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Wake up India! Time's running out

July 03, 2007 12:24 IST

How do you explain to headquarters that you need a little extra cash this quarter to set up your own power plant? Or that there's no water at the factory site because you refused to bribe the officials at the local corporation office?

When multinational companies set up manufacturing bases in India, they usually know that things will be different here: how different, they find out the hard way. Of course, they aren't alone in their suffering: Indian companies too have to run the gauntlet of a creaking infrastructure, a lax bureaucracy and harsh trade unions. Industry's litany of woes only grows louder every year.

All that has to change, and fast. A new report says it is high time manufacturing in India developed to world-class level; that will help domestic manufacturers expand further even as it attracts increased global investment.

The study, "Globalising Indian Manufacturing", has impeccable credentials: developed by Deloitte Research in collaboration with the Indian School of Business, the Stern School of Business at New York University, Purdue University and the National Science Foundation, it is based on the discussions among the 200-odd business executives and academics who attended the Indian Manufacturing Competitiveness Summit in Hyderabad some months earlier.

What do the report's findings and recommendations mean for Indian manufacturers? the strategist takes a look.

The whys have it

For some years, analysts have written the Indian economy's success story as one based on services and low-cost manufacturing. That may be a fairy tale: services account for half of India's GDP, but the sector employs only a quarter of the country's people.

If prosperity has to reach across the population, manufacturing will have to take centrestage. That means growing its share from the current 17 per cent of GDP to around 30 per cent, which is closer to the developed-country norm.

There are other, just as compelling reasons for Indian manufacturing to upgrade to international standards. "Driven by a need to cut costs while preserving quality, change is underway: production is moving to low-cost locations with good service infrastructure and services are moving to locations with low-cost, skilled manpower," states the report.

As industries increasingly adopt a vertically segmented business model where parts and components are produced by different divisions or companies, often in different countries, it is easier than ever for India to get its share of the bounty. Equally, though, it is more critical than ever that India gets its foot in the door ahead of competing nations.

Of course, the country is already ahead on several counts. Skilled, English-speaking manpower? Check. Low wages? Check. Strong home market to drive demand? Strategic location to play role of trans-shipment hub? Existing high growth levels? Check, check, check.

So, what is needed? As a first step, it would be a good idea to stop depending on the low-cost manufacturing advantage. "At some stage, all low-cost countries stop being low-cost," warns Kumar Kandaswami, manufacturing industry leader and a director with Deloitte Touche Tohmatsu India.

"If you consider the costs relating to poor infrastructure, logistics, and so on, it is reasonable to conclude India will not be able to compete effectively with low-cost countries like China." Which means if India is to become globally competitive, it has to improve efficiencies, quality and productivity.

Cracking the code

What is the best way of doing that? The report offers different prescriptions for domestic and multinational companies. It is relatively easy for overseas players to get their Indian act together.

Over-investing would be a good beginning: get more land and more people than you really need; explore initiatives like rainwater harvesting and alternative energy sources. You'll need them sooner than you think.

It is also a good idea to change the product offering for the market, based on local R&D: Samsung Electronics, for instance, sells washing machines with memory backup to compensate for frequent power cuts, and a special rinse cycle that prevents sarees from getting tangled. A final tip for global manufacturers: employ locally; residents understand the market and the government far better than newcomers.

The to-do list for Indian companies is more complicated. Eliminating waste in the manufacturing process is first priority. "On average, 95 per cent of what any manufacturing company does falls under the headings of non-value-adding activity, non-value-adding time or non-value-adding cost," states the report.

The solution: go lean. For instance, low-cost automation can bring down equipment cost by over 70 per cent; tracking systems and single-piece flow mechanisms can reduce inventories; employee productivity can be stretched through incentives and accountability.

Reducing waste is already an imperative with many Indian industries. The auto components industry is a well-documented case study. But also consider cement. A decade ago, 640 people were engaged for producing 1 million tonnes of cement; that number has been halved. Energy consumption is down from 100 kwh/ton to 80 kwh/ton.

Similarly, heat consumption has improved from 750-800 Kcal/kg of clinker to the current 690-700 Kcal/kg. "We have also started using waste-derived fuels, reducing coal consumption and helping in waste disposal," points out S K Maheshwari, group executive president, cement business, Grasim Industries.

There is another area of improvement: the supply chain. The Deloitte report recommends overhauling traditional networks of suppliers to take advantage of communication and technology innovations. That means, for instance, opting for "dynamic supply chains" that are formed to deliver a specific product or service and are dissolved once the task is completed.

Adopting auction technology would also be strategically wise, since it can help determine the true value of products and components. Improved negotiation and vendor selection will also increase efficiencies and, in the process, give manufacturing a much-needed leg-up.

Dig deep for higher ground

All these will be of little use, though, if R&D is not brought up to speed. One way of catching up with global best practices is by acquiring a recognised brand or company - Indian pharma majors are doing just that, while the auto sector is technology-shopping for specific projects (consider the Scorpio and Indica). But what will really yield value is increasing investment in R&D, specifically for innovation in product, process or business model.

"It is ironical that while multinationals use India as a base for innovation/engineering services, the Indian manufacturing industry does not take advantage of the available deep engineering skills. And while cost of innovation in India is a third that in developed markets, R&D spends of Indian companies is around 1.5-2 per cent of turnover, while that of global companies is around 3-4 per cent," points out Kandaswami.

Adds Grasim's Maheshwari, "By adopting current technology or technology that is being phased out, we will continue to be at a competitive disadvantage.  We need to spend more on R&D and innovation. In fact, every company should have a manager for innovation." Even headquarters would approve that idea.

Case study: The multinational reality check

As national borders have blurred, the rules of doing business have changed rapidly. For 3M, this new reality is reflected in the fact that 61 per cent of its top-line sales come from outside of the United States - growing from about 35-40 per cent just 10 years ago.

A well-thought-out strategy has the company investing in the countries it does business in: it has 69 subsidiaries and 33 laboratories in different countries. Also, 99 per cent of the company's international employees are local employees of the country where the business is based.

Such a strategy helps speed up service in addition to saving on costs. By locating R&D and manufacturing near final markets, 3M is able to better tailor its products and services to local markets and respond faster to customer demands.

The low cost of labour, however, is not a key issue in the decision to source from a particular geography. It may be useful in a basic converting operation. Moving up the technology chain, however, the cost of labour is not as important as the skill level. In the absence of skills, the cost of mistakes tends to become very high.

From 3M's perspective, India's excellent academic structure is a major strength in considering it as a sourcing destination. The country has first-rate universities and a great network. Its other strengths are domestic entrepreneurialism and the base of local manufacturing.

A growing middle class is one of the keys to having successful manufacturing, particularly on a global basis. If you have a growing middle class, those are really the consumers that drive manufacturing. The challenge for India is to leverage and grow the foundation that it possesses, spread it across the country, and get more entrepreneurs to invest in manufacturing growth.

A major handicap is the limited infrastructure that has not been able to keep up with industrial growth. Whereas the preoccupation in other geographies is with speeding up the supply chain and limiting inventory, in India the major concern is buffering inventory. Also, the different regulations in different states slow down the supply chain considerably. On top of a convoluted system, there is corruption to the point where it can have a significant financial impact.


Case study: Container conundrum

The opening up of container movement by rail in India to private operators has ended Container Corporation of India's (Concor's) monopoly in the sector. Rail movement, though, will still be open only to Indian Railways. (Concor, a high performing public sector enterprise, has a network of terminals and owns rolling stock. It has a strategic alliance with Indian Railways.)

Many players have entered the sector in various route categories, with 13 companies so far having signed up to provide rail-based services. But no models have yet emerged in terms of infrastructure for private operators.

Container movement by rail requires terminals with rail siding, fleet management, network operation and fleet sizing, cargo monitoring, customer interface and railway interface, and coordination of trucking and handling activities.

Freight movement by rail offers the advantage of economy of scale but it is cost-effective only for distances beyond 700 km. A profitable enterprise will estimate aggregate demand and plan services accordingly while considering the reliance on Indian Railways.

Three possible scenarios for the use of terminals include: 1. Leasing assets from Concor or other big players. This would presuppose only occasional use of the terminals. 2. Medium and long-term contracts.

These will permit ramp-up of services and ensure a certain level of service to customers in terms of asset availability. 3. Dedicated assets acquired by larger players with large enough demand.

Then comes the question of ownership of rolling stock assets. Containers are leased under an international scheme.

Rail wagons/flats are not manufactured in large enough numbers in India so that importing them, especially wheel sets, is an option that needs to be considered. Locomotives will have to be leased from Indian Railways.

Private players will also need to consider certain operational and pricing issues. They will need to come up with a network, and plan service levels after considering the frequency of service that they can provide, and whether they will provide services on demand or work by contract.

They will have to figure out short-term pricing, reserve some capacity for last-minute customers, lock in long-term commitments, and consider tie-ups with shipping lines.

In signing medium-term contracts, private players will have to consider asset availability versus uncertain demand. How does an asset provider allot capacity to multiple players based on specified service requirements? How does scale economy translate into detailed service requirements for individual chunks of demand?

Suggestions from private players include a penalty for delays in running trains and in supply of locomotives. They have also suggested an annual increase in haulage charges based on input costs, and that locomotives must be made available at two hours' notice.

In terms of strategy and industry structure, there are many possibilities for integration. For instance, shipping lines and rail companies can form alliances, as can trucking companies and manufacturers.

Also, it is essential to make the right level of investment in the network or at a given location. Growth possibilities exist but not for all players to invest in dedicated infrastructure. Some other issues that will emerge include the possible participation of players in railway infrastructure.

Extracted from Deloitte Research's "Globalising Indian Manufacturing"
Meenakshi Radhakrishnan-Swami
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