The promise of India as the next global manufacturing powerhouse, particularly for coveted electronics like Apple’s iPhones, is facing a complex test. Recent shifts in the trade landscape between the United States and China, marked by a tentative “reset,” are casting a shadow over India’s ambitions. Initially, there was considerable optimism that India could capitalize on a potential exodus of manufacturing from China, driven by companies seeking to diversify their supply chains. However, the easing of trade tensions between Washington and Beijing may alter the dynamics, presenting both challenges and opportunities for India.

The excitement in India was palpable when Apple signaled its intention to shift some iPhone production from China to India. Shilan Shah of Capital Economics and other analysts pointed to India’s potential to benefit from companies seeking alternatives to China. But the situation became more complicated after the US and China reached an agreement in Switzerland that included a reduction in US tariffs on some Chinese goods. This development has prompted a reassessment of India’s competitive position in the global manufacturing landscape, especially with India’s hope to manufacture Apple products.

“India’s low-cost assembly lines may survive, but value-added growth is in danger,” warns Ajay Srivastava, founder of GTRI, highlighting a crucial concern about the long-term sustainability and profitability of India’s manufacturing sector.

Apple’s intentions to move iPhone production to India, at least partially, for the US market initially appeared promising. However, despite this commitment, a significant challenge remains: India’s heavy reliance on China for the raw materials and components necessary for iPhone manufacturing. This dependence raises questions about the true extent to which India can benefit from Apple’s expansion.

As Ajay Srivastava of GTRI points out, “India’s earnings from making iPhones will only rise if more of the phone is made locally.” Currently, a significant portion of the value generated from iPhone sales accrues to Apple, even when the devices are assembled in India and exported to the US. While the full export value is attributed to India, the reality is that Apple retains a much larger share of the profits.

The competition for manufacturing investment in Asia is fierce. Vietnam, Thailand, Cambodia, and Malaysia have emerged as strong contenders, attracting foreign investment with simpler tax laws, lower tariffs, and proactive free trade agreements. A Niti Aayog report underscores this growing challenge, highlighting the need for India to enhance its competitiveness.

Sonal Verma and Aurodeep Nandi from Nomura emphasize the critical need for India to improve its ease of doing business to attract foreign investment and compete effectively. India faces several hurdles, including a complex business environment, stalled manufacturing growth, and limited success in attracting investments that are shifting away from China. These challenges are well-documented in reports from Niti Aayog and various economists.

“Hence, for India to capitalise on this opportunity, it needs to complement any tariff arbitrage with serious ease-of-doing-business reforms,” argue Sonal Verma and Aurodeep Nandi of Nomura.

One strategy being considered by India is to attract Chinese businesses to set up export-oriented factories within its borders. This approach aims to leverage Chinese manufacturing expertise and capacity to boost India’s exports. However, some experts caution that this strategy could further hinder India’s ability to develop its own local know-how and build a strong industrial base. The concern is that India might become overly reliant on Chinese companies, potentially stifling the growth of domestic industries.

Furthermore, the nature of jobs created by assembly lines raises concerns about long-term economic development. Unlike the more comprehensive supply chain development associated with companies like Nokia in the past, modern smartphone assembly often involves low-skill, low-wage jobs. Ajay Srivastava of GTRI points out that “today’s smartphone makers mostly import parts and push for lower tariffs instead of building supply chains in India.”

To realize its manufacturing ambitions, India needs to undertake significant reforms. Ajay Srivastava has offered several recommendations for policymakers, including slashing production costs, fixing logistics bottlenecks, and creating regulatory certainty.

India must adopt a long-term perspective and avoid being sidelined by the shifting dynamics of US-China trade. Ongoing trade negotiations between India and the US could potentially offer benefits, but India must focus on creating a stable and attractive environment for both domestic and foreign manufacturers.

According to Ajay Srivastava, GTRI, to secure any deal, India must “Slash production costs, fix logistics, and build regulatory certainty.”

While the initial optimism surrounding Apple’s potential manufacturing shift to India was encouraging, the US-China trade “reset” presents a complex set of challenges. To truly capitalize on global supply chain shifts and realize its ambition of becoming a global manufacturing hub for electronics, including Apple products, India must address its reliance on Chinese components, improve its ease of doing business, and foster a robust local manufacturing ecosystem. The future of India’s manufacturing sector hinges on strategic reforms and a long-term vision that prioritizes sustainable growth and value creation.