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An Alternative Supply Chain in India? Taiwan’s Experience

An Alternative Supply Chain in India? Taiwan’s Experience
 Mathieu Duchâtel
Resident Senior Fellow and Director of International Studies
 Sana Hashmi
Postdoctoral Fellow at Taiwan-Asia Exchange Foundation

The COVID-19 pandemic, shortages of medical supplies, disruptions in the semiconductor supply chain, China’s economic coercion, military tensions in East Asia, and China’s zero-COVID policy, are all increasingly leading governments and companies to consider investment in China a risk that needs to be managed and reduced. This has led to a surge in “China + 1” thinking, a term coined in the early 2010s which encourages the diversification of production and suppliers away from China and into other countries to avoid excessive dependence. This new awareness of geopolitical risks linked to China has created a rare opportunity for countries to develop policy frameworks to attract foreign direct investment (FDI) and help companies reduce their exposure to possible negative scenarios. Important examples here include Taiwanese companies that, amid China’s increasing economic coercion and military intimidation, are attempting to pull their investments out of China and into India, which is gaining traction as a possible alternative for foreign direct investment and the relocation of manufacturing bases.
This piece examines recent trends behind Taiwanese companies expanding their footprint in India. From successfully seizing business opportunities during China’s years of reform and opening-up (from Deng Xiaoping to Xi Jinping’s “New Era”), to correctly assessing the gravity of the COVID-19 outbreak in Wuhan in December 2019, Taiwanese actors have often been front runners in catching trends emanating from China. While several countries are still looking to decouple from China with minimum economic risks and some are willing to still operate in China, Taiwan is accelerating investment diversification away from China. This is notably visible with the initiation of the New Southbound Policy in 2016, which was launched to reduce reliance on a single market (China) and diversify economic ties with countries in the region (South and Southeast Asian economies). After years of inertia, Taiwan-India economic relations are finally taking off.

The Apple supply chain, and beyond

India is a relatively new story from the perspective of Taiwan’s business diversification. Between 2000 and 2016, Taiwan only ranked 40th in the list of foreign investors in India, and between 2000 and 2017, Taiwan’s FDI in India represented only 0.07% of total FDI in India.

This new awareness of geopolitical risks linked to China has created a rare opportunity for countries to develop policy frameworks to attract foreign direct investment (FDI) and help companies reduce their exposure to possible negative scenarios.

From this very low base, a trend is finally picking up, highlighting the importance of speeding up diversification away from China among governments and companies. As of April 2022, with more than 100 Taiwanese companies in India employing 65,000 Indians, Taiwan’s investment in India amounts to US$ 1.5 billion, and has risen to close to 1 percent of Taiwan’s outbound investment. The signing of the upgraded bilateral investment treaty in 2018 doubled Taiwan’s investment in India. In 2020-21, India’s Investment Promotion Department received 87 applications from Taiwanese companies in 17 sectors, including electronics, healthcare, information technology, manufacturing, power generation, e-commerce, and retail.

The ICT supply chain is driving this starting wave of Taiwanese investment in India, and key Taiwanese Apple's suppliers are on its frontline. Apple has started assembling the iPhone in India in 2017. Wistron Corporation, a leading Taiwanese original design manufacturer, started the flow by assembling the then budget model iPhone SE. Wistron was followed by two other Taiwanese iPhone assemblers, Taiwan’s Hon Hai Precision Industry Co., Ltd. (best known as Foxconn, the largest manufacturer in units and numbers of models) and Pegatron, for assembly of the iPhone 12, 13 and now 14. India has, thus, broken China’s monopoly of being the only country manufacturing the latest iPhone model. Importantly, Apple’s India strategy has changed over the past five years. Initially, Apple’s production in India was aimed at the local market; but Apple now aims to build a strategic production base in India for export in third markets, such as Europe’s. Foxconn, Pegatron and Wistron are willing to expand their footprint in the Indian market.
The trend is, however, not limited to Apple’s consumer electronics. The semiconductor sector is also undergoing transformation. In February 2022, Foxconn and India’s Vedanta Ltd. signed an MoU to form a joint venture for establishing a display fabrication and semiconductor facility in India. A few months later, the two companies selected the Indian state of Gujarat to establish the plant. The press release mentioned, “This first-of-its-kind joint venture between the two companies will support Indian Prime Minister Narendra Modi’s vision to create an ecosystem for semiconductor manufacturing in India”. TSMC, however, has still not ventured into the Indian market, despite India’s Minister for Technology and Entrepreneurship Rajeev Chandrasekhar’s direct involvment in trying to woo TSMC to invest in the country.

However, expansion of Taiwanese companies is not free of challenges. One major setback was the riots in a Wistron manufacturing plant in Narasapura in South India. There were a number of factors responsible for the riots including a rumor that it was backed by the opposition in the state. But there were also larger issues at play, such as delay in the payment of wages, raising doubts on the long-term viability of a strong footprint by Taiwanese companies in India.

India has broken China’s monopoly of being the only country manufacturing the latest iPhone model.

Foxconn’s Chennai plant also encountered a strike in late 2021, linked to workers’ living conditions and food quality. Taiwanese companies are known in Asia for sparing no production cost reductions, but the fact remains that Taiwanese businesses largely remain dependent on the middlemen, thereby leaving room for miscreants’ activities, miscommunication, confusion, and mismanagement.
The issue is bigger than those specific cases – it points to the investment environment in India, but also to huge cultural differences and language barriers. Key Taiwanese officials working to develop business relations with India underline the importance of working with the experienced intermediaries to navigate India’s complex regulatory environment. Taiwan is not sufficiently promoting Indian studies and language studies, but its companies may be able to rely in the future on the 2,500 Indian students who are currently pursuing degrees mostly in the sciences field on the island. A few steps were taken towards this direction including an event, ‘The New Southbound Policy—Indian Students as Market Navigators’, aimed to connect Indian students in Taiwan with local businesses. What also could be done is to extend TSMC’s sponsored Elite Scholarship Program for Southeast Asia Students in Semiconductor Field to Indian students and professionals. A long-term vision is nevertheless missing from the New Southbound Policy: one that focuses on combining the economic collaboration pillar with the people-to-people exchanges pillar. People-to-people exchanges are likely to play a crucial role in the development of Taiwan-India business relations, and the link between Taiwan’s Hsinchu science park and Bangalore’s Science Park deserves particular attention in that regard.

Taiwan's push

In Taiwan, diversification away from China has been considered urgent since the early 1990s – yet it did not materialize until very recently. According to Taiwan’s Ministry of Economic Affairs, cumulated investment from Taiwan in the People’s Republic of China (PRC) totaled US$ 198.3 billion by 2021.

A long-term vision is nevertheless missing from the New Southbound Policy: one that focuses on combining the economic collaboration pillar with the people-to-people exchanges pillar.

In recent years, Taiwanese FDI to China experienced a slowdown. In recent years, Taiwanese FDI to China experienced a slowdown. It went from an average of US$ 9 billion per year in 2011-2018 to an average of US$ 5-6 billion since 2019, and from more than 50 percent of Taiwanese outbound FDI to about a third, according to statistics of the National Development Council of Taiwan. Chinese President Xi Jinping may be credited for having created the conditions for a real turning point regarding Taiwan’s business diversification in India. The US-China selective high-tech decoupling, rising production costs, the slowing of growth in China, and Xi’s zero-COVID policy, are all finally combining to facilitate the Taiwanese government’s policy of achieving both reshoring in Taiwan and diversification away from China.

A recent CSIS survey among Taiwanese business leaders underlines that Southeast Asia is the primary beneficiary of this diversification strategy. Between 2010 and 2021, the share of Taiwan’s total outward investment in Southeast Asia grew from 6.3% to 30.6%. In particular, Taiwanese companies see the EU-Vietnam Free Trade Agreement as an encouraging factor to invest in Vietnam and benefit from reduced export tariffs to the EU.
India now features prominently in Taiwan’s strategic thinking, as a long-term counterweight to China’s power in Asia. Taiwan’s Foreign Minister Joseph Wu is personally invested in the deepening of ties with India, “democracies standing on the frontline of China’s threat (…) which should work together to curb authoritarian expansion”. Wu also announced that “the Taiwanese government will encourage and provide help to the local manufacturers who would want to invest in India”. The Taiwanese Ministry of Economic Affairs describes India as an “ideal business location due to the abundant workforce with high-tech talents”.

Taiwan’s New Southbound Policy plays an important role in driving Taiwanese companies to consider India as a potentially attractive destination. Just like the Go South Policy helped taishang (Taiwanese businesspeople) navigate their way to Southeast Asia, the New Southbound Policy  expands the potential market for Taiwanese investors to South Asia, Australia, and New Zealand. Within this framework, India is identified as a key partner country. Given promoting economic collaboration is one of the four pillars of the policy, India fits well in Taiwan’s goal of reducing reliance on China and remains vital for diversifying its external engagement. However, a major challenge regarding the New Southbound Policy could be that while it provides a framework, it has yet to provide for a set of guidelines for Taiwanese businesses in the new addition of Taiwan’s southbound outreach, particularly India.

India's pull

For India, collaboration with Taiwan could go a long way in establishing India as an alternative supply chain hub – an ambition outlined clearly by Indian Prime Minister Narendra Modi’s government. Despite the lack of formal diplomatic relations, India considers Taiwan a key valued partner in such endeavors. India’s current representative to Taiwan, Gourangalal Das, highlighted, “In the post-COVID-19 pandemic world, Taiwan’s position in the global supply chains also makes it a desired partner for India’s goal of Atmanirbhar Bharat or self-reliance”.

Taiwan’s New Southbound Policy plays an important role in driving Taiwanese companies to consider India as a potentially attractive destination.

In India’s case in particular, greater collaboration with Taiwan could be achieved through direct cooperation with the state governments in India. State governments are also working as conduits of Taiwanese investment in India.  In comparison to the central government, state governments have more autonomy to engage Taiwan that is accompanied with stable state governments, investment-friendly policies, abundant manpower, and adequate infrastructure.
State governments in India are competing among each other to secure investments from Japan, South Korea, and Taiwan. Most recently, a Telangana Government delegation visited Taiwan to talk to the representatives of the semiconductor industry. Wistron, which already has a substantial presence in Karnataka, is looking to expand to other states in India and Telangana could be a potential destination for companies like Wistron.
While state governments have been able to strengthen business ties with and attract investments from Taiwan, the central government has launched several policies to attract supply chains specifically focusing on electronics manufacturing, semiconductors, and electric vehicles.

  • The Production-Linked Incentive (PLI): Launched in 2021, the PLI aims to boost domestic manufacturing across 14 key sectors. Pegatron established an Apple manufacturing unit in Chennai under the PLI scheme. In 2021, Foxconn and Wistron were further approved for the PLI scheme. Such schemes are lucrative for companies that are looking for easy access to and expansion in the Indian market in the post-pandemic period.
  • India’s Semiconductors and Display Fab Ecosystem: India is attempting to build an effective semiconductor ecosystem, and the target countries involve South Korea and Taiwan. With an initial investment of US$ 10 billion as part of the Production-Linked Initiative, a comprehensive program for the development of semiconductors and display manufacturing ecosystems in India was announced by Modi. As India is trying to transform itself into a chip manufacturing hub, such incentives are beneficial for the country to attract chip companies. What makes these policies important is that India still does not have any semiconductor fabrication plant needed to manufacture chips. This is where such policies will prove instrumental in attracting Taiwanese companies. However, while this plan seems ambitious, it remains to be seen if this could prompt Taiwanese businesses to seriously consider India.
  • Electric Vehicles (EV) Supply Chain: There are efforts to promote India as a manufacturing hub for EVs. There is a growing demand for relatively affordable electric vehicles in India. As per India’s Society of Manufacturers of Electric Vehicle (SMEV), “in 2021, 236,803 cars, including 143,837 secondhand electric motorcycles, 88,378 electric tricycles, and 4,588 electric four-wheeled cars and buses”. Developing EV supply chain in India serves a dual purpose of addressing the challenge of degrading air quality in the country and domestic consumption.

There exists complementarity between India’s software skills and Taiwan’s hardware capabilities, and this partnership could help India in upgrading its EV supply chain. As a concrete first step that suggests a trend might be picking up in the sector, Taiwan’s Gogoro, a battery-swapping technology success story, is venturing into the Indian market with India’s Hero Motocorp.

Challenges, opportunities, and consequences for Europe

This development is good news for India, signaling a new chapter in India-Taiwan relations, a fillip to building India’s chip ecosystem, and most importantly, a potential step to making India an important destination for an alternative supply chain. There is a strong case for Taiwan and India to collaborate. There are mutual complementarities, and as the two sides are reducing their dependence on China, this partnership has merit and potential.

There exists complementarity between India’s software skills and Taiwan’s hardware capabilities, and this partnership could help India in upgrading its EV supply chain.

While there is readiness and intentions, both sides are not on the same page on a number of issues. One major roadblock is the non-conclusion of the Free Trade Agreement (FTA). Lack of familiarity with the market and incentives make Taiwanese companies wary of the opportunities in India. Taiwan’s Representative to India, Bau Shuan Ger suggested, “India and Taiwan should firm up the proposed FTA at the earliest as it will remove all barriers to trade and investment and help create a resilient supply chain”. The push from Taiwan is understandable as Taiwanese companies are looking to reduce their operating costs and need greater predictability.

Contrary to the European Union, India has signed a Bilateral Investment Agreement with Taiwan and has signaled more openness than Europe to sign a bilateral FTA with Taiwan. However, an FTA is currently not in the cards, and Taiwanese companies will need to operate without one in the foreseeable future.
India’s conservative trade policy has been a key factor in its past failure to build an advanced foundry capacity in the country, as shown by the Takshashila Institution, a Bangalore-based think-tank. By contrast, the importance of the EU-Vietnam FTA as a factor for Taiwanese companies to invest in Vietnam is a reminder of the strategic importance, for both the EU and India, of the ongoing bilateral negotiation of an EU-India FTA – as well as its possible collateral benefits to Taiwanese companies and to the reduction of China-related risks for all parties. However, it is also realistically important to keep in mind that there are limits to what foreign policy frameworks and agreements can achieve in terms of forcing investment trends. In the case of India-Taiwan relations, Apple’s strategy, and the larger global forces in the semiconductor industry, have been the most decisive factors so far in the emerging trend described in this piece.
However, there is a need for both Taiwan and India to look beyond the Apple supply chain. While there seems to be willingness and intentions for boosting Taiwan-India economic collaboration, a relative lack of interest of Taiwanese investors to look at India, despite the push by the government, is still obvious. Reducing supply chain risks linked to China is an extremely complex issue on a company level, that deals with hundreds, if not thousands of suppliers over several tiers. The supply chain security issue is a major opportunity for Indian industrial development, but if the strategic argument naturally favors India, the question of commercial viability and operating costs in India will be more decisive than foreign policy orientations by states.




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