Authors: Rajesh Tripathi, Principal, L.L.M., Market Leader, International Tax, U.S. India Corridor and Mr. Nishant Singh, Partner, IndusLaw
The current trend we have seen is that the logistics and transportation industry has been disrupted by internet tech giants and, more recently, the COVID-19 pandemic. As the world emerges from the shell shocks of COVID–19, China’s dominant role as the ‘world’s factory’ has surfaced as the weakest link in the global supply chains. Indeed, this pandemic has become the black swan event for bringing this vulnerability to the forefront. Globally, businesses need to strengthen their supply chains or else they will carry the risk of being caught unaware again.
What Does a U.S. Business Want?
When a U.S. business is looking at shifting its supply chain, the key factors to consider are:
- How can the business diversify its supply chain?
- Can the business trust the infrastructure for the movement of goods?
- Does the local country have a friendly and reliable business and political environment?
The U.S. urging India to address some of these concerns and to create a robust supply chain friendly environment has led to widespread reforms causing India to rapidly jump 67 places, in 3 years, to rank 63rd among the 190 countries as per the World Bank’s ease-of-doing-business ranking released in 2019.
Industries have to change how they do business and their service offering on each spectrum of the supply chain. Listed below are the top seven trends for businesses to consider while addressing the current challenges to the supply chain:
- 3PL, 4PL and 5PL – Provides logistic to address the supply chain needs of companies.
- Distributor vs B2C – Eliminating the middle-man and going straight to the end customer.
- E-commerce Tax – New VAT rules for e-commerce could be introduced in the European Union for online sale of goods. These new rules aim to raise VAT revenues and combat VAT fraud. These changes will have a significant impact on e-commerce businesses.
- Robotics – 24/7 operating warehouses with robots that don’t take cigarette and bathroom breaks.
- Less compliance more action – Countries, borders and international business norms mean very little to sprouting e-commerce businesses.
- Data Analytics – Logistics and transport (L&T) companies currently have very little to do with managing boxes in a box or moving things.
- Logistics blueprint – Looking at outsourcing, using multiple L&T vendors and understanding where and who the end customers are.
India – Advantages and Concerns
During this global crisis and disruption of the supply chain, the Indian government has taken a proactive approach to convert this crisis into an opportunity, by attracting U.S. businesses to consider India as a destination for shifting their supply chain. Here is a quick peek at some of the high-level points that U.S. businesses need to take note of:
- As the 5th largest global economy, India is poised to fill a sizeable chunk of the gap ensuing from an exodus of manufacturing industries from China.
- Geopolitically, India has remained neutral to minimize any geopolitical risks.
- In the last five years, India has overhauled its legal, regulatory, and policy framework (such as indirect tax, insolvency & land laws) to rapidly jump the global index of ease of doing business. India is also transforming its labor laws, which shall come into full force by the end of 2020.
- Towards this end, the Indian government’s ‘Make in India’ campaign has fetched global giants like IKEA, Apple, Foxconn to its shores.
- Even during COVID-19, India has received a copious amount of foreign capital in various sectors. This trend is here to stay.
- Recently, Japan has offered incentives to Japanese companies to shift their manufacturing base from China to India, among others.
If India needs to attract U.S. businesses to shift their supply chain, it should take a long term approach of addressing some of the following concerns:
- Reduce the high cost of doing business in India;
- Adopting regulations which are less bureaucratic and more business friendly;
- Reduce high tariff cost;
- Data localization;
- Protecting intellectual property rights; and
- Provide tax incentives and tax holidays.
- India – Opportunities for you company (section header)
India – Opportunities for Your Company
China Plus One Strategy
It is not easy to find a quick replacement for China. However, to de-risk China, India could be a more accessible substitute for many strategic reasons. Globally, the businesses will have to play China Plus One strategy to optimize their global supply chains.
Among many sectors, India has emerged as a partner of choice for the following sectors:
- Auto Component
- API and Speciality Chemicals
India Entry Strategies
Foreign Direct Investment Policy of India permits almost 100% foreign investment in all sectors without any government approval. Based on the investment strategy, a foreign company can enter into India in one of the following ways:
- Contract Manufacturing
- Liaison or Project Office
- Minority Investment
- Joint Venture
- Majority Investment
- Wholly Owned Subsidiary
Various industries that have transitioned to the Indian supply chain space are reaping the benefits that have come from this shift.