manufacturing competitiveness of indian states

Manufacturing Competitiveness of Indian States

Anshul PachouriSenior ResearcherInstitute for Competitiveness, IndiaE-Mail: [email protected]

mailto:[email protected]

© Institute for Competitiveness, India & Michael. E. Porter

Defining Manufacturing Competitiveness

• Manufacturing Competitiveness is determined by the productivity (value per unit of input) with which the manufacturing sector uses its human, capital and resources.

• Manufacturing Competitiveness can be measured at different levels firm, city, state or national level.

• Manufacturing competitiveness of a region is dependent on various factors and sub-factors including regulatory structure, business environment, technology sophistication & skills of the workforce.

© Institute for Competitiveness, India & Michael. E. Porter

Defining Competitiveness

The business environment at a given location is the cumulative outcome of policy at all levels of geographyMicroeconomic Competitiveness raises the importance of lower levels of geographyThe allocation of responsibilities across levels of geography is a crucial policy challenge

World Economy

Broad Economic Areas

Group of Neighboring Nations

Nation

State, Provinces

Metropolitan Areas

Rural Areas

© Institute for Competitiveness, India & Michael E. Porter

Indicators and Enablers of Manufacturing Competitiveness

Productivity

Competitive Business Environment

Presence of Suppliers and Related Clusters

Gross Output per

firm

Value Added per

Worker

Investmentin the sector

Technology Sophisticati

on

Innovation & Patents

© Institute for Competitiveness, India & Michael E. Porter

Levels of Influence on the Business Environment: Manufacturing

Context for Firm Strategy and Rivalry

Related and Supporting Industries

Factor Conditions

Demand Conditions

NationalCheap Imports from other economies, Incentives for manufacturingRegionalState tax policy

RegionalSuppliers; Clusters and Logistics Partners

NationalGrowing Population. Rising Income LevelsRegionalPrice competitiveness, Distribution

NationalAvailability of skilled laborForce, land, power, technologicaladvancement RegionalLocal public education system; Vocational Training

© Institute for Competitiveness, India & World Bank Database

World Manufacturing

6.3

33.0

0.82.9

23.1

% Contribution in World Manufacturing (1991)

Latin America & Caribbean European UnionIndiaChinaUnited States

5.8

20.9

1.813.7

24.3

% Share in World Manufacturing (2010)

Latin America & Caribbean European UnionIndiaChinaUnited States

• The contribution of Europe in World Manufacturing has decreased from 33% in 1991 to 20.9% in 2010. This significant decline has come at the cost of rising China whose contribution in World manufacturing has reached 13.7% in 2010from merely 2.9% in 1991.

• India on the other hand is just able to increase its share by merely 1% in the past 20 years and was 1.8% in 2010.

© Institute for Competitiveness, India & World Bank Database

World Manufacturing

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

0

1000

2000

3000

4000

5000

6000

7000

Latin America & CaribbienEUIndiaChinaUSWorld

• Per capita Manufacturing GDP of China had increased by 8 times from 1991 and reached 806 US$ in 2010 while India had just reached 112 US$ in 2010.

• China may be succeed to capture the world manufacturing but still its per capita manufacturing GDP is still far behind US which is 6147 US$ in 2010

© Institute for Competitiveness, India

Manufacturing Competitiveness of India: Need of the Study

• Manufacturing sector is the backbone of Indian economy which has the potential of creating millions of job opportunities and helping in poverty reduction in the country.

• Its importance can be realized by the fact that manufacturing sector employs around 9% of the total workforce estimated around 36 million workforce combining organized and unorganized sector.

• The manufacturing sector of the country is suffering from low labour productivity, shortage of skilled manpower, unsophisticated technology, high taxes, unsupportive policies & cheap imports from other economies.

• With 75% of the total working population educated till middle school or below, Manufacturing Sector only has the capacity to absorb the large labour pool of the country. (CISCO)

• With more than 50% of the total workforce employed in agriculture and generating only 22% of the GDP, manufacturing sector has great potential to employ people and increase income levels. (FICCI)


Manufacturing Sector in India: An Introduction

• India’s manufacturing today is known for its quality, precision and value across the globe.

• There is a huge export opportunity for industries such as auto components (US $ 25 billion by 2015), and textile (US $ 50 billion by 2010) which is huge. (CISCO)

• With estimated middle class population of 600 million by 2022, there is a huge domestic market in India itself for manufactured products especially consumer goods.

• According to KMPG Executive Survey, the manufacturing sector will attract huge investments in coming 2-3 years.

• The UN Industrial Development Report puts India as of the top manufacturer. India tops in the production of textiles, chemicals, basic metals, general & electric machinery in developing countries list excluding China.

• India is placed second in the Delloite Manufacturing Competitiveness Report. • India has already beaten Brazil in the production of motor-vehicles which is good

sign for country’s growth in value added manufacturing.


India : Sourcing Destination

India has big potential to become the best preferred sourcing nation which can be easily understood from success stories below.

• Pharmaceutical company AstraZeneca sources active pharma ingredients (APIs) from India for use in its global operations, according to James Chelliah, CFO for branded generics operations at AstraZeneca India. "Over the years [sourcing from India] has been increasing year on year by around 100%. From the sourcing perspective India is ahead of China.

• Through a partnership between Suzuki and Nissan, Indian subsidiary Maruti Suzuki manufactures the Pixo model compact car for sale in Europe, according to Mayank Pareek, Maruti Suzuki India's managing executive officer for marketing & sales. The Indian auto major is likely to start making vehicles for Volkswagen soon; in 2009, the German carmaker bought a 19.9% stake in Suzuki for US$4.5 billion.

• At Pfizer India, Thomas Lobo, director of global external supply, says there has been a significant increase in sourcing activity from India with an average annual growth of 35 to 50%. "We source drug formulations, APIs and drug intermediates. India is a leading country in drug product-formulation outsourcing, although we are starting to see competition from other markets, including China.“

(Source: Knowledge@ Wharton, Business Standard)

© Institute for Competitiveness, India & RBI

Contribution of Manufacturing in GDP

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201112.5

13.0

13.5

14.0

14.5

15.0

15.5

16.0

16.5

17.0

14.9

14.414.1

14.5

15.1

16.216.4

15.8

15.2

14.8

15.3

14.8

15.215.0

15.115.3

16.016.1

15.8 15.9 15.8

% Contribution of Manufacturing in GDP

• It is interesting to note that the percentage contribution of manufacturing in GDP has remained nearly constant to 15-16% for the past twenty years.

• This shows that the potential contribution of manufacturing in GDP is yet to achieve.

Manufacturing in India : Situation

0 5000 10000 15000 20000 25000 300000

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

2000000

1426259

1081005

1732790

742198

1032880

228238

712985

601494

341603

210533167225

534087

252485161228

531115

107010

367768

52085145049118645

532197066455372560228402588

Total Number of Factories

Tota

l Per

sons

Eng

aged

© Institute for Competitiveness, India, Data Source: ASI


Gross Output at Factory Level

0 500 1000 1500 2000 2500 3000 35000

2

4

6

8

10

12

2064

31351035

44433269

868

14241959

1755

147

97

185

20881687 2389

32313689

39992916

34233037

1330 2625

53941223

1180

Fixed Capital ( Per Factory)

Gros

s Out

put/

Fix

ed C

apita

l ( P

er F

acto

ry)

• The two states Maharashtra and Gujarat together forms the 34% of the total Gross output in the manufacturing sector of the country which makes them manufacturing giants of India.

• In states like Bihar, the firms are found to be very efficient in using their capital and are producing more than 10 times the gross output on their fixed investments.

Size of the Bubble denotes the Gross Output ( Per Factory)

Total Output - Input

0 50000 100000 150000 200000 250000 300000 350000 400000 450000 5000000

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

1.274329760640831.17875290356191.1951269515194

1.263197808172051.23846779736851

1.56407630644598

1.173737113916211.204090952220791.28385943528326

1.387589097292591.33145942441883

1.152519644702311.22915912912235

1.37927101433961

1.17006575033592

1.46278510534103

1.144076814940041.2467268763625

1.112838554845791.16885931451634

1.34838062645072

1.12096498959692

1.447867280716961.45318773084953

1.299491353001011.24948453608247

Total Inputs ( Rs in Crore)

Tota

o O

utpu

t/ T

otal

Inpu

t

• The manufacturing sector of Uttarakhand is best able to use its inputs in an efficient manner and has Outputs/Input ratio of 1.6.

• The lowest Output-Input Ratio is found is Bihar which is 1.17 and needs to be addressed.


State-wise Manufacturing Growth

2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.00.0

5.0

10.0

15.0

20.0

25.0

30.0

11.0

2.2

9.7

4.4

19.1

6.9

27.827.4

17.3

10.7

6.6

26.9

18.1

6.8

9.0

17.1

2.0

15.415.4

12.0

3.2

18.8

2.8

12.912.7

9.2

CAGR Manufacturing (2006-10)

% C

ontr

ibuti

on o

f Man

ufac

turin

g in

GDP

• In states like Goa, Gujarat and Jharkhand, manufacturing contributes to nearly 27% of the total GDP which makes it extremely important for these states to focus on developing policies to foster the development of this sector.

• It is interesting to note that manufacturing sector in Odisha and Chhattisgarh had grown by more than 16% against the overall India’s manufacturing growth rate 9.3% for the past five years and driving the future growth of these states.


0 20 40 60 80 100 120 140 160 1800

50

100

150

200

250

300

350

400

450

500

114.09

8.74

96.87

25.16

287.72

117.68

470.78

271.92

321.84

258.36

41.47

162.45

122.58

82.2684.6

198.6

19.3107.65 7.54

86.397

189.47

96.02

7.84

105.77

13.15

89.81

134.6

34.96

Labor Productivity – Agriculture (In Thousand)

Labo

ur P

rodu

ctivi

ty in

Man

ufac

turin

g (In

thou

sand

)

Labour Productivity in Manufacturing versus Labour Productivity in Agriculture

0 50000 100000 150000 200000 2500000

200000

400000

600000

800000

1000000

1200000

1400000

598484

1068282

232594

1235057

336065

270262

487532

330650

397699

987324714157007

944952

196441

293383

846420789703

978414

561244541357

778357

335343

504131

929269

202999 222390

Emoluments Per Employee for Manufacturing

Net

VAl

ue A

dded

Per

Em

ploy

ee (M

anuf

actu

ring)

, ASI

Emoluments per employee (Manufacturing) Vs Net Value added per employee ( Manufacturing)


Manufacturing : The China Factor

• China is losing its competitive edge in low-cost manufacturing like toys and garments which is moving to other low-cost locations like Vietnam, Indonesia & Sri-Lanka.

• In high-end manufacturing where design plays a critical role, India will have a positive edge over China due to their precision techniques and high quality.

• Lower costs alone will not tilt the scales, however. Many Western companies head to India for outsourcing manufactured parts and sub-assemblies because China lacks the required expertise. (Knowledge @ Wharton)

• Dumping of cheap products in India from Chinese firms had a huge negative impact on Indian domestic Industry in the past especially in consumer goods category.


Manufacturing: Areas of Concern

• Manufacturing in India today requires urgent attention of the policymakers to address the challenges both at the macro and micro level.

• There is need to reduce the tax burden especially on the MSME sector to improve their profitability.

• More support to enhance the skills of the workers and technology up-gradation is needed from the government. India itself is a very big market due to high demand of manufactured products.

• The cost of production has reached extremely high levels with the rising land cost in India which needs to be checked.

• The high power costs, lower efficiency and declining availability of quality labor are affecting competitiveness of the Indian manufacturing sector.

• Indian manufacturing players needs to pitch on the quality of the product in the western markets rather than focusing too much on the price competition from China.


Manufacturing: Challenges Faced

• Low labor productivity as compared to Asian counterparts. CEOs of the leading export companies think that their productivity is atleast half or one-third of Chinese firms operating in same sector. (CISCO)

• Building world-class infrastructure is again a big challenge to support high manufacturing growth.

• Indian Manufacturers are operating way beyond their potential and capability.• Insufficient return on Cost of invested capital.• No presence of intelligent production planning• Rising commodity prices and raw material costs.• Low labor productivity.• Lack of efficient capital expenditure decisions and management• Lack of reforms in land, labor and operating environment


Manufacturing : Opportunity

High Technology Exports

Clean Technology – Wind, Bio-fuels

Heavy and Light Tech Products – Aerospace, Defence

Auto & Auto-components

Consumer Goods – Textiles, Leather etc

The key sectors which promises a huge and attractive opportunity for the Indian manufacturing sectors are mentioned below.


Ranking Manufacturing Competitiveness

• Extensive use of hard data to reflect on performance of states and reduce sampling errors and personal biases.

• Selection of indicators & grouping is done in way that inform overall policy for corporate to take informed decisions while establishing strong framework for assessing policies at various levels in the manufacturing sector.

• Calibrated weights are applied to the set of indicator values to generate an overall Index score

• Principal Component Analysis is used to defining weights for the indicators so as to take care of multi-collinearity

• First time index is developed hence comparison with past rankings is not available. This would evolve over a period of time

Secondary Research

Identification & Grouping of Indicators

Development of Framework for Analysis

Analysis & Calculation of Index

Rankings of States

Defining Strategy for companies and policy imperatives for government


Key Deliverables of the Manufacturing Competitiveness Index

• Assess all states of India on manufacturing competitiveness and come out with an integrated index grounded in academic research and measured through hard data

• Presents a comprehensive framework of analysis for measuring the manufacturing competitiveness of the states & concentrate on understanding determinants of productivity in the manufacturing sector.

• Identification the key pain areas in the states which are affecting the manufacturing sector in their region Capturing basic insights about state performance in manufacturing.

• Key strategies with which the companies can increase their productivity in the manufacturing sector in different parts of the country.

• Implications & suggestions for the policymakers & key government agencies to enhance the manufacturing competitiveness of their region.


Manufacturing Competitiveness Framework

Factor Conditions

MSME Performance

Industry Factors

Economic Conditions Clusters Innovatio

n

Institutional Support

Business Environment


Manufacturing Competitiveness Framework

Manufacturing Competitiveness Score ( Manufacturing Productivity) =

W1* Factor Conditions Sub-Index score + W2* MSME Performance sub-index

score + W3*Industry Factors Sub-Index score + W4* Economic Conditions

sub-index score + W5* Clusters Sub-Index score + W6 * Innovation sub-index

score + W7* Institutional Support Sub-Index score + W8 * Business

Environment sub-index score


Factor Conditions

Availability of Credit

Credit given to the manufacturing

sector by different types of financial

institutions.

Infrastructure

Road, rail and air infrastructure; availability of

power, pollution, quality of

healthcare et al

Communication

Availability and access to internet, telecom services that include land

line access as well as cellular access,

personal computers etc

Human Capital

Number of employees and

workers engaged in different

industries in manufacturing,

presence of vocational training

institutes and excellence centres


MSME Performance

Productivity

Productivity of labour, output from plant and

machinery. Gross Valued Added per per enterprise in

the MSME sector.

Export Performance

Exports per enterprise from

the MSME sector. Major industries

contributing to the exports and firms

performance.

Credit & Loans

Credit and Loans both institutional

and non-institutional in

nature. Interests paid and

percentage of enterprises which

have taken the loan.

Sickness

Percentage of MSME enterprises which are sick and suffering from in-

debtedness.


Industry Factors

Productivity of labour, output from plant and

machinery. Gross Valued Added per per factor in the industry sector.

Share of materials used and fuels in the total inputs and costs. The

amount of interest paid and amount spend of plant &

machinery.

Profits and Income made at the factory and

industry level. Total amount of debt and debt

servicing at the factory level.

Capital Formation done at the sector

and firm level.

Number of factories which

are currently operating in

different industries in the manufacturing

sector.

Productivity Cost Composition Profitability Capital Formation Diversification of Factories


Economic Conditions

Size of the economic output

of the state.

Division of GDP in various sectors like

manufacturing, services and

others.

Short-term and long-term growth

rate of the manufacturing

sector.

Per capita GDP of the state and share of the

manufacturing per capita GDP in

overall per capita GDP.

Difference in the growth rate of the

manufacturing sector in

comparison to other sectors.

State GDP GDP Composition Manufacturing Growth Rate Per capita GDP

Difference in Manufacturing

and other sectors


Clusters

Total Number of clusters both

services, manufacturing and repairing

clusters.

Different types of clusters in different

industries existing in the state.

Clusters operating in seasonal, casual

and full-time modes.

Division of clusters like micro,

medium and small enterprises in

various industries.

Total Number of people engaged in different clusters

in the state.

Total Number of Clusters Type of Clusters Nature of

OperationsCategorization of

Clusters

People Employed in Different

Clusters


Innovation

Source of technical-know

how of the manufacturing

firms like abroad, domestic

companies and R&D institutions.

Status of technology used

by the manufacturing

firms like latest or outdated.

Number of quality certifications taken by the

manufacturing firms in the state.

Total number of patents and

trademarks taken by the

manufacturing companies in the

state.

Presence of research and development

institution, excellence

centres.

Technical-Know how Technology Used Quality

CertificationsPatents &

Trademarks R & D Institutions


Institutional Support

The different policy initiatives

taken by the state government to

support the manufacturing

growth.

Initiatives taken by the state

governments to increase the

growth of exports of the

manufacturing sector.

Different supports and assistance

provided by the state government for technology up-

gradation like interest free loans for manufacturing

enterprises.

Dedicated special economic zones

for manufacturing sector and their performance.

Lower interest rates given by

various financial institutions for the

manufacturing firms.

State Government Incentives Support in Exports

Assistance in technology up-

gradation

Special economic zones Banking Support


Business Environment

Lock-out and Disputes

Investments

Doing Business Conditions

Registered Industry Bodies

Total Number of lock-outs and

disputes occurring in the factory sector in the

states.

New investments that are expected

to come in the states through letter of intents

and foreign projects approved.

Time taken to start a business. Operating

conditions and costs involved in taking clearances and procedures

involved.

Number of Industry Bodies operating in the state and their effectiveness in

bringing problems of the

manufacturers to the government.

Crime and safety in the state,

political stability and effectiveness

of the government in implementing reforms and take

decisions.

Quality of bureaucracy, protection of

investors rights and intellectual property rights.

Burden of regulations including

environment.


Manufacturing Competitiveness Strategy for States

Strong Manufacturing States – Innovation Driven Strategy These states need to move towards more technological advancement to improve their efficiency in production. These states should invest in developing advanced skill-sets for manufacturing and become more export competitive. Weaker Manufacturing States- Clusters Development Strategy These states should adopt the cluster based approach focusing on the MSME sector. They need to give more incentives to the industry in terms of tax, power costs and logistics and try to facilitate more private investments in the sector. Medium Manufacturing States- Factors Driven Strategy These states need to focus in lowering down the costs of inputs of production, develop right set of skills and talent and remove barriers in doing business. The states should initiate public private partnership mechanism to attract investments and improve productivity.

Each state is at the different stage of development in the manufacturing industry and therefore different strategies need to be adopted to improve the manufacturing competitiveness.


Categorization of States

Strong Manufacturing States

Gujarat, Maharashtra, Tamil Nadu, Karnataka, Andhra Pradesh, Goa, Haryana, Jharkhand

Medium Manufacturing States

Chhattisgarh, Himachal Pradesh, Madhya Pradesh, Odisha, Punjab, Rajasthan, Uttar Pradesh, Uttarakhand

Weaker Manufacturing States

Tripura, Sikkim, Nagaland, Kerala, Jammu and Kashmir, Delhi, Bihar, Assam, West-Bengal


Policy Imperatives

• The government should adopt the cluster based development strategy to maintain the high growth in the manufacturing sector.

• The government needs to develop strategic policy framework to identify and develop innovative clusters which have the great potential in exports and can generate more employment.

• There is need to develop investment mechanism to foster public private partnerships to invest in the sick clusters and focus on improving their productivity.

• State specific approach towards enhancing the manufacturing competitiveness needs to be adopted.

• The clusters which are not export oriented needs to be analyzed that where they can fit in the global value chain of manufacturing.

• The manufacturing clusters in India need more marketing and brand building assistance to improve their export competitiveness in comparison to other competitors like China.


Manufacturing: Steps Needed

• Supportive policies for the manufacturing sector which eases land acquisition & labor employment.

• Focus on growing domestic demand especially in the consumer goods sector.• New Business models which can fit in global manufacturing value chain.• Invite global manufacturing giants to come in & invest in India to cater Asian

market easily.• Investment in Skills development centers and vocational training centers through

Public-Private partnership model.• Provide support infrastructure in key manufacturing targeted clusters.• Focus on improving the cost competitiveness of the manufacturing sector• Marketing support for the firms to increase their exports in big markets. • Ease the doing business conditions in manufacturing sector to attract fresh

investment and improve overall competitiveness of the sector.


Manufacturing: Steps Needed

Building world class Infrastructure (Dedicated freight corridors, Roads, Power etc)

People and Skills Development (Vocational Training Institutes, More Training Facilities)

Sophisticated use of IT for supply chain management

Supportive Policy

Investment in R&D (Inviting Companies, Soaps & Tax Holidays)

Technology & IPR (More Incentives needed)

Best business practices

Enhance the Investment Climate in manufacturing sector in Indian States


Innovation in Manufacturing

Innovation in Sourcing of Raw-Materials

Process Innovation

Decreasing the Product Development Life Cycle

Business Model Innovation

New Management Techniques

Technological Innovation

The manufacturing firms in India needs to capitalize innovation to increase their competitiveness in global manufacturing. The present needs of various innovations needed by manufacturing companies are presented below