Nepal needs to learn that merely building industrial parks won’t doThe country can learn a lot from India to attract foreign manufacturing, such as slashing corporate tax rates and implementing favourable policies.
Nepal and China are planning to establish an industrial park in Chitwan. If it comes to fruition, it will be the second such park to be built in Nepal with Chinese cooperation. The first one is slated to be built in Jhapa. Since 1979 when Deng Xiaoping opened up the Chinese economy, special economic zones played a significant role in attracting foreign investors to that nation. Here in Nepal, the special economic zone in Bhairahawa, which was inaugurated in 2014, reportedly has only one tenant so far. This can change, provided policymakers become aware of the ongoing shift in regional dynamics and provided they play their cards right.
China experienced breakneck growth for four decades. This was primarily driven by a massive network of factories churning out everything from mobile phones to apparel to computers. The northern neighbour's competitive advantage included massive capacity and a cheap labour force. Since 2001, when it became a member of the World Trade Organisation, manufacturing in what is known as the 'factory of the world' picked up speed. Foreign direct investment poured in. Along the way, a robust supply chain was born in the region.
With the passage of time, China is also moving up the value chain. That is how things evolved in Taiwan and Singapore in the past decades. Currently, Japan and South Korea are much further along the technology curve. China is not quite there yet, but has gradually gained sophistication over the years. Huawei, a leading Chinese telecom company, recently unveiled a 5G chip that takes aim at competitors like Qualcomm, a leading US chipmaker. Wages are rising in China, particularly in coastal cities. Manufacturing is moving inland, or to cheaper countries elsewhere in the region.
US-China trade war
The ongoing US-China trade war adds another dimension to the supply-chain dynamics in Asia. As Washington and Beijing play a tariff tit-for-tat on each other's products, companies are shifting focus. Taiwan's Matsutek, which operates multiple assembly lines in China to manufacture robotic vacuum cleaners, is focusing on its brands catering to Chinese customers. Anhui Deli, a Chinese glassware manufacturer, is opening a factory in Pakistan; it is also selling more to Chinese customers through online channels such as the website Pinduoduo.
There are mainly two types of companies in China—one with a Chinese focus and one with exports in mind. Boeing late last year delivered its first 737 Max jet assembled in China. The Zhoushan facility is a joint venture with state-owned plane maker Comac. Boeing needs to be present in what one day is set to become the largest aeroplane market. On the other hand, others such as HP and Dell are thinking about moving at least a portion of their notebook production out of China, thanks to new tariffs. Google recently announced it would move manufacturing from China to Vietnam starting this year.
Vietnam—also called 'mini-China'—has benefited from the trade tension between the two largest economies of the world. For years, the Southeast Asian nation benefited from the cost advantage it offered vis-a-vis China. In the post-trade war era, more companies are lining up to invest in Vietnam as supply chains migrate from China. Already, ports are congested, land and labour costs have jumped, and residential prices have risen. Taiwan's Eclat Textile, a Nike supplier, is looking to diversify beyond Vietnam to cheaper locations. In June, the Trump administration threatened to add Vietnam to its customs list.
Manufacturing revival in India
Software put India on the global technology map, and it became one of the largest outsourcing destinations. It is now shooting for manufacturing prowess. At 1.3 billion people strong, India itself is a huge market with an expanding middle class. Taiwan's Foxconn, the world's largest contract manufacturer of electronics and the biggest assembler of Apple products, operates two assembly plants in India. Apple wants to make iPhones in India in order to meet domestic demand. Taiwan's Pegatron, also a contract manufacturer, plans to set up its first manufacturing facility in India this year. Wistron, a smaller competitor, is already in India. Other phone makers such as Xiaomi and OnePlus, both Chinese, are already there. Holitech, a Chinese component maker and Xiaomi supplier, recently set up a plant in Uttar Pradesh.
India is hungry for more. On September 20, it rolled out the welcome mat by slashing its corporate tax rate for existing companies from 30 percent to 22 percent, while new manufacturing firms incorporated on or after October 1, 2019 and starting operations after March 31, 2023, will get their rate lowered to 15 percent from 25 percent. The southern neighbour is wooing companies with a presence in China that are looking at other countries to escape higher tariffs. More than 10,000 Taiwanese companies have operations in China. What this probably means is that in due course, the electronics supply chain will no longer revolve around the Far East. The potential for a dynamic ecosystem in India is rising. It will open up opportunities for neighbouring countries.
This is where Nepal comes in. A manufacturing revival in India has the potential to ripple through Nepal in a big way. From the labour cost perspective, if India is cheaper than Vietnam and China, Nepal is less expensive than India. But this is not the only factor foreign companies consider before they decide to bring in capital. They look at a whole host of things, from bureaucracy to infrastructure to rules and regulations governing foreign direct investment.
The advantage Nepal has is its proximity to India—not to mention China—and it is in an infrastructure-building phase. The migration of the supply chain to South Asia will occur over many years. It is up to Nepali policymakers to decide how to capitalise on this budding trend and what infrastructure projects to emphasise. It is one thing to build industrial parks such as in Jhapa and Chitwan, and another to turn them into vibrant economic forces. There is something to be learnt from the latest Indian tax cuts. Equally important is the need to build a relationship with the likes of Terry Gou. He is the founding chairman of Foxconn.
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