chains. An early conclusion of the FTA with the EU will, therefore, help significantly raise India’s investment appeal. 

Besides Vietnam, comparisons are also drawn with other proximate, regionally integrated Southeast Asian economies. Thailand and Malaysia, for example, are considered viable alternative locations for shifting supply chains by the Taiwanese electronic majors. While packaging firms are moving to Thailand, assembly units are being relocated to Malaysia, which as the earliest Southeast Asian economy to integrate with the global and regional electronics value chains has the experience and capacity to absorb relocating foreign investments. Citing these examples, prospective Taiwanese investors underline the need for India to not be fixated on foreign investments at the higher end of the value chain, notably advanced manufacturing/ fabrication factories for semiconductors, as it may not be feasible in the absence of a prior supply chain ecosystem in the country. Semiconductor production is not restricted to a single fabrication factory, but is a dense and complex web of interconnected production units that may be impossible to replicate in India in the near future. Setting up a fabrication unit is also beyond the capabilities of Taiwanese firms like Foxconn or Pegatron, which are essentially contract manufacturers following lead manufacturing companies. In this context, while the US-based Micron Technology’s recent announcement to set up a semiconductor packaging facility in India was cited as signalling a more realistic goal set by our policymakers, the inability of a Taiwanese major like Foxconn to conclude a joint venture with Vedanta is regarded as dispiriting for other relatively smaller Taiwanese electronic firms.

Among extra-regional emerging market economies (EMEs), Mexico is viewed as a strong contender in the friend-shoring trend of GVCs, particularly with the additional advantage provided by the US-Mexico-Canada Agreement under the US Inflation Reduction Act. Eastern European countries such as the Czech Republic, well integrated with the European GVCs, are also considered viable options. However, there is some concern over the spillover effects of the war in Ukraine and the developing regional strategic context. While this could be to India’s advantage, the window of opportunity may be short-lived.

All the competing EMEs are also regarded as relatively more open and export-oriented compared to India. This is evident, as was stated, in India’s relatively higher average most favoured nation (MFN) tariffs in the manufacturing sector as a whole and on specific inputs in the electronics sector, recent  announcement of an “import management system” in some segments, as well as tax policies with regard to foreign investments. Given the networked nature of production, such policy measures, even if strategically appropriate, tend to discourage intermediate-stage Taiwanese firms that remain nervous of relocating their supply chain operations to India. In comparison, a relatively more open and predictable business environment in competing EMEs gives them a competitive edge.

Finally, while the size of the Indian market is a positive attribute, it has limited value as an argument for attracting foreign investments. It is widely believed among potential Taiwanese investors that while the Indian market is large, it is very difficult to attain a permanent customer base, and ensure profits and reasonable margins. In an extremely price-sensitive Indian market, it has been difficult for smaller investors to sustain themselves for long before competition from local producers catches up or the inability to comprehend local work culture and demand patterns begins to impinge upon profit margins. The exit of Wistron in the iPhone assembly segment is often viewed from this perspective. The success of Asus, the Taiwanese tech giant, in the affordable price range in India, though noted, is considered to have limited spillover implications given its focus on a small niche gaming segment in the overall personal computer market. Significantly, the only Taiwan-based company that has achieved success in India is Apache, manufacturing shoes for the global brand Adidas in the low-skill, labour-intensive sector.

In the high tech, semiconductor industry, therefore, Taiwanese investments will only come after India successfully attracts global lead firms. Furthermore, India will need to enhance its export orientation and trade openness.

The writer is professor, School of International Studies, JNU, and author of India’s Trade Policy in the 21st Century, Routledge: London, 2022. The views are personal.

1.Sponsored by  SIS, JNU and Taipei Economic and Cultural Centre, New Delhi