More than China's leftovers

Manufacturing as a component of national income, for the first time, overtook agriculture this decade. That's not just a simple factoid but a statistical event with far-reaching significance. Consider these numbers: India employs an estimated 225 million people in farming, fishing and forestry-related activity.

About one-fifth of that, or just 48 million, is engaged in manufacturing. Conversely, each factory worker generates five times the income of a farmer. Not just that. For each new factory job, three jobs are added in the services sector, which in turn adds at least another three jobs in the economy through intricate, ever-evolving spender-provider linkages.

That to India watchers such as Vikas Sehgal presents a never-before opportunity for the country to generate distributed wealth and pull millions out of generations-old poverty. The Chicago-based partner at Booz and Company, a firm of management consultants, believes that with the edge gained in the global economic reset, the country has a chance to get on the manufacturing bandwagon that it missed out to China, Korea, China, Taiwan and even Malaysia or Indonesia.

Most of the jobs in manufacturing in the last 10 years have been created in what is called informal employment (contractual or casual labour that has little by way of job security and regular wages); even so, the statistics are telling. The period between fiscal 1994 and 2000, Indians employed in manufacturing grew 1.68 per cent. In the five years after (fiscal 2005 is the latest that the National Sample Survey Organisation has data for), factory jobs expanded 4.05 per cent—at a clip nearly 2.5 times faster.

MNC Rush
Leading global manufacturers such as phone vendor Nokia, consumer electronics leaders Samsung and LG, car makers Hyundai Motors and General Motors, earth moving equipment leaders JCB and Caterpillar, have contributed significantly to this job expansion by setting up large-scale manufacturing facilities in India. Though their initial rationale was to be close to a burgeoning domestic market that India is, they soon realised the potential the country offered to service demand from select overseas locations.

Hyundai Motors, which entered India in 1996, has since made its plant near Chennai the global hub for its small cars. So has Suzuki Motor, which controls India's Maruti Suzuki. It has identified its Manesar plant near Delhi as the global small car hub. Nokia exports handsets made at its Sriperumbudur plant, the biggest by output volumes among nine such factories it has from Brazil to South Korea, to over 50 countries.

Indian players across industries have also scaled up like never before. Take automobiles, for instance, an industry that contributes about 20 per cent of manufacturing output. Tata Motors, Ashok Leyland, Bajaj Auto, Hero Honda and TVS Motor have expanded capacities manifold to meet the surging demand. The number of vehicles made in India this fiscal year is expected to touch 12 million as against 4.8 million sold in 1999-2000. Today, waiting for more than a few weeks is seen as a loss of business – clearly a far cry from the days when Bajaj Auto had a waiting list of 10 years and more for its popular Chetak brand of scooters.

In fact, several among the world's top five manufacturers in various industries are homegrown. India counts within its boundaries the world's biggest maker of bikes in Hero Honda; in Moser Baer, the planet's second-largest maker of optical discs; United Spirits is the second in the world in the alcoholic spirits sweepstakes; and the fourth place among global truck makers is taken by Tata Motors. All these rankings are by volumes of units produced and not revenues. Still, the change is tectonic.

Scale apart, Indians embraced international practices raising quality and productivity bars. India has over 30 winners of the Deming Award, the Oscar in manufacturing. "Each of the half million cars that India will export this year are high-quality cars built to exacting standards with 95 per cent plus of components manufactured in India," says Surinder Kapur, Chairman and Managing Director, Sona-Koyo, a maker of steering assemblies. In doing so, India will end up as the fourth-largest car exporter from Asia, overtaking China.

But can India grow its manufacturing ambitions out of the shadow of China—the preferred global factory—which adds at least 10 million factory jobs a year (India added 8.50 million manufacturing jobs in 2000-05)?

The Mill Stones
A close look at the composition of India's jobs is helpful to get to the root of what is wrong. India's low employment—12 per cent of population— in manufacturing (versus 57 per cent in agriculture and 21 per cent in services) and a minority, yet powerful, organised factory workers pose big hurdles in the way of labour productivity and flexibility—factors that are key to manufacturing. "The government, in effect, is reflective of interests of some 9 per cent of the labour. A protected labour is killing the opportunity for others who could gain with manufacturing," Booz's Sehgal says.

Others complain companies are forced to spend time and energy on archaic rules that are completely out of place. "A company needs to keep a matka (earthern jar) on the shop floor for employees to drink water from. Even if they had a cooler with Evian water, if they don't have a matka, the managing director can be sent to jail," points out Marut Sen Gupta, Executive Director at business lobby Confederation of Indian Industry (CII). Venu Srinivasan, President, CII, and Chairman, TVS Motor, estimates that laws in India push up transaction costs by at least 20 per cent compared to China.

There is then the pain of a sagging infrastructure— be it lack of power, poor roads and over-stretched airports and seaports. Ask Hyundai. The automaker, which exports 20,000-25,000 cars a month, deals with a peculiar logistics problem every day while dispatching cars from its Sriperumbudur factory to the Chennai port, 45 km away. "We are allowed to use the highway only for six hours (a day) in the night, which means we have to fill up a yard at the port with a shipload of cars and only then load it on ships," says the company's Vice President Arvind Saxena.

Changing Tide
One hotspot 65 km north-west of Chennai may hold the answer on how India's lot in manufacturing could change. Work is on at a panting pace at Sri City, a 5,800-acre multiproduct special economic zone (SEZ). Already, 22 companies (21 are foreign-owned) have set up or agreed to set up shop in the 18 months after the SEZ opened, with some 5,000 workers making goods ranging from cryogenic pressure vessels , railway interiors, handsets, tooling and recycled printing heads.

At the SEZ, K.P. Sridharan, Managing Director, Al-Reyami-Rockworth, an office automation company making modular workstations, is not very concerned that similar zones in China, a country he has visited each of the last 10 years, are up to about 1,500 times larger than Sri City. Here, he says, the intelligence, even at the worker level, is superior in working out solutions for difficult situations, which "is a great plus for manufacturing".

The bigger jump for Indian manufacturing may come with a structural change in the form of a global shift to low-cost manufacturing to create products that have demand in emerging economies from Asia to Africa to South America—the only growth markets left. Already General Electric, or GE, in what Chairman and CEO Jeffrey Immelt calls an attempt to "disrupt GE", has announced its intent to develop products in India to sell them here and similar markets elsewhere. What Sridharan and Immelt are living through, says Vijay Govindarajan, Earl C. Daum 1924 Professor of International Business, Tuck School of Business, can be traced to Tata Motors' development of the Nano, the Rs 1 lakh car. "With Nano, India has established itself as a technology leader—a refreshing change from it being considered as just a low-cost manufacturing hub." That advantage has others such as Volkswagen and Michelin, too, headed India-wards with record investments.

The coming 10 years may then well be India's decade of manufacturing. A big change indeed.

— With inputs from Nitya Varadarajan