Moving Location’s A Losing Game

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Good morning.  In today’s edition — location may not matter anymore in manufacturing; Vistara’s last flight; and the Enforcement Directorate (ED) has its eyes on Flipkart and Amazon.

THE TAKE

Location As A Strategy To Manage Manufacturing Costs Is Now Becoming History

There was a time when business success meant making a great product and then selling it at a price that helped recover the costs of making the product and selling it — including advertising, marketing and distribution — and there were still profits on the table.

In the last few decades, profitability has been significantly dependent on where you produce a product rather than on where and how you sell it. Older Indian manufacturing companies are used to this, having moved production between different states hunting for the best tax incentives.

Locations like Silvassa, in the union territory of Dadra and Nagar Haveli adjoining Gujarat, Pantnagar in Himachal Pradesh and Haridwar in Uttarakhand were well known for this. In the early 2000s, new industrial units set up in these areas could be entitled to a 100% corporate tax exemption for five years and roughly 30% taxes for the next five. In addition, they got a 100% excise duty exemption for 10 years from the date of commencement of commercial production. The excise duty part is now subsumed into the Goods & Service Tax as of 2017 and the tax holidays are over in any case.

Nevertheless, all these places still enjoy the benefits of industrialisation and job creation even if they are not logistically best positioned in the national or global supply chains, particularly Pant Nagar and Haridwar.

Location Shopping Moves Abroad

If location shopping was earlier confined within India, it’s also gone global. For almost 20 years, major exporters in India’s garments industry have been moving production to Bangladesh with most of them hosting factories there, making garments from cotton and yarn often imported from India.

A report in Outlook Business says  25% of manufacturing units in Bangladesh are owned by Indian companies. This includes Shahi Exports, House of Pearl Fashions and Gokaldas Images. Indian companies have also been importing directly from China and in many cases, badging products here. White goods like air conditioners, toasters and electric irons are classic examples, where products are made in China but sold in India under a local brand.

Donald Trump's election as president of the United States and the real possibility of high tariffs — ranging from 20% to 60% — on imports into the US will put manufacturers the world over in a quandary. Firms making in China are bracing for the worst.

Shoe brand Steve Madden has said it will reduce goods manufactured in China by 40% within the next year, up from its prior target of a 10% reduction. “As of yesterday morning, we are putting that plan into motion,” chief executive officer Edward Rosenfeld told analysts on an earnings call Thursday reported by Bloomberg.

Whirlpool Corp., which makes Maytag and Amana household appliances, said Americans will see higher prices on microwaves if tariffs are increased. “The biggest thing we get out of China is microwaves,” a top official told Bloomberg just before the election but added that they would be more insulated from the risk than other manufacturers because it produces most of its goods sold in the US domestically.

Steve Madden said only under half of its current business would be potentially subject to tariffs on Chinese imports. If the company’s plan to mitigate its exposure is successful, that would drop to around 25% within the next year. That is because, like many others, the company has been shifting its supply chain more toward Cambodia, Vietnam, Mexico and other countries. Some years ago, 95% of Steve Madden’s imports came from China. 

Locations Won’t Matter

Indian manufacturers are possibly better off staying at home and trying to produce more efficiently and hoping that if India faces tariffs, they are a lower band and that bilateral negotiations lead to some compromise. But for manufacturers and producers, the larger lesson is that location as a strategy to manage costs is now receding into history. 

Even if the US relents, the uncertainty on tariffs linked to geopolitics will stay and most likely increase. Companies will have no choice but to produce closer to their consuming market.   

Manufacturers realise that producing in relatively higher-cost countries like India will push prices higher, whether it is for the intermediate or final product. That is a problem India has to solve at some point.

CO:RELATION

Surrender Value Impact 

October 2024 saw the implementation of a new insurance sector rule that pushed insurance companies to pay an enhanced special surrender value to policyholders after the first policy year if the premium is paid for the whole year. Earlier, such payments were not made to customers surrendering policies in the first year. The latest data from the Life Insurance Council, an industry body, reveals that the number of policies sold in October 2024 stood at nearly 1.2 million, a 46% drop compared to the previous year, primarily due to the revised surrender value norms. Industry data showed that the state-owned giant collected a new business premium of Rs 17,131 crore, while all private insurers gathered Rs 13,216 crore in October 2024. The value of the new business is much lower than that in September 2024. Share prices of life insurance companies have underperformed those of Nifty 50. Due to superior margins, investors continue to award a higher premium in terms of the price-book value multiple to private sector listed companies like HDFC Life, SBI Life and ICICI Pru Life.

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FROM THE PERIPHERY

—🧑‍⚖️ India's financial crime agency, the ED, is turning up the heat on e-commerce giants Flipkart and Amazon. Following searches of online sellers linked to the platforms, the ED has summoned executives from both companies. The ED seems to be looking closer at how these e-commerce firms handle their inventory, specifically whether they're playing by the rules of the Foreign Exchange Management Act (FEMA) and India's e-commerce regulations. Interestingly, this investigation comes on the heels of booming sales for both Flipkart (owned by Walmart) and Amazon in India's $70 billion e-commerce market. It also follows a recent antitrust investigation that, according to Reuters, found both companies guilty of favouring certain sellers. 

—🚨 Zomato and Swiggy have refuted a Reuters report claiming they breached competition laws. The report followed a Competition Commission of India (CCI) investigation, initiated after a complaint by the National Restaurant Association of India (NRAI), which alleged that the food delivery platforms' practices favoured select restaurants. Zomato clarified that the CCI's 2022 inquiry, prompted by concerns over listing preferences and pricing parity, has not yet yielded any formal conclusions. Swiggy also dismissed the report as misleading. While both platforms have changed how Indians consume food and how restaurants operate, the CCI investigation highlights concerns about their impact on competition and restaurant profit margins.

—✈️ As India bids farewell to Vistara, which took its final flight on Monday, loyal fans flooded social media with heartfelt tributes. According to The Economic Times, the luxury airline’s merger with Air India, finalising today, signals a major shift in India’s aviation landscape, reducing full-service carriers from five to just one over 17 years. Though Vistara's schedules, routes and cabin crew remain unchanged for now, many are anxious about the possible service declines post-merger. Singapore Airlines, Vistara’s 49% stakeholder, now holds a 25.1% stake in Air India as it leads this major transition.

—🏦 India's public sector banks are exploring the possibility of extending home loans to individuals who lack traditional income documentation. This unconventional approach would involve assessing borrowers' earnings through alternative means, such as evaluating a street vendor's transaction levels based on QR code credits, rather than relying on customary income proof like employer certificates or tax returns, according to a report in  The Economic Times report. While still in the conceptual stage, this proposal may target customer segments currently served by non-banking finance companies (NBFCs) involved in unsecured lending. However, this approach carries risks. NBFCs have been facing regulatory scrutiny and concerns over their growth pace, with major lenders reporting increased delinquencies on unsecured loans..

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