Apple recently announced plans to make its latest iPhone 14 in India, a significant milestone in the company’s strategy to diversify manufacturing outside of China.
Five percent of iPhone 14 production is expected to shift to the country this year. By 2025, a quarter of all iPhones the company makes could be produced in India, say analysts at investment bank JP Morgan.
This decision to make their flagship model in India is a major step as trade tensions between Beijing and Washington keeps rising.
This move is also important in the backdrop of the global supply chain “de-risking” which is underway because of China’s “zero-Covid” policy.
‘China plus one’
Beijing’s hard-line approach to eradicating the pandemic has led to industrial lockouts and large-scale supply chain disruptions
As a result, global firms are increasingly adopting a “China plus one” strategy – or avoiding investing in China alone – to re-orient their supply chains.
Companies are no longer willing to sit and wait for a policy change in China, or put their eggs in one basket for their sourcing needs. They want to make sure they have two or three alternatives.
This is a very big opportunity for India to attract global manufacturers.
Advantage India
India, which is Asia’s third largest economy, has been working hard to position itself as an attractive manufacturing and exports hub for multinationals.
It has a large domestic market and plentiful low-cost talent.
With GDP growth in the range of 6-7%, and headline inflation that’s more modest than in many other parts of the world, India has been one of the better-performing major economies this year.
Its merchandise exports crossed the $400bn mark after stagnating at the $300bn ballpark for nearly a decade.
India is showing improvement on most of the manufacturing’s key requirements like – highways, ports, communication network, power availability, labor availability, and ease of doing business.
Tipping point
There are still many hurdles for businesses in India like land acquisition, protectionism, licensing, and bureaucracy.
But despite these timeworn challenges, India is in a better position than ever before to leverage this historic opportunity.
Certain key regions in India – southern states such as Tamil Nadu, Telangana, and the National Capital Region in the north – are well poised to develop a critical mass in manufacturing, as the US and its allies decouple from China.
This is likely to unleash an era of healthy competition among the states.
Time to buy stocks
China+1 is just one of the reasons that make India an attractive investment opportunity now. In the previous newsletter we have mentioned number of other reasons. The scenario is attractive to buy stocks now, but the global risks are quite serious.
Global Risks and the Current Rally
It was explained in previous newsletters that US is in critical conditions and the key factor for global inflation. The US fed has been hiking interest rates to contain inflation but had not seen any success till now. Rising rates always lowers demand for goods and services and that is highly visible in US and other developed countries where inflation is much severe compared to India.
Some of the key developments in US –
- September home sales collapsed 10.2%, more than triple the decline expected
- Interest cost on home loans have more than doubled in last few months, housing has already become unaffordable for Americans and this sector is already in deep recession. Existing home sales are down by nearly 30% from 2020 peak.
- October S&P Global U.S. PMI Composite crashed to 47.3 vs. 49.3 expected and 49.5 prior, a severe contraction, this level is deep below the threshold of 50
- According to a LendingClub survey, the number of Americans living paycheck to paycheck (no savings left from salary after meeting expenses) is nearing record levels (63%).
- Top US companies are facing low demand and high cost. Top companies have seen falling operating income in September quarter – Mcdonalds -7%, Alphabet (Google) -19%, Amazon -95%, Cococola -43%, General Electric -35%…
All this indicate that US economy is under pressure and US fed can not continue hiking rates. UK and Canada central banks have already softened their stance on rates, and Fed will soon be the next.
And this is the basis of the current rally – an expectation that fed will pivot. It is expected that the rate of hike will be lower and it may even re-start QE for economic stimulus.
China and Japan have already announced stimulus packages and US may be the next.
But any reversal of fed’s current policy will again cause a rise in inflation. Such decisions are political and not always in the best interest of the country. There may be a temporary boost to the economy but it is just delaying the disease, it is not a cure.
Fed may reverse its policy, chances are high, and the current stocks rally may get even more stronger.
The fed (and most other countries’ central banks) is in a fix – if it raises rates, there will be severe recession, and if it pivots, there will be severe inflation. If it continues with the high rates, the recession will be a long one this time because the debt levels and money supply are at very high levels. We will not only have an economic crash but also a fiscal crash.
Right now, the higher probability is that fed will pivot and the global inflation may get TOTALLY out of control – and high inflation again leads to recession. The bubble is getting bigger. One can ride the rally till it lasts – but do you know how long will it last?