India: A compelling alternate in advanced manufacturing

Transcription

1 India: A compelling alternate in advanced manufacturing After years in the shadow of its behemoth manufacturing neighbor China, India is poised for growth in the high-end manufacturing sector.

2 After years in the shadow of its behemoth manufacturing neighbor China, India is poised for growth in the high-end manufacturing sector, especially in precision areas such as machine tool manufacturing. This new focus on manufacturing and service, and its movement away from the country s traditional agro-economy, can be attributed to a collectively increasing sophistication of the country s workforce and infrastructure and the potential need for global companies to diversify away from Chinese manufacturing base. The stakes for the Indian economy are high: manufacturing employs 30% of the non-agricultural workforce in India and contributes to 15.2% of the country's gross domestic product[1]. The sector s rise or fall sets the tone for the overall Indian business cycle and its health is very much at the core of India's socio-economic fabric. The Indian market provides both risks and opportunities for growth within advanced manufacturing and therefore an analysis of the elements of the macro environment and their implications is crucial before investment. The paradox of manufacturing in India The manufacturing industry in India has, to its advantage, a significant consumption platform: an upwardly mobile, burgeoning population with an almost insatiable demand for goods and services. This domestic demand, coupled with the fact that most multinationals now wish to diversify their production bases to include low-cost plants in countries other than China, could help India s manufacturing sector to grow six-fold by 2025, to $1 trillion, creating up to 90 million domestic jobs.[2] Today, the sector generates about 45 million jobs, 80% of which are in unorganized segment.[3] This is also reflected in the fact the majority of employment is in rather small enterprises. For example, the share of micro and small enterprises in manufacturing employment is 84% for India versus 27.5% for Malaysia and 24.8% for China.[4] Hourly average compensation costs for all employees in manufacturing, selected economies and regions, Indexes of hourly compensation costs in manufacturing (Index US = 100) 2

3 Growth Trend Hourly average compensation costs for all employees in manufacturing, selected economies and regions, Note: Data for India refer to the organized manufacturing sector only Source: U.S. Bureau of Labor Statistics, International Labor Comparisons Traditionally, India s manufacturers have performed below their potential due to a combination of factors: the lack of infrastructure (including electricity), poor logistics and unfriendly licensing policies. The Indian government has realized that, in the short term at least, it must focus on developing industrial clusters with an ecosystem of supply-chain responsiveness, lower logistic costs, and availability of labor and technology upgrades. These clusters can unite the advantages of innovation and employment generation for smaller firms with scale and cost advantages of larger organizations. The success of these intentional industrial locales is visible in the auto and auto ancillary clusters in Tamil Nadu and the pharmaceutical clusters in Andhra Pradesh. These clusters and others to come will provide cost and productivity gains and drive India up the global manufacturing chain. Despite all this, India s manufacturing exports are growing rapidly, particularly in skill-intensive sectors such as auto components, engineered goods, generic pharmaceuticals, and small cars. Nonetheless, the manufacturing sector generates just 16% of India s GDP much less than the 55% from services, revealing a huge untapped potential. This reveals the country s manufacturing paradox-there is huge demand, the wherewithal to produce, and yet manufacturing in the country is currently operating way below its estimated potential. Growth Trend Despite the falling Rupee and general gloominess hanging over the broader Indian economy, the manufacturing sector is slowly and steadily registering substantial growth. The official data reported by the Reserve Bank of India showed that the Indian economy grew 4.8% in the first quarter of January to March 2013[5]. In the same period of January to March 2013, the Indian manufacturing sector also registered a year-on-year (y-o-y) growth of 2.6%.[6] 3

4 What Sectors Are Ripe India, the fourth most competitive manufacturing nation on Deloitte s 2013 Global Manufacturing Competitiveness Index (preceded only by China, the U.S. and Germany), is gaining recognition for its growing capabilities. In addition, The Index, based on a survey of CEOs, executives and officials of 550 global manufacturing companies, predicts that India will become the second most-competitive manufacturing country by 2018, behind only China. Not just another China The differences between India and China, the two top manufacturing players should not be underestimated by international manufacturers when considering where to set up additional manufacturing capacities. India is quite different from China in two key areas: production cost and price. Regarding production, Indian manufacturing may still not be sufficiently price competitive for a multinational company; while China is a low-cost producer in a wide range of sectors, India s advantages tend to be limited to more value-added areas, such as aerospace or special purpose machines. Because of this, only certain sectors and companies might benefit from keeping India on their short list. India also differs from China on price. Like in the United States, the Indian domestic market is relatively large and can absorb much of what is locally produced, unlike other Asian markets, where the vast majority of production is exported Consequently, Indian manufacturers are not pressured to compete on price for foreign sales. Chinese manufacturers, on the other hand, compete aggressively on price because they tend to export so much of what they produce. Sectors where the opportunity is ripe In addition to its advantages in the workforce and technology, India also has abundant natural resources needed in production notably, iron ore and aluminum for engineered goods, cotton for textiles, and coal for power generation. As such, the country could become a viable manufacturing alternative to China in industries ranging from apparels to auto components and might even dominate some skill-intensive manufacturing sectors. If India s manufacturing sector realizes its full potential, it could generate 25%-30% of GDP by 2025, thus propelling the country into the manufacturing big league alongside China, Germany, Japan, and the United States. Along the way, it is estimated that 60 million to 90 million new Indian manufacturing jobs would be created and the country would definitively become an attractive investment destination for its own domestic entrepreneurs and multinational companies. 4

5 Greatest Opportunity Machine tool sector poised for greatest opportunity India is the sixth largest consumer of machine tools in the world so it follows that a large share of the global production of high-end machine tool manufacturing will soon congregate in India. As the overall manufacturing capacity of the country rises, accompanying growth of the machine tools sector is expected since it serves as the mother industry for other manufacturing units. In recent years, developed economies have seen a stagnation of manufacturing capacity and therefore a fall in the growth rate of the machine tools industry. As such, shifting machine tool capacity to low-cost, high-skill geographies like India has become imperative. The Indian machine tool industry has around 1,000 units involved in the production of machine tools, accessories/attachments, subsystems and parts. Of these, around 20 units in the large-scale sector account for 70% of the turnover (the rest are in the SME sector of the industry). Approximately, 75% of the Indian machine tool producers are ISO certified. While the large organized players cater to India s heavy and medium industries, the small-scale sector meets the demand of ancillary and other units. Many machine tool manufacturers have also obtained CE marking certification, in keeping with the requirements of the European markets.[7] Import of Metal Working Machines into India (Value Bn USD*) FY Note:* Conversion rate taken throughout this report is 1USD = 60 INR Source:Indian Machine Tool Manufacturers' Association 5

6 The Indian Advantage The Indian machine tools sector offers ripe opportunities for investment. Given the current gap between demand and supply, there is a clear opportunity for adding capacities in this sector. The industry is moving toward increasingly sophisticated CNC machines, driven by demand from key user segments, such as automobiles and consumer durables. Machine tool manufacturers need to develop capabilities in country to cater to this demand and investments in this area of India s advanced manufacturing economy could prove to be extremely profitable in the long term. One of the major global industry houses that is taking advantage of India s available talent pool and lower manufacturing costs is General Electric (GE), which plans to make India one of its manufacturing hubs for the world.[8] GE believes that there is an opportunity to step up the India advantage in manufacturing with the India for the world concept. If the Indian markets are subdued for other economic reasons, it is an opportunity from an export perspective, which can yield major long term gains. Like several other industry leaders, GE believes that the fundamentals of the country still remain strong and that India is on the learning curve in terms of regulatory processes. In fact, it is believed that India can be the best manufacturing destination in the world, especially in high-tech items like aviation, gas and steam turbines. GE now has 6,000 engineers in Bangalore and 2,000 in Hyderabad. They have 1,000 patents to their credit in India, and believe that there is no dearth of knowledge and talent in the country. As a logical step GE is now setting up a manufacturing facility at Chakan near Pune with an investment of $200 million. The plant will locally manufacture a host of different aviation and turbine machinery components as well as wind turbines. They expect the facility to be up and ready by mid. The Indian advantage: people and technology The new generation workforce is comprised of highly-skilled individuals who have the ability to quickly grasp the new concepts and technology demanded by the manufacturing and services industries. Naturally, such activity is centered in larger cities, which are now seeing an influx of young adults eager for new job opportunities. After years of serving as the outsourced service workforce for Western companies of all stripes, the average Indian worker is highly skilled at adapting new technologies to suit local requirements. As a result, India is increasingly adopting a global approach to become a strategic player on the international platform. The entry of foreign companies in the manufacturing industry has anchored a technology-based orientation which has subsequently helped India create an advanced manufacturing sector. India s huge supply of small- to medium-sized ancillary manufacturing units that can supply larger, upstream players keeps cost of production and scale of operations low, therefore making them ideal OEM suppliers. 5

7 Conclusion So it is not surprising that today manufacturing companies from India are significantly more likely to operate multi-nationally than those from China and Brazil. In fact as much as 88% of Indian manufacturers operate globally as compared to 68% in China and 64% in Brazil. And when it comes to aspects of global operations such as sourcing, manufacturing, distribution/sales and marketing/promotion, Indian companies are with 55% on par with those in Germany (50%) and the US (54%) leaving behind their counterparts in China (32%) and Brazil (31%).[9] Conclusion Therefore any internationally operating company will have to at some point evaluate whether for their business India is not only a market but also a base to source or even manufacture. Also to make further headway in capturing market size in India, for many companies contract manufacturing might be the next logical step. While India remains a difficult market on the ground and there are still obstacles in the political and legal frameworks ahead, with a good knowledge base in the respective industry and a carefully developed network of suppliers, manufacturing in India will be more and more crucial for a successful growth strategy in India and Asia. [1] The Times of India, Economic Times [2] Ministry of Economics [3] For further details on the unorganized segment and its relevance in the Indian economy please see: Report On Conditions Of Work And Promotion Of Livelihoods In The Unorganized Sector. Academic Foundation. January 2008 [4] EXIM Bank newsletter, March 2013 [5] Reserve Bank of India (RBI) [6] See HSBC India Manufacturing Purchasing Managers Index, August 2013 [7] Indian Machine Tools Manufacturer s Association IMTMA [8] See interview with Banmali Agrawala, president and chief executive officer (GE South Asia) (Business Standard, November 2013 [9] Referring to a study published by Underwriter Laboratories in December

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