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Made-in-India brand gets stronger
Suveen K Sinha in New Delhi | February 18, 2006
The Pune factory of Tata Motors has a training wing where one can observe young apprentices at work. Some of them have studied up to Class X, some up to Class XII. Few of those faces have had contact with a razor.
However, their hands move deftly over basic tools as well as laser and computer numerically controlled machines. This focus on skills - the training wing was the first to be set up by the factory's founder, S Moolgaokar, in 1965 - also manifests itself in the company's production engineering wing, which makes dyes for global marquees such as Jaguar, Ford, Toyota and Fiat.
This skill set came to the aid of the company when it found itself driving through uncertain terrain in the 1990s, as it embarked on a three-phase programme to rejuvenate itself by increasing productivity, cutting costs and improving quality.
Nine years ago, Tata Motors had close to 38,000 employees earning an annual turnover of Rs 10,000 crore (Rs 100 billion). At present, its turnover is Rs 21,000 crore (Rs 210 billion) earned by 30,000 employees. Its salary cost has dropped to 5.5 per cent of turnover from 10-11 per cent five years ago.
"The attitude of 'can do' pervades the organisation," says Tata Motors managing director Ravi Kant. Skill, innovation, productivity and cost efficiency are also the leit motif at other Indian manufacturing houses, most of which found themselves wobbling when faced with the challenge of becoming globally competitive in the 1990s – a task made more onerous by the industrial downturn in the decade's second half.
Mahindra & Mahindra's 5,000 employees churned out 60 vehicles a day in 1994. The company now has 2,000 employees rolling out 160 vehicles every day with zero overtime.
Essar Steel has constructed the world's second-longest iron ore slurry pipeline of 267 km from Bailadilla to Visakhapatnam that can carry 8 million tonnes of iron ore a year and bring down transport costs from Rs 550 to Rs 80 a tonne.
Last year, when Japan's automotive giant Honda Motor expressed an intention to use two spark plugs in its 100-125 cc motorcycles to reduce engine friction, a cheer went up in the research and development wing of Bajaj Auto, which claims to be the first to use two spark plugs in motorcycle engines.
Maruti Udyog Limited, during the three years to 2004-05, cut costs by 30 per cent and increased productivity by 50 per cent. It has embarked on a similar programme for the next three years.
These are also companies that have traversed the great distance from the wobbly to the bountiful in just a few years. Tata Motors made a Rs 500 crore (Rs 5 billion) loss in 2000-01. It made a profit of Rs 1,236 crore (Rs 12.36 billion) in the last financial year.
Maruti Udyog has moved from a loss of Rs 269 crore (Rs 2.69 billion) in 2000-01 to a net profit of Rs 853.6 crore (Rs 8.53 billion) in 2004-05.
Mahindra & Mahindra's Rs 512.6 crore (Rs 5.12 billion) profit for 2004-05 marked a steep climb from just Rs 96.9 crore (Rs 969 million) in 2001-02.
Essar Steel has, between 2002 and 2005, reduced its term debt by Rs 1,100 crore (Rs 11 billion). When the two-wheeler market shifted overwhelmingly from scooters to motorcycles, it was expected to claim Bajaj Auto as a casualty.
Today, the company is a strong number two in motorcycles with a 36 per cent share of the market.
As these companies turned around, they also turned economic theory on its head. In general, economies move from agrarian to manufacturing to services. In the 1990s, it was generally expounded that India had missed the manufacturing bus.
It remained untouched by the first wave of industrial offshoring revolution, which gravitated to China, Thailand and other countries in East Asia, helping a vast section of the working population migrate from agriculture to industry.
India's future, they said, lay in services. This gained credence as agriculture's share in India's gross domestic product fell to barely 20 per cent from 32 per cent in 1991, and that of services soared to 52 per cent from 41 per cent.
Industry's share remained flat at 27 per cent and within that, manufacturing's remained stagnant at 17 per cent. The industrial downturn of 1996-97 doused whatever little hopes there may have been of a manufacturing renaissance.
However, services are much less efficient in creating jobs compared with manufacturing. That didn't work for India, 2.5 per cent of whose population is joining the workforce every year, compared with a population growth of 1.5 per cent.
Says Shirish Sankhe, a partner in consultancy company McKinsey: "Without manufacturing, India could not grow. Manufacturing is the best avenue to create jobs that may not be very education-intensive - services need education - and pull people out of agriculture."
There had to be a way to get on to the bus. It could not be done the China way, which was one of China's high-volume low-cost model, since China had already mastered it. Given its thrust on special economic zones and flexible labour policy, it would be difficult to upstage. Why would, say, a Walmart, which sources most of its goods from China, turn to India?
The solution was found in skill-based manufacturing, which increased cost efficiency while keeping quality high.
Says Baba N Kalyani, "India's strength lies in products that require multiple skills, using technology to increase productivity," says Baba N Kalyani, chairman and managing director of Pune-based Bharat Forge.
Over the last five years, the employee cost of Bharat Forge, the world's second-largest forging company, has dropped from 9 per cent of the turnover to 5 per cent, even as wages have doubled.
Bharat Forge was an early bird. Starting in 1989, it overhauled its business model to usher in modernisation. In the subsequent years, a similar wind quietly blew in to other manufacturing companies, dismissed in the 1990s as "old economy".
This was the time when Indian manufacturing was moving from the doomed low technology-low capital-cheap labour model delivering "just about" quality to a combination of high technology, higher capital and a very highly skilled workforce that promised global competitiveness.
Around this time, the business climate too changed. The country had always had a steady supply of technical manpower. Interest rates fell from 19-21 per cent to about 10 per cent and under.
Labour, which used to think of management as the devil's own, began to realise that their interests were not very divergent after all.
Ten years ago, M&M's Kandivli plant, near Mumbai, had a quota system under which each worker's actual work time was under 240 minutes a day. Today, every worker puts in 450-460 minutes a day, excluding the lunch break.
The coming of age of services, especially software, helped. People began to appreciate the technology-driven business model. M&M got into nuts and bolts, literally, to reduce the time taken for each activity in terms of seconds.
Its utility vehicle Scorpio, in the beginning, had about 6,000 welding spots. As the company gained confidence in its product, the number of spots came down to 5,500. Tata Motors' Pune plant alone has 100 robots. You wouldn't find a soul on Essar Steel's shopfloor, except in the electric arc furnace.
Even the public sector - whose prime function once upon a time was to create employment - caught on. In 1998, Steel Authority of India Ltd had 1,77,000 employees and produced 10 million tonnes of steel. Its private sector rivals produced half that amount with a workforce of just 5,000.
Having spent Rs 12,000 crore (Rs 120 billion) on modernisation, SAIL now produces 13 million tonnes with 1,24,000 employees. Five years ago, SAIL was groaning under a debt burden of Rs 15,000 crore (Rs 150 billion). It is debt-free now. "We can withstand the dynamics of the market," says V S Jain, the company's chairman.
Cost efficiency has made it lucrative to do business in India. According to the Confederation of Indian Industry, the average return on investment in India is over 19 per cent, compared with just over 14 per cent for China.
That higher return is a reflection of higher value-added manufacturing. M&M spent a mere Rs 600 crore (rs 6 billion) on the Scorpio project. "For a multinational doing a similar project overseas, the cost would be Rs 4,000 crore (Rs 40 billion)," says the company's president (automotive), Pawan Goenka.
The result is a blow to the old wisdom that in vehicle manufacturing only a very high scale - Detroit pegged it at 1 million - can ensure profitability. The Scorpio is profitable on sales of 33,000 a year. Macroeconomic data too is beginning to show that Indian manufacturing is riding a crest, growing at 9 per cent a year, the highest in recent memory.
But more to the point is the changing world attitude. When Ratan Tata had announced Project Mint, which yielded Indica, in the 1990s, it was greeted with universal scepticism.
Experts thought the project would finally undo the man, whose track record had not been exactly exemplary. Two years ago when Tata said he would make a car that retailed for $2,000, the reaction was one of anticipation. The experts wanted to know how he would do it.
And, as the company's vice-president Rajiv Dube points out, no one uses the phrase "old economy" any more.
Next stage: The world
The once-troubled Daewoo Commercial Vehicles has turned around. Acquired by Tata Motors two years ago and renamed Tata Daewoo Commercial Vehicles, its net profit increased three times to Rs 45.8 crore (Rs 458 million) for April-December 2005. It has a 27 per cent share of the South Korean market.
"We cut costs there, just like in India, and increased exports substantially to South Africa, Middle East and South Asia, where Tata is already an established brand," says Tata Motors' managing director Ravi Kant.
Kant's explanation, though small, tells a big story - an Indian company acquiring a multinational and helping it prosper on the strength of cost efficiency and brand development in India.
India's exports account for just 0.8 per cent of world trade, compared with 6.4 per cent for China. But its share could quadruple in a decade, according to McKinsey.
"Manufacturing exports from India could increase from $40 billion in 2002 to approximately $300 billion by 2015, leading to a share of approximately 3.5 per cent in the world manufacturing trade," says the consultancy.
In part, that will be a result of the downsizing of blue-collar America - such as auto-component giant Delphi - and the subsequent outsourcing to low-cost countries in a way that does not increase exposure to China. But a big role will be played by Indian companies that are making the world take notice of the "Made in India" label.
Close to 5 per cent of Mahindra & Mahindra's turnover now comes from overseas, but it has been growing at 90 per cent. The company hopes to earn a fifth of its turnover from abroad in three years. "We have the ambition to become a truly global company," says M&M president (automotive), Pawan Goenka.
Last year, the company took control of Chinese tractor maker Jiangling, which gave it a foothold in the world's third-largest market and a low-cost base from which to export tractor kits to the US. Starting May this year, it will start selling the Scorpio and Bolero in Spain and Portugal.
Indian automotive component companies have already notched up a number of acquisitions overseas. Pune-based Bharat Forge, which has made six acquisitions in four countries in the last two years, has set a target to become the global leader in its business by 2008.
Tata Steel is the world's lowest-cost producer of steel. Hero Honda is the world's largest motorcycle manufacturer. And Maruti Udyog, in which Japan's Suzuki Motor Corp holds about 55 per cent of the equity, is slated to soon become bigger than the parent.
Infrastructure remains a constraint in India. Most infrastructure services cost 50-100 per cent higher here than in China, with Indian manufacturers paying twice as much for electricity and three times as much for rail freight.
However, according to consultancy firm KPMG, India scores better than either China or Brazil on business regulation, better than either on the burden of tax and customs administration, and better than Brazil on the perceived level of corruption.