Competitiveness Vs Triumphalism for manufacturing in India- getting the equations right
By: Amit Bhushan Date: 14th Aug. 2014
With 'supposedly' having focus on manufacturing/industry, the government is trying to drum up support for 'the businessmen' again, amongst the bureaucracy as well as public, so that they 'become' responsive/sensitive to the concerns of the 'sector'; 'much more than previous'. The interpretation is that this is as per desires of the populace as expressed through 'votes' in elections. The 'great new idea' is that these businessmen will invest in putting up plants which will employ 'millions' and the country will become a 'manufacturing powerhouse'. Nothing can be farther from truth, if past experience is any indicator. In practice, the businessmen will only invest is some ramshackle operating unit which churns out shoddy products, perform some branding and develop distribution for such brands. This is because seasoned businesses will pour investment where 'profit' is. And for profits, competitiveness is paramount and not doses of myth or lectures. In a serious operations for manufacturing i.e. other than assembly, the factors that impact competitiveness is 'cost of procurement' for which infra including payments infra plays a role; then there is 'cost of works or factory' cost which are impacted by cost of energy, manpower, water and facility rent; and then 'office cost' involving branding and distribution etc. Distribution abroad is exports and again relies heavily on infra and underlying transaction cost including financing for such exports and payments risk there under.
India has high transaction cost for procurement of goods (especially imports and exports) as our trade facilitation mechanism and infra is still under developed for cost effective movement of goods and trade linkages for most of the minerals and components is weak because supply chain is not well planned and mature. The facility or factory cost is high in comparison to competing countries because of high rentals; inadequacy of power, water and sanitation; expensive financing due to perceived risks (which includes high risk of project development as well as high cost of imported capital goods); and perception about labour being uncompetitive/unskilled for the kind of wages. It is the office costs components where our entrepreneurs try to out-compete their MNC counterparts (in same location) and feel that they are doing some good job. This is because such cost need to be absorbed within the country as branding and distribution are mainly for home consumption (provided goods manufactured are not for exports). We have situation that due to efficient professional services from 'office', such services can also be exported to other costly locations due to manpower arbitrage for skilled manpower with necessary maturity/competency. R&D, project planning and accounting, credit management, payments processing and settlement/reconciliation etc. can deemed to be part of such office operations.
Any hasty decision by some megalomaniacal organization with limited understanding of 'manufacturing scenario' to push the government for 'manufacturing/ industry', results in encouraging banks to lend aggressively to 'large conglomerates' to put up 'large factories' about which bankers really have no clue. Playing around with bureaucrats other statutory bodies including judiciary, who can obstruct and question, serves to reduce scrutiny that the 'policy and project assessment reports' deserves and further makes investors/people susceptible. Assumption is made/developed by bankers, retail investors about the units being proposed; that such units will manufacture huge quantum of goods for domestic consumption as well as exports on the base of gung ho news being poured out by 'your friendly media'. Volumes of Feasibility reports are designed to justify the needs for 'your/bank's funds' and this involves 'investments' by corporates in large swathes of lands on which supposedly a futuristic plant will be put up. In effect it is only the competitive 'assembly' and 'office' is put in place which may include a few actual manufacturing units (generally small to med-sized) for components whose local manufacturing can be profitable (for a specified period of time in future) given the 'landed cost of such components'. The finishing assembly line processes some domestic and other imported components for local branding and distribution. The rest of the investment by banks becomes ready for almost perennial or sometimes suitable (i.e. for limited period of time) restructuring. Note that some manufacturing assets/factories also become non-performing due to emergence of more competitive new locations as well as due to technological obsolesce. The Businesses 'settle' with banks by 'commercializing' and capitalizing land holding in conjunction with political god fathers and move on to 'new projects' at emergence of suitable opportunity. This may also involve pepping up stock markets to get equity component from 'small investors' to make them partner in 'profits' (anybody's guess what such investor will get 'over the long term'). It may be noted that despite the long experience, banks- local as well as global, still follow the call of the government to shore up finance as per priorities.
By focusing on 'manufacturing' alone, no country has ever shored up manufacturing. It is by focusing on competitiveness that the countries have shored manufacturing/ industry and maintained/developed their position in global order. One can quote examples of Germany, Japan, the US or China. The mechanism for achieving competitiveness can be basis innovation and technology (Germany/the US), cheap capital (Japan/the US), highly developed and mature supply chains (Japan) or Cheap labour and infra (China). Access to markets including favourable opinion about brands for premium positioning and low barriers in other countries is the other hidden component for competitiveness (this happens when there are prevailing low standards in buyer country & need to invest for product upgrade is low; a country engagement model is built around this and supported by institutions in exporting country along with the promotion material for such wares and may some time involve dollops of buyer finance). The pundits in India will discuss 'model states' and 'state models' for manufacturing where an ordinary viewer will end up being totally clueless as what the discussion is about and the targeted end state and this can include learned bankers as well as seasoned investors. The whole bet is on hype and euphoria which will yield retail investors on whom costly 'paper' can be dumped (whenever this fact is realized by them) so that the risk taking is easier for such seasoned investors. This is all the while when 'good data' is churned out and discussed by 'learned economists, bankers and journos' who are adept to behave as though stunned and spell bound by the turn around in business scenarios/specific projects/business groups, even though we may not have any change at ground level with reference to competitiveness, although a slew of new widgets may start appearing including some new signboards and advertisements to keep the buzz about something new happening somewhere, where…
By: Amit Bhushan Date: 14th Aug. 2014
With 'supposedly' having focus on manufacturing/industry, the government is trying to drum up support for 'the businessmen' again, amongst the bureaucracy as well as public, so that they 'become' responsive/sensitive to the concerns of the 'sector'; 'much more than previous'. The interpretation is that this is as per desires of the populace as expressed through 'votes' in elections. The 'great new idea' is that these businessmen will invest in putting up plants which will employ 'millions' and the country will become a 'manufacturing powerhouse'. Nothing can be farther from truth, if past experience is any indicator. In practice, the businessmen will only invest is some ramshackle operating unit which churns out shoddy products, perform some branding and develop distribution for such brands. This is because seasoned businesses will pour investment where 'profit' is. And for profits, competitiveness is paramount and not doses of myth or lectures. In a serious operations for manufacturing i.e. other than assembly, the factors that impact competitiveness is 'cost of procurement' for which infra including payments infra plays a role; then there is 'cost of works or factory' cost which are impacted by cost of energy, manpower, water and facility rent; and then 'office cost' involving branding and distribution etc. Distribution abroad is exports and again relies heavily on infra and underlying transaction cost including financing for such exports and payments risk there under.
India has high transaction cost for procurement of goods (especially imports and exports) as our trade facilitation mechanism and infra is still under developed for cost effective movement of goods and trade linkages for most of the minerals and components is weak because supply chain is not well planned and mature. The facility or factory cost is high in comparison to competing countries because of high rentals; inadequacy of power, water and sanitation; expensive financing due to perceived risks (which includes high risk of project development as well as high cost of imported capital goods); and perception about labour being uncompetitive/unskilled for the kind of wages. It is the office costs components where our entrepreneurs try to out-compete their MNC counterparts (in same location) and feel that they are doing some good job. This is because such cost need to be absorbed within the country as branding and distribution are mainly for home consumption (provided goods manufactured are not for exports). We have situation that due to efficient professional services from 'office', such services can also be exported to other costly locations due to manpower arbitrage for skilled manpower with necessary maturity/competency. R&D, project planning and accounting, credit management, payments processing and settlement/reconciliation etc. can deemed to be part of such office operations.
Any hasty decision by some megalomaniacal organization with limited understanding of 'manufacturing scenario' to push the government for 'manufacturing/ industry', results in encouraging banks to lend aggressively to 'large conglomerates' to put up 'large factories' about which bankers really have no clue. Playing around with bureaucrats other statutory bodies including judiciary, who can obstruct and question, serves to reduce scrutiny that the 'policy and project assessment reports' deserves and further makes investors/people susceptible. Assumption is made/developed by bankers, retail investors about the units being proposed; that such units will manufacture huge quantum of goods for domestic consumption as well as exports on the base of gung ho news being poured out by 'your friendly media'. Volumes of Feasibility reports are designed to justify the needs for 'your/bank's funds' and this involves 'investments' by corporates in large swathes of lands on which supposedly a futuristic plant will be put up. In effect it is only the competitive 'assembly' and 'office' is put in place which may include a few actual manufacturing units (generally small to med-sized) for components whose local manufacturing can be profitable (for a specified period of time in future) given the 'landed cost of such components'. The finishing assembly line processes some domestic and other imported components for local branding and distribution. The rest of the investment by banks becomes ready for almost perennial or sometimes suitable (i.e. for limited period of time) restructuring. Note that some manufacturing assets/factories also become non-performing due to emergence of more competitive new locations as well as due to technological obsolesce. The Businesses 'settle' with banks by 'commercializing' and capitalizing land holding in conjunction with political god fathers and move on to 'new projects' at emergence of suitable opportunity. This may also involve pepping up stock markets to get equity component from 'small investors' to make them partner in 'profits' (anybody's guess what such investor will get 'over the long term'). It may be noted that despite the long experience, banks- local as well as global, still follow the call of the government to shore up finance as per priorities.
By focusing on 'manufacturing' alone, no country has ever shored up manufacturing. It is by focusing on competitiveness that the countries have shored manufacturing/ industry and maintained/developed their position in global order. One can quote examples of Germany, Japan, the US or China. The mechanism for achieving competitiveness can be basis innovation and technology (Germany/the US), cheap capital (Japan/the US), highly developed and mature supply chains (Japan) or Cheap labour and infra (China). Access to markets including favourable opinion about brands for premium positioning and low barriers in other countries is the other hidden component for competitiveness (this happens when there are prevailing low standards in buyer country & need to invest for product upgrade is low; a country engagement model is built around this and supported by institutions in exporting country along with the promotion material for such wares and may some time involve dollops of buyer finance). The pundits in India will discuss 'model states' and 'state models' for manufacturing where an ordinary viewer will end up being totally clueless as what the discussion is about and the targeted end state and this can include learned bankers as well as seasoned investors. The whole bet is on hype and euphoria which will yield retail investors on whom costly 'paper' can be dumped (whenever this fact is realized by them) so that the risk taking is easier for such seasoned investors. This is all the while when 'good data' is churned out and discussed by 'learned economists, bankers and journos' who are adept to behave as though stunned and spell bound by the turn around in business scenarios/specific projects/business groups, even though we may not have any change at ground level with reference to competitiveness, although a slew of new widgets may start appearing including some new signboards and advertisements to keep the buzz about something new happening somewhere, where…