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00:00 [MUSIC PLAYING]
00:03 Thanks for tuning into "Profit Insights."
00:10 And this promises to be a fairly insightful conversation,
00:13 because it's on the back of a report
00:15 that a team of Nomura analysts have written.
00:21 And the report is titled "Asia's New Flying Geese."
00:24 And let's just make you wonder what we're talking about.
00:29 Are we talking about beneficiaries of a shift
00:32 in supply chain globally, and how some of Asia's economies
00:36 could be--
00:37 are and could be potential beneficiaries of this?
00:39 One of the authors of this note, Sonal Verma,
00:42 is with us in our studios to talk about this.
00:44 Sonal, great having you.
00:45 Thanks for taking the time out.
00:46 Thank you for having me.
00:48 No, the pleasure is entirely ours.
00:49 So at the outset, the belief that a China plus one
00:54 is benefiting a clutch of Asian economies,
00:57 being spoken about for the last 24 or 36 months,
01:00 what gave you the idea or what do you
01:03 give as the idea to think of such an exhaustive note
01:06 on something like this, which has been discussed,
01:08 but also doing it very differently, as I've seen?
01:11 Yes, it's been talked about a lot.
01:13 But one of the key questions we keep getting from everyone
01:16 is, where is the evidence?
01:19 We don't see it in the data.
01:20 We don't see it in exports.
01:22 We don't see it in FDI.
01:25 So we decided to basically find some evidence.
01:29 So what we've done is take a top-down and bottom-up
01:32 approach.
01:33 The top-down approach essentially
01:35 looks at some of the top-down data that
01:37 should reflect countries benefiting from supply chain
01:41 relocation.
01:43 And a bottom-up evidence, which is
01:45 a survey of about 130 firms in terms
01:49 of which countries investing in which destination
01:53 and which product category.
01:54 So we decided to take both a top-down and a bottom-up
01:58 approach, put it together, and essentially identify
02:01 the winners and the trends.
02:03 And that's fascinating.
02:05 I can't wait to hear this.
02:06 So we'll divide this up into two.
02:08 One is something that you've done
02:09 in the earlier half of the report,
02:11 is just talk about how this is a very natural progression.
02:14 Japan did it to Hong Kong, Singapore, South Korea.
02:18 South Korea and all did it to ASEAN, but particularly China.
02:20 And in some sense, China is now doing it
02:22 to the rest of the Asian countries.
02:23 In some sense, this is bound to happen,
02:26 or this was bound to happen, and is now happening.
02:28 That's right.
02:29 So the term "wild flying geese" is actually
02:34 a literal translation of a Japanese word, the "gangokitai."
02:38 And it was actually named by a Japanese economist called
02:42 Akamatsu in 1930s.
02:45 And he did that on the basis of empirical observation
02:48 for Japan.
02:48 So he saw that as Japan progressed during that period,
02:52 it initially was producing more of low-end garments,
02:56 but over a period of time progressing
02:58 in the quality of goods that it was producing.
03:02 And over time, also as cost started increasing in Japan,
03:07 Japan shifted production to newer countries,
03:11 so the newly industrialized economies of Hong Kong,
03:14 Singapore, Taiwan, and Korea.
03:16 And we've seen since then this natural progression,
03:20 wherein as costs rise, the production actually
03:24 shifts to lower-cost destination.
03:27 So to that extent, in 2001, when China joined the WTO,
03:33 China was one of the flying geese benefiting from the supply
03:37 chain relocation from these newly industrialized economies.
03:42 And it's done exceptionally well over the last 20 years.
03:46 But since 2010, costs itself have been rising in China.
03:51 And we've seen geopolitical trade tension escalation
03:55 post-pandemic.
03:56 The big focus for companies has been,
03:58 how do I diversify my risk?
04:00 And so I think both a mix of the national progression
04:04 you would have anyway seen, but also some of these push factors
04:09 in terms of diversification of risk
04:11 has accelerated the China plus one strategy.
04:15 So what we are basically trying to find
04:17 is, who is the lead goose, which is leading the production
04:23 relocation?
04:24 And who are the new flying geese,
04:26 which will benefit from this production relocation?
04:30 Interesting.
04:31 And in some sense, Sonal, does this--
04:34 you briefly mentioned it, but the report speaks about it.
04:37 I just want to understand this rising US-China trade
04:40 tensions.
04:41 Does that accelerate a cyclical phase or a developing phase
04:48 like this?
04:48 We know cycles are usually shorter now
04:50 than what they used to be.
04:51 But does this kind of accelerate that behavior
04:53 of the geese getting on, taking off from the goose, so to say?
04:57 It does accelerate the transition
05:01 and the relocation of production,
05:03 which is sort of what we've been seeing in the last five,
05:06 six years.
05:07 I think the challenge, though, is the enormity of China.
05:12 And one of the things that we talk about
05:15 is how weaning of China is very difficult.
05:18 So when you think about, let's say, textiles,
05:22 some of the key inputs--
05:24 so let's say Vietnam is now seeing more of a garment
05:28 manufacturing move.
05:29 But a lot of the inputs that go into making something actually
05:32 are still sourced from China.
05:35 And the kind of scale, quality, and price
05:40 at which Chinese manufacturers have supplied,
05:43 it's very difficult for firms to actually move all of that
05:47 from China to elsewhere.
05:49 It's just a completely different scale.
05:51 So yes, the geopolitical tensions
05:54 are accelerating the trend.
05:56 But it's also extremely difficult to completely wean
06:00 off China because of its scale.
06:04 I wonder if you have any thoughts here.
06:07 But even if the supply chains are not completely,
06:10 let's say, for a particular set of products,
06:13 extinguished from China completely
06:16 and moved to other nations, but even if a part of it
06:18 happens either due to the supply chain reconfiguration
06:22 because of the China plus one strategy
06:24 or because of China's draconian measures during COVID,
06:27 et cetera, and people saying that, hey,
06:28 even if China is cheaper than any of the others,
06:31 but we just want diversification because it's good for us,
06:34 dependability, et cetera, then let's move that.
06:36 Is that small shift also big enough for the ASEAN nations
06:42 because of precisely what you said, the enormity of China?
06:45 It's big.
06:46 So China's market share in overall exports,
06:52 in the goods exports, China accounts for roughly 14%,
06:56 15% of global exports on an aggregate basis.
07:01 Now, if you take a category like toy,
07:03 which is a low-cost product, extremely cost-sensitive,
07:08 China still has nearly 50% global market share in toys.
07:14 So a small shift from China is still a big move, a big drop
07:20 for some of the smaller economies.
07:22 And of course, as some of that moves to the likes of India,
07:27 that's also going to be quite significant.
07:29 I think the one mindset change that
07:31 has happened from the multinational corporations
07:35 perspective, because they are the ones who actually decide
07:38 what part of the value chain should be in which country,
07:41 because that decision is based on what's
07:44 the comparative advantage of different countries,
07:47 they want to diversify risk.
07:50 So the kind of concentration in production
07:52 we saw in China 20 years back, I think the global backdrop
07:58 is very different.
07:59 So it's essentially, I don't want
08:01 to put all my eggs in one basket.
08:03 And so there is a diversification of risk.
08:05 That's one.
08:06 The second aspect is the industrial policies
08:09 of developed advanced nations.
08:12 So US itself is trying to have more of EV, EV battery,
08:19 and of course, on the semiconductor manufacturing
08:22 fab set up back in US.
08:26 So for some of those supply chains, of course,
08:29 it's going to be a lot more tricky.
08:31 It might be easier for other products,
08:35 like capital goods or smartphones.
08:38 But those products is where the advanced economies actually
08:41 want to bring production back home.
08:44 So lots of different dynamics actually
08:46 going on at the same time.
08:48 And interesting.
08:49 I'll come to the top down and the bottom up piece.
08:51 But since we are on this topic, what you've said in the report
08:54 is one, the sectors in India which benefit,
08:56 and semiconductor assembly and testing features there,
08:59 as do smartphones, something that you spoke about.
09:01 So that is one.
09:02 I mean, you came--
09:04 you boiled down upon these based on the flows that have already
09:06 happened, plus the responses from the companies?
09:09 Or is there some other mechanics for arriving at what sectors
09:12 will benefit the most in which country?
09:15 So it's a mix of--
09:16 so investment intentions have been announced,
09:19 that company X wants to invest in, let's say,
09:24 India in this product category.
09:27 Some of that investment may have come in.
09:30 And a large part of it will come in the future.
09:34 So it's a mix of both actual and investment intention.
09:38 But I think a larger proportion is going
09:40 to be investment intention.
09:42 And therefore, the conversion of that into flows
09:45 will show up in the data in the coming years, I think.
09:50 Which leads you to believe that India, even
09:55 versus other isolation, say for Vietnam,
09:57 the cargo of exports till 2030 for India could be 10%.
10:02 Put this into perspective for us, Sonal.
10:04 10% looks impressive as a number from the basis that we are at.
10:08 But please help us understand the magnitude
10:11 of what this number would mean.
10:13 Well, to put this in perspective,
10:15 if you look at the last 10 years, 2012 to, let's say,
10:18 2023, 2020--
10:20 let's-- yeah, till 2023, on a CAGR basis,
10:25 our exports were less than 5%.
10:28 And part of that, of course, was the pandemic shock,
10:30 which was a lost year on exports.
10:32 We had a degrowth.
10:33 But that was the growth exports saw during that period.
10:37 So what we've done is try to identify product categories
10:41 where India is seeing interest from MNCs
10:46 to relocate production, because those
10:48 should be some of the products where exports will do well.
10:51 And second, we've also tried to assess
10:54 which are the product categories where India has
10:56 a higher comparative advantage.
10:59 So if you have a higher comparative advantage
11:01 and you're seeing firms actually move
11:03 to make that product in India, you
11:06 have a higher chance of growth exports
11:09 in that particular category.
11:10 So we've done a bottom-up analysis
11:12 on that sectoral forecast, based on which we think
11:16 that over the next five, six years,
11:19 India's exports will grow at 10% on a CAGR basis, which
11:24 basically translates to exports going from something
11:28 around $430 billion in 2023 to closer to $850 billion by 2030.
11:36 Yeah, 431 to 835 is the number that they've
11:39 mentioned in the note.
11:39 That's about a 10% CAGR, till 2030.
11:44 Before we take that break, one more question.
11:46 So a lot of people argue that India lost out in the past year,
11:53 as you mentioned as well, on that manufacturing boom
11:56 that happened across the world, and lament the fact that, oh,
11:59 it can never be recovered.
12:00 I'm just trying to understand, because you've
12:02 studied so many other economies as well.
12:04 Has there been a case like this wherein
12:07 you may have lost out in the past on a global manufacturing
12:11 boom, but now the country awakens
12:14 to the importance of manufacturing
12:15 as India has, to be fair, in the last three, four years,
12:19 and still deliver a robust, competitive growth
12:22 with manufacturing taking the lead?
12:24 Because India, hit or to has been a services-led economy.
12:28 Can manufacturing come to the fore?
12:30 Have there been past examples like this?
12:31 Any thoughts on the same?
12:33 I think what we've seen is some of the ASEAN-IV economies,
12:39 like Thailand, Indonesia, actually
12:42 took off around the same time when China took off.
12:47 And China really boomed, whereas these economies
12:51 were not able to convert.
12:53 And I think for India, therefore, it
12:55 is important to understand what is the policy lesson here.
12:59 And the ingredients that are needed to keep this going--
13:04 getting integrated is just the beginning.
13:07 You have to accelerate the process.
13:10 You have to increase the quantum of domestic value added.
13:13 And you have to move up the value chain.
13:16 In a semiconductor, for instance,
13:18 if you're doing assembly and testing right now,
13:20 we want to, over a period of time,
13:22 move to making chips that are lower in terms of nanometer
13:28 and so more advanced.
13:29 So it's a journey.
13:31 It's a process.
13:32 And during that process, there are lots of policy actions
13:36 that need to be implemented, both in terms of the next one
13:39 year, five year, but I would say even the next 10,
13:42 20 years, to ensure we grow and increase our market
13:49 share in the global value chain.
13:51 So I think it's a process.
13:53 We need to work hard to make it happen.
13:56 OK, great.
13:57 Sonal, stay on.
13:58 We need to take a very quick break.
13:59 Because what I've done is I've done
14:00 the beginning and the end of the interview in this segment.
14:03 The middle part, which is the process that they followed
14:05 and the responses that they would have gotten from the
14:09 bottom-up survey that they did, and also the bottom-up
14:12 interviews that they may have done,
14:13 and the top-down survey, we'll try and talk
14:15 about that with Sonal on the other side
14:17 of this very quick break.
14:18 Stay tuned.
14:19 [MUSIC PLAYING]
14:22 [END PLAYBACK]
14:27 Back with Profit Insights in conversation
14:29 with Sonal Verma on the report about the flying geese
14:32 and the benefits that come in to economies in the ASEAN region
14:39 and probably even Mexico, as you may want to pronounce it.
14:43 But Sonal, we spoke about it before the break.
14:47 A quick segue into what the responses of the top-down
14:53 research that you may have done in a bottom-up conversation
14:56 of 130 MNCs, if I'm not wrong, that you guys did.
14:59 Anything interesting that it threw up
15:01 aside of the headlines, which is that these
15:03 are the sectors, et cetera?
15:04 What did it throw up?
15:06 So it's a survey of firms based on reports.
15:10 So a couple of things that came out.
15:13 One is, of course, Asia is the biggest beneficiary
15:16 of the shift in supply chain.
15:18 And in particular, we find India, Vietnam, and Malaysia
15:24 as the new flying geese.
15:25 So these are the countries that are attracting
15:28 most of the production from China or elsewhere.
15:32 But outside of Asia, Mexico is the biggest competitor
15:37 for the region.
15:38 Second, in terms of who is investing where,
15:44 one of the things that stood out--
15:46 so we had done something similar back in 2019.
15:49 So it's interesting to compare then and now.
15:52 And back in 2019, a lot of the production, the source
15:56 country, the MNC, were actually US companies,
16:01 or they were Taiwanese or Japanese companies
16:04 that were doing reshoring.
16:05 So they were moving production from China back onshore.
16:08 This time around, actually, China is the biggest investor.
16:12 What we therefore would say is China
16:14 is the lead goose in this cycle.
16:17 It is leading here.
16:20 And interestingly, most of China's investments
16:24 are in the ASEAN economies, particularly Vietnam, Thailand,
16:28 Indonesia.
16:30 So that's actually more China.
16:32 Whereas when we look at where India is getting investments
16:36 for majority of the inflows into India
16:38 are actually from US-based companies
16:41 and some of the companies from developed Asia.
16:44 So we do think that China investment in ASEAN and US
16:48 investment in India is sort of an indication
16:51 of the geopolitical alignment that these countries have.
16:55 Third, let's talk about the sectors
16:58 as well, because we've looked at which sectors are attracting
17:04 investment.
17:06 And for India, which is sort of the number one in our survey,
17:12 the investment attraction is actually fairly broad-based
17:16 across sectors.
17:18 So it is, of course, smartphones, but also autos,
17:23 capital goods, semiconductor assembly and testing,
17:27 and quite a few others.
17:29 So it's very broad-based, which is actually
17:31 in contrast to what we see for some of the other new flying
17:35 geese.
17:35 So Vietnam, a lot of the investment
17:37 is in the EV sector, solar panels,
17:40 or in the PC on the electronic side.
17:44 Malaysia, it's largely in semiconductors
17:46 and in electronics.
17:48 So I think the broad-based nature of investments
17:50 that India is seeing is quite interesting this time around.
17:54 OK.
17:54 Could it also be because of the large domestic opportunity
17:57 that India gives or not necessarily?
17:59 It's definitely a plus point for India,
18:02 because none of the other countries
18:04 actually have that large domestic market size.
18:07 So the economies of scale that that provides,
18:11 the MNCs in terms of catering to domestic market
18:14 and using it for export purpose, I think
18:16 is definitely a positive for India.
18:20 The other factor that could be playing a role
18:23 is the risk around further escalation
18:26 of geopolitical tensions.
18:28 So Trump has mentioned that if he comes back
18:34 as US president, he's going to impose a tariff, a 10% blanket,
18:39 10%, 15% tariff actually across products,
18:41 and particularly 60% on China.
18:45 And if there are loopholes where Chinese companies are shifting
18:49 production to third countries, then they
18:52 will also look to put potential tariffs on those countries.
18:57 So I think from that perspective,
19:00 since India is getting more diversified source
19:03 of investment source, you have both an economic as well as
19:08 geopolitically, actually India is very well placed
19:12 to attract more investments.
19:14 One final point, Sonal, and maybe two part question
19:16 rolled into one, is that there are two-- how do I say?
19:22 People who want to throw stones kind of talk
19:25 about two aspects.
19:26 One, that [NON-ENGLISH SPEECH] you don't see the benefit.
19:31 So any thoughts on that?
19:33 Part one of my question is that.
19:34 Part two of my question is, a lot of people
19:37 compare what, say, China is doing in its investment
19:42 right now, wherein it is investing
19:43 in futuristic tech, et cetera, and all,
19:46 and how India is not doing so.
19:49 The part two of my question is, is this a natural evolution
19:51 of a country at the stage that India is,
19:54 that it will probably do this right now
19:57 and do the high tech stuff?
19:59 It is doing some of it, but do the large scale high tech
20:01 stuff only at some point of time in the future.
20:03 Is it a natural stage of evolution or nothing like that?
20:08 It's not a natural state of evolution.
20:10 There has to be concerted policy efforts to make it happen.
20:15 Otherwise, countries get stuck in the middle income trap.
20:19 And for instance, you can give more incentives
20:22 on R&D, higher quality education, training institute.
20:26 But a lot of that work needs to start now so that we are ready.
20:31 But it's not natural.
20:33 A number of countries, very few make it.
20:36 A number of countries get trapped,
20:38 which is why we have to also focus on here and now,
20:42 but also the tomorrow.
20:44 On your first question, and that's a fair point,
20:47 I think the point that the PLI allocations are there
20:52 but has not been used, or while we
20:55 are exporting more electronics and smartphones,
20:58 we are also importing more.
20:59 So the net electronics trade balance is not moving.
21:02 So where is it?
21:04 One thing that we learn by studying history
21:09 is that this is a process.
21:12 And typically, it plays out in a three stage process.
21:16 The first stage is where countries
21:19 that get integrated in a global value chain
21:21 actually import a lot more of intermediate goods.
21:26 And then you assemble it.
21:27 Your value addition is typically low.
21:29 You export it.
21:30 But you're importing a lot.
21:31 So your net trade balance, domestic value addition,
21:34 is generally low.
21:35 India is in that stage right now.
21:38 But as you progress, you build the domestic ecosystem.
21:42 You import less while you're exporting more.
21:46 So there's some improvement.
21:47 And finally, you reach stage three
21:49 where your domestic manufacturing has
21:52 become so competitive that there's
21:55 a big decline in imports and a significant acceleration
22:00 on your exports.
22:01 And that's when the trade balance actually
22:03 swings decisively on the positive side.
22:07 So I think India is still in the very early innings.
22:11 And we should not be too hasty in coming to a conclusion.
22:16 That said, we are trying to integrate
22:19 in a global environment that is a lot more
22:22 hostile than any of the previous flying geese have encountered.
22:27 But this is an opportunity.
22:29 I think we are seeing evidence of that.
22:31 There's a lot of interest in India.
22:33 It's a broad-based interest across sectors.
22:35 We just have to keep it going on the policy front.
22:39 OK, and how long-- sorry, last question-- how long does this
22:41 typically take to move from being a mix of export
22:45 and import to a largely exporting thing?
22:48 Is it time-based?
22:49 It can vary.
22:50 But typically, it can easily take 10 years, 5 to 10 years.
22:55 And we are in the early stages.
22:57 So let's not be too hasty.
22:57 We are very much in the early stages.
22:59 So even in the smartphone, we are
23:00 trying to increase the domestic value addition component of it.
23:05 But for instance, in the semiconductor space, as I said,
23:08 we are doing more of assembly and testing.
23:09 But we will evolve.
23:13 We will keep hitting harder in terms of doing better,
23:16 moving from more crude products to more advanced products
23:20 within each product category.
23:22 And the ecosystem needs to build around it.
23:26 Got it.
23:26 Great.
23:27 So lovely, lovely talking to you.
23:29 Thanks for, one, doing such a lovely report, of course,
23:32 and for talking about it to us and our viewers.
23:34 Really appreciate your time today.
23:35 Thank you very much for having me.
23:37 The pleasure was entirely ours.
23:38 And viewers, I hope this episode of "Profit Insights"
23:40 was as insightful for you as it was for me
23:43 while I read the report and finally managed
23:45 to talk to Sonal Verma.
23:46 Thanks for tuning in.
23:47 [MUSIC PLAYING]
23:50 (upbeat music)
23:53 you