MAKING INDIAN MANUFACTURING GLOBALLY COMPETITIVE
N.VISWANADHAM & ROSHAN GAONKAR
The Logistics Institute Asia Pacific
Singapore-119260
mpenv@nus.edu.sg
Introduction
Manufacturing is the backbone of every economy and its global competitiveness is
important for creating employment and to nurture the agriculture and service industries
including food processing and defense. Indian manufacturing accounts for 25% of its
GDP and India has sound manufacturing base that is growing at 6-8% per year. It is also
a preferred destination for manufacture of auto components, software, bulk drugs and
others.
The lowering of trade barriers by various countries, combined with rapid advances in
global transportation and information technology, has led to the proliferation of global
manufacturing networks. Now manufacturing and services are global to take advantage of
low cost wage structures and also to reach the local markets. In global manufacturing of
this kind, components may be sourced from several countries, assembled in yet another
country, and distributed to the customers all over the world. Information transfer
regarding the location and status of moving inventory, payments and also the customs
paper work plays a big role in efficient logistics. These networks are not generally under
single ownership but are group formations of independent companies in alliance for a
specific and special purpose. They compete with similar cooperating networks. Such
networks are common in all industrial sectors including the automobile, pharmaceutical,
aero-space, electronics, computer, food, and apparel industries.
In India manufacturing accounts for 25% of GDP, about USD 175 Billion and provides
employment for 16% of the population. In other developing economies it is generally
40% of GDP. Recently there is a debate, following the success of IT companies in the
global markets, whether India should jettison manufacturing and concentrate on IT and
other service sectors. We strongly believe, on the other hand that a ten-fold growth in
manufacturing will be very important for India. We cite the following reasons in support
of this argument.
a. 75% of India’s working population (600m) has education middle school or
below. Only Labor intensive manufacturing and related services can generate
employment in adequate numbers.
b. Organized retail is only 2% of total $180Bn retail activity in India. Increasing
its share is vital for improving the employment potential in the country
c. Experience of Europe, America, Japan, the Tiger economies, and now China
shows that both Wealth creation and Job creation are possible only through
International trade oriented manufacturing and organized retailing.
More importantly, it is essential for India to increase its proportion of Global GDP
through growth in all the three sectors of the economy. It has currently 1/6 of population
and 1/60 of the global GDP. Planned or wild, growth is essential and important.
The issue of Global competitiveness of Indian manufacturing has been the subject of
much economic debate and also there is a lot of business press in recent years. One can
look at competitiveness at various levels – at the individual corporate firms' level, at the
industry level and at the national level. Of course, these three are not independent but are
highly correlated (see Figure 1). An individual firm's competitiveness is dependent on the
competitiveness of the environment in which the vertical industry and the national
economy operate. Excellent logistics and IT infrastructure is becoming a prerequisite for
global competitiveness of manufacturing and service companies. Also, the nations
economic and import and export policies such as tariffs, customs regulations, free trade
agreements highly influence the growth of the firm and the industry vertical. On the other
hand, the competitiveness of an industry or a nation would be partly explained by the
initiatives and innovations of individual firms. For example India is named as the number
one destination for IT outsourcing because of the superior performance of companies
such as Infosys, Wipro, etc.
Figure 1: Firm, Industry and Economic environment
Also one could look at the competitiveness of industries from two angles – export
competitiveness and domestic competitiveness. The former relates to a scenario where
the domestic manufacturer is competing with global manufacturers for gaining an
increasing share of the foreign market. The latter relates to a scenario where the domestic
manufacturer is competing against the local and foreign manufacturers in the domestic
markets. Similarly the industrial growth can be viewed from domestic markets as well
from the export markets.
1.
2.
3.
Identify Manufacturing sectors for domestic and export for competitiveness and
employment generation
a. Agriculture and Food processing
b. Organized Retail
c. Manufacturing related services
Suggest ways and means to enhance the logistics infrastructure through innovative
use of IT. In particular,
a. Automating the customs and trade documentation
b. Use of Knowledge based service providers
Explore the relationship between economic policies such as free trade agreements,
tariffs, customs regulations and special economic zones and manufacturing
competitiveness in the Indian context.
Manufacturing Growth Strategy
It is beyond doubt that India has to increase its manufacturing share to 40% create
employment for its millions of people, while concurrently attracting MNCs and
encouraging local manufacturers to become MNCs. The main question however is in
what sectors and what is the strategy for each sector. Traditionally manufacturing sector
includes sectors such as Automobiles, Chemicals, Oil and its derivatives, Electronics and
so on. There are other sectors such as Food processing and Retail and producer services
also called after sales in which India can lead the world. The former falls in the domain of
agriculture and the later falls in the domain of Services.
In each sector, different growth strategies and approaches need to be followed. In
saturated sectors such as automobiles, chemicals, pharmaceuticals and oil where several
advanced countries are leaders and competing for market share, India should follow lean
manufacturing and mass production strategies to meet the domestic demand. In sectors
where Indian companies are component suppliers to the global supply chains, they should
move up the value chain to become contract manufacturers and product design
manufacturers. In ever green sectors such as food processing where India has huge
natural resources and possible productivity improvements, the country should pursue
aggressively export oriented growth strategies.
Sectors with Huge Growth Potential
Retail is the tail end of any manufacturing activity and is the organ through which
manufactures interact with the end consumer. This is 200 billion dollar market and is
currently highly fragmented and inefficient. Restructuring this activity to increase its
efficiencies and encouraging organized retailing through technology based mass
production would trigger huge benefits to all the three sectors of the economy. Food,
textiles, leather goods, personal hygiene products need to be mass produced so that there
is cost advantage. Currently this sector suffers from several regulatory obstacles in land
holding, agrimarketing, price controls, etc that inhibit its growth. The small scale sector
needs to be integrated in to the global retail networks. There is a huge opportunity for
India to provide leadership in lean retailing.
In producer related services India has huge opportunity to become a global leader and this
area could be a real winner for India. Currently companies providing solutions rather than
products are the winners. Leaders in this area include aircraft manufacturers such as
Boeing, computer manufacturers such as IBM, wireless phone manufactures and a host of
others. India is already destination for R & D and a supplier of components to the global
supply chain. If in addition, India develops capabilities for repair and maintenance and
also the fast delivery logistics, there are immense growth opportunities in aircraft
servicing, computer server maintenance, medical equipment maintenance and a host of
other life critical MRO applications.
Finally there is tremendous need for India to follow the supply chain management
principles in Infrastructure building, health care services, coordinated disease
management etc.
Technology: A Great Engine of Change
Technology of various forms is the enabler and facilitator of globalization. It is the
fundamental force in shaping the pattern of transformation of economies. The
transportation and communication technologies have shrunk the world dramatically.
Transportation systems for moving goods have several innovations during the last few
decades including the commercial jet aircraft to container shipping. The new transmission
channels the satellites and the optical fibers have revolutionized the global
communications. The Internet is the real innovation facilitating instantaneous
communication and effortless low cost search tool for information search as well as
information delivery. The recent innovations such as wireless and RFID will further
create efficiencies in the supply chain communications and co-ordination. There are
several e-commerce and e-business tools that can be created and used to advantage in
managing and coordinating various industrial production systems and supply chains.
These include exchanges, e-retail tools, e- search and e-governance tools.
National Competitiveness in a Globalizing Economy
The nations regulate how their economies operate within and across the borders. The
governments do provide the physical (roads, railways, airports, seaports) and
informational infrastructures (telecom facilities, Internet, e-commerce and e-business
infrastructure) and also the human infrastructure. The national governments have in their
hands tools to control the economic activity with in the country as well as the flow of
trade and funds across the borders. The cross border economic activity is controlled
frequently by trade policies such as Tariffs (taxes on imported goods) and non-tariff
barriers such as customs regulations and documentation, import licenses, exchange rate
manipulation, local content requirements, etc. The national trade policies however need
to operate within the International trade regulations formulated by World Trade
organization (WTO). Foreign direct investment, both inward as well as outward, is
controlled by economic policies of the Governments. The Indian Government does not
permit FDI in Retail for example.
Nations collaborate with each other in several ways to achieve specific economic and
welfare goals. There is a tendency for states to develop political-economic relationships
at the regional scale. These regional blocs have considerable influence on the world trade
as evidenced by European Union, NAFTA and AFTA. The four types of regional
arrangements in the increasing order of political-economic integration are free trade area,
customs union, common market and the economic union. Each successive stage includes
the features of the previous stage. The number of free trade agreements has grown in
recent years and by 2001 there were about 170 regional trade agreements accounting for
40% of global trade according to WTO.
National competitiveness is determined by the infrastructure elements, the economic
policies described above and also the regional integration in terms of free trade
agreements and other instruments. In the Indian context the economy was closed till
recently and FDI accounts for 4% of GDP. India ha s signed free trade agreements with
Thailand, Sri Lanka and Singapore.
There are several issues that need attention in the Indian context to improve the national
competitiveness. Here we focus our attention on two issues: the infrastructure
development and the special economic zones.
Strategic Global Logistics Infrastructure Development
Manufacturing is not an isolated function. It is a member of a supply chain cluster
consisting of suppliers, logistics, transportation, airports, seaports, financial and insurance
agencies, services such as power, water and construction, and more importantly the
knowledge suppliers the education institutions. A country could thrive in a global
manufacturing if and only if all these cluster members are well developed and
collaborative. Thus to succeed in manufacturing, India needs to create world class
logistics and information technology infrastructure and also improve the input
efficiencies. Currently companies are coping with inefficient power, transport and IT
infrastructure by having captive power plants, co-locating the tier 1 suppliers with the
assembly plants etc. But these could only be an adhoc solutions since the tier 2 suppliers
still have to transport through large distances.
Currently the Indian Government is concentrating on building critical infrastructure such
as airports, highways, and shipping ports to foster their growing economies. In addition to
expanding the hard infrastructure the other network components, such as efficient
customs clearance and quality trucking services, that can have a strong impact on GDP.
Automation of global trade documentation and streamlining the goods and documents
flow through the customs at the airports and seaports could result in huge cost savings.
Also attracting the Third party logistics companies to India will benefit the
manufacturing, retail and the after sales services.
SEZs and Foreign Direct Investment
Amongst all the measures used by developing countries to stimulate their export
industries and to attract FDI, one device the Special economic zones has received
particular attention. The special economic zones are excellent and well proven means for
attracting foreign direct investment. Several countries have nurtured them with
considerable degree of success in Asia. In fact China is very successful in attracting FDI
in Shenzhen, Zhuhai, Shantou and Xiamen.
The Indian SEZs are not very successful. Some preliminary studies indicate that this may
not be due to not following the cluster concepts. The managers probably wanted to attract
as many companies as possible to set up shops in these zones. For example in both the
leading SEZs Mubai and Noida the products manufactured textiles, drugs and
pharmaceuticals, gems and jewelry, leather goods have nothing in common in terms of
either logistics requirements or IT or knowledge sharing. This leads to considerable
inefficiencies. The SEZs could be better planned to have companies that can grow using
each others competences and knowledge.