India and the US are becoming closer trade partners, yet the South Asian country is unlikely to usurp China's role in American companies' supply chains.

India registered a 67% rise in the value of its exports to the US between January 2020 and March 2023, with a near 10-fold increase in the value of mobile phone exports and a 328% rise in electrical machinery and parts shipments over the same period. Strained geopolitical relations between Beijing and Washington are moving US companies to rethink their supply chains, with the fast-growing Indian economy drawing investment from the likes of Apple Inc., the posterchild for US investment in China.

India's vast 1.4 billion population and growing economy also make it a potentially attractive destination for US companies looking to diversify their operations.

"We have seen a shift in the mix of US imports for a wide range of products away from mainland China. Yet, a large part of the shift has been to [Southeast Asian bloc] countries. Manufacturers investing in India are primarily looking to supply the local market first and exports second," said Chris Rogers, head of supply chain research at S&P Global Market Intelligence.

Indian exports to the US pale in comparison to exports from China, which hit $536.75 billion in 2022. Constraints in infrastructure, tight labor laws and trade restrictions are hampering India’s ability to serve as a replacement for China. Rather than shift wholly to India, it is likely that American supply chains will become more diversified with countries like Vietnam continuing to draw investment.

Deals inked

China has been the key US trading partner in recent decades, supplying cheap, highly skilled labor essential to keeping down costs in tech supply chains. That relationship is now breaking as the US looks upon China as a geopolitical rival and sees its reliance on China in sensitive tech spaces as a security threat.

The US government has been clear in its desire to end its dependence on China for the production of certain key products such as semiconductors, thus presenting opportunities for other countries.

"The countries that will benefit the most are those with good business climates and infrastructure, and reservoirs of untapped competitive labor that can work in manufacturing," said Louis Kuijs, chief Asia economist at S&P Global Ratings. "Vietnam has in recent years seen significant investments in this context. India has recently also seen increased interest and some major initiatives by foreign firms."

The Indian government on June 21 approved a $2.7 billion agreement for US-based Micron Technology Inc. to build a semiconductor testing and packaging plant in the country, while Apple Inc. is investing to make India a key manufacturing hub for its iPhones. Tesla Inc. boss Elon Musk has also said the carmaker will be in India "as soon as humanly possible."

"Shifting supply chains do take time, but the process has started," said Arpita Mukherjee, economic policy researcher at the Indian Council for Research on International Economic Relations. "Governments and companies are focusing on building resilient supply chains, and India is being looked at as an alternative destination for resilient supply chains."

Some sectors will find it harder to leave China than others. Less capital-intensive industries such as apparel have not invested heavily in equipment and factories, and can easily move if they have not already. Companies that have invested billions in manufacturing facilities, on the other hand, will find it more expensive to relocate, according to William Reinsch, a senior adviser at the Center for Strategic and International Studies.

"Companies are engaged in risk reassessment with respect to China," Reinsch said. "Some will leave, some will not. Most will seek to identify chokepoints — places where they are dependent on a sole Chinese supplier — and then find redundant sources of supply somewhere else, so they have alternatives if China squeezes them."

A survey of members of the American Chamber of Commerce in China published in March found that 45% of respondents believe the environment for investing in China is deteriorating, yet just 24% of members are considering or have begun moving capacity outside of China.

As it is, China continues to attract far more foreign investment than India. The latest United Nations Conference on Trade and Development world investment report shows that $189.13 billion flowed into China in 2022 compared to $49.35 billion into India.

US barriers

India has many advantages but is not as easy a proposition as China was at the turn of the century.

The nation has focused on developing logistics and transportation infrastructure while also moving toward clean energy and streamlined labor laws, said Mukherjee of the Indian Council for Research on International Economic Relations. Yet survey data from the think tank found that US companies are concerned about high import duties, the lack of clarity around special enterprise zones, restrictions on foreign direct investment in sectors such as retail, and a lack of incentives for startups seen elsewhere in Southeast Asia.

"For India to fully leverage the opportunities offered by the current global and regional currents, more progress needs to be made with reforms in these areas, as well as with the quality of education," Ratings' Kuijs said.

Perceived hostility to foreign investors in India has also raised pessimism about India's potential, said Reinsch of the Center for Strategic and International Studies.

"It's very hard for me to see India willing to make major changes in those areas. They will continue to talk about it and say foreign investment is welcome, but they will rely more on the size of the Indian market as an attraction than on policy changes they could make," Reinsch said.