The great supply-chain rewiring, a warmer Asia, and India’s opening to move up the supply chain

The brief exchange between Japan’s trade minister, Ryosei Akazawa, and China’s commerce minister, Wang Wentao, at the recent APEC meeting in Suzhou looked like a modest thaw in Asia’s most important trading relationship. It was not. It was a reminder of how hard it has become to manage dependence on China without provoking retaliation. The real question is not whether Japan and China are warming to each other, but whether the latest phase of supply-chain rewiring will let India move from assembly base to genuine manufacturing hub.

Japan’s predicament captures the wider dilemma: it cannot break with China, but it can no longer ignore the cost of dependence. Beijing has restricted heavy rare earth shipments to Japanese firms, placed companies on export-control watchlists, and introduced Decrees 834 and 835 to scrutinise or penalise businesses that shift sourcing away from China or comply with foreign sanctions. That instinct to preserve leverage is precisely what has pushed China+1 from slogan to strategy. Capital is following the search for safer production: ASEAN drew a record $225 billion in FDI in 2024, while FDI into China fell 29% to its lowest level in decades.

India has emerged as one of the most compelling stories in this reconfiguration. Gross inward FDI reached $94.5 billion in 2025-26, and electronics shows how quickly policy intent became manufacturing scale. India now makes roughly one in four of the world’s iPhones, placing its assembly inside global lead-firm networks. Electronics exports rose 42% in the first half of 2025-26 to $22.2 billion, climbing from India’s seventh-largest export category in 2022 to its third. That is a genuine achievement—but it is best understood as a platform, not the finish line.

That distinction is crucial. Much of what is moving across Asia is still final assembly, while the intermediate goods, machinery, processed materials, chemicals, and precision components that feed those factories remain disproportionately Chinese. If diversification were reducing dependence as fast as it relocates assembly, the trade numbers would look different. Instead, ASEAN’s trade deficit with China jumped 44.6% in 2025 to $275.8 billion, more than double its level two years earlier, and India’s deficit reached a record $112.6 billion in 2025-26 on imports of electronics, machinery, chemicals, and plastics. The lesson is sobering: assembly has relocated, but dependency has not.

India’s real opportunity—the place where it can genuinely move up the supply chain—is to fill the missing middle, the layer where components, subassemblies, processed inputs, and specialised industrial materials are produced at scale. So long as that layer stays thin, India will

keep exporting more while capturing too little of the value; once it deepens, the country can become a supply-chain anchor rather than a mere assembly stop. Policy has already moved on two linked tracks. The government has cut more than 47,000 compliance requirements, decriminalised thousands of minor provisions through Jan Vishwas reforms, and expanded single-window clearances that have shortened some approvals from months to under 30 days. Meanwhile, production-linked incentives, semiconductor and electronics-component support, critical-minerals policy, and plug-and-play industrial parks are pushing manufacturing beyond assembly.

Capital is responding to this clearer proposition. Manufacturing FDI rose 18% to roughly $19 billion in 2024-25, increasingly aligned to the deeper industrial capabilities India is building. U.S. investment more than doubled to around $12 billion in 2025-26, while Japan remains a leading source of capital and technology. The signs are concrete: Micron’s assembly and test facility, Tata Electronics’ fabs in Gujarat, and the HCL-Foxconn display-driver venture suggest an upstream semiconductor base is forming. Major cloud and AI commitments from Microsoft and Google are landing too, strengthening an ecosystem in which higher-value manufacturing increasingly depends on data, design, and AI-enabled production.

India is also building a market-access platform large enough to matter to global firms. Its nine free trade agreements span 38 countries and cover more than two-thirds of global trade and 70% of global GDP. Newer deals increasingly pair market access with investment commitments, including the EFTA agreement’s best-effort target of $100 billion over 15 years and a similar India-New Zealand pact worth USD 20 billion. But preferential access becomes commercial power only when firms meet standards on quality, traceability, carbon accounting, and delivery reliability.

Japan could be the decisive partner in this transition because its strengths map directly onto India’s missing-middle gaps. Japanese firms bring patient capital for component plants, process technology for high-yield manufacturing, supplier discipline for quality and delivery, and expertise in the inputs beneath final assembly. Their capabilities in semiconductors, precision components, industrial machinery, chemicals, batteries, critical minerals, and clean-energy equipment align closely with the segments India needs to deepen. The India-Japan Joint Vision, targeting ¥10 trillion in private investment over the coming decade, and the Quad Critical Minerals Initiative, aiming to mobilise up to $20 billion for processing outside China, should be read as more than diplomatic signalling. They are a practical route to filling the component, processing, and materials gaps that keep India dependent on Chinese inputs.

India has earned its place in the new supply-chain conversation, with the incentives, agreements, investment flows, and assembly credentials to compete. Now comes the larger opportunity. If it can deepen suppliers, improve logistics, keep regulation predictable, upgrade standards faster, build far more component capacity at home, and convert a warmer Asia into durable industrial partnerships, India can turn today’s momentum into lasting industrial power. The great rewiring now under way gives India a rare chance not merely to assemble the world’s products, but to move up the supply chain and produce the inputs that make them possible.

(Pandey is Partner, Shardul Amarchand Mangaldas & Co; Minocha is Research Analyst, Shardul Amarchand Mangaldas & Co. Views are personal.)