Supply chain realignments position India, SE Asia as manufacturing hubs, beyond China

De-risking supply chains is pushing diversification of manufacturing hubs beyond China, and India along with southeast Asia stand out to be net beneficiaries for companies keen to complement or diversify from their existing manufacturing bases in China.

The government’s focus on Make in India programme and the production linked incentive (PLI) schemes to promote manufacturing has started to yield results as indicated by leasing demand for light manufacturing and warehousing.

This robust growth is further evidenced by a notable 4.5 times increase in leasing activity for light manufacturing spaces in 2023, as compared to 2020, with projected year -on year growth of over 25% in 2024, shows a JLL study.

“India’s demographic dividend and therefore being one of the largest consumer markets in World makes India an attractive proposition over other SEA countries. Manufacturing companies are exploring innovative transaction structures to complement their timeline targets and funding strategies in India,” said Chandranath Dey, Head (Operations & Business Development), Logistics & Industrial, India, JLL.

According to him, the Make in India initiative, Industrial Corridor Development Program, Production Linked Incentives (PLI), India Semiconductor Mission & National Logistics Policy are a few policies and initiatives that have helped propel the India story globally.

“We have noticed a significant shift in demand from e-commerce, retail, and 3PL to manufacturing companies in our key industrial micro markets of Mumbai, Pune, and Chennai during FY24. Around 60% of our new customers were international companies setting up or expanding their light manufacturing bases in India, indicating that India's future as a manufacturing powerhouse is already unfolding,” Abhijit Malkani, CEO, ESR India, told ET.

A Foxconn Group company Yuzhan Technology recently leased around 5.5 lakh sq ft warehousing space in ESR’s Chennai Industrial Park for a 10-year tenure. This is among the largest facilities in India for the Apple products manufacturer.

The driving force behind this trend is not only the need for supply chain diversification, but also to capitalise on the strong economic fundamentals of this region, including a large population and labour pool, favourable costs, and various incentives.

The Make in India 2.0 continues its impressive trajectory, fuelled by a 55% increase in Foreign Direct Investment (FDI) equity inflow in the manufacturing sector from 2014-2023, reaching a substantial $148.9 billion, compared to $96 billion between 2005-2014, the JLL data shows.

India's growth story unfolds with remarkable contributions from the engineering, auto & ancillary, and electronics & white goods sectors, driving the leasing demand for light manufacturing.

According to Dey, these thriving industries require spaces with advanced specifications, leading to a substantial 35% of manufacturing leasing being garnered through built-to-suit transactions. The remaining 65% is dominated by Ready-Built transactions, underscoring the eagerness of manufacturing companies to swiftly occupy readily available stock.

Among the key markets, Pune, Chennai, and NCR-Delhi have emerged as prime destinations, attracting companies with their robust manufacturing ecosystems and well-developed infrastructure.

Over the past few years, companies have begun exploring the relocation of manufacturing outside of China. In Asia Pacific, this near/re/friend-shoring trend has resulted in the China+1 strategy where companies add additional manufacturing bases outside of China to hedge against supply chain disruptions by reducing reliance on a single country.

According to the JLL study, the impact has been mostly felt at the destination country, especially in Southeast Asia and India. As a result, governments are supporting these opportunities and implementing more policies that aim to boost their local manufacturing industries, placing a premium on land availability and access to capital sources.

From a manufacturing investment perspective, these factors position South East Asia and India as major manufacturing hubs for global markets.

According to several estimates, rising costs in China over the past decade have served as the primary accelerator of this shift towards diversification.

Higher demand for industrial land, coupled with rising wages and material costs, has also pushed up land prices in China, which can be up to two times higher compared to some South East Asian countries and India.