India’s re-emergence in Manufacturing

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Par 100 posts (V.I.P)
December 1st, 2005 by Reuben Abraham

For the longest time, most analysts simply assumed that India had lost the manufacturing race to China and should therefore concentrate on developing its service sector, where it retained a competitive edge. In fact, there were those, like Stephen Roach, who argued that India would shoot itself in the foot by concentrating on building a manufacturing base. Not so, says Jo Johnson, who has written an interesting piece in the Financial Times about India’s growing manufacturing capabilities, especially as companies look to avoid being over-exposed to China (not to mention access to a huge internal market in India). First, Johnson points to the problems India faces.

No one denies that infrastructure remains the biggest single obstacle to “Made in India” emerging as a world force. With the exception of telecommunications, the cost of most infrastructure services is 50-100 per cent higher than in China, with Indian manufacturers paying twice as much for electricity and three times as much for rail freight. The gap is widening, too. China spent seven times as much as India on infrastructure in 2003, the latest year for which figures are available, and three times as much relative to the size of its economy - Dollars 150bn (10.6 per cent of gross domestic product) compared with Dollars 21bn in India (3.5 per cent of GDP), according to Morgan Stanley. India’s cash-strapped state and central governments are unlikely to be able to bring infrastructure up to Chinese standards any time soon, especially as politicians prefer to spray their limited resources at voters in the form of subsidies rather than invest in construction projects with a longer pay-back.

Specialists in process operations management say Indian factories are also years behind China’s. Mark Gottfredson, global head of performance improvement at Bain, the management consultancy, says he has yet to see “any real stars” in Indian manufacturing. “China has world-class manufacturing. India has third-world manufacturing. I have been in a lot of auto plants, textile factories and metal foundries and was not impressed. They do not pay as much attention to process flow, inventory management, continuous improvement or safety. I’ve been in foundries where there are sparks flying around and the operators don’t even have eye protection.”

The reforms process, however, seems to be bearing fruit.

These reforms included the gradual abolition of import licensing and the reduction of extremely high industrial tariffs; the privatisation of aluminium, car manufacturing, telecoms and information technology companies; the liberalisation of the exchange rate regime and the cautious relaxation of rules governing foreign direct investment. Their cumulative effect has triggered a consumption-led boom that, in turn, has for the first time created a genuine mass market for Indian manufacturers.

Manufacturing has started to enjoy its fastest growth in memory, expanding at 9.8 per cent in the five months to August compared with a year earlier, and business confidence indices are at their highest levels since 1995. After slashing their workforces in the 1990s, industrialists are adding capacity, not just to cater to domestic consumers but also to feed a growing appetite for “Made in India” abroad. Exports in the seven months to October, three-quarters of which were of manufactured products, were up 22 per cent.
In no sector is India’s emergence as a force in global manufacturing more evident than in mobile telecommunications equipment. It is not difficult to see why. With its operators adding 2m subscribers a month - and the figure is rising - India is the world’s fastest-growing big mobile telecoms market, with 52m subscribers today and probably more than 300m in 2009, analysts say. Yet until South Korea’s LG Electronics started a plant in Pune this March, none of the international market leaders offered a Made-in-India handset, preferring to import phones from around the world. Motorola will next month start to assemble phones in India in the “first step in a multi-phase manufacturing strategy for India”, while Nokia plans to open its first Indian manufacturing facility in Tamil Nadu in the first half of next year.

Baba Kalyani of Bharat Forge makes an interesting point about manufacturing and job generation.

“Manufacturing jobs will get created but it will not be like before, when unskilled labourers from rural areas got work. They will need to find jobs in construction, building roads, ports and power infrastructure . . . What makes Indian manufacturing competitive today is technology, not cheap labour. We tried it the other way around before and it didn’t work.”
This makes it all the more important for the government to relax rigid labour laws, such as the requirement that companies with more than 100 employees receive approval from state authorities to shed staff, and further reduce the number of sectors, such as handloom, in which only inefficient small-scale production is permitted. Even if it does all this, India would still struggle to find jobs for a working-age population set to expand by 71m to reach 762m in the next five years, let alone cater for the millions leaving the land for the cities and the 38m backlog of unemployed. “India has a serious employment problem and manufacturing on its own is not a panacea,” says Bibek Debroy, an economist helping the government to devise a national manufacturing strategy.

In related news, India’s economy clocked an 8% growth rate in the second quarter, compared to 6.7% last year. Financial services and construction seem to have registered the highest growth rates.
 
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