Reshaping the Manufacturing Ecosystem

This is the longer version of the paper written by us in the PGPX Program for our flagship event, Connexions at IIMA. The abridged version is available in the paper “Rethinking Make in India”.

Authors: Aniruddha Srinath, Manish Kulkarni, Vijay Jaiswal

Manufacturing sector in India: History & Transformation

India’s manufacturing sector has had a rich and varied history (Chand, n.d.), occupying different levels of significance in its own economy as well as in global trade over different millennia. We believe that it is useful to understand the context of Indian Manufacturing over different periods of time, with a more detailed look at events and outcomes closer to this decade.

Ancient India

The concept of manufacturing is as old as the history of human evolution and the same applies to the origin of manufactured finished goods in Indian context as well as evidence of manufactured goods were found in the ruins of the Harappa civilization. Coins, jewelry, kitchenware, tools, arms and even carts were shining examples of manufactured goods and the consistency in the design of these items hinted at the existence of an organized guild that employed artisans and master craftsmen who had perfected the art of producing them. Indian handicrafts were respected all around the globe and brought admiration and income from distant lands for the artists and craftsmen. Textiles, specially made of cotton were an important export from India, even 1500 years before Christ. From the Iron column near the Qutb Minar, it is evident that Indian blacksmiths had advanced knowledge of ferrous metals.

In addition to cotton textiles and steel industries; wood, stone and ivory carvings, silk textiles, pottery, bronze, brass, silver and copper works, dyeing and calico printing were also famous throughout the world. The following periods mostly saw the refinement of these skills and scale in these categories right till the British era as the various rulers mostly encouraged industry as an independent means of revenue for their citizens and as a source for taxes for themselves.

British India

There is a fair amount of ambiguity over the state of Indian manufacturing during the British rule. One view proposes that the British Monarchy protected its industries back home in England and the new Colonies of the Americas by selling them cheaply in India, simultaneously stymieing growth of Indian industry. This slowed India’s transition to large-scale industrial manufacturing from cottage-industry manufacturing. Despite its status as a British colony, India lost out on the benefits of the Industrial revolution and instead became a supplier of raw materials and cheap slave labor, often financing the deficits of the kingdom in its transaction with other countries. The only real infrastructure provided by the British to the Indian subcontinent were the railways and the ports, whose primary aim was to transport raw materials quickly inland and ship them out.

The other view suggests technological advancement in the west coming to India through the British as reflected in building up of Bombay’s textile mills during 1854 which by 1875-76, grew in number to 47. Among other industries that flourished before the outbreak of World War I in 1914 were woolen textiles, paper and breweries with the three primary capital cities of Bombay, Calcutta and Madras also being transformed into industrial centers with full-fledged ports. The sole inland industrial center of any consequence was Kanpur, the base of military equipment production. A real spurt was provided by the Indian Fiscal Commission set up in 1921-22, which gave the much needed protection to industries like iron and steel, textiles, cement, sugar, paper and metals. Apart from this, a number of industries such as heavy chemicals and metal were initiated to to meet the civilian requirements. A wide variety of engineering industries like machine tools, machinery manufacture in respect of cotton, tea, and oil processing industries, electrical equipment, vanaspati manufacturing, power, alcohol, synthetic resin and plastic industries also flourished.

The years before and after independence were also not particularly helpful, with India not participating significantly in industrialization efforts as part of war. Partition was not very helpful either, with unified Pakistan accounting for only 23 per cent of the area and 18 per cent of the population and still  getting  40 per cent of the cotton and 81 per cent of the jute output that existed in pre-partition India.

Independent India: The First 5 decades

Much of India’s economic activity in its first 5 decades was planned, Socialist style with the introduction of the Planning Commission and its 5 year plans (Rao, 2013). In a tightly controlled economy, the Government focused on sectors of growth as per the requirements of time and set targests for growth in GDP, employment and other economic and social indicators. We saw the emergence of large public sector undertakings, either started from scratch or acquired from industry. This was also the regime of licensing, with limited participation of the private players due to high barriers of entry. Interestingly, this was also the period where many Asian giants made remarkable strides in their industrial progress (Japan since the 1950s, China since the 1980s). Another notable fact is that they started the process of development at a similar point in time but chose very different trajectories. Appendix 1 succinctly describes the various 5 year plans undertaken  by India over the past 5 decades.

India & China: The Deflection Point

Any discussion on manufacturing strength in today’s context is incomplete today without a reference to china. Even though China has long been credited by the modern West as the inventor of goods such as Gunpowder and silk, India also has a rich history in manufacturing with technology monopolies in gunpowder, sugar, steel, dominance in silk, cotton, textiles, fabrics. In fact, its de-centralized manufacturing made for a conducive environment of innovation for a long period in human history. India also competed in scale, producing ten times more gunpowder than China. In 1820, the two countries contributed to nearly half of the world’s income. However, for close to 150 years, both had lost their prominence as their contribution to the world income shrank to less than a tenth by 1950. Currently at one fifth, it is poised to increase to one third by 2030.

In the post-independent India era, the economies of China and India were comparable in terms of gross domestic product (GDP), as late as in 1980. It was then that the Chinese economy grew at an average rate of 10 per cent between 1980 and 2010, and is consequently eight times the size of India’s economy now. Some reasons for China’s rapid growth are:

1. Continued emphasis around education and healthcare reforms helped china in harnessing its immense human capital pool. In 1982, the literacy rate in China was 64.4 per cent, compared to India’s 37%.  China also had better numbers on infant mortality and life expectancy, partly aided by its one child policy. It has also ensured better female participation in its workforce. .
2. China has strategically chosen to position itself as the Factory to the World, crafting policies which are conducive for large scale exports. This is in stark contrast to India where, barring a few areas, much of the production was for domestic consumption.
3. The aggressive growth of infrastructure sector eased out logistic constraints while making the lifestyle of a factory worker attractive to a larger population.  India in the last decade has been strong progress on this aspect but china already has a major headway on this and can boast of a infrastructure that is certainly comparable to the best in the world.

However, China has clearly made some costly mistakes in the areas of overcapacity and sustainability, mistakes we ought to take as serious lessons.

The liberalization of the 90s:  An Open Economy Movement (UNIDO, n.d.)

There is no denying the fact that the 1991 open economy reforms put the Indian growth story on a global map and led to the emergence of the Indian Middle class. While on one end it improved bilateral trade between a number of countries and India, it also pitched the Indian corporations to compete with Global firms, a situation in which a large number of firms that did not have the muscle to fight perished leading to a loss of employment as well. India found a new avenue for growth in the services sector, primarily driven by wage parity and built an impressive Services sector. Government policies saw this as easy route to quickly fill the gaps in its economic development agenda and encouraged this sector with all its might.

Despite increased demand, Manufacturing was sluggish and soon lost its position to the service sector in terms of value, contribution to India’s GDP and the preferred choice of employment for its engineers and managers. This phase also saw a large number of multinationals set up their base in India with the opening up of FDI, sluggish demands in their traditional markets and a lucrative market with the emergency of an aspirational Indian middle class.

These multinational however also posed a major threat to the existence of Indian enterprises who struggled with capacity utilization, technology access, labor issues and quality concerns of customers on a regular basis. The policy designs of the Government ensured that foreign and domestic companies partnered through joint ventures and alliances. A positive for the domestic sector was the exposure to global markets and the inculcation of global practices and quality focus in their own operations, which helped them to achieve global recognition.

It is difficult to say if these Indian brands really achieved what they were set out to achieve but they certainly became better in the process and contributed much more effectively in the growth of Indian manufacturing sector and India’s economic growth. These firms also developed talent in the areas of business management and technology better than the multinationals as the multinationals scarcely offloaded their decision making and technology development to their Indian offices while for Indian firms, that was their only way to building a competitive advantage.

The Tenth Five Year Plan (2002-2007) targeted a GDP growth rate of 8% and an industrial growth of 10%. The two breakout sectors were automobile/auto components and pharmaceutical sub-sectors. Several initiatives have been launched for modernizing, technology upgradation, reducing transaction costs, increased export thrust, so as to enhance its global competitiveness and achieve balanced regional development. In terms of policy, the Government has launched major initiatives on infrastructure development, special economic zones, market access and foreign trade.  Social issues impacting the workforce had been addressed through insurance cover for workers in handloom, agriculture and rural industrial and processed marine product sector. This had resulted in the exports requirement making up for a lackluster performance in the domestic sectors, with decent numbers being portrayed in the growth of industrial production.

Make In India: A New Perspective

The Make in India Initiative (Das, 2014), with a focus on 25 industries is led by the Department of Industrial Policy and Promotion. The initiative aims to raise the contribution of the manufacturing sector to 25% of the Gross Domestic Product (GDP) by the year 2025 from its current 16%.  It also seeks to facilitate job creation, foster innovation, enhance skill development and protect intellectual property. We feel that the thrust is in 4 major areas:

There is increased economic activity in high-value industrial sectors through increased foreign collaboration. The aim is to propel India into a global hub of excellence for a wide array of products and services. By way of illustration, as a precursor to this initiative, in mid-2014, India enhanced foreign investment in the defense sector and railways infrastructure. As a consequence, defense production, including import substitution for military imports, is finally establishing roots in India.

The Make in India initiative is thus targeted at developing a conducive environment to encourage the manufacturing sector through focus on infrastructure and skill development, creating new FDI guidelines and relaxing the current tax structures. There is also a renewed thrust on cutting down in delays in manufacturing projects clearance, develop adequate infrastructure and make it easier for companies to do business in India.

The issues (kaur, 2015) related to land acquisition for setting up large scale state driven infrastructure projects and development of industrial hubs have been addressed by focusing on land reforms and developing a structured approach for rehabilitation and compensation to the displaced population in wake of the land acquisitions.

Make in India intends to develop an ecosystem that may facilitate the deployment of modern day technologies and foster innovation for creating a center of excellence for manufacturing and services in the identified sectors. This drive is complimented by a roadmap to establish a robust mechanism to protect intellectual property, environment leading to advancement in education including research and development (R&D), supplemented by foreign collaboration with an eyes on sustainable growth.

 What’s next ?        

Alice asked at the crossroad, “Which road should I take?”

“Where do you want to go,” asked the Mad Hatter.

“I do not know,” said Alice. “Then it does not matter which road you take,” he replied.

 – Lewis Caroll, Alice in Wonderland

Macroeconomics factors suggest that India is among the lone shining stars, even within the cluster of BRICS nations in terms of economy. Real GDP growth is poised to remain stable at more than 7%. Ease of doing business has moved up 16 places for the last two years to rest at 38 this year, within striking distance of China at 29. Some key reforms like GST have also been cleared for implementation. As a consequence, India’s competitiveness as manufacturing destination has increased. This is also reflected in the World Economic Forum’s Global Competitiveness report for 2016~17 (Klaus Schwab, 2016). The table below, derived from the same report indicates the performance of various parameters across the last decade (2007`2016)

 

Pillar	Weighted contribution to change in GCI in the last decade	Change in pillar score	Pillar weight	Pillar score 2016
Health and Primary Education	0.09	0.62	15%	5.54
Infrastructure	0.09	0.59	15%	4.03
Macroeconomic environment	0.05	0.34	15%	4.55
Market size	0.02	0.27	6%	6.43
Institutions	0.00	0.03	15%	4.36
Innovation	0.00	0.15	3%	4.05
Labor market efficiency	0.00	0.02	6%	4.10
Higher education and training	0.00	0.00	6%	4.12
Technological readiness	-0.01	-0.18	6%	2.99
Business sophistication	-001	-0.43	3%	4.39
Goods market efficiency	-0.02	-0.26	6%	4.39
Financial market development	-0.03	-0.52	6%	4.41

 

Hence, India is poised to attract significant attention and investment in the next decade. This places our policy makers and more importantly, our industry representatives in a position of strength where they have greater influence to chart out their course of action over the next decade or further. it is a good time to pause and ask ourselves as to what kind of blueprint we aspire to work towards in our path towards increasing manufacturing’s share of GDP. Three key themes emerge:

Beyond the definition of Make in India

The definition of Make in India, as it has been widely understood, assumes to make India a manufacturing hub for goods which can be exported. Domestic demand is also considered in conjunction with this larger export market. The primary attractiveness of making in India is the cost attractiveness aided by other conveniences. We have a young population which will translate to a stable, English speaking workforce. Our perceptions about Make in India, shaped in part with the extended conversations we have had over the past two years with various experts on this topic influence our formation of the following hypothesis about the current snapshot of Make in India:

1. China was fortunate to have expanded its manufacturing base from the 1980s onwards, a time when the industrialized nations were still indulging in a substantial chunk of imports to meet the burgeoning needs of their factories and customers. India is trying to grow manufacturing in a very different world scenario. Demand for imported goods has slowed down and hence domestic demand is going to be the largest and most important constituent for our manufacturing goods market. This crops up the danger of trying to over stimulate the economy, which has been the reason why many emerging markets have always tried to export a majority of their manufactured goods. However, India’s growth potential seems to be steady, at least over the next decade with a large segment of our population, especially the rural population not even having access to avail basic goods and services. It seems highly unlikely to us that India might make much inroads into the markets of the world’s largest market (by population), China as that country itself has overcapacity. Hence, it seems logical to look more inward and Make in India, largely for India (Rajan, 2015). This comes with the risk of the temptation to over stimulate the economy, which has been the reason many Asian tigers chose a path of export in the first place.
2. Stan Shih, the founder of Acer Technologies, proposed a graph called the Smile Curve(Brookings Institute, 2012) to understand value creation (in terms of profitability) in the product realization value chain. As per his graph, manufacturing derives the least profitability. In fact, manufacturing was one of the first activities which developed economies and their firms outsourced, retaining the more profitable design and marketing elements with themselves and converting them into their core competencies (Apple is a famous example). Hence, it may emerge that, even if we create a replica of the China model of manufacturing competitiveness, which is anyway hard, we would still be creating an overcapacity of a capability which has low profitability.
3. Closely related to the above two factors, and partly deriving from them is the insight that the era which we are expanding in is the era of mass customization. Naturally, with India being the largest market for our goods, we need to design, make and sell our goods in accordance to domestic needs and tastes. Design thinking is crucial here, as it drives us to empathize about the very specific requirements of our target customers(Parmar, 2015). Gone are the days when products can be introduced in the Indian markets by only making cosmetic changes like functional requirements (electric plug design) or miniaturizing in order to create an affordable segment. The Indian customer is well informed and is critical about product and service aspects, and is expecting additional elements of frugality (value for money) and sustainability (lower life cycle cost, environmental friendly) paradigms.

Hence, it is imperative that firms not just Make in India but Create in India and Make for India. Time and again, we have seen spectacular products and services which prove our point (Srivastava, 2016). The inexpensive Mitticool refrigerators, which cost just $50 and keep food cool for 5 days using only clay. The Aravind Eye Care System, which is bringing eye surgery that is quick, affordable and of very high quality to much of rural South India and makes cataract lenses at the lowest costs anywhere in the world. Examples abound.

The next logical step in this course is to create a brand for Indian products as it has been created for much of the services sector. Some negative perceptions about the Made in India brand are of quality, perception of being technologically low, the lack of a flagship brand or products (watches for the Swiss, electronic components for Taiwan and so on). Branding efforts must be concurrent with larger gamut of activities (Chakrawal & Goyal, May 2016)

Infrastructure. Infrastructure. Infrastructure.

We have used infrastructure thrice in our title to emphasize its three fold impact in the Make in India/ Make for India/ Create in India Story.

1. Infrastructure as a delivery mechanism of progress and prosperity: Though India fares well in macroeconomic indicators, much progress needs to be achieved in the areas of creating more and better jobs, lifting more people from poverty and reducing inequality. Infrastructure enables all this as it provides the media for citizens to gain income through access to jobs, satisfy their needs and wants through consumption of goods and services as well as plan for the future through instruments of savings. For the Government to portray the Make in India campaign as a success and share the benefits of this success, delivery mechanisms need to be made ready through infrastructure investment.
2. Infrastructure as the engine of manufacturing growth(Gupta, Budhadev, Chotia, & Rao, 2016):  The quality and quantity of public infrastructure, which provides mobility and connectivity is critical for the growth of manufacturing (Mitra, Sharma, & Véganzonès-Varoudakis, 2016). The impact of infrastructure and ICT is strong on industries which are exposed to foreign competition like textiles, chemicals, light machinery and automotive components. The criticality is felt both in terms of access to technology (for which ICT is also a key enabler) and ability to expand capacity. Private industry participation is curtailed by the fact that the Government has to invest in all these key infrastructure, although they can contribute through high quality public private partnerships.
3. Infrastructure as a consumer of India’s manufacturing sector: Infrastructure is the biggest target sector of many important industries like steel, electronics, telecommunication and energy. Hence, investment in infrastructure by the government through large scale programs like port and airport building, highway creation and city modernization programs provide additional and increased demand for goods and services in these sectors. Economies like Japan and Europe, which are characterized by slowing demand from ageing consumers often use investment in infrastructure to provide stimulus to the economy. Thus, infrastructure and manufacturing are cyclically dependent on each other and the two sectors need to work in tandem

Automation and robotics

Much of the narrative around manufacturing stems from the way it is understood currently. The context around manufacturing is shaped by three factors; technology, people and resources. Our understanding is that proxies for each of these factors have been obtained from the past decade. For example, we believe that the growth of manufacturing from 15% of GDP to 25% of GDP will result in the creation of close to 100 million new jobs. This is a linear extrapolation, assuming that same levels of productivity will exist in this next phase of growth.

However, this is not how the future looks like. The two major industrial revolutions which have taken place in the last three centuries have been derived from electrical and mechanical advancements since the 19^th century and advancements in ICT since the 1980s. The next industrial revolution will take place through advancement in robotics, artificial intelligence and hence robotics. The primary drivers of this revolution are advanced computing capabilities and sophisticated machine learning.

Martin Ford (Ford, 2015) makes a number of critical points in his new book on this subject. In his opinion, the first industrial revolution really benefited the workforce as it led to increased labor and better working conditions for them. The second revolution helped the investors and managers more as they yielded better profitability and return on investments. The upcoming revolution is instead going to cost a lot of workers their jobs, especially the traditional ones.  He sees the distinct possibility of many jobs actually returning to developed economies because automation and robotics are making the whole concept of cost arbitrage due to lower labor wages irrelevant to the debate. China already has the largest number of robots in the world, and hence they will still remain competitive.

Automation and robotics have severe implication for the Indian economy. Even in the established services industry, where we have a competitive edge due to our skilled and English speaking workforce, we are going to see a lot of jobs becoming redundant. If perceived from the context of things as they stand, the manufacturing sector will also be adversely affected. The organized sector will be the first to be impacted, as it leads the unorganized sector in forays into new technologies. Our version of success needs to be planned keeping in mind the state of manufacturing technology five years from now, not what it was five years earlier.

 Enablers

1. Creating and Moving up the Value Chain

Movement of firms or even countries in the value chain of any industry can be attributed to different changes

1. Change in the type of activity being performed. As we have seen from Stan Shih’s smile curve, products can choose to perform design as well in addition to manufacturing and could also choose to launch their own brands.
2. Change in the product/ service mix. A good illustration of this is the Aerospace Value chain(NASSCOM, 2012), which is globally among the most mature supply chains, with a clear tier structure. The aerospace industry is characterized by programs of long duration and firms take a long time to get established in a tier or to move up to another tier. As we go up the value chain, there are fewer firms which are involved in specific product/service lines to the extent that there are only a handful of prime integrators, the firms which make the aeroplane. Another unique character of this value chain is the fact that profit margins along the value chain movement decline; the higher tier firms are less profitable but make for it with large revenues.
3. Change in the quality of exports and imports which a firm or a country trades in(Hiau Looi Kee, 2015), which is really the consequence of the above two changes. However, this is noteworthy as it helps both the firm and the country in their foreign exchange position.

We recommend the following enablers which help firms to move up the value chain:

1. The ability to form and retain complex networks, like the Keiretsu system of Japan. This helps to build strengths in both supply chains as well as in distributing, particularly on a global platform while the firm central to the keiretsu can focus on its core competencies.
2. Building solutions and not just products(Bansal, 2015): This requires capabilities like the ability to form partnership with the customer on a long term basis, deep immersion into the customer’s product and business lifecycle, complex systems engineering capabilities and the ability to service throughout the lifecycle of the product.
3. Transformation from cost based revenue models to risk and reward based ones: This enables the transition from being yet another low cost vendor to critical business partner for the customer. The upside is relief from the battle for wafer thin margins but the downside of being tied at the hips with the fortunes of the customer needs to be accounted for.
4. Understanding and adhering to world class quality standards: Requirements from global customers in highly regulated sectors like aerospace, automotive and healthcare are unrelenting and firms which are already active in these supply chains can turn their experience into a sustainable competitive advantage.
5. Glocal business potential(World Economic Forum, 2012): It is becoming imperative that choice of firm location, either for manufacturing or otherwise needs to be justified by not just a global demand but also by a local market. This is required in order to insulate the location from fluctuating demand problems. Hence, very few firms would set up a manufacturing facility in India if they do not also take advantage of the domestic market here.

2. Innovation and Entrepreneurship

Innovation is the specific instrument of entrepreneurship. The act that endows resources with a new capacity to create wealth.

Peter F. Drucker (1909–2005)

Author and management consultant

As seen from the World Economic Forum’s Global Competitiveness Report, India’s score on innovation has remained flat over the past decade. This is a worrying sign, for innovation is a key driver for growth. In fact, a key study undertaken by Assocham and PwC (PwC, 2015) emphasizes that India could grow its GDP by a CAGR of 9% and elevate per capita GDP from US$1490 to US$6800 by 2030 if the transformation is driven by innovation. The report advocates a mix of catching up, leaping significantly and leapfrogging in terms of innovation. There is a significant interplay between large and established firms, SMEs and small entrepreneurs and the government.

Innovation and entrepreneurship are closely related, as seen from the quote by Peter Drucker. entrepreneurship is critical for the economy as it is the sole solution to the glaring gap in supply and demand that exists in in the quest to create 12 million new jobs a year. It is expected (Manufacturing Enterpreneurship critical for “Make in India”. Experts, 2015) that entrepreneurs will also emerge in hitherto unimaginable sectors like telecom, defense manufacturing and automobiles along with IT and finance.

Interventions by the large and established firms to help their SME and startup counterparts in the Supply chain are required at every stage of the Product Lifecycle. At the idea and concept stage, the larger firms need to actively use their proximity to customer and data insights to test ideas for impact, scalability and business viability. Product development requires sustained financial support during design, prototyping and product definition and a fine segmentation of the market to position products and services appropriately. Product manufacturing and scaling up requires large delivery mechanisms, sharing of production and tooling costs, educating the customer about new solutions and overcoming regulatory requirements. Finally, selling requires an effective pricing process, the ability to reduce cost from vendors through buying at scale and access to larger markets. SMEs have traditionally received patronage of the Public Sector and large companies but the relationships remained largely transactional for decades, with hardly any sharing of knowledge. The innovation networks of the future require the large firms to both teach and learn along with their SME and start-up partners.

3. Skilling and Education

That India is at the cusp of a great demographic dividend is well known. It is also well documented that unless the work force is skilled and provided appropriate jobs, the demographic dividend may soon turn out to be a demographic disaster. Less certain is the extent of understanding regarding what is exactly the skill gap. One way of classifying would be to understand if the problem is of skilling, reskilling or upskilling.

The India Skills report 2015 (Pandey, 2015) explains a skill gap as the difference between the skills needed for a job versus those skills possessed by a prospective worker. Dr Pandey says that India has to achieve the target of skilling/upskilling 150 million people by 2022. Linking of skills to growth requires a matching of labor output to the labor market, preparing for rapid change and estimating future requirements well in advance to plan for them.

The chart above illustrates a value chain of the future for advanced manufacturing of machined components in industries like aerospace and automobiles. We have mapped the steps in the value chain (assessment till supply and distribution) with the various ecosystem partnerships required below the value chain and with the competencies required for executing each step above. This is just a technical perspective to the value chain and would require peripheral requirements of support functions which perform indirect activities like corporate planning, finance, HR, marketing and so on. We can visualize that not all the activities mentioned above can be mapped with skills currently existing in the Indian market. The concepts of skilling and upskilling can be well illustrated here.

With the current slew of gigantic deals taking place in the aerospace sector in India (Chaudhary, 2016), and the rider of offsets being attached with many of them, Indigenous production is poised to take off. However, foreign and Indian firms alike are finding it difficult to hire people with the right skills to make parts for aerospace. There is an analysis that India needs close to a lakh aerospace and defense workers in the coming decade and the problem of skilled labor shortage is highly visible.

On the back of the skill development plans of the government which aim to train 15 million people by 2020 on the basis of a $3-Billion-dollar investment, large foreign companies like Boeing are increasing investments internally. Boeing is training recruits on aircraft assembly in partnership with India’s National Skill Development Corporation. Boeing helped these recruits find jobs with an Indian supplier, and is looking to scale up by having regular curriculums. While GE relies on extensive inhouse training and transformation programs, Alstom is sending Indians for training abroad and in India as well for its train manufacturing facilities.

The problem is even more pronounced for the SMEs, the startups and the unorganized sector which often do not have and cannot afford formal skilling/ training programs, restricted as they are by lack of awareness and tight cash flows. Though SMEs hire from the vocational training schools, there is never enough numbers and attrition is quite high as people are willing to jump companies for even meager raises. Manufacturing is also perceived as a job of sweat and toil and is seeing its existing and potential workforce being poached by the comparatively lucrative and “comfortable” services jobs. It is again incumbent upon the larger firms to develop the skills in their supply chain in order to make them world class and capable of scaling up.

Conclusion

Based on our analysis of the manufacturing ecosystem, we perceive the future of the manufacturing ecosystem in India as below.

• India’s GDP is growing at 7% per year for last decade. As disposable incomes rise, consumption in India will pick up speed. Consumptions driven sectors such as food & beverage, textiles and clothing and consumer electronics are leading the growth.
• India has advantage of having large and young workforce, wages that are half that of China, emerging supply chains, and access to natural resources. Global MNCs are looking to diversify their manufacturing base to low cost countries other than China. China has seen exponential increase in wages in last few years. India has once in a lifetime opportunity to gain significant market share in global low cost manufacturing market.
• India can lead in skill intensive and creative manufacturing sectors like auto components, jewelry, apparel, leather and pharmaceutical. Firms need to focus on the domestic market as well as to create products for the Indian customer.
• Skilling of workers across the value chain will provide the true potential of the demographic dividend.
• Only low cost is not enough of a benefit, Indian firms also need to focus on innovation and quality.
• Larger firms need to encourage enterpreneurs in their value chain and derive benefits from the interaction by forming powerful knowledge sharing networks.

We next discuss challenges faced by Indian manufacturers and path forward to overcome these challenges.

Challenges and path forward

Labour productivity

Indian manufacturers depend heavily on labour cost arbitrage instead of investing and quality and productivity improvement. Because of rigid labour laws Indian manufacturers have to hire large number contract workers. Lack of appropriate automation, outdated manufacturing processes, limited use of design-for-manufacturing, and  non-value-added tasks contribute to lower labour productivity.

Path forward – Manufacturers and SMEs’ should improve their operations by efficient line balancing, lean plant layout and de-bottlenecking and use automation selectively for quality and productivity.

Skilled manpower

India faces shortage of skilled and “employable” manpower. The quality of training imparted by it is not as per the industry standards. Firms hire large number of contract workers due to rigid labour laws in India. This limits development of highly skilled and productive workforce. Curriculum is more analytical and simulation based and lacks hands on experience to manufacturing.

Path forward – Firms should form clusters to establish vocational training.  Manufacturing sector could replicate large scale skilling programs employed by Indian IT firms and train fitters, welders, machine operators and maintenance engineers. Maruti has started expanding some of its training programs to include its suppliers.

Supply chains

Indian supply chains suffer due to suboptimal infrastructure and transportation. This increases the inventory throughout the supply chain and lowers the profitability. Poor supplier performance and reliability forces manufacturers to increase inventory levels to mitigate stock outs. This hinders smooth flow in the production line and reduces productivity.

Path forward – Companies should implement agile practices to lower inventory and manage the production flow better. Supply chain should be used as a strategic tool Use of data analytics could improve forecasts and hence supply and demand planning. Appropriate ERP tools should be used for coordination to rationalize the inventory levels. Indian IT industry should lead this transformation by building custom tools for SMEs. Manufacturing clusters allow companies to get benefit of network effects created by concentration of suppliers, sharing of infrastructure and remove bottlenecks in supply chain.

Quality of products

Tier 1 and tier 2 suppliers tend to be small or medium enterprises. They hesitate to make investments in statistical process control and product development. This results in higher rejection which is “waste” in the production process. Rework due to quality problems also reduces labour productivity. The speed to market of Indian manufacturers is slower compared to global competitors.

Path forward – OEMs should invest in suppliers to transform them into lean manufacturers. OEM supplied jigs and fixtures and poka-yoke could reduce quality issues at supplier end. Indian companies need increased focus on Quality systems. Some of the Indian companies have taken steps in this directions. Tata Steel won prestigious Deming Prize in 2008 for Quality and Process Improvement. Frontloading of product development efforts could improve speed to market for Indian manufacturers.Flag ButtonShare

Some Unique examples

We have looked at 4 different emerging Indian companies and feel the solutions they are implementing offer a unique way forward. We have categorized them in terms of whether they are existing or new problems and whether they are being addressed using existing or new solutions.

Appendix 1

Plan	Period	Manufacturing Focus
1st Five Year Plan (1951-1956)	Irrigation and energy, agriculture, transport and communications, social services	emphasis on increasing capacity of existing industries rather than starting new ones while the main plan agenda remained agricultural growth to meet the food demand of the nation.
2nd Five Year Plan(1956-1961)	Power and irrigation, social services, communications and transportation	Build upon nehru’s vision of ‘temples of modern India’ leading to the development of basic and heavy industries and emergence of the public sector as a key factor in in the economic development of the country
3rd Five Year Plan (1961-1966)	Agriculture (wheat), defense industry,	expansion of basic industries like steel, chemicals, fuel, power and machine building with a driving philosophy of a ‘self-generating’ economy.
4th Five Year Plan (1969-1974)	Agriculture (Green revolution), Banks (Nationalization)	Capacity enhancement of existing firms(state & Private)
5th Five Year Plan (1974-1979)	Agriculture, defense, highways	Capacity enhancement of existing firms(state & Private)
6th Five Year Plan (1980-1985)	Focus on liberalization	Focus on efficiency, globally competitiveness, cost effectiveness, capacity creation and modernization.
7th Five Year Plan (1985-1990)	Focus on technology	developing a ‘high tech’ and electronics industrial service base. Industrial dispersal, self-employment, improving the utilization of the local resources, skill development

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