India’s China dilemma is about capability, not import reduction
A recent Reuters poll pointed to continued resilience in China’s export growth, even as weakness persists in parts of its domestic economy. This resilience reflects a larger shift: China’s manufacturing capabilities are moving decisively up the value chain. For its trading partners, the question is no longer simply how much China exports, but what it exports now—and whether they can compete with China without continuing to depend on the industrial ecosystem that underpins those exports.
This is the backdrop to warnings about ‘China Shock 2.0.’ Unlike the first China shock that followed China’s entry into the WTO and the rapid expansion of its labour-intensive exports, the new shock is qualitatively different. Chinese firms are now formidable competitors in clean-energy technologies and advanced manufacturing. What is reaching global markets is therefore not simply another wave of inexpensive Chinese goods. China Shock 2.0 is a capability shock, driven by the scale, technological learning, supplier networks and sustained industrial investment behind those goods.
The idea of China as an emerging ‘electrostate’ captures a significant dimension of this transformation. An electrostate derives economic and strategic power from capabilities across technologies that generate, store and use electricity—from solar panels and batteries to EVs and power grids—much as petrostates derived influence from hydrocarbons. China’s advantage lies not in any single industry but in the depth and integration of the industrial ecosystem that connects these technologies.
What turns this industrial transformation into a global shock is the scale at which China can deploy these capabilities. Chinese firms are no longer merely catching up; they are expanding abroad, building on production systems built around vast domestic capacity. Their ability to combine competitive costs with technological sophistication creates pressures quite different from those generated by the first China shock. Competition now reaches industries that other economies regard not only as sources of employment and growth, but as central to their technological and strategic futures. In fact, the gravity of China Shock 2.0 lies precisely in the fact that China is not merely a formidable competitor. It is also a critical supplier and a hub of industrial ecosystems that other economies may need to compete with.
The right balance
Yet the balance between competitive threat, supply dependence and development opportunity varies across economies. For the US, the concern centers on preserving technological leadership while reducing dependence on a strategic competitor. For Europe, Chinese competition threatens established industrial strengths, most visibly in the automotive sector. The calculus is different for many developing economies, where affordable Chinese solar panels, batteries and other clean-energy technologies can reduce electrification costs and accelerate the energy transition. What appears as industrial displacement from one vantage point can therefore represent a development opportunity from another.
India fits uneasily into either category. It is not merely seeking access to affordable Chinese technologies; it aspires to become a major manufacturing and technological power. Unlike the US, however, India cannot restrict economic and technological links with China from a position of accumulated industrial strength. Apple’s expanding manufacturing footprint in India captures this tension. Tata Electronics has acquired Wistron’s Indian operations and expanded iPhone production, but relocating assembly does not automatically relocate the production system behind it. China – and Taiwan – remain at the centre of Apple’s most developed supplier and manufacturing ecosystem, built over decades. In other words, the geography of production can diversify faster than the industrial capabilities that sustain it. Building an alternative ecosystem may therefore require continued access to components, equipment and capabilities embedded in the Chinese one.
This is India’s de-risking dilemma. Too little de-risking can expose critical industries to supply disruptions, export controls or geopolitical coercion. Indiscriminate disengagement, however, can raise costs, restrict access to technology and impede the growth of industries India is seeking to build. India must distinguish between dependencies that create strategic vulnerability and linkages that help develop capabilities it still lacks.
India should therefore adopt a differentiated approach to de-risking. It should build alternatives where disruption would diversify to include substitute suppliers. Where Chinese machinery, components or technology are difficult to replace but support domestic production and technological learning, continued engagement may serve India’s longer-term interests—provided such engagement contributes to capability-building within India.
Mapping dependencies
These dependencies should be assessed against their criticality, concentration, substitutability and controllability. The relevant question is not simply how much India depends on China, but what a particular dependence enables India to learn, build and eventually do for itself
China-plus-one cannot simply translate into China-minus-one. Supply-chain diversification and capability-building are not the same. Replacing a Chinese supplier with one in another country may reduce exposure, but it does not necessarily create technological or manufacturing capability within India.
China’s advantage rests on industrial ecosystems developed over decades, and reproducing them is much harder than redirecting trade. For India, the real test of de-risking is not whether imports from China decline, but whether dependence is being converted into greater domestic capacity to innovate, manufacture and scale.
China Shock 2.0 will intensify pressures on countries to choose between openness and protection, and between engagement and disengagement. For India, these binaries obscure the real policy challenge. The objective should not be disengagement for its own sake, but greater freedom of economic and strategic choice—the essence of strategic autonomy. That freedom will depend on the capabilities India builds at home, not simply on the dependencies it eliminates abroad. India will ultimately have de-risked successfully not when it buys less from China, but when it is better able to decide what it still needs to buy from China—and what it no longer needs to.
The author is a professor in Humanities and Social Sciences at IIM Indore. Views are personal
