Manufacturing or services?
Posted : October 27, 2004 at 11:21 am [IST]
India’s stunning economic growth has come through its success in services. Yet, a lot many in the country wanted future growth to be manufacturing-driven. The hope is that it will add more low-end jobs and narrow income inequities. But is this reasoning right?
Stephen S. Roach, MD and chief economist, Morgan Stanley, visited India recently and ‘Business World‘ has published his views through an article “India’s policy paradox” in its November 01, 2004 issue where he asks why India is obsessed with manufacturing
“Despite the stunning successes of its IT-enabled services companies, India believes that prosperity ultimately will come from a thriving manufacturing sector.
I certainly understand this aspiration. However,
” Unlike the IT sector, which hires India’s best and brightest out of its universities, manufacturing attracts lower-skilled and less-educated - offering opportunity at the lower end of the income spectrum for a nation with a staggering poverty problem.
” The Indian manufacturing model, in my view, continues to suffer from three major deficiencies - a lack of infrastructure, a low national savings rate (a little over 20 per cent), and anaemic inflows of foreign direct investment (barely $4 billion in 2003).
” Of those constraints, the infrastructure gap is the most serious. Not only does it risk crimping the efficiencies of supply-chain management and nationwide delivery capabilities, but it raises serious questions about the transportation requirements of a dynamic export sector.
” Services, by contrast, need none of the above. Moreover, India’s new services dynamic plays to some of the nation’s greatest strengths - education, entrepreneurial spirit, and IT literacy. Services also rest on a platform of e-based connectivity - offering an important end run around a massive physical infrastructure deficiency.
Another glaring shortcoming of India’s manufacturing solution relates to a mistaken impression of its job-creating potential.” He refers to the two companies he visited in Pune that drove this point home.
“Bajaj motorcycle factory - a most impressive facility that was using state-of-the-art technology (i.e., Japanese robotics enabled with Indian IT) and Japanese production techniques to turn out 2.4 million two-wheel vehicles annually with approximately 10,500 workers. By contrast, in the mid-1990s, Bajaj needed a workforce of some 24,000 to produce only 1 million vehicles.
Tata Motors - a jewel in the crown of one of India’s oldest and greatest companies. The vast 510-acre Pune facility felt like an Indian Detroit - complete with a university-like training campus, design, engineering, and testing facilities, and vertically-integrated production and assembly lines for cars, light- and heavy-trucks, buses, and, of course, SUVs. Yet the Tata Motors workforce has also shrunk significantly over the past decade as its vehicle output has soared; in early 2004, about 21,000 workers produced 311,500 vehicles, whereas in early 1999, it took some 35,000 workers to produce 129,400 vehicles.
These examples are indicative of the tough uphill battle India faces in achieving a manufacturing-led solution to its daunting unemployment and poverty problem. Even as reforms accelerated over the course of the past decade, job growth in India’s manufacturing sector - which employs only about 11 per cent of the nation’s total workforce — averaged just 2.1 per cent per annum over the 1994 to 2000 period, identical to the sluggish pace over the 1983-94 interval.
In today’s intensely competitive world, manufacturing success is all about productivity prowess - and the capital-for-labour substitution strategies that are central to achieving such efficiencies. Manufacturing has become an intrinsically labour-saving endeavour, even in low-wage economies such as India and China.
Labour-saving productivity enhancement means that a manufacturing-led employment strategy requires huge scale for success. That appears to be working reasonably well in China. But given India’s deficiencies in infrastructure, savings and FDI, such scale looks extremely problematic for the foreseeable future, in my view.
Services, by contrast, remain labour-intensive endeavours. That’s especially the case for knowledge-based activities that are now driving the growth of India’s most vibrant service companies - not just call centres and data processing facilities at the low end of the value chain but also software programming, engineering, design, and a broad array of professional services (such as lawyers, accountants, actuaries, medical workers and doctors, consultants and financial analysts) at the upper end of the value chain.
By contrast, labour-intensive services need less scale to drive job creation. The trick for India, of course, is to create enough job opportunities at the low end of the occupational hierarchy to avoid a situation of worsening income disparities between the haves and the have-nots. That’s no easy feat for services- or for a manufacturing-based economy.
My services-led argument basically fell on deaf ears in India. At least that’s the pushback I have gotten consistently from a broad cross-section of Indian investors, corporate executives, policy makers, government officials, politicians, and academics. Services are viewed as interesting but not essential to India’s economic development. For me, that’s a huge disconnect - not just from an analytical point of view, but also out of step with India’s intrinsic strengths and recent successes in services. A new India still aspires to do it the old way - the manufacturing way. ”
India does not wish to give up services sector and switch over to manufacturing. It wants to develop a strong manufacturing sector along with equally strong and capable services sector. An emphasis appears to be necessary as the manufacturing has fallen behind, just as agriculture has. In agriculture too a similar argument about its scale (in this case holding) is relevant. But for a country like India both manufacturing and agriculture must grow equally strong. They can’t be given up for service sector. A huge country such as India can’t survive with a service sector alone.
Bajaj Auto and Tata Motors have reduced the manpower over the years and replaced the same in many places by latest automation. But simultaneously they have also outsourced extensively during the same period and created good Tier one vendors, and they, in turn have created many small vendors. Automation improves productivity. Apparently, It appears to reduce the human beings from operation. But actually it is a shift of skill level and many other service facilities become necessary requiring more manpower in those areas retaining the overall manpower. Reduction is only marginal. Only it goes outside the premises.
Moreover, many of the manufacturing is not scale dependent and India can aspire to be the leader in that. Low volume production products such as heavy machinery items, special machine tools, tools and die manufacturing, prototypes manufacturing, heavy casting and machining, forgings- a huge items of manufacturing remain a lucrative business as well as retain the potential of huge manpower deployment. New innovations in manufacturing equipment design have made it more flexible. Manufacturing of many different things on the same equipment has become possible. Even the incorporation of design changes does not require addition of machinery and equipment as it was necessary earlier. It can be done on line.
The new concept of outsourcing and concentrating on business of core competence has to be extended by the bigger manufacturing companies of India including PSUs. A company like BHEL and HMT must outsource as much as possible and create a manufacturing culture in the country as has been done by automobile companies over the period that has made auto component sector a booming business. The bigger companies can also outsource the engineering and design of the products and production toolings, prototypes manufacturing, accessories manufacturing. To give just one example, nowhere in the world a machine tools company such as Hindustan Machine Tools keeps so much of manufacturing in house. In-house manufacturing is limited to assembly and testing.
Without a strong manufacturing base that includes design too, it is difficult to do a good work service work related to that industry. A good automobile company may help an entrepreneur to build a CAD based design house or a CAM based production engineering consultancy or software development centre. A thrust on manufacturing sector is a necessity for it. It has all ingredients to succeed. The infrastructure is a must for all development including those related to rural areas.
India has certain basic advantages in manufacturing such as raw materials and technical skill required. With focus on the basics of manufacturing such as TQM, Kaizen, Deming and TPM Awards, many of the Indian manufacturing companies are showing the way to become globally competitive in high end manufacturing. Let the thrust continue.
- Indra
Category: Manufacturing |
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