M&A Potential in India-China Trade: Opportunities and Key Constraints

The recent diplomatic dialogue between Indian Prime Minister Modi and Chinese President Xi Jinping, while signalling a potential diplomatic breakthrough, is unlikely to lead to an immediate shift in India-China economic and trade dynamics. According to the Global Trade Research Initiative, India’s significant trade deficit with China, which exceeded USD 387bn over the last five years, highlights deep structural economic dependencies that cannot be addressed by diplomacy alone. To bridge this gap, India must focus on strengthening domestic manufacturing capabilities, diversifying its sources of imports, and promoting export growth. 

The trade data analysed by India Briefing highlights a clear trend; India’s exports to China have stagnated at around USD 16bn annually since FY20, primarily in raw materials such as iron ore and chemicals. Meanwhile, imports from China have surged from USD 65bn in FY20 to over USD 101bn in FY24, driven largely by cost-competitive Chinese industrial goods such as electronics, telecom equipment, pharmaceutical APIs, and machinery. This imbalance underscores India’s limited value addition in its exports compared to China’s high-value finished goods.

Implications for cross-border M&A investments

Given China’s dominant presence in sectors crucial to India - especially electronics, telecom, and pharmaceuticals- Chinese companies are likely to increasingly pursue M&A activities in India to strengthen their market position. Major industry players have already established a strong foothold, capitalising on the cost competitiveness of Chinese goods and India’s expanding consumer base. With the surge in government restrictions on Chinese investments since 2020, Chinese firms are expected to shift their focus toward M&A in labour-intensive and less regulated sectors such as textiles and e-commerce, or alternatively, indirectly through venture capital channels. 

On the other hand, some Indian companies operating in China - particularly in pharmaceuticals, IT services, and automotive components - are facing challenges in China’s tightly regulated, high-tech sectors. While India boasts strengths in cost-effective production and service delivery, China has shown limited interest in direct Indian investments in crucial sectors like electronics and electric vehicles, preferring to maintain a competitive edge through domestic players. 

However, the growing banking ties between India and China present new opportunities for cross-border M&A, as companies engage in more streamlined financial operations, which ease the path for acquisitions. As both nations aim to strengthen economic relations, this financial cooperation is likely to foster a conducive environment for strategic M&A, enhancing market access and technological advancements.

Recent telecom and IT partnerships between Indian and Chinese firms further highlight promising M&A prospects. These partnerships could pave the way for future acquisitions, enabling Indian companies to access advanced Chinese technologies and strengthen their foothold in the telecom industry.

Domestic M&A impact in India

The government’s “Make in India” and “Atmanirbhar Bharat” initiatives are driving local companies to boost domestic production, particularly in sectors traditionally dominated by Chinese imports. This has led to a resurgence of M&A activity in India, with a 13.8% increase in deal value, reaching USD69 bn in the first nine months of 2024, compared to USD 60bn during the same period in 2023. Indian companies are likely to pursue acquisitions in electronics, manufacturing, and pharmaceuticals to strengthen their production capacities and develop competitive advantages against Chinese imports. 

Domestic M&A impact in China

Chinese companies may also adapt by consolidating their market position domestically, especially given the challenges to M&A expansion in India and the broader Asia-Pacific region. In the first half of 2024, M&As involving Chinese companies fell by 45% year-on-year, reaching around USD 96bn, as economic struggles and stricter espionage laws hindered cross-border deals, according to Nikkei Asia. Some companies have already tapped into India’s market and may now focus on bolstering their domestic resources and technological capabilities in electronics, telecommunications, pharmaceuticals, and advanced manufacturing within China. 

Concluding thoughts

Recent diplomatic progress between India and China could positively influence the Indian M&A market, opening doors for strategic partnerships, particularly in technology and manufacturing. Reconsidering restrictions on Chinese investments, especially in electric vehicles (EV) and batteries, would allow Indian firms to access advanced technology and expertise through joint ventures, boosting domestic production capabilities. Easing visa regulations for Chinese technicians would also support smoother integration of expertise in key infrastructure and energy projects. Additionally, improved relations could spur growth for telecom companies, attracting investment for the expansion of 5G networks and telecom infrastructure. Collectively, these developments enhance India's appeal for foreign investment, offering Indian companies valuable partnerships that foster innovation and competitive growth across sectors.