China Is Choking India’s Factories — And India Has No Quick Fixes

India’s industrial ambitions, from building a global electronics base to becoming a major defence exporter, are now facing a slow but methodical stranglehold. The pressure isn’t coming from domestic policy missteps or global demand shortfalls. It is being engineered, behind the scenes, by China.

This isn’t a conventional trade war with tariffs or sanctions. It is a quieter and more insidious campaign, carried out through complex regulations, hidden barriers, and deliberate uncertainty.

China’s export denial strategy has become a powerful tool of economic coercion. Its goal is not to provoke openly but to undermine gradually.

The tactics vary but follow a consistent pattern: unexplained customs delays, arbitrary export license denials, and the sudden withdrawal of technical experts in the middle of key projects. What links them is plausible deniability. These actions are never part of official statements and rarely trigger global outcry. Yet their cumulative impact is crippling.

Nowhere is this clearer than in the unfolding rare earth magnet crisis. These magnets are central to India’s vehicle manufacturing ecosystem, used in motors, turbines, and advanced electronics. Since early April, China, which controls most of the world’s magnet production, has effectively frozen shipments to India.

The fallout has been swift. The likes of Tata Motors, Hero MotoCorp and Maruti Suzuki have all scrambled to fix the problem. Companies have rerouted sourcing teams, called emergency meetings, and sent delegations to China. But all of it has come to nought.

Trade records show that more than 35 Indian firms have faced outright denials or administrative dead-ends for magnet procurement since April. As of June, inventories are dangerously low. Some EV manufacturers are just weeks away from production halts.

Worse, China is increasingly weaponising its grip on critical supplies by demanding companies to give sensitive information — including production details, customer lists, and factory footage — that could directly undermine their competitive edge.

But rare earths are only the most visible part of the problem. Across multiple sectors including solar, electronics and electric vehicles, the trend is the same. For instance, Foxconn’s iPhone assembly facilities, the cornerstone of India’s high-end electronics ambitions, were recently disrupted when Chinese engineers were abruptly recalled without explanation and the shipment of specialised manufacturing equipment from Chinese ports was delayed.

In a world of fragile supply chains where resilience matters as much as cost-efficiency, India’s economic aspirations are now tied to dependencies that China is quietly exploiting. The challenge has arrived just as India positions itself as the next global manufacturing base, offering a “China plus one” alternative to multinational firms.

This raises a difficult and urgent question. How should India respond to an adversary that never declares economic war, but steadily wages it in silence? There are no easy answers.

Manufacturing in a Minefield

Despite the urgency, India faces entrenched constraints in responding to China’s export-denial tactics. Each lever India might pull risks collateral damage or falls short of the scale required to compensate for China’s dominance.

1. Lack of Immediate Alternatives

When critical components are restricted, finding replacements isn't as simple as turning to a new supplier. These aren’t commodity items you can source off the shelf — they often involve complex, specialised manufacturing chains that are tightly integrated and dominated by a few players, often with deep geopolitical entanglements.

Take rare earth magnets as a case in point. India is attempting to diversify its sources in response to China’s export restrictions, and has initiated discussions with five countries — Vietnam, Indonesia, Japan, the US, and Russia. Of these, Vietnam and Indonesia appear the most immediately promising.

However, Vietnam consumes about 90 per of its rare earth magnet production domestically, leaving only limited capacity for exports. Indonesia, which uses around 50 per cent domestically, is a better prospect, but concerns remain about how much of its supply chain is indirectly influenced or controlled by China.

Japan could be a replacement, but the magnet quality is not comparable to China's, according to Indian officials. Meanwhile, potential imports from the US and Russia are hampered by bureaucratic lag — qualifying and certifying suppliers under India’s standards could take several months. Unfortunately, industrial production lines operate on a much shorter timeline, often measured in weeks.

As a temporary workaround, Indian companies are exploring the possibility of either importing motors directly or sending sub-assemblies to China, having the magnets fitted there, and shipping them back. Since the restrictions target magnets and not finished products, this could buy time — but at the cost of increased expenses and a loss of business for Indian firms currently engaged in this segment.

2. Limited Leverage for Retaliation

While it may be tempting to respond to Chinese export restrictions with reciprocal measures, India’s ability to do so is constrained by multiple factors.

One, the asymmetry of industrial dependence.

India’s dependence on China is not a short-term imbalance, it is a structural feature of its industrial economy. Over the past 15 years, China’s share in India’s industrial product imports has risen from 21 per cent to 30 per cent, with Chinese exports growing 2.3 times faster than India’s overall imports. This growing reliance gives Beijing extraordinary leverage, without the need to issue threats or make demands.

Retaliation is not just risky, it could be self-defeating. India’s manufacturing ecosystem, from pharmaceuticals to solar to electronics, is deeply enmeshed with Chinese inputs.

Over 70 per cent of the active pharmaceutical ingredients (APIs) used in Indian drug manufacturing come from China. Electronics production, from smartphones to consumer appliances, also depends heavily on Chinese sub-assemblies and modules.

Any attempt to impose countermeasures, whether through higher tariffs, delayed customs clearance, or outright bans, would likely disrupt domestic production lines more than it would hurt Chinese exporters. India lacks the redundancy in its supply chains to absorb such blowback.

Two, China’s diversified export markets cushion the impact.

If India blocks imports, Beijing can redirect shipments to Europe, North America, or Southeast Asia, all of which remain major customers for Chinese industrial goods. India, by contrast, has a more limited export base and fewer alternative markets that can absorb shortfalls quickly. Moreover, China imports virtually no critical inputs from India in sectors like electronics, electric vehicles, or clean technology, meaning any retaliation from Delhi would have little material impact on China’s core industries.

Three, investor confidence is a collateral casualty.

Foreign original equipment manufacturers (OEMs) and global component suppliers weigh regulatory and supply chain risks when allocating capital.

If India appears unstable due to retaliatory policies, production disruptions, or a broader China-linked supply squeeze, investment flows could slow. Delays in project approvals, production planning, or component sourcing can prompt multinationals to divert resources to lower-risk destinations.

3. Domestic Capacity Takes Time

India’s push for self-reliance through schemes like the Production Linked Incentive (PLI) is strategically sound but operationally slow. Capacity creation, especially in complex, capital- and tech-intensive sectors, unfolds over years, not months.

Take rare earths, for instance. India has reserves it can exploit, but mining alone isn’t enough. It needs refineries and separation plants, which take four to five years to build and stabilise. Similarly, niche capabilities like neodymium alloying — blending rare earth metals into high-performance magnets used in EV motors and missiles — require specialised know-how that can’t be rapidly scaled.

The solar manufacturing sector highlights how difficult and time-consuming the shift can be. Under the Rs 19,500 crore PLI scheme for module manufacturing, 48.3 GW of capacity was sanctioned by the government. As of now, only 17.5 GW in modules and 6 GW in cells has been commissioned. Wafer and ingot output is almost negligible — only 2 GW of 37.5 GW awarded has come online so far.

A key factor slowing progress is the continued reliance on China. Most technology and component sourcing still flows from Chinese suppliers. Since the beginning of 2021, around 57 per cent to 100 per cent of Indian imports of products including modules, cells, wafers and solar glass are sourced from Chinese firms. China withholding tech transfer, delaying component shipments, and restricting technicians’ travel to India has directly stalled timelines.

Even in the case of rare earth magnets, the new incentive scheme currently in the works to reduce crippling dependence on China comes with a long lead time. It is expected to take at least two to five years to get off the ground, with plans to scale up capacity to around 4,000 tonnes only over the next seven to ten years.

India may aspire to build local ecosystems, but as the solar PLI scheme bottlenecks show, execution still depends on inputs controlled by China.

4. Dependence on Chinese Intermediates

Global supply chains remain heavily reliant on Chinese intermediates, even with "China+1" diversification strategies. Components sourced from Western or Southeast Asian suppliers often incorporate Chinese-processed materials.

For instance, in electric vehicle (EV) battery production, key precursors such as lithium hydroxide, cobalt, and graphite are predominantly processed in China, which controls 60–90 per cent of global supply. For instance, six Chinese companies alone produce more than 65 per cent of the world’s battery anode materials.

South Korea, China, and Japan currently dominate the global battery market. Four battery cell manufacturers in China, three in South Korea, and three in Japan together control 90 per cent of the world’s battery production. Yet, even when batteries are assembled in places like South Korea or Japan, these factories often rely on Chinese raw materials.

In effect, Lithium-ion batteries produced by companies like LG Chem or Panasonic may carry Korean or Japanese labels, but their core components—cathodes and anodes—frequently originate from Chinese refineries.

This creates a hidden dependence that remains intact even as production footprints shift. Without securing upstream inputs, “China+1” risks becoming “China+1 in name only”—a reshuffling of assembly lines, not a rewiring of supply chains.

What India Can Do: Beyond Self-Reliance Cliches

The standard playbook — domestic capacity, import diversification — remains essential. But it is too slow and too blunt to address targeted coercion. India needs smart, granular tools that respond to real-time threats.

1. Create a China-Exposure Index

India’s industrial and strategic planning lacks a unified tool to gauge where China-dependent vulnerabilities lie—and how severe they are.

A sector-wise “China Exposure Index” would offer precisely that: a structured, quantifiable lens to assess exposure in critical industries. It would move beyond anecdotal assessments, allowing policymakers to compare sectors on a like-for-like basis and identify where targeted interventions are most urgent.

The index would also serve as an early-warning system. By regularly updating indicators like input reliance, supplier concentration, and inventory buffers, it could flag sectors at risk of disruption before a crisis unfolds.

It would assign each sector a composite score based on three pillars:

• Input Dependency: The share of key components sourced from China (e.g., 90 per cent of rare‑earth magnets for EVs).

• Supplier Concentration: The number and diversity of alternative suppliers, weighted by their capacity to scale.

• Inventory Lead Time: The number of days a sector can operate on existing stocks before facing a halt.

The index could be managed either by NITI Aayog or a special cell within the Ministry of Commerce. It would guide investment incentives, trade diplomacy, and risk modelling. If a sector is 85 per cent reliant on Chinese supplies and has less than 30 days of inventory, it should trigger alerts and intervention.

Similar frameworks already exist abroad. The US Department of Defence, for instance, has evolved a supply chain risk management mechanism to identifies potential threats or vulnerabilities through the DoD supply chain. In the UK, the Bank of England developed a framework to measure the UK’s global supply chain exposure, including hidden dependencies on China, across 17 manufacturing sectors.

Interestingly, in the UK's case, the exercise revealed that China is not only the largest individual-country supplier to over half of UK manufacturing sectors, but, more importantly, this "exposure comes through indirect, ie unobserved/hidden, channels". 

By spotlighting sectors where Chinese inputs and low inventories collide, India can decide where to build domestic capacity, and where to pursue diplomatic hedges.

Such a tool would shift policy from reactive firefighting to proactive risk management, helping to prevent situations like the current rare earth magnet crisis, where no new supplies are arriving and only a few weeks of inventory remain.

Along with a China Exposure Index, India could also create Supply Chain Surveillance Cells to enable real-time monitoring of critical supply chain choke points. These cells would analyse customs data and import-export flows, flag unusual delays or denials from key suppliers like China, track firm-level inventories and bottlenecks, and coordinate with the Ministry of External Affairs for diplomatic outreach.

In 2021, South Korea, which has been at the receiving end of Chinese economic coercion in recent years, deployed a similar mechanism—an 'early warning system' to monitor approximately 4,000 critical industrial materials, including those where more than half of the supply comes from specific countries. Japan and the US have now adopted it too.

Integrated with the China Exposure Index, which identifies long-term vulnerabilities, the surveillance cells could provide dynamic, operational intelligence to ensure rapid response to potential disruptions against geopolitical and logistical risks.

2. Set Up Stockpiles — Selectively

Not every item warrants a stockpile, and not every dependency is equally risky. Some go beyond strategic concern to become critical vulnerabilities—where a disruption could have immediate national security consequences and no quick fixes exist.

These are the pressure points where alternatives are scarce, switching is slow, and the impact would be felt hardest. For these few but vital materials, stockpiles act as an insurance policy—bridging the gap, buying time to activate fallback supply chains, stabilise prices, and keep essential sectors running when normal trade is no longer an option.

Building a strategic materials stockpile, like India’s Strategic Petroleum Reserves, could help close this gap. It would operate on a rotating inventory system to maintain usability and manage costs. A central coordinating body, possibly under the Department for Promotion of Industry and Internal Trade (DPIIT), could manage warehousing, replenishment cycles, and drawdown protocols in collaboration with industry hubs.

The focus should be on materials that are:

• Irreplaceable or have long sourcing lead times

• Essential for national security or industrial competitiveness

• Exposed to potential supply disruptions from China

India’s dependence on Chinese imports for several critical minerals is alarmingly high—bismuth (85.6 per cent), lithium (82 per cent), silicon (76 per cent), titanium (50.6 per cent), tellurium (48.8 per cent), and graphite (42.4 per cent). Take Bismuth, for example, to understand why strategic stockpiling makes sense.

First, China dominates global supply, accounting for nearly 73 per cent of bismuth production, leaving few viable alternatives. While countries like Bolivia, Mexico, Canada, and Russia also produce bismuth, their output is too limited to quickly meet India’s needs if Chinese supplies were disrupted.

Second, China also leads in processing and refining, making its exports not only dominant but also cheaper and more readily available. Replacing Chinese supply would require building entirely new sourcing and processing arrangements.

This kind of concentration risk makes a strong case for India to build strategic reserves of select materials where supply shocks could cripple key industries.

Such stockpiles would serve not just in peacetime but in crises—whether conflicts, supply chain disruptions, or emergencies. Without reserves, Indian industry and defence manufacturers could struggle to replace lost equipment or sustain production during a conflict, and there would be no time to find alternate suppliers.

The US, for instance, maintains a National Defense Stockpile of critical materials to support both military and essential civilian needs during emergencies.

In a 2021 assessment, China was identified as the primary global producer or top US supplier for over 20 of the 53 critical materials the Pentagon expects would be in short supply during a conflict. This dependence is especially troubling given that the stockpile is built around a single, explicit scenario: a conventional war with China.

In India’s case, dependence on China for critical minerals is likely just as high—if not higher—than in the US.

3. Introduce a 'Resilient Trade Partners' Clause

India should introduce a 'Resilient Trade Partners' clause in its procurement policies, particularly for critical sectors such as defence, telecom, infrastructure, and energy. This clause would prioritise sourcing from countries that meet key criteria: low geopolitical coercion risk, stable diplomatic ties, and transparency.

While this approach may raise procurement costs in the short term, the long-term benefits—reduced supply shocks, investor confidence, and policy stability—far outweigh them.

Japan offers a textbook example of a measured, strategic response to supply chain coercion. When China abruptly halted rare earth exports in 2010 during a diplomatic dispute, Tokyo responded by incentivising firms to shift sourcing to countries like Vietnam and Australia, while also building domestic stockpiles. Within a month, the government approved a supplemental budget of $1.2 billion at the time to support these efforts.

Over time, this approach has paid off. Japan’s reliance on Chinese rare earths has come down from 90 per cent in 2010 to around 60 per cent now.

India has taken a similar approach in telecom. Since 2021, telecom companies rolling out 5G networks have been required to buy equipment only from government-approved “trusted sources”—a move that effectively shut out Chinese firms like Huawei and ZTE. This approach could gradually be expanded to other critical sectors.

India’s industrial ascent will depend not just on its capacity to produce, but on its ability to anticipate and neutralise supply chain risks. China will increasingly leverage its dominance over supply chains to wage a form of competition that falls below the threshold of open conflict. To protect its ambitions, India must combine long-term planning with sharper, faster responses — before pressure points turn into full-blown disruptions.

The battle for supply chain control began with the 2020 pandemic, and India cannot lean only on long-term plans like the PLI scheme to forge a robust, competitive industrial base. While PLI and targeted subsidies fuel growth in key sectors, India must act swiftly to deploy flexible, decisive tools to prevent supply chain crises like the one it faces today.