Moving to India: a new journey in manufacturing
The continuing debate whether or not India will emerge as the alterative manufacturing to China grossly ignores certain ongoing silent abatement of manufacturing business & number of significant facts of India. Today India holds the world’s largest mobile manufacturing plant which is operated by Samsung, the cheapest solar power generation in world, the biggest complete indigenous 2 wheeler manufacturing company in world and second biggest mobile phone manufacturing base in world. To a biggest surprise mobile manufacturing in India offered the best of the quality ever achieved in world and best cost parameters of Asia as claimed. This Samsung plant is located at NOIDA on outskirts of Delhi & couple of others is in south India. There can be doyen of such examples which may surprise to majority of experts and analysts who are from India or outside, trying to analyze the future of Indian manufacturing.
The present drivers for selection of manufacturing location are primarily guided by two parameters. First one is vicinity to end user market on best of cost and second is de risking the lifeline of supply chain from single source. India naturally evolved as the most favored location in meeting these two prime attributes. Although finished product manufacturing had matured in India for high volume and complex products . This existed here for past several years. A strange perception exists that complete downstream supply chain is not self reliant . This is hardly true. Many of the major manufactures have developed their supplier base and localized a robust ecosystem. Not only this supplier base meeting their sourcing needs but also on an independent business by themselves sold worldwide on cost & quality. The manufacturing technology, manufacturing related software and process originated from India retains top spot globally. Recently Warwick University Manufacturing research had concluded and tried to estimate the unpredictability in demand side. The result stresses there are need of advanced analytics and predictive behaviors to the present supply chain management (SCM) applications. Means gradually, starting from immediate near future manufacturing setups will need a dedicated focused predictive software enablement. This has an immense benefit from large size Indian software and IT base. The SCM need to be data driven and the move necessarily needs to elevate from present form to stage three levels which are most advanced. This will make the SCM predictive, analytic and yield best inventory turns for revenue. The next industrial revolution is going to be evolved around Industry 4.0. This concept will force worldwide all manufactures to adopt and change the way they perform. This is a major sweet spot from India value proposition . Recently the most Industry 4.0 software, applications and process are getting developed from India. So the next level trigger for adopting a new avtar for manufacturing plants to change the way they manufactures, designs and refurbishes the products meets a local ecosystem advantage from India . Industry 4.0 is the complete digital version of traditional manufacturing blended with the power of big data, high computing capacity, artificial intelligence and analytics with an ultimate goal of production excellence. There are more than fifteen Global giants building and developing their smart factory framework and Industry 4.0 roadmap from India. Boeing is the most notable and significant from them. Boeing had aided and developing the same with IISC in Bangalore. There are large number of top fortune 500 companies building their team, development centre and centre of excellence in India to drive factory automation & Industry 4.0 globally as available in public domain. This factor is playing a vital favorable parameter for major companies in expanding their Indian manufacturing base or relocating to India. A conservative estimate values the Industry 4.0 will see an investment for more than US $150 Bn in next five to seven years. This is the most suitable avenue where India fits the best.
Now let’s analyze how India differentiates economically for traditional manufacturing and next gen smart factory manufacturing. Right now the Net Manufacturing Value Add ( NMVA) for any high volume product of US $100 Mn ranges in segment of 8 to 10% in India which can be averaged out as 9%. This is the complete cost of manufacturing. The global independent bench marking index for same quality and revenue establishes the cost in other global locations as follow. The NMVA for same $100 Mn and same product are : in China- 11% , Singapore -17% or more , Malaysia -12%, Indonesia-12%, Thailand -14%, Vietnam 10%,Taiwan 11%, Brazil-17%, Mexico-22% & average of Eastern Europe 19 %. There is no concluding data for Japan in recent times. The most compelling value differentiator now comes is when the wish is to setup a robust automated factory and Industry 4.0 compliant plant. The increase in NMVA it will affect to start is 5 to 7% India for a $100 mn product output. Same will inflate to at least 14 to 16% in other Asian locations except Japan for moving to Industry 4.0 in first couple of years !
It is factually established that India had long entered to the space of high technology, complex and high volume manufacturing plus going to stay here. In addition to these data we should analyze each segment in depth. Unfortunately this is not known to lot of analysts & experts but visible to few key business leaders worldwide. They are familiar with strengths of India as a manufacturing destination. We can’t claim that everything in India had achieved the zenith of its excellence and became world-class , but since year 2010; with a slow a steady growth India now entered to the club of global manufacturing big boys. There are also significant growths of supply chain enablement across India. A step by step analysis convinces the present factors in India are very favorable and equally admired by major global corporate who are seriously mulling to expand the base in India or migrate to India from other locations. In next two to three years Indian manufacturing is going to witness an exponential growth. It is also a myth that the manufacturing in India is largely dependent on supply chain of China. Take example of pharmacy sector. The pharmacy sector in India had surpassed US $ 60 Bn revenue size and growing with more than 20% year on year. The import of raw materials and axillaries account between 5 to 10% only. When we compare this to electronics except semiconductor products majority of bulk materials fairly localized and continuously growing. A deep analysis brings the light that the simple electrical components barely weigh 20% in the whole supply chain of electronics systems. These are typically resistors, capacitors etc. These will also very soon be manufactured in India. There is a systematic growth in high value component in getting manufactured in India.
Post COVID world the preference of manufacturing landscape had changed. It is futile to think now; China is going to be invincible world’s most favorite destination for manufacturing. Based on scientific and factual deep due diligence and analysis it’s found outside of China , India offers the best alternative place for manufacturing. The key findings and why it is concluded in favor of India will be explained here. The manufacturing strengths which are visible today matured with a consistent effort and focus of various government and private initiatives. The major three primary strengths now in India play a very vital role as following. These were build along since last couple of years & had contributed to augment the high tech and high end manufacturing.
First prime factor is the massive domestic consumption and existing market potential. When it is compared with other South Asian countries like Singapore, Malaysia, Indonesia, Vietnam and Thailand it overpowers all. This is a vivid contrast to China. The product to be sold in China in most cases need to be a Chinese brand. In India the global brand can leverage the local market and also utilize it as a base for global market. The volume growth brings the cost advantage with benefits & ease on reverse logistics management.
Second factor is rather more significant. The Resource factor is the most reliable & qualitatively well educated too. In India technical resource with experience costs lower overhead cost. This derives its root to mature and established IT sector in India. Today India is the place where advanced product design and software development of all Fortune 500 companies taking place. An existing three million IT employee base has its own influence to enrich the local manufacturing. There are additional four million IT and technology flavored resource in non IT sectors who manage internal systems. A rough estimate throws a visibility that minimum US $200 Bn worth of commercial value products & business software are manufactured in India. This is the basic pillar which hugely differentiates India’s talent pool to other South Asian base. There is an immense growth of Robotics, Industry 4.0, factory automation, artificial intelligence, machine learning, big data and digital manufacturing applications and process developments ongoing in India. Today all top five big data usage of world are getting built and supported from India. The development centers of major IT giants are located in Bangalore, Chennai, Hyderabad & New Delhi capital region enabled a fantastic resource eco-structure. When we map to major high technology manufacturing it shows an interesting result. The major brands of world like GE, ABB, Simenes, BMW, Nokia, ALSTOM,ABOTT, Honeywell,Moog, EATON, Schneider etc have a stabilized large size manufacturing setups for years, here in India . A diversified manufacturing base had evolved in last four to five years.
Third strong advantage in India is IP protection. Large chunk of established global manufactures found India is having a robust intellectual property safeguard and protection framework. India is a clear winner in Asia compared vis-à-vis to China in ensuring high tech product manufacturing technologies piracy protection with safeguards. This is backed by a strong culture of customer service & experience management orientation which surprised many existing global manufactures. Today the most sought after factory automations, AI in manufacturing, analytics and digital SCM is seen in India. This is mainly influenced or borrowed from a large pool of IT companies and their innovation hubs in India!
The Purchasing Managers Index for India today is the strongest amongst all its South Asian peers. Fortunately the inflation is under control for couple of years and the overall overhead is at very attractive range when it’s compared to Malaysia, Thailand, Vietnam & Indonesia. The overhead in India is almost half when compared with China. World Bank’s East Asia & Pacific Regional report rates the Indian work force in manufacturing sector as the most qualified and trained compared to all South Asian locations for same dollar value. This brings its own sweet reward and agility for companies long term growth .
So what next we are going to see in next three years on manufacturing segment. A fair scientific assessment predicts at least a 45% to 75% growth is going to happen to present manufacturing sector as it exists. This combines high volume consumer electronics & mobile phones, medical devices, Telecom systems, automobile & industrial segment, defense products and IT & computational systems. At least more than two hundred global giants and manufacturing entities are at advanced level discussion with various state and central governments. There is a geo political dividend now to manufacture in India. Key top five sectors which are going to largely pick India as a base for manufacturing are telecom, consumer electronics, electric Vehicle, industrial systems and medical equipments. Electronics System Design & Manufacturing (ESDM) is seeing a double digit growth year on year in India since year 2016. From a near collapse of this sector in 2012 because of many external factors to now with reaching revenue more than US $10bn is remarkable. In spite of this, ESDM sector had not even reached to half of its existing potential of at least $50 Bn per annum in India. Today all major Global top contract manufactures of world are present and having a sizable business. Foxconn, Flex,Jabil , Sanmina & Wistron are few to name. Also more than ten top tier contract manufactures and EMS (Electronics Manufacturing Services) companies of world are in last leg of their plan to finalize to entry into India. This is driven by a demand! All major brands of world are now having big fat revenue in India , their product development centers and also exports from India are having financial advantage compared to other locations.
The main financial bonanza India offering today to hi tech manufacturing and volume manufacturing is very valuable to the balance sheets. Today the overall tax rate in India is best in ASIA. Even compared to Vietnam and Singapore it offers an immense competitiveness. The Industrial manufacturing incentives package by Central Government recently launched & known as Scheme for Promotion of manufacturing of Electronic Component and Semiconductors (SPECS) definitely had ignited a massive positive interest for global giants. This differentiated India distinctly from other South Asians locations on policy and benefits. Capital subsidy, ease of repatriation and having simultaneous setup for SEZ (Special economic zone) for export & DTA (Domestic Tariff Area) for India business is a tremendous business enabler. These are strongly and heavily backed by various state governments with additional benefits. Majority of Industrialized states like Tamilnadu, Karnataka, Telangana, Andhra Pradesh, Maharastra , Gujarat & NCR ( New Delhi Capital Region ) had business ready clusters and a dedicated government establishments to enable Industrial houses commence their business hassle free. These clusters too have high skill work force with best cost even when compared to Vietnam & Indonesia!
There is a huge debate going on Supply chain management (SCM) enablement in India. SCM enablement is slowly picking up in India for complete range of electronics items. Today the local manufacturing of smart phones and consumer electronics had brought a steep rise in developing local SCM around it. Also SALCOMP recently had acquired the defunct Nokia factory in outskirt of Chennai to build various modules of smart phone. There is an unreasonable fear and buzz created that local supply chain is inadequate. On a realistic assessment it’s clear that, baring high value electronics items of semiconductor products like processors, chips and integrated circuits ( IC) and memory modules rest all manufacturing had established and stabilized in India. The grey area or failure from India is, it never encouraged to boost local manufacturing of PCBs. Fortunately off late the Government dispensation had taken some encouraging steps to boost local PCB manufacturing. The incentives and tariff on PCB to import had invoked an interest in major players to opt for India. Surprisingly there are pockets in India where land , water, electricity, resource and logistics to a probable PCB plant are optimal. These zones are the best place in world to setup the PCB industry . These are primarily in states of Odisha, Chatisgarh , Madhya Pradhes & Assam. The raw materials and chemicals for these plants are up to some degree common as used in steel, paint and glass industries which are extensively present in India. These states are having major rivers, large land banks owned by state governments, easy availability of resource and beautiful network of road & rail to strategic customers and sea ports. Another major component of electronics manufacturing is mechanical systems, which are known as mechatronics too. India had a robust mechanical SCM with best quality and cost. Today there is also a sizable volume of these systems exported to western markets.
A major hidden success story of local manufacturing in India is always unnoticed – the US $ 135 bn incumbent automobile market success. To be fair we can say the key stake holders and business leaders very well understand it but beyond this crowd others are not aware. A lot of analysts and freelance experts who sometime raise the question about scaling up of high tech manufacturing in India need to review the automotive story. The automotive manufacturing can be factually analyzed. The beauty of Indian automotive market is on quality and cost it overtakes China! Let’s go slight deep into analyzing the automobile manufacturing in India. Today India is the fourth largest automobile market in world . This market is near hundred percent localized. The extreme high end systems are imported and value added which is less than 5% of the current market size. In addition to this the automobile segment is doing an annual average export of US $15 bn ! All major four-wheeler brands and two wheeler brands have their own manufacturing setups. This is not a new game but had almost traveled a path of a decade in being local. Today complete automobile supply chain is localized in India. The automobile SCM from India also seeing a sizable export to other geographies. From passenger cars to luxury vehicle to commercial vehicles to heavy transport segment all are now manufactured in India. All major brands of automotive world are manufacturing and growing in India. Like BMW, Volvo, TATA, Ashok Leyland, Mahindra, Suzuki, Hyundai, MAN, Renault-Nissan, Volkswagen ,Eicher, Toyota, Isuzu are to name few. Each sub system like mechanical body, engine, digital systems, brakes, ABS, steering, electronics and AV systems all are now manufactured locally. The biggest component manufactures or OEMs like Bosch, Wabco, Harman, ZF,LTVS, Delphi & Mobis etc have their own complete manufacturing setup and serve the end customers. The SCM of automotive industry in India spans all across India with more than thousand companies and employees more than hundred thousand employees. A state of the art high technology and unmatched quality with lowest cost in the world became the hallmark identity of Indian automobile segment.
If we compare the automobile manufacturing to Electronics manufacturing a striking resemblance appears. The same positive parameters or tail wind, which was catalytic for automobile success is now incarnating for electronics & industrial manufacturing. That’s local consumption and a reliable talent pool with attractive cost. Today the consumer electronics market in India had surpassed US $12 Bn and reaching $20 Bn in next two years. This sector is seeing a tremendous downstream growth in setting up own manufacturing hubs. This sector is completely localized now because importing these items attracts a burden on basic custom duty.
The reservation of few analysts that India is not going to witness FDI shift from other locations are terribly bungled. They miss two parameters significantly due to lack of detailed understanding of manufacturing business and its lifecycle here . Let’s keep aside the present geo political turmoil for some time. It’s clear that every country now will focus on local market and try to control its sourcing. The growth in Indian consumer spend can’t be ignored by any global player if they wish to survive worldwide. Korean brands successfully read this market early and harvested their dividend by entering India around 2009-10 strongly. Last few years many Japanese conglomerates had sensed it and re jigged their India strategy. The business leaders in this segment from conglomerates of USA & EU understand now the benefits of India and sometime it appears in public domain. There is an unseen and unexpected interest from Taiwan industrial giants which surfaced recently for India. Since last one year many high tech and components companies from Taiwan directed their interest to locate themselves in Indian eco systems.
Telecom sector and Computational systems like servers, desktop, laptop etc now shifting to India. Now a global giant of personal computers initiated to manufacture in India. The trend is very impressive and expected to grow hundred percent years on year. India has a magic and miracle left to experts to explore & decode. Take the example of Reliance Jio. Perhaps this is the most successful and most advanced telecom operator in world with cutting edge technologies but don’t have a single Chinese product in its network. In spite of this the cost per unit capacity with latest technology is very attractive compared to anywhere in world. Many of these gears have their own Indian contents. So there are lot of myths and grandma stories around cost, quality and reliability dependency obstacles by manufacturing in India. The reality is completely different. The domain experts understand it. Perhaps the interest of Facebook in Reliance Jio has one of this factors embedded in this strategic engagement. Now the users data across the world moving to clouds. Even major enterprises moving their systems to clouds. Datacenters became the key in next business evolution. India is the source and user of almost one third of Global public data. There is a very powerful dimension and aspect here. It’s emerging that by locating data in India or building large data centers offers the best cost of ownership and reliability. Couple of major cloud providers started exploring to leverage India presence and strengthening their India business as a tool to succeed in worldwide arena. Needless to mention you name an IT systems giant now & they are in India. Dell, HPE, Hp Inc, Lenovo,ATOS, Cisco etc strongly exist in India with engineering and manufacturing base. Even the prestigious processor companies like Intel, Qualcomm, AMD etc are having vital R&D centers in India. The list doesn’t stop here. The companies like WD, SAMSUNG,MICRON, TI etc are strongly present too.
In a nutshell a conservative estimate in major seven verticals going to see a bare minimum US $35 bn additional manufacturing setup in India by end of year 2022. The Electric Vehicle revolution is going to create another thunder storm. The immense Infrastructure spending and Government commitment is building to trigger a massive EV wave in India. The policy makers are determined to see the EV which will be sold in India should be completely made in India. This is not a difficult goal because all major car and two wheeler brands in India have their large manufacturing base here. In addition to this the battery and the power systems need necessarily to be manufactured here. A compulsion and an available opportunity going to make a huge difference.
When we conservatively analyze the main segments of India including telecom, automotive, consumer electronics, FMCG, industrial sector and health care products & local defense manufacturing , it is wise and safe to see in next two to three years around US $ 50 bn additionally is going to touch Indian soil for having a manufacturing revolution.
Present COVID situation surprised the world when it came to light the power of Indian pharmaceutical business. All over the world many analysts and market experts were completely ignorant that Indian is the number one generic drug manufacture. This further surprised whole world when Indian manufactured record PPE and ventilators in a short span. It is already in public domain several big dads of medical and health care system manufactures of the world seriously contemplating to ramp up or setup their massive manufacturing houses in India.
In spite of this what was headwind for India story? Perhaps a baggage of India fatigue which is primarily aroused ten or fifteen years back. Post 2012 perhaps India saw a decisive focus on manufacturing on double powered engine. Intent from Central government backed and keenly pursued by state governments. Recent success of SriCity in Andhra Pradesh around the year 2014 to 16 and rejuvenation of NOIDA perhaps ignored by many. Today SriCity hosts more than twenty global brands as manufacturing base and perhaps in a span less than five year no place in world became such successful as a most sought after destination. Kia Motors had ventured to AnathPur a town in Andhra Pradesh and around 150 Km from Bangalore to be up and running in two years.
The gist of the story is India need to be consistent and eliminate the certain residue bureaucratic red tapisim. Labor laws still need to be enhanced and simplified. The single window clearance and ease to run business need to be further emboldened. It is also practical that no country or region is perfect. Anywhere in the world for a manufacturing business the industries weigh pros and cons. India should increase its advantages immensely to outweigh the disadvantages it carry. It is much needed to have a strong trade agreement with USA perhaps at par with free trade agreement ( FTA). India has FTAs with Japan & Korea. This brought an advantage. Now it’s time to march ahead and not to limit our trade policies revolve around ASEAN countries only. It’s high time we setup FTA framework with EU, UK & USA. Defense manufacturing is growing but not upto satisfaction. A strategic FTA with western world will be a great stimulus to this.
A major glitch on policy performance of India is contract enforcement and legal settlements. These two lacunas of corporate law need to be rectified at the earliest.
Couple of concluding observations are vital too. A financial framework for ready cash for Industrial houses is much needed. This will be the main attraction for domestic players to enter into components manufacturing and will be enabler for many. Government procurements need to be consistent and clauses of localization should be stringent. The PMA (Preferential manufacturing access) in government was a major advantage to speed up local manufacturing which was implemented in year 2012. The MSIP scheme introduced later brought a significant result by having around hundred additional new manufacturing units. Now to materialize the global enthusiasm and interest in India the policy makers should fast track concrete tangible benefits. It needs to be few steps more than present capital subsidy, land banks, repatriation ease and lowest corporate taxes. No doubt these are great virtues and benefits of India. There need to be project specific , out of the way packages to corporate houses for large investments . To be fair the present administrative echelon are dealing mega projects with utmost care and additional benefits are getting handed out .
There is a major intent by Government of India to have a semiconductor fab in India. There are few players in this space. Does India lack now a resolve to have it? When we see past success stories in India it teaches a lot. India today has the world’s biggest petroleum refinery, many world class steel plant, massive infrastructure projects and state of the art private airports. Each of these had seen much more in money spending than a Semiconductor fab will need. To have such next level of technology in country we need a massive resolve and support from Government. It will be crucial to observe if that materializes in next three to four years time frame.
As we are here in mid 2020 a lot changed in world in last three months. The assertion of Government of India to be “Self Reliant” is stepping stone and perhaps will be a critical enabler too. The growing GDP will have its proportionate spending in various sectors spanning from defense till healthcare. The year 2020 till 2025 will see a repeat of year 2000 to 2005 in parlance to IT Industry. Year 1999, Indian IT Industry made its presence felt. Subsequently in next five years Indian IT industry and per say India became the Global development centre. The sister concern of manufacturing is the infrastructure sector. Rapid growth in highways, ports and airports are going to bring positive impetus too. It is prudent to see a rapid manufacturing growth in India to serve local market and expand its profile to global coverage.
Bottom line is now the manufacturing in India is offering a two sided reward to improve top line and bottom line. The next gen manufacturing and intelligent manufacturing is perhaps having the best available support systems in India more than anywhere else in world.
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