Competing in Global Industries:
Challenges for India:
Over the last decade, India’s manufacturing sector has changed
dramatically and emerged as the key to meeting the ambitious
nine percent growth target in the Tenth Five Year Plan.
Manufacturing is the logical engine to provide employment
growth in India, because the work force in the organized
sector—a core engine for growth—is currently only eight
percent.
The challenges are significant. There are numerous constraints
to growth, and India has its work cut out as it makes the
transition from being an attractive labor pool to a global
manufacturing power. Foremost among these are a paucity
of natural resources and highly skilled manpower, and an
ineffi cient regulatory mechanism. Beyond this, there is a
shortage of faculty in higher technological institutions, which
constrains India’s ability to fi ll the skilled manpower void.
High interest and tax rates are another problem, contributing
to a risk of losing employment and investment through fl ight
of capital. There is a need for low taxes, tight fi scal policy, and
monetary stability.
How, specifi cally, can India improve its competitiveness? There
are several priorities:
1. Infrastructure in various sectors: Urban infrastructure—
including power, telecommunications, ports, roads and
civil aviation, and legal infrastructure—demands attention.
This is not the sole responsibility of government: there
is a notion in the public mind that everything is the
government’s responsibility, but it is essential to encourage
the public and the government to think in terms of private
and public partnership. Some needs are quite specifi c and
urgent. For biotechnology, for example, common testing
facilities are crucial.
2. Market framework regulatory environment: India
must ensure fair competition and better access to markets,
conduct trade negotiations to provide a level playing
fi eld for domestic manufacturers, and reexamine the
regulatory accountability, rationalization and simplifi cation
of regulatory procedures. And the patent system requires
reform.
3. Cost competitiveness and domestic demand:
Reduction of import duties and domestic indirect taxes
enhanced World Trade Organization compatibility, export
incentives, facilitation and simplifi cation of FDI and, fi nally,
lower interest rates and labor reform could have a positive
effect on India’s manufacturing costs and domestic
demand.
4. Educational system and skill training: Quality improvement in vocational and higher technical education is particularly necessary. The severe shortage of faculty in higher educational facilities must be addressed.
5. Innovation and technology: Industry must create more opportunities for “chance to meet the prepared mind,” according to Professor Ananth. While it is important that we prepare minds, it is equally important that there should
be more exposure to the industry. Companies should invest at least two percent of their turnover on R&D. Right now it is under one quarter of one percent.
6. Benchmarking, for each sub-sector: Companies must assess technology in order to eliminate substandard technology imports. Consumers have to be educated about quality.
7. Small and Medium Enterprises and the Public Sector:
“The small-scale sector in India has been very vulnerable,” Prof. Ananth said. “In the last few years, there has been an awakening and the interest rates changed, but even now it is very vulnerable. We need to do something about it because, per unit of investment, the employment is much higher in the small scale sector. There is need for greater venture financing and possibly use of the cluster approach to development.” The top people in the private sector have often served in public sector enterprises for many years. The public sector is not able to retain them simply because of its inflexible and low salary structure. It is time, according to Prof. Ananth, that the government empowered the public sector to be able to retain its talent. These are some of the key policy initiatives required to make the manufacturing sector not only more competitive, but also responsive to the needs of the other sectors of the economy. For India, quite a lot depends on the future trajectory of manufacturing. With the right interventions now, the potential will be immense.
Competing in Global Manufacturing: Benchmarking
Indian Industry
In pursuing profi table growth, manufacturing organizations
worldwide create ever more complex supply chains, as well as
manufacturing, and distribution systems. These complexities
arise when companies attempt to reduce costs by reducing
their work force or by moving production, sourcing or
engineering, and when they pursue new markets and new
products.
These complexities create challenges around optimization,
innovation, collaboration, fl exibility and risk management.
Research shows that only a small minority of the companies
has overcome these paradoxes and they achieve signifi cantly
higher levels of profi ts and growth. The key to success, despite
operating in highly complex global supply chains, is their ability
to develop and synchronize activities and major processes
across the extended value chain.
Indian manufacturing companies are often overlooked as a
competitive force in the global manufacturing arena. Typically,
India is perceived as having great strength in technology
skills, so that the debate on outsourcing to India is focused
on technology. However, the present, preliminary research
shows that industry capabilities in areas such as product
innovation, manufacturing quality, and process innovation are
driving the performance of Indian manufacturing companies.
In fact, Indian manufacturers participating in the Deloitte
Global Benchmark Survey (which to date covers more than
800 manufacturing companies and business units around
the world) are outperforming their counterparts around the
world in terms of gross profi ts (EBIT) and sales growth. With
respect to operational capabilities, Indian manufacturers on
average have made greater inroads in key areas, such as quality
management, than the rest of the world.
Yet, this analysis also suggests that there are a number of key
areas that Indian manufacturers need to address to set an
agenda for growth that matches the great promise of Indian
industrial development:
• Lack of investment into R&D prevents many Indian
manufacturers from taking a lead in their sectors in global
competition.
• Lack of fi nancial capacity to build the production and
distribution capabilities needed to sustain double-digit
annual growth rates.
• Lack of scale in crucial areas of production, distribution,
and marketing/sales—key capabilities needed to effi ciently
access nation-wide and global markets.
• Lack of capabilities and investment in technology and
infrastructure to support rapidly growing domestic and
international business.
• High cost of funding expansion and working capital.
• Lack of managerial talent with international exposure in
the manufacturing sector to pursue international expansion
opportunities.
While the challenges are many, our preliminary global
benchmark research suggests that Indian manufacturers are in
a position to blaze a new trail for growth in both domestic and
international markets.
Economics and Indian Expansion:Lessons from the Automotive
Industry:
There is much to cheer about in regard to the growth in the
manufacturing sector in India, but also an historical context
that suggests loftier aspirations. When one starts to look at
what India’s aspirations ought to be, it is important to view this
in the context of history. Several centuries ago, India and China
dominated the world’s manufacturing output. From 1800 to
1900, the Western world’s share of the world’s manufacturing
output went from 25 percent to well over 75 percent—literally
in one century. Today, India accounts for only 1.7 percent of
world GDP. There is no reason why, for a country of India’s size
and population, India cannot aspire for a larger share of global
GDP and global manufacturing output.
A robust domestic market, with stable consumption trends
for two-wheel, passenger and commercial vehicles, is a key
to growing scale and gaining competitiveness. However, the
current ownership of vehicles per capita in India is one of the
lowest. Historical trends show an increase in auto ownership
as country per capita GDP increases, and there is reason for
optimism in India’s case. The BRIC report postulates that over
the next few decades India’s rate of GDP growth is bound
to exceed the other BRIC countries—namely Brazil, Russia
and China. The logical conclusion is that, if the GDP growth
continues in India, and it is stable and sustainable over a period
of time, manufacturing output represented by the vehicle
output or penetration is bound to grow. The bottom line is
that there is good reason to expect strong potential for home
market automobile demand as living standards rise in India.
The Indian market has evolved as a more natural economicmodel. Most passenger car sales in India are to private
individuals and private owners. Most are made through access
to money from fi nancing, or loans. Given that 85 percent of
these sales are fi nanced through loans, it indicates a widely
available economic structure for buyer behavior. In contrast,
in China, 85 percent of the cars sold are cash transactions,
indicating that loan availability is extremely poor. This
observation has caused analysts to forecast that the auto sector
will grow in India over the next decade. Demand crossed a
million units last year, and the expectation is that by the end of
this decade, demand should be well in excess of 1.6 million.
In a sense, both countries, India and China, are proceeding
along an inevitable curve in terms of vehicle ownership and per
capita income. Currently, India appears to be lagging China by
about 5-7 years. Compared to India’s passenger car sales of
one million units, China’s demand is at 3.5 million.
In fact, India will need to overcome several factors to surpass
China when it comes to manufacturing competitiveness. A
detailed analysis of manufactured products of India and China,
commissioned by the Confederation of Indian Industry (CII),
points to the specifi cs underlying the main issue—which is
that there is an advantage in China to the tune of about 23
percent. That number encompasses factors ranging from
HR, energy costs, cost of the no-exit policy and engineering
capability.
The auto policy enacted in China—a single-minded document
aimed at fostering the creation of large multinationals in
the auto sector—has played a large part in making Chinese
industries competitive and has enabled them to fl ourish in the
last few years. In India, by contrast, one of the biggest sources
of the cost disadvantage facing Indian companies is the burden
of cascading cumulative taxes and duties; together, these
account for more than 18 percent of India’s cost disadvantage.
Thus, while manufacturing in India is getting competitive, there
remains a long way to go in terms addressing the kinds of
change and the pace China is setting.
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