With U.S. firms reassessing their reliance on China, India is gaining traction as a preferred supply chain partner. Samir Kapadia, Founder & CEO of India Index, explores the factors behind India’s emergence in global supply chains and the challenges it faces.

India as the Preferred Alternative to China

A recent survey by UK market research firm OnePoll revealed that a significant number of U.S. executives are leaning toward India as a manufacturing hub over China. The survey, which polled 500 executive-level U.S. managers, found that 61% would choose India over China if both countries could manufacture the same materials. Moreover, 56% preferred India for their supply chain needs within the next five years.

The survey highlighted the growing perception of risk associated with sourcing materials from China, with 59% of respondents finding it “somewhat risky” or “very risky,” compared to 39% for India. This shift in sentiment is driving companies to consider India as a long-term investment strategy rather than a short-term pivot to avoid tariffs.

“Companies are seeing India as a long-term investment strategy as opposed to a short-term pivot to avoid tariffs,” said Samir Kapadia in an exclusive interview with CNBC.

Strengthening U.S.-India Relations

The warming ties between the U.S. and India, spearheaded by President Joe Biden’s “friendshoring” policy, have further bolstered India’s appeal as a manufacturing hub. This policy encourages U.S. companies to diversify their supply chains away from China and into more friendly nations, particularly India.

The relationship between the U.S. and India reached new heights with Prime Minister Narendra Modi’s state visit to the White House in June, during which a series of agreements on defense, technology, and supply chain diversification were signed.

“The U.S. and China continue to sit in rather chilling air. Whereas there is a constant stream of iterations, conversations, dialogues, and agreements between the U.S. and India,” Kapadia noted.

Recent announcements of significant investments into India underscore this trend. For instance, Maruti Suzuki recently announced a $4.2 billion investment to build a second factory in the country, while Vietnamese electric automaker VinFast plans to invest around $2 billion to establish a factory in India.

Challenges and Risks for U.S. Firms in India

Despite the optimism, U.S. companies remain cautious about India’s supply chain capabilities. The survey revealed that 55% of respondents identified quality assurance as a “medium risk” when considering manufacturing in India. Additionally, concerns about delivery risk (48%) and intellectual property (IP) theft (48%) were also highlighted.

These concerns are not unfounded. In September, Apple supplier Pegatron temporarily halted operations at its factory near Chennai after a fire broke out, underscoring the operational risks in India.

Amitendu Palit, senior research fellow and research lead of trade and economics at the Institute of South Asian Studies, warned that replicating Apple’s rapid expansion in India might not be feasible for other companies. “What Apple has done will not be able to be done immediately and as quickly by many other companies. Apple has the capacity to create an ecosystem much faster than other companies, so time must be factored in,” Palit told CNBC.

Both Palit and Kapadia agreed that completely shifting supply chains away from China is unlikely. “I don’t think China will ever be taken out of the equation,” Kapadia said. “The reality is that China will always be a cornerstone of U.S. supply chain strategy.”

Vietnam as a Competitor

Vietnam has also emerged as a strong contender for companies looking to diversify their supply chains away from China. The country saw a 14% surge in foreign direct investments last year, with $29 billion pledged from January to November 2023.

However, Kapadia pointed out that Vietnam cannot match India’s potential. He emphasized that India’s vast customer base offers a unique advantage that Vietnam lacks. “Companies are not making these decisions for cost arbitrage. They’re making these decisions for cost savings and access to markets. You’re not going to see that same sort of benefit in just shifting to Vietnam,” Kapadia added.

Conclusion: India’s Growing Role in Global Supply Chains

As U.S. firms increasingly seek to diversify their supply chains away from China, India is positioning itself as a viable and attractive alternative. The country’s growing economic ties with the U.S., coupled with significant investments, highlight its potential to become a key player in global manufacturing.

However, as Samir Kapadia’s insights reveal, there are still significant challenges that India must address to fully capitalize on this opportunity. Quality assurance, delivery risks, and intellectual property concerns remain critical issues for companies considering India as a manufacturing hub. Nonetheless, with the right strategies and continued investment, India could play a pivotal role in reshaping global supply chains in the coming years.

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