India needs to gear up its ecosystem for export-oriented manufacturing

Dr Jagdish Sheth, Charles H. Kellstadt Professor of Business at Emory University Goizueta Business School, opines that India needs to strengthen its financial, legal & accounting systems, enhance ease of trade and build multi-modal infrastructure to achieve the goal of becoming a manufacturing hub.

When it comes to discussing India’s evolution, potential and missed opportunities in the manufacturing sector, most analysts would readily refer to the 1991 reforms, and the services-heavy growth model that India adopted. Indeed, India leapfrogged from the agricultural sector to the services sector, wherein we have the raw materials, resources, talents and lower wages. Indeed, in IT services and other professional services such as publishing, accounting, and R&D services, India also has an enormous size and scale advantage. These could be easily marketed worldwide. Moreover, several bottlenecks like cost of capital, procedural hurdles, etc inherent in manufacturing were not applicable for the services sector.

But if one digs deeper into history, independent India really missed the opportunity in the 1950s. After the victory against the Germans & Japanese in World War 2, there was a huge pent up demand in America, which was a dominant power. When the military (GIs) came back, they started forming their households. But there wasn’t enough capacity in America, especially to manufacture household products; also there was a shortage of labour.

The US also wanted to outsource manufacturing. And the country they approached was India, which was a vital manufacturing hub under the British Empire, especially in textiles and steel.

In accordance with the David Ricardo comparative advantage theory, India was a natural choice with nationalised state-owned enterprises as well as private players like the Tatas and Birlas. However, we decided not to align with the Allies because of the colonial history.

If we had agreed at that time, in the early 50s, India could have taken the leap in manufacturing, which was instead taken by Japan, Taiwan, South Korea and eventually China. China’s rise was not due to their domestic enterprises at that time. It was basically American, German, European companies giving the technology, capital and raw materials to make value added products in that country. Now, of course, China has become a manufacturing superpower.

Things did change fortunately with the 1991 reforms. We allowed more privatization and liberalization, which allowed manufacturing growth in India in two ways. Many Indian industrial firms began to consider investing in India rather than abroad. The 1991 reforms led to Reliance Industries thinking about manufacturing petrochemicals in India and built the biggest factory. The biggest surprise came out of telecom industry. Out of nowhere, massive capital investment was poured into telecom networking by the likes of Sunil Bharti Mittal’s Airtel.

Yet, India’s growth continues to be largely services-led. The government has envisioned growing the share of manufacturing in GDP to 25%, but progress has been slow over the last decade. This is surprising, since India has the resource advantage in all three areas: industrial, agricultural and human resources. Secondly, India has a large and growing markets for branded products for foods, beverages, furniture, automobiles, pharma and many others.

More and more technology companies are establishing their own development centres in professional services. India is becoming a global destination in high tech industries.

The biggest weaknesses ailing manufacturing are lack of infrastructure and existing laws, which were established more than fifty years ago. They need to be revised from a domestic to a global perspective.

The same is true for the export sector. In fact, India is so large domestically that in the private sector, especially owner-managed businesses say, “I am just happy here. As long as I have succession planning with my children, I will be okay.” They don’t have the global aspiration or mindset because they think it is a headache.

It is virtually impossible to imagine sustained growth without a strong and globally competitive manufacturing sector – be it in terms of reducing trade deficit, boosting incomes and jobs and promoting overall development. So ease of doing business has to ultimately translate into ease of manufacturing and ease of trade.

Global manufacturing landscape – Technology, virtualisation, automation

India has to tune its manufacturing to the emerging paradigm. There are three big changes over the last decade in global manufacturing. The first is the use of technology to both automate and integrate the end-to-end value chain. Furthermore, it is almost real time so that all the parties involved know what is happening in value addition.

Secondly today, it is possible to do mass customization, so that capital assets such as plant and warehousing can be used for multiple purposes. Today, I can offer product variety and personalize the order by each customer on a global basis.

Finally, we have experienced the rise of contract manufacturers. The best example is Foxconn. In other words, the vertical integration is replaced with virtual integration, where both Cisco Systems and Apple are leaders.

As companies have sought to de-risk from China over the years, new manufacturing destinations have emerged, even if they proved to be more expensive. This became very evident during the COVID pandemic with respect to PPE products. It seems that we will see the rise of distributed manufacturing and bring the manufacturing closer to markets. While at one time, it was the tax incentives and other benefits which were the selling point to attract manufacturing, companies will be more strategic in their approach now to ensure uninterrupted supply in the coming years.

There will be greater automation and use of artificial intelligence and robots to allow humans to do more cognitive and problem solving tasks. Most repetitive activity and activities in hazardous situations will be taken over by machines. India’s strength is at the high end of engineering, science and technology. This includes defence, public infrastructure and software-based services. As we have seen recently, more than US$ 20 billion will be invested by Silicon Valley companies. All of it is in next generation technologies, where India needs to have greater focus.

Next level of competition

To be competitive as a manufacturing hub, India has to identify and fix the gaps, and learn from other countries who have been very strong in manufacturing exports. One instance is Germany, whose export economy (goods + services) accounts for nearly 50% of its GDP. The government has provided a lot of assistance. Many years ago, they put a policy in place, where once the product is FOB, or ex-factory as we call it, the government provides the insurance risk. So if the product is destroyed in transit because of storms, pilferage etc, the government will take the risk. Since I have no risk, I have more incentive.

Many countries are now competing to become sourcing destinations. In Southeast Asia, Vietnam has gained enormously. After the Vietnam War, the economy was rebuilt with more contemporary, modern farming and manufacturing. Another factor was that they were able to access the requisite technology from the Chinese; because Communism was there at one point of time. So, they were already there in the game and more export oriented. Similarly, Thailand has a very strong export-oriented economy.

The first thing is that we have to massively invest in infrastructure for manufacturing. In other words, how do we have a world class physical supply chain organised with technology? The easiest way is to do it in some sort of a clusters or special economic zones. But these should be spread across the country. For instance, the Northeast region is waiting to be tapped.

My view is that India has to build 25-30 new airports in the next 4-5 years maximum. These should come up in tier 2 or tier 3 cities, because many of the smaller town manufacturers, agricultural or industrial resources are out there. You have to go where resources are for infrastructure. Today, more and more cargo is no longer dependent on rail roads or highways; rather it is air cargo. So if I have the mechanism to get factory output by air to some other place in India, I can do it by air in 4-6 hours; instead of 6-8 days by rail.

Furthermore, there is much traffic in India for the domestic market from one seaport to another. We thought seaports were designed for foreign export markets. While that is true, I can equally design sea ports where a cargo can go from the West Coast, say Kandla or Mundra to West Bengal. We have a long coastline, so 15-20 seaports can be built by looking at domestic markets or cargo opportunities. If we build multi-modal transport, that can be hugely beneficial for the domestic market alone.

We also don’t have financial institutions as much geared towards export-oriented manufacturing. To attract manufacturing FDI, India needs to strengthen its support systems, be it financial, legal or accounting. None of that is organised well so far.

Technology is a great enabler. So, today I can do transactions online using blockchain as a settlement mechanism, for example, which is a governance mechanism.

The world wants to come to India, so it’s important to make it much easier to do business, where there are still issues. For instance, the banking system is still highly regulated and paper intensive. As an NRI, I still have a hard time doing business in India, document after document. The best platform is online so that no paper is held up. While the backend is digitised, more and more customer facing documentation has to be digitised as well.

There are positives over the years in this regard. In the External Affairs Ministry, visa is basically an online activity. So, I don’t have to go and wait in line at the embassy or the consulate, which cannot handle the volume anyhow as the economy gets more integrated globally. So as we get more globally integrated, we have to ensure proportionately greater use of technology as an enabler for business.

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Jagdish N. Sheth is Charles H. Kellstadt Professor of Business in the Goizueta Business School at Emory University. He is globally known for his scholarly contributions in consumer behavior, relationship marketing, competitive strategy, and geopolitical analysis. Professor Sheth has over 50 years of combined experience in teaching and research at the University of Southern California, the University of Illinois at Urbana-Champaign, Columbia University, MIT, and Emory University. Dr. Sheth is a recipient of the 2020 Padma Bhushan Award for literature and education, one of the highest civilian awards given by the Government of India.

He is also a Fellow of the Association of Consumer Research (ACR); Fellow of the American Psychological Association (APA); Fellow of the American Marketing Association (AMA); Distinguished Fellow of the Academy of Marketing Science; and a Distinguished Fellow of International Engineering Consortium. Dr. Sheth is the recipient of an Honorary Doctorate in Science, awarded by the University of Illinois at Urbana-Champaign (2016), and Honorary Doctorate of Philosophy, awarded by Shiv Nadar University (2017). He is the recipient of all four top awards given by the American Marketing Association (AMA). Dr. Sheth has been on the board of several companies including Norstan, Pacwest-Telecom, Cryocell International, Shasun Drugs and Chemicals, and WIPRO Limited. Over the 50 years, he has been advisor to numerous companies including Whirlpool, Motorola, Texas Instruments, Cox Communications, Rockwell International, AT&T, Bellsouth, WIPRO Consumer Care, Aditya Birla Group, L.M. Mittal (Avanta), E&Y, Square D, Ingram Micro, Hughes Corporation, and others. His Rule of Three book has been the foundation for investment bankers and policy makers with respect to industry consolidation including horizontal mergers and acquisitions.

Professor Sheth has authored or co-authored more than three hundred papers and several books including Clients for Life (2000), The Rule of Three (2002), Tectonic Shift (2006), Self-Destructive Habits of Good Companies (2007), Firms of Endearment (2007), Chindia Rising (2011), The 4 As of Marketing (2012), Breakout Strategies for Emerging Markets (2016), The Sustainability Edge (2016), and Genes, Climate and Consumption Culture: Connecting the Dots (2017). His autobiography, The Accidental Scholar (2014), has inspired others in the areas of education and academic entrepreneurship. Professor Sheth has been advisor to the Government of Singapore in repositioning the nation for the future. He has also been the policy advisor to the U.S. Government about the future of the telecommunications industry. Dr. Sheth is the Founder of Center for Telecommunications Management (CTM) at University of Southern California (USC) which has now become an Institute. He is also Founder and Chairman of India, China, and America (ICA) Institute which analyzes the trilateral relationship and its impact on geopolitics, security, trade, and investment. Finally, Professor Sheth is the Founder and Chairman of the Academy of Indian Marketing (AIM) which supports research and scholarship among Indian scholars in marketing and management.