Vietnam stole a march on India. It's India's time now

Recent reports indicated Apple is planning to expand its iPhone manufacturing operations in India where US tariffs are lower than on China and Vietnam. Under this plan, factories in India may cater to the US demand, while China operations supply other regions.

Now, Alphabet Inc is reportedly chalking out a similar strategy. It has initiated talks with its Indian contract manufacturers -- Dixon Technologies and Foxconn -- to shift a part of the global production of Google Pixel smartphones to India from Vietnam, especially devices headed for the US, ET has reported. The first round of talks on this took place about a fortnight ago, two industry executives told ET.

Also Read: Alphabet Inc shifts Google Pixel production from Vietnam to India amid US tariff concerns

The shift is part of Alphabet’s strategy to de-risk sourcing, with the US having threatened high tariffs on Vietnam, the Pixel’s primary production base. The company has also shared plans with the contract manufacturers on localising some components in India, such as enclosures, chargers, fingerprint sensors and batteries, the executives said. Currently, most components for made-in-India Pixel phones are imported.

Google started Pixel production in Vietnam through Foxconn and Compal in 2023 to reduce risk and dependence on China, according to media reports, almost half of all the premium models were manufactured in Vietnam last year.

The shift of manufacturing from Vietnam to India will be a new trend, given that Vietnam has gained more from the "China Plus One" strategy after Covid disrupted Chinese supply chains.

How Vietnam gained more from "China Plus One" strategy

The "China Plus One" strategy, where companies diversify their manufacturing outside of China, has seen Vietnam and India emerge as key beneficiaries. While both offer advantages like lower labor costs and favorable business environments, Vietnam has been more successful in attracting investments and diversifying supply chains compared to India.

India has seen limited success so far in capturing the "China Plus One" strategy, while Vietnam, Thailand, Cambodia and Malaysia have become bigger beneficiaries, as per a report of government think tank Niti Aayog released a few months ago. It said that factors such as cheaper labour, simplified tax laws, lower tariffs and pro-activeness in signing Free Trade Agreements (FTAs) have played a critical role in helping these countries expand their export shares.

Last year in July, when asked if Vietnam was benefiting more from the "China Plus One" strategy, Finance Minister Nirmala Sitharaman told ET that Vietnam has had certain advantages such as border sharing with China. “I don’t think we can conclude that it has not worked for us. There are advantages that Vietnam has had since some time and being contiguous to Chinese territory can also be one advantage that they had over us,” Sitharaman said.

Vietnam has also emerged as one of the major benefactors of the "China Plus One" strategy due to its 20 per cent corporate tax rate and its export-oriented economic growth model. India, on the other hand, in the Union Budget 2024 slashed its corporate tax rate for foreign companies to 35 percent from 40 percent in an attempt to attract more investments.

How Trump tariffs can help India over Vietnam

Trump tariffs on Vietnam can tilt the scales in India's favour. Vietnam was hit with a 46% tariff by the US as against 26% on India. While the tariff has been suspended for 90 days, Vietnam and the US have agreed to start talks for a trade deal. However, Vietnam is unlikely to get a deal from Trump more favourable than India might. The reason is Vietnam is widely seen as a rerouting destination for China's stealth exports to the US.

Vietnam had gained from Trump's China tariffs during his first term. However, behind America’s trade deficit with Vietnam, thrice the 2018 level, is perceived to be China which started using Vietnam to escape US tariffs. "Vietnam is also seen as a major source of indirect Chinese exports to America," says a recent report by Lowy Institute, an independent think tank. "That includes pure tariff evasion through the rerouting of Chinese goods via Vietnamese ports but more significantly the heavy use of Chinese parts and components within Vietnam’s exports to the United States. The Economist magazine cites Vietnam as the key example of how both Trump and Biden have failed to cut underlying trade ties with China. The apparent smoking gun is the high correlation in recent years between Vietnam’s booming exports to America and its surging imports from China."

White House trade advisor Peter Navarro has raised concerns about Chinese goods being sent to America with "Made in Vietnam" labels that draw lower duties.

In hope of avoiding punishing US tariffs, Vietnam is prepared to crack down on Chinese goods being shipped to the United States via its territory and will tighten controls on sensitive exports to China, Reuters has reported. However, Vietnam is in a tight spot as it tries to preserve trade with the US, which is its largest export market and a security partner. At the same time, Hanoi does not want to antagonize China, which is a top source of investment as well as a neighbour with which it has clashed over boundaries in the South China Sea.

Given Vietnam's reputation as a stealth transshipment hub for Chinese exports to US labelled as 'Made in Vietnam' as well as huge Chinese investment and import of China-made components at a vast scale, it is unlikely to get a trade deal from the US more favourable than India. Alphabet's move to shift Pixel production from Vietnam to India could be due to this expectation.

Alphabet may not be the only company shifting production partly to India. Korean electronics maker Samsung has a major base in Vietnam. Besides electronics, Vietnam is a major exporter of apparel and shoes to the US. So, India can expect manufacturing shifts in these sectors too.

Almost a third of footwear imports in the US were from Vietnam in 2023, as per data provided by Footwear Distributors and Retailers of America, an industry trade group.

Nike manufacturers about half of its footwear in China and Vietnam, with about 25% coming from Vietnam, as per an CNBC report. The furniture industry has also ramped up its reliance on Vietnam. In 2023, 26.5% of US furniture imports came from the country, close behind the 29% coming from China, according to data from the Home Furnishings Association, a trade group that lobbies on behalf of home goods retailers

Toymakers have also leaned on Vietnam to make more merchandise that's imported and sold to kids and adults across the US Hasbro, SpinMaster, Mattel and Crayola are among the companies that work with GFT Group, one of the largest toy manufacturers in Southeast Asia, as per the CNBC report.

India can ramp up manufacturing capacity in many of these sectors. But while Trump tariffs can put India at an advantage over Vietnam, it still needs to address structural issues in its manufacturing sector such as land and labour reforms, ease of doing business, policy stability and increased investment in logistics and infrastructure.