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Indian manufacturing gets competitive

July 02, 2003

An Indian competitiveness seems to be slowly emerging in manufacturing.

The process has been on for some time but has been gaining momentum in the last one year or so. To understand its dimensions, it is necessary to examine a few examples of what is actually happening on the ground.

At the bottom, in terms of value creation in India, are instances where only manufacturing shifts to India. Conceiving the product, developing it, building the machines which will do the manufacturing and of course creating the brand are all done outside India.

Such manufacturing involves multinationals shifting individual plants out of Japan or Korea to India, to mainly take advantage of lower wage costs. In this category comes Hyundai and Ford, deciding to source certain models out of India.

A slightly different stage was reached when Toyota decided to set up a transmission equipment plant in India. A good part of the machine tools for that plant are being sourced in India, unlike in the case of the earlier assembly plant which was shipped lock stock and barrel from outside.

Hyundai and Ford are also sourcing some of their capital goods from India, so, to that extent the border line between these two stages is a bit fuzzy, with one merging into the other.

ABB's increasing manufacturing activity in India also falls near these categories. It has taken a key decision to have just one or two manufacturing bases in every geographical region and has chosen China and India for Asia.

A good part of the plant and equipment are coming from outside but there is a difference in that ABB has also set up an R&D centre in India which is working on factory automation as part of the company's global R&D effort.

So ABB is undertaking both manufacturing and a bit of product and process development in India, though may be not always developing the products which are being manufactured here.

One step up the value chain comes the electronic components MNC, Tyco. It is now trying to attract more and more group manufacturing to India. This it does by also developing the tooling for the manufacturing and fabricating it in India.

Conceiving and designing of the product manufactured is mostly not done here but engineering services are being offered, contributing to the overall designing capability of the MNC.

In the next higher category of value creation comes Widia India which has entirely conceived and designed a new category of machine tools for which it foresees a good global demand.

The product has already been supplied to leading MNC car manufacturers in India and certification for export to Europe has been cleared.

In the category of products being entirely conceived, designed and manufactured in India, along with a good part of the capital equipment needed for manufacture, are auto models like Indica, Victor and Scorpio.

These are not being exported in large numbers and it is not manufacturing that has come to India, but they represent a new range of world class manufacturing which can stand up to international competition.

Conceptualisation, development and manufacturing taking place in India are resulting in substantial exports as will happen in the case of Maruti which has been designated the development centre for Suzuki's products for the Asian market.

All that will not be made in India is the Suzuki brand. But the brand is totally Indian in the case of the Reva electric car which the Maini group of Bangalore has conceptualised, designed, developed and manufactured and which they are currently busy introducing to the global market.

Should it take off, it will represent a new benchmark for Indian manufacturing, where a new generation hi-tech product has been entirely done out of India.

In the hi-tech area prominently figure GE's medical electronic items like the CAT scan and x-ray equipment. These are being designed, developed and manufactured in India, some being even conceived at the Jack Welch Centre in Bangalore.

In this discussion we have not touched upon such well established manufacturing successes like Sundaram Fasteners, Sundaram Brake Lining and Bharat Forge, simply because they are already very well known stories.

They represent benchmarks on the way to achieving manufacturing competency. The particular analytical attempt here has been to show how Indian manufacturing has been going up the value creation ladder with the top rung being taken up by companies which are seeking to take their own brands across the globe.

What has made this rise in manufacturing competency possible?

The greatest advantage remains the wage cost. Indian skills are competent, abundant and cheap. The additionality is that India is also able to offer strong designing capabilities, something that a country is usually able to do at a much later stage of development.

What has also helped is the change in the policy environment. Trade liberalisation has meant that capital goods and raw materials are now available to Indian manufacturers at near international prices. The cost of funds has come down dramatically.

Telecom connectivity has vastly improved. And what is not so readily realised, transaction costs, linked to the earlier restrictive policy regime, have also come down. Here the state governments are playing an important part.

The competition between them is leading to active canvassing of large investments by states with promises to provide all manner of clearances without hassles.

The competition between Tamil Nadu and Karnataka to get the Volkswagen project is a case in point.

In one area things have only partially changed -- logistics. Today the ports do much better but rail and road transport are almost where they were a decade ago.

Customs procedures remain a serious hurdle but there is promise of a new beginning with the pilot introduction of self-declaration.

Only power remains where it always was, right at the end of the queue. That will probably remain the ultimate touchstone. By the time Indian power costs go down substantially, Indian manufacturing will also have arrived.

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