U.S. firms are increasingly viewing China as a risky location for their supply chains and are turning to India as an alternative for setting up overseas operations.

According to a survey conducted by UK market research firm OnePoll, 61% of the 500 executive-level U.S. managers polled said they would choose India over China if both countries could manufacture the same materials. Additionally, 56% preferred India to serve their supply chain needs within the next five years over China.

The survey highlighted that 59% of respondents found it “somewhat risky” or “very risky” to source materials from China, compared to 39% for India. Notably, at least one in four of the executives who participated in the independent, third-party survey commissioned by marketplace India Index in December do not currently import from either China or India.

"Companies are seeing India as a long-term investment strategy as opposed to a short-term pivot to avoid tariffs," said Samir Kapadia, CEO of India Index and managing principal at Vogel Group, in an exclusive interview with CNBC.

Recent diplomacy between the U.S. and India, led by President Joe Biden and Prime Minister Narendra Modi, with the former’s “friendshoring” policy aimed at encouraging U.S. companies to diversify away from China, has also made India an attractive alternative. The relationship between the two countries entered a new chapter last June with Modi’s state visit to the White House, where deals on major collaborations in defense, technology, and supply chain diversification were signed.

Challenges and Opportunities

Despite the optimism, U.S. firms remain cautious about India’s supply chain capabilities. The survey showed that 55% of respondents found quality assurance to be a “medium risk” if they have factories in India. Delivery risk (48%) and intellectual property theft (48%) were also concerns for U.S. firms considering India.

Moreover, investments into China remain robust, and it continues to be the “second choice” for investments after the U.S., said Raymund Chao, Asia-Pacific and China chairman at PwC.

Similar to India, Vietnam has also been an option for investors adopting a “China plus one” strategy. The optimism in the Vietnamese market led to a more than 14% surge in foreign direct investments (FDI) last year compared with 2022. According to London Stock Exchange Group (LSEG) data, $29 billion in foreign direct investments were pledged to Vietnam from January to November 2023. However, Vietnam’s population is significantly lower than India’s, which is the world’s most populous country and offers access to a massive customer base.

As U.S. firms look to diversify their supply chains, India emerges as a favored destination due to its long-term investment potential and strategic alignment with U.S. policies. While challenges remain, such as quality assurance and delivery risks, the opportunities presented by India’s large population and growing economic infrastructure make it an attractive alternative to China. As both countries continue to strengthen their diplomatic and economic ties, India is poised to play a crucial role in the global supply chain landscape.

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