The Opportunity For India Amid Ever-Evolving US China Ties

Amid the evolving geopolitical dynamics between China and the US, India is in a sweet spot to gain from this ongoing power tussle between the two largest economies in the world. This includes not just economic benefits as some investors and companies start to turn lukewarm on China but also political leverage as the US seeks more allies across Asia to counteract China’s ambitions.

India has a lot going for it as opportunity knocks. A large domestic consumer hinterland. A young and rapidly growing population that brings with it a bigger middle class and rising incomes, and a greater number of workers for decades to come. And a world-class edge in technology services, too. It all adds up to a big and lucrative market for American goods and services, buoying bilateral trade and economic growth for both nations.

The country, hence, is proving increasingly attractive to foreign companies and investors, including those in America, who are assessing how to reduce supply risks and skirt trade tensions between China and the US. Already, some firms have opted for a China plus one or China plus two strategy: that is, retaining capacity in China and investing in one or two locations elsewhere. This helps mitigate the impact of any further US-China fallout on the supply of their goods and services globally.

Here, India is appealing as a lower-cost option. Its production capabilities include a scale advantage versus other smaller competing hubs like Vietnam and Malaysia. India is also closer to Europe and the US, a key consideration in freight and logistics.

There is strong policy support as well. For Indian Prime Minister Narendra Modi, the diversification of global supply chains fits nicely with his country’s development needs. A key driver of wealth is industrialization and urbanization, which will bring jobs to the masses as Indians from rural areas are drawn to the cities in search of work and higher income amid an industrial boom.

Modi is putting money where it counts. India is spending nearly 20% of its latest budget on capital investments, the most in at least a decade. This follows the "Make in India" government initiative, production-linked incentive schemes for 14 key sectors, the Industrial Corridor Development Programme, and National Logistics Policy, which seek to transform India into a global manufacturing hub.

Feeding into this narrative of potential is also India’s superiority in the IT services arena, amid the technological race between China and the US. A skilled workforce, especially engineering and software talent, enhances India as a viable option for those looking beyond Chinese tech firms.

Some big US names are buying in. Apple has been seeking to lessen its supply reliance on China, pushing its suppliers Foxconn, Wistron Corp,and Pegatron Foxconn to ramp up production in India. As a result, Apple now makes almost 7% of its iPhones in India, a big leap from just 1% in 2021.

More recently, chipmaker Micron Technology has announced plans to build its first plant in India. It is partnering with the Indian government to build a $2.75 billion semiconductor assembly and test facility in the state of Gujarat. Initial production is due to begin in late 2024. Significantly, Micron’s announcement came when Indian Prime Minister Narendra Modi traveled to the US in late June, on a trip where Modi met US President Joe Biden and a key agenda item was advancing cooperation, such as joint production and development, in key tech industries.

Aside from tech and business, the US has also been strengthening its broader strategic ties with India. The most significant initiative would be the Quadrilateral Security Dialogue (Quad) involving India, the US, Japan, and Australia. The two countries have also been collaborating more closely in areas like defense, maritime security, and the sharing of intelligence.

Both parties have much to gain. For the US, India is pivotal in countering China’s aggression in spreading its influence through the Asia Pacific, especially when the US is not investing as heavily in security in Asia as before. For India, this presents an opportune time to assert itself more on the regional stage, and even globally too, and increase its geopolitical leverage.

Another broader theme is also promising for India: the green transition. The country has committed to meeting half of its energy needs from renewable sources by 2030 and to be net-zero carbon by 2070. It is the world’s leading supplier of solar power equipment. It was recently reported that Tesla is in discussions with the Indian government to set up a factory that is able to produce half a million electric vehicles every year. There is plenty of opportunity for transition capex investments as the infrastructure— for example, energy storage — is built out.

Given the above, India is well placed to better forge its growth path ahead by playing to its strengths and fostering cooperation with the US and other like-minded nations. In doing so, it would also help contribute to a more politically stable and economically prosperous region as a whole.

What's the opportunity here?

As foreign investments flow into India, alongside government spending, this should drive demand for industrial companies that are geared to capital expenditure. ABB India is among the potential beneficiaries. ABB India is a power engineering company that undertakes engineering and construction projects and makes heavy engineering and industrial equipment.

Urbanization and an infrastructure boom are set to benefit property developers and producers of materials such as cement, such as Godrej Properties and Prestige Estates,as well as UltraTech Cement.

With greater supply chain diversification comes better prospects for companies like Syngene International, a leading contract research organization serving both pharmaceutical majors and biotech startups. It's potentially a good play on rising outsourcing trends, as well as supply chain diversification, in the pharmaceutical industry.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.