Sectors, Stocks Most Exposed To India-China Trade Links, According To Motilal Oswal
As two of the world’s most populous countries try to manoeuvre between diplomacy and violent conflict, after their deadliest clash in more than four decades, the battle cry in India is to reduce the country’s dependence on Chinese goods and investments.
From barely any deficit in 1999-2000, India ran a trade deficit of 1.7% of its GDP with China in FY20, with a number of trade linkages irreplaceable in the short to medium term.
Sectorally, automobiles, consumer durables, pharmaceuticals, telecom, chemicals and the renewable energy (solar) sectors seem to be the most dependent in terms of sourcing from China, according to a Motilal Oswal report.
The research firm, while clarifying that it’s not trying to assume or predict the possible steps taken in the future, analysed sectoral interlinkages between the two countries to narrow down on those—and stocks within—which will be impacted most or least by this dependence.
Here’s what the report said:
India cannot give China the cold shoulder unless dependence is reduced.Motilal Oswal Report
Over a quarter of total import content is from China with the country being a key supplier of sub-components used in engines, electrical/electronics, alloy wheels, tyres, etc.
It would be difficult to replace Chinese suppliers in certain segments like electrical and semi-conductors as the required scale and skill isn’t available at present.
The government should focus on enabling a policy framework to increase localisation of imported content.
Consequently, once scale has been achieved, globalisation should be pursued.
Chinese brands in goods such as televisions and mobiles have strong presence in Indian markets while they’re looking to increase their presence in air-conditioner, refrigerator and washing machine segments.
Supply chain dependence on China for Indian brands is also high. It would be difficult to replace Chinese suppliers in critical components like compressors, LED chips, motors, mobile displays, etc.
90% of Havells India Ltd.’s manufacturing is in-house (may be dependent on some intermediary goods from China). For other companies, in-house manufacturing stands at 20-60%.
Telecom companies are dependent on network equipment providers like Huawei and ZTE for network access, which includes front-end telecom sites as well as backhaul network.
Out of 22 circles, Bharti Airtel Ltd. and Vodafone Idea Ltd. use Huawei telecom equipment in around three and seven circles, respectively. They both incur an annual Rs 100-200 billion annual capex in India toward adding access sites and improving backhaul—transport and core capacity.
China services three-quarters of handset demand in India and is deeply entrenched in the global smartphone supply chain. Any disruption in Chinese products may have a major impact on 4G adoption in India.
Dependency on China for key starting materials is at 60-70%. A ban on imports from China could lead to supply chain disruption in the Indian pharma industry.
Due to economy of scale, raw materials procured from China are estimated at 20-30% cheaper than those manufactured domestically.
Meaningful investment for setting up facilities in India to replace Chinese supply would be needed, which requires time as well as regulatory approvals.