According to media reports, the blast is said to have caused tremors equivalent to a 2.2 magnitude earthquake. It rendered the air and water toxic and houses uninhabitable, and left scores of people with cuts from flying glass shards. About 4,000 residents and workers were forced to evacuate.
The plant, set up in 2007, was found to have 13 safety problems after an inspection last year. These included leaks, poor site management and a lack of operating procedures, according to reports.
This wasn’t a one-off. Similar fatal explosions in China over the past few years have shaken the Chinese government under President Xi Jinping.
Since late 2016, Chinese chemical companies have been subject to strict environmental tests, leading to the closure of many plants. Almost 70% of chemical companies are said to have failed the tests, according to reports.
Such inspections used to be a mere formality. Not anymore. Officials who failed to ensure compliance were dismissed. Some were even handed over to the police.
Reducing environmental pollution quickly became one of the top priorities of the Chinese government. Chemical companies had two options – stop production or upgrade to ensure compliance. Many of these companies needed to relocate to dedicated industrial parks.
Also read | China plus one: Will the dragon now make way for the elephant?
As such, many small chemical producers shut down. For bigger companies, costs shot up and approvals took much longer. Many of these companies were catering to global demand, but the government’s tough measures caused the supply of several critical chemicals to dry up.
This led to a spike in prices and supply interruptions for the industries that depended on these chemicals, causing them to look elsewhere. Beneficiaries included Indian chemical companies, which rushed to fill the supply gap.
But that good run did not last long. Indian chemical companies have struggled of late to put up capacity with China offering products at throwaway prices.
A new ‘China plus one’
China’s internal issues were the initial trigger for widespread ‘China plus one’ de-risking strategies, but the version that has been emerging post-covid is different.
Since the pandemic, governments – and not just companies – have been looking to rewire supply chains. This is not driven by cost or availability issues in China. It’s a proactive step to avoid over-reliance on a single economy.
India, along with emerging and Southeast Asian economies, have benefited. What could turbo-charge this shift is policy measures – a focus on indigenisation, and production-linked incentive (PLI) schemes.
Companies in the electronics manufacturing supply chain have been big beneficiaries, with Dixon Technologies much-celebrated star of this story.
Many more companies could benefit. For instance, according to TCPL Packaging’s management, the iPhone presents a huge opportunity as Apple appears serious about expanding its presence in India.
Also read: Dixon is becoming India’s Foxconn
Another potential beneficiary is Faze Three. The company supplies home textiles other than sheets and towels, including floor coverings, top of the bed (TOB) textiles, curtains, and other value-added products. It’s a supplier to global retail chains such as Target, Walmart, Bed Bath & Beyond and others.
Perfect storm
Historically, China has dominated these categories. But with manufacturing costs increasing in China, a ban on Chinese cotton, the emergence of a level playing field on tariffs, and the government’s intention to make up for the lost opportunity in technical and manmade textiles, the timing could not have been better for India. Even a small diversion could open up a billion-dollar opportunity for domestic companies such as Faze Three.
Also read: Exports show signs of a shift to higher value-added products
If Tesla enters India, companies such as Valiant Communications, Sundaram Fasteners, Samvardhana Motherson International, Suprajit Engineering, Sona BLQ Precision Forgings and Hindalco Industries could benefit.
Overall, ‘China plus one’ and the replugging of supply chains could be a long-term phenomenon this time. Watch this space.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
