India-China Border Conflict:
Implications for Global Supply Chains

India-China Border Conflict:
Implications for Global Supply Chains

Executive Summary

  • Bilateral tensions have escalated between China and India following a border clash in the Himalayan Galwan Valley on June 15 that killed 20 Indian soldiers. The border standoff has triggered a wave of anti-China sentiment in India with calls for a nationwide boycott of Chinese goods and renewed efforts to promote domestic manufacturing alternatives in order to reduce India’s supply chain dependence on Beijing.
  • In the midst of heightened tensions, the Indian government is planning to impose tariffs and stricter quality control rules targeting at least 370 products that can be locally produced and implement a severe lag in customs clearance for shipments originating from China, Hong Kong, and Macau across all Indian ports as well as air cargo terminals. In retaliation, imported goods from India have also been held back by Beijing at Hong Kong and Chinese customs. 
  • 70 percent of the active pharmaceutical ingredients (APIs) that India needs to formulate generic drugs come from China. While no disruptions have been reported amid the new customs regulation, the government plans to roll out an ambitious scheme to support the domestic APIs and intermediates production in the coming years. Any new regulatory changes at present may disrupt the global pharmaceutical supply chain amid the pandemic.
  • Other major sectors — including technology, automotive and mobility, engineering and manufacturing — have been similarly impacted by customs clearance delays and the threat of heightened tariffs despite India continuing to be highly dependent on China for finished goods and critical components that are imported into India for assembly of goods. These items include automotive parts, telecommunications equipment, semiconductors, and heavy industrial materials such as aluminum and iron and steel. 
  • Shippers with cargo destined for India, China, and Hong Kong in the coming weeks may experience shipment delays and port congestion due to the scrutiny of the country of origin. There is a potential for carriers to bypass ports, and as a result, manufacturers with suppliers based in India and China should plan inventories to ensure that production schedules can be met in case port congestions persist and further stringent customs regulations or tariffs on Chinese imports are imposed.

Background

Bilateral tensions have escalated between China and India following a border clash in the Himalayan Galwan Valley in eastern Ladakh on June 15 that killed 20 Indian soldiers. This is the first deadly border clash between the two neighboring countries in more than 40 years. The border standoff has been happening since early May at various points along the 3,500 kilometers (2,200-miles) stretch of the India-China border, most of which remain demarcated.

The border standoff has triggered a wave of anti-China sentiment in India with calls for a nationwide boycott of Chinese goods and efforts to promote domestic manufacturing alternatives while reducing India’s supply chain dependence on Beijing. China remains India’s largest trading partner with annual bilateral trade worth USD 92 billion (EUR 81 billion) and accounts for 14.4 percent of India’s imports as a major supplier for products such as smartphones, telecommunications equipment, plastics, metals, chemicals, and active pharmaceutical ingredients (APIs).

In the midst of heightened tensions, the Indian government under Prime Minister Narendra Modi has taken several economic retaliatory measures against Beijing, ranging from reported customs clearance and ports delays to possible tariffs and non-tariff regulatory barriers targeting Chinese goods. Over recent weeks, reports surfaced over plans to impose tariffs and stricter quality control rules targeting at least 370 products that can be locally produced and to implement a severe lag in customs clearance for shipments originating from China, Hong Kong, and Macau across all Indian ports. The latter move has held up shipments for Taiwan electronic components manufacturer Foxconn and U.S. tech multinationals Cisco, Dell, Apple, and automaker Ford Motors.

In this special report, Everstream Analytics takes a closer look at the implications that growing calls for domestic protectionism in India could have on global manufacturing and supply chain operations in India as it seeks to break its reliance on Chinese imports. It examines the feasibility of facilitating greater supply chain shifts and the various sectoral impacts the anti-China boycotts could have on manufacturers and suppliers based in India should the Modi administration impose retaliatory economic measures against China to appease rising nationalist sentiments. 

Make in India: Domestic Protectionism and Self-Reliance?

First introduced in 2014, the Make in India initiative has been heralded by the Indian government under Prime Minister Narendra Modi as a cornerstone program aimed at boosting domestic manufacturing, promoting indigenous innovation, and reducing supply chain reliance on foreign imports. Over recent years, the Modi administration has made concerted efforts to encourage global manufacturers to relocate their facilities or move production lines to India through various policy and tax incentive schemes — with the partial aim of luring manufacturers from China and elsewhere.

The push for greater self-reliance comes as the COVID-19 pandemic continues to severely cripple Indian manufacturing operations and supply chains. As was the case in other countries around the world, the COVID-19 pandemic highlighted severe vulnerabilities as global supply chains were left exposed by an over-reliance on sourcing key materials from Chinese suppliers in critical industries such as medical devices and equipment, auto parts, consumer electronics, and other strategic commodities. In India, industrial production fell by -55.5 percent in April 2020 (see Figure 1 below), marking its sharpest drop ever, as COVID-19 induced lockdowns froze most of the country’s economic activities as manufacturing output shrunk by -64.2 percent and exports plunged for petroleum (-68.5 percent), electronic goods (-45 percent), and engineering goods (-24 percent).

Figure 01: Indian merchandise imports and exports, 2018 – 2020. Source: Everstream Analytics, DHL

In light of growing calls for economic measures to be taken against Beijing, a central challenge for Delhi will be the extent to which manufacturers and suppliers based in India will be successful in weaning off its reliance on Chinese imports within their supply chains at a moment of severe instability for industrial production. Although China accounts for only 5 percent of India’s exports, Chinese imports remain essential for maintaining India’s supply chain operations at home with the vast majority of major components still being primarily manufactured in China before being imported into India. Appendix A highlights the main sectors that remain heavily dependent on China, with Chinese imports making up 39 percent of India’s overall imports for electrical machinery, 31 percent for industrial machinery, and 23 percent for aluminum and other related articles. 

Anti-China Boycotts and Retaliatory Measures

Anti-China boycotts

The desire for greater supply chain independence from China has been reignited through nationalistic calls for an anti-China boycott led by the Confederation of All India Traders (CAIT) urging the public to not buy, sell, or promote Chinese made goods as part of its drive to boycott and reduce reliance on China. Anti-China rallies have broken out sporadically in New Delhi, Calcutta, Ahmedabad, and Greater Noida including protests targeting Chinese-brand manufacturers and companies with a significant portion of Chinese-origin goods amid rising political tensions. For instance, e-commerce giants Amazon and Walmart’s Flipkart have reportedly agreed to compel merchants to start displaying “country of origin” for all of its products sold online in India in a move widely regarded as a measure to single out goods imported from China.

The calls for an anti-China boycott in India comes as Beijing itself has previously been repeatedly accused of deploying its own form of ‘boycott diplomacy] when responding to more controversial disputes by leveraging its billion-plus consumer market as a tool to punish rival economies. However, the ongoing tensions with India now threaten to pose considerable risks for Chinese companies with overseas ambitions, although it remains unclear to what extent it will impact sales or manufacturing operations in India. Chinese smartphone brand Xiaomi has been forced to cover its stores with ‘Made in India’ logos due to rising anti-China sentiments despite having 65 percent of components in its smartphones and smart televisions sourced locally.

Another Chinese smartphone maker, Oppo, which supplies for Realme and OnePlus in-house, was targeted through an anti-China protest on June 20 that saw protesters gather outside its Greater Noida factory to burn a Chinese flag and call for the boycott of Chinese goods. While production was not affected, the factory is already running with 30 percent capacity permissible under the nationwide COVID-19 lockdown. If further protests continue particularly after the lockdowns are lifted, production and sales could be affected. 

Figure 02: Country-level risk exposure score for political violence in India. Source: Everstream Analytics

Based on Everstream Analytics’s database of supply chain risk exposure indices, Figure 2 shows a risk exposure index that measures the likelihood of political violence in India, with a higher score signifying a greater probability of civil unrest occurring — one that could result in protests or riots that cause asset damages and disruptions to business operations. The score of 75 (on a scale of 0 to 100) for civil unrest suggests that there is a high probability of it occurring and to a relatively large extent. These risks may be exacerbated by the current developments with China.

Customs delays

In response to the border tensions and in an effort to lower its dependence on imports from China, importers to India were recently notified of potential delays in clearing Chinese shipments. While there have been no verbal or written announcements made by the customs authorities or the Central Board of Indirect Taxes and Customs (CBIC), the Indian customs are effectively undertaking extra physical inspection on all consignments originating from China at all ports in India. 

The Port of Chennai, a critical import hub for auto and tech components, was one of the first ports to opt for such closer scrutiny of Chinese imports. In retaliation, imported goods from India have also been held back by Beijing at Hong Kong and Chinese customs. 

According to the Federation of Indian Export Organizations (FIEO), there have been delays at Chennai and Mumbai ports for customs clearance adding pressure to the cost of imports. The Indian customs organization has categorized goods originating from China as ‘essentials’ and ‘non-essentials’ and the containers with non-essentials, which includes items like toys and electrical equipment have reportedly been given less importance for inspection. With the delays in customs clearance, the demurrage charges will increase and offset the gains from China imports, and eventually discourage importers to change their import pattern from China. 

According to local media sources, the Indian customs have not initiated the inspection process, which may subsequently affect the existing port congestion stemming from the COVID-19 related lockdown. Moreover, there is still a manpower shortage at the ports due to the pandemic outbreak, thus, any new regulation may potentially cause more delays in transit and clearance times of goods.

Despite this, reports on June 29 suggested that India is also considering expanding its custom inspection of imports from Chinese companies based in the Association of Southeast Asian Nations (ASEAN) countries. According to reports, some Chinese companies are setting up new entities in ASEAN countries like Vietnam in order to re-label and export goods to India under the free trade agreement with ASEAN.

Trade restrictions

India is reportedly set to impose stringent quality control measures and higher tariffs on at least 370 products that can be produced locally in retaliation over the border dispute. These products, which come primarily from China, would include solar equipment and components, chemicals, steel, electronics, heavy machinery, furniture, industrial machinery, auto parts, air conditioners, rubber articles, glass, metal articles, pharma, fertilizer, and plastic toys. Delhi is also working on a list of alternative countries to China that could be suppliers of critical components that cannot be manufactured domestically.

The state-run Bureau of Indian Standards (BIS) is planning around the 5,000 technical regulations aimed at providing a boost to domestically-made industrial goods, telecom products, electronics, steel and chemical by clamping down on cheap imports and stemming sub-standard imports — most of which come from China. India’s Trade Ministry is also separately evaluating non-tariff measures to ensure that Chinese imports conform to World Trade Organization (WTO) rules, which could result in more inspections, product testing, and enhanced quality certification requirements. 

Cyber-attacks

Officials from Maharashtra Cyber, the state’s cyber security bureau, allege that hackers based in China have attempted at least 40,300 cyber-attacks on India’s information technology sector and banking sector in five days from June 18-23 amid rising bilateral tensions. Denial of service (DoS), phishing, and hijacking of Internet Protocol attacks are believed to have taken place while allegedly fraudulently impersonating Indian government agencies, departments, and trade associations. 

Sectorial Impacts

Everstream Analytics outlines below the potential impact that global manufacturers and supply chains across major sectors may face as India places a greater emphasis on bolstering domestic manufacturing and reducing reliance on Chinese imports. 

Life Sciences and Healthcare 

The Indian pharmaceutical industry is the third-largest in the world by volume as the country accounts for 60 percent of the total drugs and medicines exported globally. In order to formulate drugs, the Indian pharmaceutical industry imports 70 percent of its active pharmaceutical ingredients (APIs) and inactive ingredients requirements from China. According to the China Chamber of Commerce for Import and Export of Medicines and Health Products (CCCM), a total of USD 5.65 billion (EUR 5.02 billion) worth of APIs were exported to India in 2019. This accounts for almost 17 percent of China’s total API exports and pharmaceutical intermediates for drugs such as penicillin, cephalosporins, and hormones. In terms of medical device equipment, 11 percent of India’s medical devices including thermometer, cotton wool, electrocardiograph machines, and catheters are imported from China.

If the anti-China boycott movement is prolonged, it may impact the domestic pharma companies in the immediate term as the sector is unlikely to find alternatives quickly, especially during the COVID-19 outbreak. Moreover, the new customs clearance procedures may delay temperature sensitive APIs, which may impact the production time at the plants and subsequently affect India’s pharma export sector.

In its effort to be more self-reliant from China, the Indian government is reportedly planning to roll out a new policy scheme called Production Linked Incentive (PLI) by the end of 2020 with an incentive of USD 913,272 (EUR 812,218) to support domestic API and intermediates production over the course of the eight years. The scheme will reportedly provide grant-in-aid to three bulk drug parks.

Although the over-dependence of India’s pharma industry on Chinese APIs has exposed the fragility of the supply chain particularly during the early stages of the COVID-19 outbreak in China, it may not be easy to abruptly eliminate reliance on China’s pharma supply chain.

The pharma industry in India will need at least four years or more to build the local capacities and capabilities needed to accommodate a similar production scale to that of China’s pharmaceutical industry, as it involves high-energy microbial fermentation, as well as high water and electricity consumption. Moreover, other factors like pricing and quality need to be taken into account, if India were to cut off the Chinese API supplies and enter into the global market, where China already has a stronghold.

Amid the tension, a few Chinese pharma companies such as Shandong Luning Pharmaceutical (SLP) have confirmed that its supplies to India have not been affected. India’s stance on ‘Make in India’ may be a double-edge sword, because even without India, China still has other export destinations such as Japan, South Korea, Europe, and the U.S. with 9,000 API manufacturers spread across China.

Technology

India’s tech manufacturing sector is facing severe disruptions with smartphone electronics, semiconductors, and telecommunications equipment that are dependent on imports of critical Chinese components being targeted through unofficial cargo and customs clearance delays across all Indian ports. The India Cellular and Electronics Association (ICEA), which represents Western tech multinationals and Chinese smartphone makers, confirmed that all Chinese-origin imports were subject to adverse action without prior warning — with some goods that were already cleared and loaded on trucks being prevented from leaving the ports and recalled for further examination.

Appendix B illustrates a continued heavy dependence on Chinese suppliers for critical parts and components ranging from semiconductors to telecommunications equipment imports that are largely considered essential for many manufacturing sectors to operate. China makes up a considerable portion of India’s imports for critical semiconductor components including electronic integrated circuits (76 percent) and diodes, transistors, and other similar semiconductor devices (62 percent), as well as printed circuits (45 percent). The same can be said for India’s imports of consumer electronics components with 51 percent of microphones, 42 percent of telephone sets, 35 percent of monitors and projectors coming from China. 

In terms of smartphone electronics, India recently surpassed the U.S. to become the world’s second-largest market with Chinese smartphone brands including Xiaomi, Vivo, Realme, and Oppo now making up around 86 percent of the Indian market. As part of the Modi administration’s efforts to reduce India’s reliance on Chinese imports, Delhi launched a USD 6.65 billion (EUR 5.91 billion) plan to boost electronics manufacturing and offered five global smartphone makers to establish or expand domestic production in the country. 

Automotive and Mobility 

Like that of other major manufacturing sectors, India’s auto industry stands to be heavily impacted should further turbulence arise with around 25 percent of the country’s auto components being imported from China. Many of these critical components, which range from drive-axles to engine and transmission parts, are difficult to source elsewhere immediately as companies based out of China continue to be leading suppliers for the auto industry in India. 

India’s strong reliance on Chinese auto parts imports is outlined in Appendix C. China remains India’s main source for critical auto component imports such as chassis (78 percent), road wheels (44 percent), and steering wheels (36 percent), and suspension systems (21 percent), as well as aluminum plates (84 percent) and stainless steel tubes (84 percent). Major Indian automaker Maruti Suzuki has warned that a blanket ban or raising tariffs on Chinese products could have serious effects on the domestic industry, citing that Chinese imports were necessary for manufacturing vehicles and that its vendors require it more than the manufacturers.

Meanwhile, Chinese automakers with operations in India have not been spared from the business impacts of the border dispute. Maharashtra State has reportedly put on hold an agreement that would allow Chinese automaker Great Wall Motor to operate an auto plant vacated by General Motors. Great Wall spent INR 37.7 billion (USD 498 million; EUR 442.9 million) on a factory in January and planned to start selling cars made in India next year. State authorities are also intending to freeze Chinese operations involving electric buses and machinery. 

Figure 03: Automotive facility clusters in Chennai and surrounding areas. Source: Everstream Analytics

Chennai, which is home to India’s second-largest container port, has seen a sharp rise in customs clearance delays and unspecified inspections at its port and air cargo complexes that handle critical auto components and telecommunication equipment shipments from China. The retaliatory measures are likely to have a major impact on Chennai which hosts a large pool of automotive suppliers and Original Equipment Manufacturers (OEMs). Figure 3 provides a snapshot into the automotive manufacturing and supplier locations concentrated in Chennai and its surrounding areas which include domestic auto parts suppliers Rane (Madras), Sundram Fasteners, and Brakes India.

Retail and Consumer

The Indian textile and apparel industry is still reeling from the impacts of the shutdowns in China due to the COVID-19 pandemic as India depends on the supply of raw materials from China. India imports about USD 460 million (EUR 408 million) worth of synthetic yarn and USD 360 million (EUR 319 million) worth of synthetic fabric from China annually. Other imports include buttons, zippers, hangers, and needles, which are worth USD 140 million (EUR 124 million) as India does not have a domestic supply base to meet the demands for these raw materials.

The ‘boycott China’ movement may prompt Indian garment manufacturers to look at other alternatives, including local sourcing, which may increase the cost of the finished goods by 3 to 5 percent. In addition, identifying vendors in such a short time can take a toll on lead times, quality, and cost of production. Meanwhile, China has announced that it will begin to offer non-tariff barriers for 97 percent of trade items from Bangladesh, one of India’s textile competitors, effectively from July 1. The new change may replace some of India’s textile exports to China, further worsening trade between the two countries.

As calls for boycotting Chinese products gain momentum, the Indian textile industry is searching for low-cost alternatives to source raw materials. The Apparel Export Promotion Council has reportedly been promoting local production of goods, which are normally imported from China.

Outlook

Whether India will be successful in realistically separating its supply chains from China and boosting domestic manufacturing alternatives remains to be seen. For domestic and multinational firms alike with operations in India, the latest border dispute between China and India adds to greater uncertainty at a critical moment in which Indian manufacturing activity and industrial production has seen historic drops amid the COVID-19 crisis. 

China continues to play an outsized role in India’s economy, with Delhi remaining heavily reliant on Chinese manufacturers and suppliers for imports across several essential sectors including life sciences and healthcare, automotive and mobility, technology, engineering and manufacturing, chemicals, and energy.

While the short-term impact of an anti-China boycott in India threatens to become severe, it could act as an additional catalyst for facilitating a broader longer term shift towards reducing supply chain dependence on China as India looks inward for domestic alternatives and through reshoring initiatives. The combined impact of the COVID-19 pandemic and global trade wars have highlighted the severe risks facing global supply chains of becoming overly reliant on a single country for critical products — with India being no exception. 

Recommendations

  • Keep track of regulatory updates: Organizations should keep abreast of the situation and closely monitor forthcoming developments and regulatory changes in India and potentially from China that may disrupt production lines and shipment delivery. Coordinate with in-country material suppliers, freight forwarders, and regulatory authorities to understand clear guidelines and exemption of certain goods such as medicines and its formulations, which are sensitive to time and temperature. Customers can also monitor developments on Everstream Analytics to acquire on-the-ground intelligence on directives issued for ports that may impact the clearance of goods, and the latest information on service cancellations to assist in making informed decisions.
  • Anticipate port congestion or shipping schedule disruptions: Customers should obtain visibility of ocean freight cargo scheduled to transit via Indian and Chinese ports in the coming weeks. Shipment delays can be expected, which may subsequently affect production schedules for manufacturers based in India and those that rely on supplies from the country. Supply chain managers should act now to secure cargo capacity for critical goods for the aforementioned sectors. 
  • Plan ahead with inventory:  Organize and plan the current inventory levels to ensure that production schedules can be met in case critical sourcing locations are disrupted by prolonged port congestion and further imposing of stringent customs regulations or tariffs on Chinese imports. In light of COVID-19 and the possibility of extended lockdown measures to contain the outbreak, organizations are advised to consider planning inventory in diverse locations to minimize the risk of not being able to quickly access or ship the inventory when needed.
  • Reduce concentration of risk: The political risks posed by the anti-China boycott in India combined with the impact of the COVID-19 pandemic and global trade wars have exposed the dangers of being overly reliant on any single country for critical supplies and materials. While shifts in manufacturing supply chain will not happen overnight, customers will need to consider the risks of concentrating an overwhelming majority for their production or supply networks in a single country amid continued global turbulence. 

Appendix

PRODUCT CATEGORYHS CODEVALUE IN 2019, USD THOUSANDAPPLICABLE SECTORSCHINA’S SHARE IN INDIA’S IMPORTS (PERCENTAGE)
Electrical machinery and equipment and parts thereof8519,974,394 Technology39
Machinery, mechanical appliances, nuclear reactors, boilers8413,873,013Engineering and Manufacturing31
Organic chemicals298,232,332Chemicals, Life Sciences and Healthcare40
Plastics and articles thereof392,824,126Consumer, Retail, Chemicals19
Fertilizers312,088,322Agriculture, Chemicals29
Articles of iron or steel731,696,866Engineering and Manufacturing, Automotive and Mobility, Aerospace34
Vehicles other than railway or tramway rolling stock, parts and accessories thereof871,282,599Automotive and Mobility24
Iron and steel721,261,533Engineering and Manufacturing, Automotive and Mobility, Aerospace11
Aluminum and articles thereof761,037,515Engineering and Manufacturing, Automotive and Mobility, Aerospace23
Appendix A: Share of Chinese Imports in India for Selected Sectors. Source: ITC Trade Map, Everstream Analytics
PRODUCT CATEGORYHS CODEVALUE IN 2019, USD THOUSANDCHINA’S SHARE IN INDIA’S OVERALL IMPORTS (PERCENTAGE)
Telephone sets (including telephones for cellular networks 85175,648,34442
Electronic integrated circuits85423,593,45776
Automated data-processing machines84713,339,26149
Diodes, transistors, and other similar semiconductor devices85412,003,76862
Electric accumulators8507966,68527
Electric transformers, static converters8504913,46041
Printed circuits8543294,75845
Appendix B: Selected Indian Tech Manufacturing Imports From China. Source: ITC Trade Map, Everstream Analytics
PRODUCT CATEGORYHS CODEVALUE IN 2019, USD THOUSANDCHINA’S SHARE IN INDIA’S OVERALL IMPORTS (PERCENTAGE)
Plates, sheets and strip, of non-alloy aluminum760611147,49384
Tubes, pipes and hollow profiles, seamless, of circular cross-section, of stainless steel730449110,33884
Parts and accessories of bodies for tractors, motor vehicles for the transport of ten or more87082993,78722
Steering wheels87089476,87536
Road wheels and parts and accessories thereof87087067,57644
Brakes87083047,27826
Drive-axles87085035,89520
Suspension systems and parts thereof, incl. shock-absorbers, for tractors, motor vehicles87088018,02721
Clutches and parts thereof, for tractors, motor vehicles87089315,54013
Chassis fitted with engines, for tractors, motor vehicles8706005,93278
Appendix C: Selected Indian Automotive Imports From China. Source: ITC Trade Map, Everstream Analytics

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