Q2 2020 UPDATE - gcaaltium.com€¦ · 4. Structural reforms implemented by the government have...

MANUFACTURING IN INDIAQ2 2020 UPDATE

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CONTEXT

Source: News reports and GCA analysisThe years referred to are financial year: April to March

Before 2019

China as the major manufacturing hub of the world

Early 2019

Increased labor cost and US-China trade war

Mid 2019

More than 50 multinational companies shift manufacturing

out of China

Late 2019First case of novel coronavirus

detected in Wuhan

Jan-Feb 2020

Global supply chains disrupted due to COVID-19 crisis

Post Mar 2020

Companies look to de-risk their supply chains and broad base

production

April 2020 and Onwards

Policy change announcements by India government to attract companies looking to shift

manufacturing to India

India is revisiting its policies to make foreign investment and manufacturing seamless for international companies through focus on land acquisition, labor laws and infrastructure

The central & state governments are working in close coordination to bring about changes on the ground

This document provides an overview of the changes that have been proposed by the government recently and how GCA can help companies establish a manufacturing presence in India

Companies are looking to build resilience in their supply chains. While global supply chains have traditionally been reliant on China as the primary manufacturing base, since the beginning of 2019, companies have been impacted by factors such as rising labor rates in China and the US-China trade war

COVID-19 has exacerbated the situation. Companies are keen to de-risk their supply chains and reduce over reliance on a particular country and are hence evaluating alternatives to China for their current or new capacities

India intends to address this opportunity and position itself as a viable alternative and in the process, play a larger role in global supply chains

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India offers a large domestic market and a favorable ecosystem with low-cost labor and raw material availability

THE INDIA ADVANTAGE

Source: Invest India website, news reports and GCA analysisNote: (1) Effective tax rates= corporate tax rate of 15% + other surcharges and cess

(2) 8 metros are Delhi, Mumbai, Chennai, Bangalore, Kolkata, Pune, Ahmedabad and HyderabadThe years referred to are financial year: April to March

Rich Resource Repository

Rich presence of natural resources; largest copper reserves in the world; top 5 in iron ore, coal, zinc and bauxite reserves (2019)

Large opportunity for food processing sector due to availability of agricultural products; largest in the world in milk, fruit, vegetables production; 2nd largest in pulse production; accounts for 25% of cotton production (2019)

Logistics and Infrastructure Support

Easy access to EMEA and Asia; strategically located in the center of the India Ocean Maritime Trade route; 4-8 hour flying distance from these countries

2nd largest road and 4th largest rail network

90% of the Indian population can be reached within 12 hours from one of the 8 metros(2)

Strong push for infrastructure development:

Development of 35 multi-modal logistics parks

Dedicated freight (rail) corridor – 2 under construction

USD 1.4 Tn infrastructure push to reduce logistics cost to 10% of GDP (from current 14%)

Demographic Dividend and Digital Adoption

Availability of low-cost yet productive workforce; 85% population below 55 years of age; 49% labor participation (2018)

Working age population to be 1/5th of global labor force in next 10 years

Ready for Industry 4.0

Strong R&D capability housing 40% of world’s Global In-house Centers (GICs)

Increased digitization through programs like Digital India and Skill India

Strong Domestic Consumption Base

Poised to become world’s 3rd largest consumer market by 2030

34% urban population (2019) which is projected to reach 50% by 2030

GDP has grown 2.6 times from 2004-05 to 2018-19

Favorable Corporate Taxation and Governance

Effective tax rates(1) of 17.16% for new manufacturing units; lowest among other manufacturing destinations in SE Asia

Consistent improvement in Ease of Doing Business Ranking (from 130th in 2016 to 63rd in 2019)

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India is well-positioned on parameters such as infrastructure and taxation

COMPARISON OF INDIA WITH OTHER SOUTH EAST ASIAN COUNTRIES

Source: News reports, Invest India website and GCA analysisNote: (1) Ranking published by Economic Intelligence Unit The years referred to are financial year: April to March

Parameter India Vietnam

Automation Readiness Index,2018(1) 18th 24th

FDI Inflows USD 49 Bn USD 38 Bn

Domestic Market USD 11 Bn USD 7 Bn

Rank on Port Quality 51 85

Number of Major Ports 12 7

Annual Capacity of Ports 1500 Mn Tons 500 Mn Tons

Labor Availability 500 Mn 58 Mn

Vs

Parameter Malaysia Thailand Indonesia Vietnam India India’s Rank

Corporate Tax for New Manufacturing Industries

24% 20% 25% 20% 17.16% 1

Ease of Protecting Minority Investors Index

81.7 75 63.3 55 80 2

Budget Transparency Index

50 57.7 53.8 65.4 80.8 1

Ease of Getting Credit Index 75 70 70 75 80 1

Comparative Labor Wages(monthly)

USD 200-220

USD 260-280

USD 195-215

USD 130-140

USD 100-120

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Case in Point

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Structural reforms implemented by the government have helped India improve its Ease of Doing Business (EoDB) ranking from 142 in 2014 to 63 in 2019

INDIA’S IMPROVEMENT IN EASE OF DOING BUSINESS RANKING

Source: World Bank, Ministry of Corporate Affairs (Govt. of India) & DIPP (Govt. of India)Note: (1) SPICe: Simplified Proforma for Incorporating Company electronically

(2) GST- Goods and Services Tax(3) EPF- Employee Provident Fund(4) ESIC: Employee State Insurance Corporation(5) NCLAT: National Company Law Appellate Tribunal

The years referred to are financial year: April to March

Starting a Business

Implementation of SPICe(1)

platform

One step online incorporation of company

Reduced fees

Post implementation, the average time for company incorporation was reduced to 1.7 days (2019)

Trading Across Borders

Robust risk management system to waive off inspection for 80% products

e-Sanchit platform for digital filling of documents

Electronic sealing of containers to ensure faster custom clearances

Paying Taxes

GST(2) implementation

Single unified tax that replaced multiple central and state taxes

Digitization of EPF(3) and ESI(4)

filings

Reduced corporate tax rates

Insolvency Resolution

Introduction of Insolvency and Bankruptcy Code (IBC), 2016

Timebound reorganization procedure for corporate debtors

Creation of a professional body (NCLAT(5)) for resolution of issues

Structural Reforms Implemented to Drive Improvements in the Ease of Doing Business (EoDB) Ranking

142131 130

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India's Ease of Doing Business (EoDB) Rankings

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Several policy initiatives have been recently announced to further strengthen the ecosystem for international companies to set up manufacturing in India

CREATING AN ENABLING ECOSYSTEM

Ease of Factory

Approvals

Simplified LaborLaws

Fast-Track Land Acquisition/

Leasing

Sectoral Reforms

Infrastructure Boost

Tax Relaxations

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Policy Initiatives by Central Government and State

Governments

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Factory Act 1948, which is one of the key legislations for operating a manufacturing setup, is currently being amended to make it less cumbersome for international companies to operate in India

AMENDMENT TO FACTORY ACT

Source: News reports and GCA analysisNote: (1) Indian state of Uttar Pradesh

(2) Presently there are over 200 state laws and 50 central laws(3) Over-time wage rate to be double that of the normal wage rate(4) Registers are the various records that need to be kept by the companies and Returns are the various statutory forms that need to be submitted in

order to comply with the various provisions of the Factory Act 1948The years referred to are financial year: April to March

Ministry of Labor and Employment

Easing andExemptions in Labor Laws(2)

and Other Compliances

UP(1)- ordinance passed;

Other states- in progress

Proposed for next 2-3 yrs

The State of Uttar Pradesh (UP), under the 'Uttar Pradesh Temporary Exemption from Certain Labor Laws Ordinance, 2020’ will be exempted from compliance from most of the labor laws for a period of 3 years.

Factory Act 1948 (States Amended: Gujrat, Himachal Pradesh, Rajasthan, Uttar Pradesh, Madhya Pradesh)

Current Proposed

12 hour shifts; 48 hours per week 12 hour shifts; 72 hours per week(3)

Registration of new factory takes 30 days

New factory registration to be done in 1 day

Yearly renewal of factory licenses 10 yearly renewal of factory licenses

61 registers and 13 returns to comply with various labor laws(4) 1 register and 1 return

The State of Madhya Pradesh (MP) has given further relaxations under the Contract Labor Act where in only contractors supplying more than 50 workers need to register themselves. Currently there is a need for all contractors to register.

Overview of Policy Amendment Entity Policy Amendment

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Current Proposed

Land acquisitionProcess

Long drawn with delays: Numerous negotiation with small plot owners

Reduced time: Upfront land allocation, fast-track online process

Allocation of extensive land parcels in India specifically for transfer of manufacturing hubs from China to India and implementation of fast-track methods for land acquisition are focus areas

EASING OF LAND ACQUISITION PROCESS


Land allotment (460K hectares for industrial/commercial purpose) for businesses moving out of China

115K hectares of existing industrial land in Gujarat, Maharashtra, Tamil Nadu and Andhra Pradesh respectively has been earmarked

Karnataka has proposed to build a ‘Japan Industrial Township’ to attract Japanese companies moving out of China

New


State Governments Land Acquisition Process Simplification

In-progress, to be finalized

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As an incentive to stimulate new foreign investments, India is proposing significant tax holidays (exemptions and reduction) for high-value investments

TAX INCENTIVES


10-year tax exemption for companies making new investments above $500 million

Requirement: Start operation within 3 years from June 1, 2020

Sectors: Medical devices, Electronics, Telecom equipment and Capital goods

4-year tax exemption for companies that invest over $100 million in labor-intensive sectors

Sectors: Textiles, Food Processing, Leather and Footwear

Overall reduction in corporate tax rate to 10% (from 25-30% for domestic, 40% for foreign companies) for next 6 years after expiry of exemption period


Trade MinistryCorporate

Tax Holiday(Exemption & Reduction)

Underreview, to be

finalized

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Policy amendment for Special Economic Zones (SEZs) will supplement ongoing government initiatives such as improved reliability of power supply

INFRASTRUCTURE SUPPORT



Ministry of Commerce & Industry

Special Economic Zone (SEZ) Accessibility Improvement

Underreview, to be

finalized

Land Allocation: Unused land with robust infrastructure in place to be allocated for attracting foreign investments

No increase in lease rent from 2020-2021, as relief measures to existing and new facilities in government-owned SEZs

Land

Ongoing Initiatives

Ministry of Power

Deendayal Upadhyana Gram Jyoyti Yojana (DDUGJY)

Integrated Power Developed Scheme (IPDS)

Schemes initiated pre-COVID-19

Overview of Ongoing Initiatives

Electric power will be more readily available throughout the nation

DDUGJY: Continuous power supply to rural India through investment in rural electrification

IPDS: Strengthening electricity transmission and distribution networks in urban areas

Power

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The central government and state governments in India are focusing on specific sectors to drive foreign investments in manufacturing – these are food processing, leather, auto parts, textile and medical devices

FOCUS SECTORS

Source: News reports, secondary research and GCA analysisThe years referred to are financial year: April to March

Food Processing Leather Auto Parts

Key Figures

Domestic market: USD 543 Bn (2020)

Exports: USD 18 Bn (2019)

Foreign Direct Investment (FDI): USD 3.28 Bn between 2014–2019

Second largest consumer of footwear in the world: 2.49 Bn pairs (2019)

Exports (footwear & accessories): USD 5.5 Bn (2019)

FDI: USD 54 Mn between 2014–19

Domestic market: 4th largest globally with a size of USD 43 Bn (2019)

Exports: USD 15.2 Bn (2019), growing at 14.5% (2019 over 2018)

FDI: USD 11.57 Bn between 2014–19

Factors Driving Future

Growth

42 Mega Food Parks approved (17 operational); 299 cold-chain projects approved

Strong supply factors: Global leader in milk, spices and large bovine population; No 2 in food, horticulture and fish production

Partnership opportunity in 47 approved / on-going projects with value of USD 597 Mn

Declared as a Special Focus Sector under the National Manufacturing Policy

USD 36 Mn allocated for technology upgradation of existing units (FY 19)

Central government is planning a USD 1 Bn investment for attracting foreign investors

Cheap and highly productive workforce (55% workers below 35 years of age)

Government has allocated USD 1.5 Bn for the electric vehicles segment. Interventions are planned for demand generation and technology upgradation

Announcement of Automotive Mission Plan (AMP) to increase exports by 40%

Large domestic passenger vehicle market

Recent Investments/

Proposals Swiss company Pioneer Ventures acquired Mumbai-based Lateral Praxis

German footwear brand Von Wellx has decided to shift its manufacturing from China to India

50:50 JV between Tata Auto Comp (India) and Seco Seojin Automobile (South Korea)

US-based Meritor Corp to set up axle manufacturing plant in India

100% Foreign Direct Investment (FDI) is allowed in all the focus industries through the automatic route

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The central government and state governments in India are focusing on specific sectors to drive foreign investments in manufacturing – these are food processing, leather, auto parts, textile and medical devices

FOCUS SECTORS

Source: News reports, secondary research and GCA analysisNote:(1) ISDS-Integrated Skill Development Scheme(2) SITP-Scheme for Integrated Textile Parks(3) ATUFS-Amended Tech Upgradation Fund SchemeThe years referred to are financial year: April to March

Textile Medical Devices

Key Figures

Domestic market: USD 100 Bn (2018); CAGR 10% (2009–2018)

Exports: USD 36.6 Bn (2019)

Domestic market: USD 11 Bn (2018), 75-80% of which is imported

Exports: USD 2.1 Bn (2019)

FDI: USD 600 Mn between 2014–19

Factors Driving Future

Growth

Government has spent USD 316.25 Mn since 2017 on skill upgradation, infrastructure and machinery of existing units under various schemes like ISDS(1), SITP(2) and ATUFS(3)

Free Trade Agreements (FTAs) have been signed with ASEAN countries in order to promote exports. Similar agreements are expected with EU

Government is providing strong focus on the development of the technical textile segment

Robust supply-side factors: low-cost raw material and manpower

Government has announced several measures to increase domestic manufacturing: Manufacturing license made perpetual Development of 4 medical device parks with common infrastructure

to reduce manufacturing cost (investment–USD 57 Mn) Declaration of Production Linked Incentive Scheme 2020 – incentive

is 5% of incremental sales over 2019-20 sale of devices manufactured in India

The sector is expected to see robust growth in domestic demand owing to the expansion in healthcare infrastructure

Recent Investments/

Proposals

Youngone Corp (Korea) to invest USD 130 Mn in Kakatiya Mega Textile Park in Warangal, India

Hyosung Corporation has started its full-scale spandex plant in India

Companies like Abbott and Medtronic have expressed interest in shifting their manufacturing base from China to India

100% Foreign Direct Investment (FDI) is allowed in all the focus industries through the automatic route

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Von Wellx is a German footwear brand that is a pioneer in designing and manufacturing of orthopedic footwear. It has 100 million customers and 18 manufacturing facilities worldwide and is sold in over 80 countries

CASE STUDY: VON WELLX TO SHIFT MANUFACTURING BASE FROM CHINA TO INDIA


From Manufacturing in China…..

2 manufacturing facilities in China

Export hub to 80 countries

….To Setting Up an Integrated Value Chain in India

Phase 1:

Partnership with Iatric Industries Pvt. Ltd, which has an annual manufacturing capacity of 0.5 million pairs and exports to 48 countries

Manufacturing unit in Agra, Uttar Pradesh, India

Capacity of 3 million pairs annually

2-year timeframe to reach 3 million pairs; USD 13 Mn investment

India to act as an export hub for 80 countries

Phase 2:

Development of ancillary industries like outsoles, special fabric and chemicals, which are currently not available in India

Policy Initiatives

In April-May 2020, the central government and state governments announced a host of measures to attract foreign investments:

Most labor laws were suspended for a period of 3 years

Creation of an online system for land allocation

Upfront identification of land for companies moving out of China

Infrastructure and skilled manpower availability through the mega leather cluster created at Agra by the central government

Sector Specific Factors

Easy availability of raw material. Whereas, the alternate manufacturing destinations like Vietnam & Thailand are dependent on imports for leather, India accounts for 13% of the world leather production

Leather being a labor-intensive sector, availability of a low-cost and young workforce is a key advantage for India

Availability of export infrastructure due to a large export market (USD 1.8 Bn in 2017)

Large domestic market: 2nd largest footwear consumer in the world

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Factors Influencing Shift

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CASE STUDY: SUPPLY CHAIN DIVERSIFICATION OF PHARMACEUTICAL & MEDICAL DEVICE COMPANIES


Shift

Overdependence on China….

Most US and European manufacturers are dependent on China for supply of active pharmaceutical ingredients and medical devices

….To a Rebalanced Supply Chain

Pharmaceutical and medical device companies plan to shift a part of their production capacity to India

Abbott and Medtronic have initiated the process

Factors Influencing Shift

Policy InitiativesSector-Specific Factors

Abbott and Medtronic are already present in the Indian market making their shift of manufacturing relatively seamless

Strong manufacturing ecosystem: India is the largest exporter of generic pharmaceuticals in the world (20% share); largest vaccine producer; 10,000+ manufacturing facilities including that of many globally reputed brands

Both companies would be eligible for the Production Linked Incentive Scheme announced by the government: Incentive is 5% of incremental sales over 2019 -

20 sale of devices manufactured in India

The COVID crisis is resulting in a need to diversify and rebalance global drug and medical device supply chains

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GCA assists clients end-to-end from development of a manufacturing roadmap to on-ground implementation

HOW GCA CAN HELP COMPANIES ESTABLISH A MANUFACTURING PRESENCE IN INDIA

Assess Suitability of India as a Manufacturing Base

Determination of Manufacturing Route

Inorganic

Greenfield

Partner Shortlisting

Location Analysis

Deal Execution

Cost Inputs

Implementation Support

Post-Merger Integration

GCA combines its tested financial advisory and consulting capabilities

to comprehensively assist clients

Comprehensive assessment of the macro environment & client’s sector: PEST (Political, Economic, Social,

Technology) analysis Maturity of current manufacturers

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SELECT CASE STUDIES

Leading Japanese Engineering Company: India Entry Strategy

Market assessment Strategic entry options Target finalization and business due diligence Deal negotiation and execution Post-Merger Integration (PMI)

Global Logistics Company: India Growth Strategy

Market assessment Value chain mapping of key players Target finalization Business due diligence Deal negotiation and execution

US-Based Specialty Chemical Company: Manufacturing Strategy

Assessment of the competitive landscape Logistics and distribution modelling Techno-commercial assessment of the various procurement sources Business case evaluation for manufacturing partnership (JV)

Japanese Steel Company: India Entry Strategy

Market assessment Strategic entry options Target finalization and business due diligence Business due diligence Deal negotiation and execution

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FOR FURTHER INFORMATION, PLEASE CONTACT:

Sameer Jindal

Managing Director

Mumbai

[email protected]

+91 22 6106 9001

Suman Jagdev

Director

Mumbai

[email protected]

+91 22 6106 9013

GCA Advisors, LLC is the US entity of GCA, a global investment bank that provides strategic M&A and capital markets advisory services to growth companies and market leaders. The firm offers worldwide coverage with over 500 professionals in 25 locations across America, Asia and Europe. Built by the people that run the business, GCA is a firm of experts who focus on deals that require commitment, original perspective, skill and exceptional networks.

www.gcaglobal.com

This report was prepared by GCA Advisors, LLC, a registered broker-dealer and member of FINRA and SIPC. Sources of data include Capital IQ and other news organizations. Information obtained from third-party sources is considered reliable, but we do not guarantee that the information herein is accurate and complete. The report shall not constitute an offer to sell or the solicitation of an offer to buy any of the securities mentioned herein; past performance does not guarantee future results. Recipients of this report should not interpret the information herein as sufficient grounds for an investment decision or any other decision.

DISCLAIMER: This report includes logos or other words or devices that may be registered trademarks of their respective owners. Such use is solely for purposes of convenience in referring to the trademark owners and their products/services. This report and its contents are not endorsed by, sponsored by or affiliated with any trademark owners. GCA Advisors, LLC and its affiliates are not affiliated with any trademark owner but may provide financial services to one or more trademark owners or their affiliates. For more information regarding any transactions, please contact us.

Q2 2020 UPDATE - gcaaltium.com€¦ · 4. Structural reforms implemented by the government have...

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