India poised’- Manufacturing Sector- My Apprehensions-I

The Times of India, New Delhi has published three stories in the special series on ‘India Poised’, Make 2007 The Year of India’ on manufacturing sector. I think all the columnists have painted a rather too rosy a picture of the manufacturing sector that is strategically the most important as on today for India and millions of young Indians that will be joining the workforce in years to come.

Indian manufacturing may be growing at an average of 10% with growth touching 12-14% in some months. But all these don’t give confidence enough that the growth will get stabilized at 12% or more that is the target set by the National Manufacturing Competitiveness Council to ensure the required employment generation. A visit to all the shopping complex and hyper markets will show how the small as well as big retailers are promoting the household appliances, accessories, and even some cases, the eatables of doubtful quality from the cheaper Asian markets in attractive packages. India must expand its manufacturing in all sectors, specially low-tech, labour intensive manufacturing that can take the manufacturing to even the rural areas with improving connectivity. The statement such as ‘China is slowly taking a back seat’ with reference to manufacturing sector will be self-defeating. Even the graphics provided prove the same. China (418.8 million tones) produces about 9 times more crude steel than what India (44 million tones) does. Its cement production is about 8 times more than that of India. China produces almost twice the number of cars that India does. Its electricity production is four times of India. And India can’t hope to catch up with China without electricity.

It sounds like sweet music to our ears that ‘as per the findings of a joint report of Confederation of Indian Industry (CII) and management firm Boston Consulting Group, titled ‘Manufacturing Innovation’, ‘Indian companies were the active innovators compared to their counterparts in the major rapidly developing economies. Between 1999 and 2003, Indian companies had filed more patents as compared to Russia, China, South Africa and Brazil.’

I give just one example quoting from an article in Business week. “Hisense is a good example. Describing itself as “a national high-tech enterprise and technological innovation base,” the manufacturer of refrigerators, air conditioners, computers, and cell phones now invests more than 5% of its annual sales revenue in research and development. The Hisense R&D Center, known internally as Tech-Incubation Park, houses more than 1,500 researchers. In 2005, the company introduced the first Chinese-made “digital media-processing chip.” Company scientists in just the past two years have applied for more than 400 patents.”

Another reference to cost benefits seems to be equally doubtful in reality. ‘According to another report titled ‘Indian Manufacturing in Global Perspective’, authored by research scholars at Indian School of Business, Stern School of Business and consultancy firm Deloitte, “the Indian auto industry had a 6% benefit relative to China in costs due to its engineering capability. A typical Indian auto company bought barebones equipment and developed all the software and detailed tooling in-house, in contrast to the complete turnkey purchase of all equipment and software in China.’ The speed and skill with which the Chinese auto manufacturers can copy the products of the global brands such as those of GM and even Bajaj Auto is a prove that the manufacturing facilities installed in its factories are latest, and the skill is world class.

India can count only on three Indian domestic companies in auto sector- Tata motors, Ashok Leyland, and Mahindra & Mahindra as against the presence of a large number of Chinese automakers with potential to become a force in time. Though Tata Motors with ‘Indica’ and ‘Ace’, Mahindra with ‘Scorpio’ have proven its capability of developing and producing world class vehicle, but they will have to expand their product lines many times and further improve the manufacturing quality to really compete with the global manufacturers. Can Tata Motors, Mahindra & Mahindra, Askok Leyland grow fast enough to be high-ranking major global players in passenger cars, SUVs, and commecial vehicles respectively?

It is true that ‘the profits of companies also grew rapidly during this period as most big companies implemented software programmes to systematise their operations and increase efficiency.’ However, the fortunes of the employees at the bottom of the organizational pyramids have not significantly improved, nor have been a significant increase in employment.

India’s manufactured exports are certainly rising, accounting for more than three fourth of all the sectors exports, and it is true that the manufactured exports of the Indian industry will and can drive the overall growth of the sector. But India must go miles to catch up other developing economy in manufacturing. Besides expansion of scale of the existing manufacturers which is happening, India need a huge number of entrepreneurs to join the manufacturing sector for small and big items. It does not have any significant players competing major global players in passenger cars, household appliances, in electronic gadgets, in heavy industries, in machine tools, and many sectors including networking. The older domestic companies feel comfortable by selling the enterprises with potentials or stagnate because of certain disadvantages of family business. Unfortunately, most of the manufacturers are those who got into manufacturing from trading routes. And with free market, they found it better to give up to the competition of the new breed of traders taking advantage of the free flow of imports.

“According to CMIE estimates, the value addition or the incremental profitability of the Indian manufacturing industry has been slowly declining over the last few years. In other words, though companies grew up in scale, their profitability did not keep up with sales growth during the last four years.” The focus of Indian companies must shift from the ‘cost’ related restructuring to ‘cost plus value’ based strategies. And as clear from the recent CII survey that found 70% of the Indian executives agreeing that their companies would increase spending on innovation in the coming years, the change is coming. In the last five years, the R&D expenditure of Indian manufacturing companies has increased 115% to Rs 4,707 crore from Rs 2,182 crore in 2000-01. The manufacturing sector in India must go for innovations in big way with more and more attractive and new products suiting to both local as well as global tastes at frequent intervals to be in completion or excel.
Indian Manufacturing in a Global Perspective- Setting the Agenda for Growth

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