India Gains Credibility as an Emergent Export Titan

At the Tata Motors plant in Pune, near Mumbai, a potholed “torture track” simulates the spine-jarring conditions of Indian roads. In five years’ time, only one in every two of Tata’s cars may need to go through the painful ordeal of preparing for life on the subcontinent’s streets.

With a car coming off the end of the line about every 80 seconds, the group sees itself as competitive enough to make its biggest ever push into export markets, which could lift overseas revenues to half of the total by the end of the decade from a current 20 per cent.

“Made in India” is coming of age. With its call centres and software houses, India leads the world in offshored back-office services. It has so far failed, however, to fulfil its potential as a global manufacturing hub. India’s exports account for just 0.8 per cent of world trade, compared with 6.4 per cent for China’s, reflecting a myriad of infrastructural and regulatory barriers to competitiveness.

But its share of the pie could quadruple in a decade, according to McKinsey, the consultancy. Such a shift would come just as the downsizing of blue-collar America enters a new and brutal phase with job losses at General Motors and the bankruptcy of Delphi, its spun-off parts supplier. It would have a big impact not just on India and its 1bn-plus population but also on the growing number of multinationals looking to shift production to low-cost countries in a way that does not increase their exposure to China.

“People have been rapidly disabusing themselves of the idea that India was going to leave manufacturing to China,” says Jim Walker, chief economist at Credit Lyonnais Securities Asia.

The development has taken many by surprise. It was common until recently to hear commentators dismiss Indian manufacturing as a lost cause. India had missed the first wave of the industrial offshoring revolution, which saw labour-intensive industries such as toy and shoe manufacturing migrate to China, Thailand and other low-cost countries, and seemed likely to miss out on the second, this time involving skill-intensive industries. In this context, to many economists, the preference of the country’s Congress-led coalition government for manufacturing over services as a means of driving development seemed simply wrong-headed.

Stephen Roach, chief economist of Morgan Stanley, argued in a report in March, for example, that by reverting to “an economic model of yesteryear” and by regarding services as “elitist” in terms of their employment potential, the communist-backed government was jeopardising India’s growth miracle. Furthermore, by passing a weak budget that failed to lift investment in infrastructure towards Chinese levels as a share of gross domestic product, the government ran “the very real risk of compromising the very manufacturing strategy it now supports” as well as “an equally significant risk of failing to provide incentives for an already vibrant services sector”.

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 – $150bn (10.6 per cent of gross domestic product) compared with $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.”

Yet pessimists are finding themselves confounded by the fact that structural reforms initiated by the Congress government in 1991 and supported by the subsequent Bharatiya Janata party administration have at last begun to bear 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.

For Kamal Nath, India’s commerce and industry minister, the game is just starting. “India has already shown its prowess in the service sector and now we want to become a global techno-manufacturing hub,” he says in an interview.” 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.

“India’s telecoms sector is exploding and all the big handset makers are talking about setting up manufacturing facilities here so that they can cater to this strong domestic demand,” says Shirish Sankhe, a partner at McKinsey in India. “They will then use India as a global manufacturing hub to source markets around the world, which is exactly what happened in China 10–15 years ago.

“This goes to show that even in a sector where it has traditionally been cheaper to import because of zero duties, ‘Made in India’ is starting to take off in a big way. Capacities are getting expanded and India is emerging as a global source. There is no doubt in my mind that it is happening.”

Few now argue that India should ignore orthodox models of manufacturing-led development, however tempting it might be to prioritise a service sector that plays to the country’s strengths in human capital and information technology while circumventing its massive infrastructural flaws. Morgan Stanley’s Mr Roach admits he was “quick to rush to judgment” after the budget.

“It is never black or white in India, ie, manufacturing or services. The coalition is more in the grey area of fine-tuning the reformist moves that began in the early 1990s to meet new political realities. I find that surprisingly pragmatic – and encouraging.”

Sustaining manufacturing growth at 10–12 per cent is a priority for the government, which sees it not just as a second engine of economic growth but also as a tool to tackle one of its biggest headaches: unemployment. Only by boosting manufacturing’s weight in the economy does the government believe it can solve India’s problem of jobless growth.

While agriculture’s share of GDP has fallen to barely 20 per cent from 32 per cent in 1991 and that of services has soared to 52 per cent from 41 per cent, industry has remained flat at 27 per cent. And within industry, manufacturing has been stagnant at 17 per cent of GDP. The government says this must rise to nearer the 30–35 per cent seen in China, Thailand and Malaysia.

If “Made in India” is to live up to these ambitions, however, the government needs to enact a second generation of reforms, giving a warmer welcome to foreign direct investment. India attracted less than $6bn in FDI last year – one-tenth of the amount, most of it in manufacturing, that went to China. Few emerging economies have built a manufacturing base without relying heavily on FDI, as a source of capital and a means of transferring technology and knowhow.

Resistance to FDI comes from Indian industrial houses that want to keep their home market to themselves and communist-backed unions that fear the consequences of greater competition. Daring to take on these vested interests will be one of the most important economic policy decisions facing the government.

Baba Kalyani, chairman of Bharat Forge, a world-class maker of crankshafts – it exports half its Indian production – warns that manufacturing is unlikely to create jobs in the numbers the government hopes. “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.

If a second generation of reforms is undertaken, McKinsey estimates India could lift its share in world trade to 3.5 per cent by 2015, a new global manufacturing hub would be born and millions would be lifted out of poverty at a much faster rate than would otherwise be the case. Without such reforms, India’s infrastructural shortcomings might prove ultimately overwhelming. Mr Kalyani warns that unless the Mumbai-based Maharashtra state government improves the business environment in Pune, the heartland of Indian manufacturing will lose its appeal.

He has a clear warning to policy­makers: “Today I’m the world’s most competitive forging company, but this city’s population has doubled over the last decade and there have been no new roads. Existing infrastructure is overloaded and has an impact on our costs.

“In three years’ time, if we are double the size we are today and nothing has changed, this is not going to work. For our next phase of development, we would have to find another site.”

A transformation led by improving factory efficiency

The prevalence of labour-saving techniques in higher-end Indian manufacturing may look odd given the country’s reputation for low labour costs but, executives insist, they are none the less necessary to achieve international competitiveness, write Khozem Merchant, Peter Marsh and Jo Johnson.

“We now employ very expensive labour,” says one local industrialist, citing salaries that range to Rs30,000 ($655, £380, €555) a month, but the work requires “many fewer people than in the 1980s”.

Investment in automation and efficient processes is in evidence among the market leaders. At Bajaj Auto’s gleaming $60m factory at Chakan, near Pune in western India, yellow robots help to manufacture a top-selling premium motorcycle for India’s young middle-class professionals.

Further north, in the Mumbai suburb of Kandivli, Mahindra & Mahindra’s “dust-free” factory – where clean air diminishes the scope for defects – is rolling out record numbers of engines in the country’s largest integrated tractor assembly complex.

If Indian manufacturing is moving ahead, its wheels are being turned by the likes of Bajaj and Mahindra, where labour-saving factory practices and tougher management attitudes are helping to produce globally competitive Indian manufacturers. Their engineering-based competitiveness contrasts with Chinese rivals’ strength in volume-driven, low-cost production.

Mahindra this year launched joint ventures to assemble cars in India with Renault of France and to develop lorries for local and global markets with International Trucks of the US, adding to its home-developed tractors and sports utility vehicles.

“If we had not taken the bold initiatives during the depths, we’d have faced a bleak future,” says Pawan Goenka, president of Mahindra’s automotive unit, recalling the limping manufacturing group he joined from General Motors more than a decade ago. Then, he says, 5,000 people worked overtime to assemble 60 vehicles a day at Kandivli; now 2,000 staff roll out 160 a day, with no regular overtime.

Similarly, two years ago, Bajaj required a workforce of 810 people to make 244,000 motorbikes a year at Chakan. Today, the plant has just 90 more people, yet is producing machines at nearly three times that rate, thanks to productivity improvements such as self-checking by workers to reduce the number of defective products.

Mahindra began its transformation in the early 1990s by overhauling manufacturing practices, then turning to product development – a big step up for a company with no research and development culture – and finally, in 2002, launched a group-wide globalisation drive.

Besides moves such as the tie-up with International Trucks, one highlight was the acquisition this year of a weak Chinese tractor maker, giving Mahindra’s farm equipment division a foothold in the third largest market and a low-cost base from which to export tractor kits to the US, where the products are popular with weekend “hobby farmers”.

Perhaps the most significant change at the automotive unit has been product development, which led to the first internally designed and developed vehicle, the popular and stylish Scorpio SUV.

With a development cost of $120m, one-fifth of a comparable project in the west, the Scorpio has “broken the myth of economies of scale”, says Mr Goenka.

“Few vehicle manufacturers can produce on a scale of 40,000–50,000 units and achieve profitability. We did and we intend to repeat the feat in our Renault venture.”

The company had 120 Indian engineers working on the Scorpio over five years and, budget-conscious, took big risks by working with unproven component suppliers that were one- third cheaper than the best in Europe and Japan. The measure paid off but more procurement may be brought in-house, giving rise to a components and engineering services division.

But perhaps the foremost aspiration is to become a globally competitive entity. By 2008, Mahindra wants to export one-fifth of group volumes, from just 1.5 per cent at present. While it describes the partnership with Renault as a “limited” move to learn the volume car business, Mahindra is determined for its tractors and SUVs to become world-beaters.