China Plus One is a business strategy for avoiding solely investing in China and instead diversifying into other nations. Western companies have been investing in China over the past 20 years, attracted by the country’s low production costs and large domestic consumer markets.
Reason for the ‘China Plus One’ Strategy
The trade conflict between China and the United States, as well as the COVID-19 outbreak, have caused firms to shift their supply networks outside of China. This has given rise to the “China plus one” policy.
Furthermore, the growing cost of doing business in China has increased operational costs, especially for manufacturers. because of the growth in labour prices and the complexity of doing business, and because of the high degree of risk for investors in the Chinese economy, which is ascribed to social and political restraints.
Multinational corporations are aiming to relocate their manufacturing operations from China to countries with stable governments, such as India, Vietnam, Indonesia, Malaysia, Thailand, the Philippines, and Bangladesh.
China’s API Industry
China is the global leader in the production and export of APIs, which is around 40 percent of the world’s API production. In 2021, the size of the API industry in China exceeded 460 billion yuan, representing a year-on-year growth of 17.8 percent.
In commonly used Active Pharmaceutical Ingredients (APIs), such as cephalosporins, azithromycin, and penicillin, the dependence is as high as 90 percent. Of the total imports of APIs and intermediates into India,
Indian Pharma Industry
India’s pharmaceutical business, valued at Rs. 3.5 lakh crore, ranks third in the world in terms of volume output. The Indian pharmaceutical business is expected to grow by 7 to 8 percent in FY24-FY25.
India’s reputation as the “world’s pharmacy” was highlighted across the world when India supplied nearly 70% of WHO’s vaccine needs in the fiscal year 2021-22.
The Indian Pharmaceutical sector is currently valued at $42 billion and intends to increase by $64 billion by 2024. and the government plans to double the target to between $120 billion to $130 billion by 2030.
Currently, India has an 85% import dependency on APIs and 80% dependency on medical devices, especially from China. The country imports APIs worth Rs 35,000 crore from China which is dominant in APIs.
According to Saurabh Mukherjea, founder of Marcellus Investment Managers,” China’s API production capacity is 10 times that of India. So if, due to China plus one strategy, even if 10 percent of the Chinese API capacity shifts to India, India’s API industry will double in the next two to three years”.
Indian Government Initiatives on API
According to the government, the objective of the PLI scheme is to enhance the country’s manufacturing capabilities by increasing investment, and production and to increase product diversification in the pharmaceutical sector.
● To reduce the reliance on China, The Indian government launched the production-linked incentive scheme in mid-2020 when military tensions with China were at a high. The PLI program aims to incentivize companies across all sectors to boost domestic manufacturing by $520 billion by 2025.
● Based on the PLI scheme 35 APIs began to be produced at 32 plants across India in March. This is expected to reduce dependence on China by up to 35% before the end of the decade, according to an estimate by ratings firm ICRA Limited.
● Last year, the government announced the Rs 15,000 crore PLI scheme for the pharmaceutical sector and 55 companies. A total of 34 products were approved in the first phase of the scheme and distributed amongst 49 players.
● The companies that qualified for incentives under the scheme include Sun Pharmaceutical Industries, Aurobindo Pharma, Dr. Reddy’s Laboratories, Lupin, Mylan Laboratories, Cipla, and Cadila Healthcare.
Major Stocks that can benefit from the ‘China Plus One’ Strategy:
● Alkyl Amines Chemicals Ltd
● Aarti Industries Ltd
● Balaji Amines Ltd
● Divis Laboratories Ltd
● Solara Active Pharma Sciences Ltd
● Dr Reddys Laboratories Ltd
Written by Omkar Chitnis
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