As fresh cases of the Coronavirus (COVID-19) raise fears of a global pandemic, the impact of the shutdown across China has started to hit Indian businesses, some very severely.
With the province of Hubei and eastern parts of China taking a big hit, key industries in India that depend on imports, are coming to a grinding halt. The story is not so bad for India's exports to China, but imports to several industries are feeling the strain.
According to Crisil, about 18% of India's total merchandise imports are from China. India had a trade deficit of $159 billion as of calendar 2019 and it remains a net importer from China (including Hong Kong) of $56 billion. In this backdrop, the worst hit are industries in electronics, consumer durables, auto components and pharma.
Short circuit
The sector that is under severe stress is the electronics industry. A significant share of inputs required in electronics components manufacturing has traditionally been sourced from China.
"As a result of the Coronavirus outbreak, the sector is in dire strait as the entire supply chain is now severely affected. Even those supplies that have already arrived in India require an advanced level of sanitisation before they are allowed to be dispatched to various markets. The tragedy is, no worker is willing to touch any device sourced from China as of now," says Rajoo Goel, Secretary General, Electronic Industries Association of India (Elcina).
The crisis is now across the value chain. There are thousands of electronics manufacturing services (EMS) manufacturers bought from India, and now their supply chain is, in turn, affected. "From mobile phone manufacturing to printers, to PCs to set-up boxes and inverters are being affected since PCBs were being sourced from China. These were just being assembled in India. Similarly, aluminium, copper and chemicals in electronics manufacturing were sourced from China. For a large number of electr ..
He adds that the situation is so grave that in next 10-15 days, the industry will be able to utilise only 50% of new production capacities and in the next three weeks, there is a possibility of a complete lockdown across various manufacturing plants.
Problems for the players in the sector are compounded since other countries in the region do not want to fill the gap. "It will be a major lockdown because, if instead of China, a player thinks of importing from, say, Japan or Taiwan then, the suppliers don't want to entertain Indian importers because they know the new demand generated as a result of the Coronavirus is temporary," says Goel.
In the next 30 days, all electronic equipment will turn dearer by 20-30 %, including mobile phones, among others. Experts say this issue will hamper the sector for 3-6 months.
Bitter pill
Another sector that is facing the brunt because of its over reliance on China is the pharma sector.
"Representative of Pharmexcil informed that in all 58 molecules are imported from China, out of which 12 are imported from the Hubei province which is affected by the Coronavirus. Areas beyond 500 km from Wuhan may possibly start dispatching KSM's & API's in about 2-3 weeks, while Wuhan city itself might take about 8 weeks or thereabouts to bring about normalcy to some extent," says Satish Wagh, ex-Chairman, Chemexcil
Wagh adds that 16 molecules will be affected to a large extent such as certain antibiotics like Chloramphenicol, Erythromycin, Azithromycin, Clarithromycin, Amoxicillin, Vitamins A B, E & C & E, hormones like Progesterone, Metronidazole etc. "India may have to go slow on exports of formulations based on these molecules so as to ensure adequate supplies for India irrespective of other international commitments. In case of such commitments to the foreign suppliers force majeure clause can be initiated," says Wagh.
Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small & Medium Enterprises (FISME), says the import of APIs is critical for pharma industry and its shortage will cripple pharma manufacturing.
"There is no one remedy to contain this impending crisis. I think solutions would be sector specific. For API, India may have to develop its own sources within the country. A lot of Government support is needed to realize this and it could turn out to be an opportunity," says Bhardwaj.
Leather hunt
Another sector that has massive levels of 'essential Imports' is the leather goods manufacturing sector. "There are many global buyers who strictly adopt the practice of nominating China-based suppliers for their final orders that are made here in India. So such orders will be negatively impacted. There are a whole lot of enhancements/ add-ons related to uniform packaging, labelling etc. needed for final products and there certainly is going to be an impact on s ..
What is clear is that business players in the leather sector need to re-strategize their long term roadmaps as a result of the Coronavirus outbreak. "In a nutshell, I would say, the lesson from the Coronavirus outbreak is that in the long run, Indian importers need to shun their long-held practice of putting 'all eggs in one basket' attitude. They need to diversify their risks and can't depend on one single market to meet their 70-80% of their sourcing demands. They need to explore other markets too, even if those are currently dearer by a few percentage points. This will help them better tackle any such future irregularity in their supply chains," says Dawar.
Not all bad
If dwindling imports have led to a crisis situation across many sectors, some in exports are expected to benefit.
"India will now be looked upon as a short to long term option. India is poised to gear up for production in the short-term with the low-end and medium-end products are expected to benefit well. Carpets will benefit and so will furniture and handicraft categories. If the situation continues this way, we expect India's exports to see a 10-15% growth next year," says Mahavir Pratap Sharma, Past Chairman, Carpet Export Promotion Council (CEPC).
According to Rakesh Kumar, Director General, Export Promotion Council for Handicrafts (EPCH), as far as exports are concerned, it is a major emerging opportunity for India. "There are some major trade shows that happen in Germany and other markets, where the participation of Chinese delegates and buyers have been next to negligible now. In 2020 seasons of summer, winter and fall, no surplus of Chinese products are expected. This situation is a definite opportunity buyers are thinking about an alternative supply source. That may not necessarily be India and can be markets like Vietnam, Indonesia or Malaysia as well. One has to have a first mover approach to be ahead of the curve," says Kumar.
Kumar adds that he does not see the situation improve in China before Q3 of 2020, but it is important to note that not everyone will have faith in India as capacity building has been an issue. "We can do better with mid segment buyers where capacity building does not come into play. For the large segment, confidence is still in question as far as the Indian market is concerned. We will do better for higher value and niche segment (handmade) where our strengths will also come into focus.The next two months will be quite important, but the sentiments are positive," says Kumar.
However, what is not clear is the knock on effect of the virus. With many countries in Europe seeing a spike in cases, the perceived benefits from exports may not materialize if the global economy starts slowing down and demand takes a hit.
"Various industry bodies/trade bodies like FIEO, Chemexcil, ACMA need to urgently start analysing the sector-wide impact of the Coronavirus outbreak on their respective sectors. At the moment, the biggest bottleneck is that the information coming out of China cannot be trust completely. The real impact of the health hazards could be more than what's being told at the moment," says Mahendra Sanghi, Ex-President, Assocham and Group Chairman, Sanghi Group of Industries.
Source: economictimes.indiatimes.com