Manufacturing India and McKinsey

India may not be as good in manufacturing as China is, however, its manufacturing sector is moving steadily ahead. India has risen into the top ranks of global manufacturing and is one among the world’s 15 largest manufacturing economies by share of global nominal manufacturing gross value added. As per the recent McKinsey report, while the rank of China moved from 7 in 1980 to 2 in 2010, India improved its rank from 15 in 1980 to 10 in 2010. Surprisingly, US is still number one. In the world’s 15 largest manufacturing economies, the manufacturing sector contributes from 10 percent to 33 percent of value added.

A report of Cisco India confirms the new surge of India’s manufacturing: “India is witnessing a wave of growth in manufacturing after its decline in the late nineties. The current surge in the manufacturing sector is touted to be much more promising than the first wave. With this new manufacturing opportunity slated to be more skills intensive, the industry leaders foresee India as well poised to take advantage of this shift.”

Further, India is likely to emerge as the second most competitive economy in the world after China in terms of manufacturing competitiveness in the next five years, as per the 2013 Global Manufacturing Competitiveness Index compiled by Deloitte Touche Tohmatsu and the US Council on Competitiveness.

McKinsey supports the endeavour of India to get into the manufacturing sector, and everyone who matters in this drive must go through the “Manufacturing the Future”, a new report by the McKinsey Global Institute and take clues from it and find out how India must move ahead effectively with speed:

“Building a manufacturing sector is still a necessary step in national development, raising incomes and providing the machinery, tools, and materials to build modern infrastructure and housing. Even India, which has leapfrogged into the global services trade with its information technology and business process outsourcing industries, continues to build up its manufacturing sector to raise living standards—aiming to raise the share of manufacturing in its economy from 16 percent today to 25 percent by 2022.”

It will be interesting to know some data about the manufacturing sector from the new report.

Globally, manufacturing output (as measured by gross value added) continues to grow—by about 2.7 percent annually in advanced economies and 7.4 percent in large developing economies (between 2000 and 2007).

The manufacturing sector generates 70 percent of exports in major manufacturing economies—both advanced and emerging—and up to 90 percent of business R&D spending.

Manufacturing also drives productivity growth, innovation, and trade, and also plays a critical role in tackling societal challenges, such as reducing energy and resource consumption and limiting greenhouse gas emissions.

The Report infers, ‘as countries get richer, manufacturing tends to account for a smaller share of their GDP. The point at which this decline starts varies (the share usually peaks at 20-35%), as does the rate of decline. In the 15 largest manufacturing economies, manufacturing’s share of GDP ranges from 33% in China to 10% in Britain. India is at position 10.

According to McKinsey report, the potentials of five different groupings of manufacturing are different.

1. The largest group is global innovation for local markets, which is composed of industries such as chemicals (including pharmaceuticals); automobiles; other transportation equipment; and machinery, equipment, and appliances. These industries accounted for 34 percent of the $10.5 trillion (nominal) in global manufacturing value added in 2010. Industries in this group are moderately to highly R&D-intensive and depend on a steady stream of innovations and new models to compete.

2. Regional processing industries are the second-largest manufacturing group globally, with 28 percent of value added, and the largest employer in advanced economies. The group includes food processing and other industries that locate close to demand and sources of raw materials; their products are not heavily traded and not highly dependent on R&D, but they are highly automated.

3. Energy- and resource-intensive commodities such as basic metals make up the third- largest manufacturing group. For these companies, energy prices are important, but they are also tied to markets in which they sell, due to high capital and transportation costs.

4. Global technology industries such as computers and electronics depend on global R&D and production networks; the high value density of products such as electronic components and mobile phones, make them economically transportable from production sites to customers around the globe.

5. Labor- intensive tradable, such as apparel manufacturing, make up just 7 percent of value added. The group’s goods are highly tradable and companies require low- cost labor. Production is globally traded and migrates to wherever labor rates are low and transportation is reliable.

And a careful study of the categories will confirm the possibilities for India to become a large manufacturing power. India has attained significant progress in the category of the largest group- chemicals (including pharmaceuticals); automobiles; other transportation equipment; and machinery, equipment, and appliances.

India has both MNCs as well as domestic players in those industries. Many MNCs such as automakers have made India their manufacturing hubs for some of their products, producing for the domestic consumption as well as export. Quite a good number of them have set up their R&D centres developing product for the local market as well for sales in similar markets all around the world.

Unlike China, none of the public sector companies performed have gone to become globally competitive company such Hawaii or Haier, though BHEL and NTPC have done pretty well.HMT could have become the largest machine tools company, but could not because of it being a public company. BEML is another government company that could have taken big stride, but it couldn’t indigenize even Tetra trucks for the defence forces. And the country has kept on importing its major parts. Many other public sector companies also had potential.

However, some of the Indian private companies such as Tata Motors, M &M, Bajaj Auto, Hero MotoCorp, Ashok Leyland are on track to become MNCs. Almost in every sector Indian manufacturers have their significant presence, but somehow, I find them lacking the drive, focus and vision required to become ‘Made in India’ brand globally recognized. Some the top valued Indian companies are from varied sectors automobiles (Maruti Suzuki, Hyundai), earthmoving (BEML, Caterpillar auto-parts (Bosch, Bharat Forge), pharmaceuticals (Sun Pharmaceuticals, Dr. Reddy’s Laboratories, Biocon), engineering (L&T, BHEL, Siemens, ABB), home appliances (LG, Samsung, Videocon, Voltas, Godrej), metals (Tata Steel, SAIL, Sterlite, Hindalco), electrical (Crompton Greaves, Havells India) and even computer hardwares (HCL), jewelery or watches (Titan, Gitanjali) and even cell phones (Nokia, Samsung) as well consumer goods (Unilever, Godrej, ITC, Dabur, P&G), or eatables (Nestle, Amul, Britannia). However, perhaps the biggest of the contribution to manufacturing in India is coming from small and medium industries that must be around half a million.

The government has ambitious targets in its manufacturing policy mentioned above. Its huge R&D organization such as CSIR, DRDO etc can help India in accelerating the growth of manufacturing sector. It requires some re-engineering of the government units. For example, all the research institutions such as the Mechanical Engineering Research Institute, Central Machine Tools Research Institute can work in liaison with each other to assist the manufacturing sector.

I am still dreaming of a day when even every village and hamlet will have some sort of involvement in manufacturing the way Gandhiji wanted through cottage industries and the way Chinese succeeded with its village enterprises.

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