NOVEMBER | DECEMBER 2015Vol.26 No.9 $15.00

ROLLS OUT THE RED CARPETROLLS OUT THE RED CARPET

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As India’s economy gains strength, the government’s Make in India campaign is enticing companies to set up manufacturing

operations in the country to spur much-needed job growth.

16 ISM November | December 2015

INDIA ROLLS OUT THE RED

CARPET

ISM November | December 2015 17

India is rolling out the red carpet to the world’s manufacturing compa-nies, complete with a slick adver-tising logo and the catchy phrase,

“Make in India.” With a large youthful population, low-cost labor, a solid technology foundation — and now the strong backing of its government — India is hoping its open-for-business message will make manufacturing the backbone of its economic future.

India has long been associated with the services industry, which fueled the country’s economy from 1994 to 2008, but the government is keenly aware of the need to create hundreds of mil-lions of jobs in the world’s second- most populous country. Experts agree India’s services industry can only take the country so far, while manufacturing could be the engine to drive it to the next level of economic and job growth.

Prime Minister Narendra Modi unveiled the campaign last year with the goal of transforming Asia’s third-largest economy into a manufacturing hub. The ambitious initiative includes plans to cut government red tape, and develop and improve infrastructure, creating a positive business climate for global manufacturers attracted to the country for its huge market potential. But a democratic country as large and complex as India doesn’t change with the flip of a switch, meaning business

and supply management leaders will need to perform extensive due dili-gence before they accept Modi’s invi-tation to Make in India.

Targeting ReformsA report from Rice University’s

Baker Institute for Public Policy high-lights concerns for India’s economic future, including the fact that its labor force is languishing in low-produc-tivity agriculture, and manufacturing currently is too small a share of both employment and GDP. Noting that the Indian population is relatively young, it states that “the best potential source of future growth lies in India’s ability to foster a manufacturing sector that can capitalize on its abundance of labor.”

Russell A. Green, Ph.D., one of the study’s authors, says the government needs to target four reforms to meet its goal of making India a manufacturing powerhouse. They include:1) Improving the business climate2) Improving infrastructure 3) Reducing onerous labor regulations 4) Carrying out substantial reforms in

the government.

“The government has all the right pieces to enact the four tough reforms and reignite India’s economy,” he says. “The demographic dividend of young workers presents perhaps the

By Mary Siegfried

November | December

COVER STORY

ISM November | December 201518

last good opportunity India will have to experience sustained, high eco-nomic growth, and it can only happen through expanding manufacturing.”

Infrastructure ChallengesThere is little argument that

India faces challenges in its efforts to become a manufacturing hub, but Anil Gupta, Ph.D., a leading expert on strategy, globalization and emerging markets at the University of Maryland’s Smith School of Business, believes Modi’s government is pre-pared to tackle the issues head on.

He cites a McKinsey study that says over the last 15 years, India has spent about 4.5 percent of its GDP on infrastructure, including roads, rail-ways, power and airports. In compar-ison, he says, China spent 9 percent of GDP while Latin America spent less than 2 percent. Gupta estimates India will spend 5.5 percent of GDP on infra-structure in 2016.

He says supply management practitioners should evaluate India’s

infrastructure in two “buckets.” One is moving bits and bytes — telecom-munications, fiber optics and satel-lites. “It’s an area where India has been strong, almost world-class for the last 10 to 15 years, and it’s what has made the country an IT power,” Gupta explains.

The second is the movement of physical goods. And when it comes to

highways, railways and power genera-tion, India is much weaker. Gupta says the government is strongly encour-aging private investment through the Make in India campaign in an effort to improve power and transportation, and he believes great strides can be made in these areas, although it will take many years.

In October 2014, an India Development Update by the World Bank estimated that “simply halving delays due to road blocks, tolls and other stoppages” could cut freight time by 20 percent to 30 percent and logis-tics by 30 percent to 40 percent. In its follow-up report six months later, the Update notes that the government’s efforts to boost private investment “will be crucial to bridge the yawning infrastructure deficit and support the favorable growth outlook.”

Weighing Pros and Cons Despite roadblocks to manufac-

turing growth, both figuratively and literally, Gupta says multinational

companies can’t ignore India because of its huge market potential. “And now that the government is making it easier for them to do business in the country, manufacturing growth is beginning to happen.”

He points to the August 2015 announcement by Foxconn, a world leader in contract electronics manu-facturing, that it signed a US$5 billion

deal to establish R&D and high-tech manufacturing over the next five years in Maharashtra, India. It’s estimated the plan will create a minimum of 50,000 jobs in the west-central Indian state.

When weighing the pros and cons of manufacturing in India, Krishan K. Batra, president of ISM-India, says there are several issues supply management practitioners should consider:

Growth, market potential. The World Bank’s real GDP growth out-look for India is 7.5 percent this year, 7.9 percent in 2016 and 8 percent in 2017. It also says India is on course to overtake China to claim the position as the world’s fastest-growing large economy in the next two years. Batra says the recent economic turmoil in China is an indication that some companies are re-evaluating their global manufacturing strategy, which could work to India’s advantage as it attempts to showcase the demand opportunity its population offers. India is expected to rank among the world’s top three growth economies and among the top three manufac-turing destinations by 2020.

Regulatory challenges and oppor-tunities. Batra says supply manage-ment professionals need to be aware of changing regulations prompted by the Make in India initiative and be prepared to seize the opportuni-ties some of the changes offer, espe-cially in the areas of investment and the ease of doing business. Make in India’s website, www.makeinindia.com, has a “Policies” section which details and updates new processes and policies in areas such as foreign direct investment, intellectual prop-erty and national manufacturing.

Supply management skills. The supply management profession is growing in India, Batra says, but supply chain leaders likely will face

India is expected to rank among the

world’s top three growth economies

and among the top three manufacturing

destinations by 2020.

INDIA ROLLS OUT THE RED CARPET

ISM November | December 2015 19

a shortage of senior professionals with strategic capabilities. He says ISM-India is “working hard to increase the number of Certified Professional in Supply Management® (CPSM®) cer-tifications so more professionals can master the skills that will be important in manufacturing supply chains.” India is ranked fifth for number of CPSMs, and it’s expected to soon overtake Canada. Increased manufacturing means supply management practi-tioners will need high-level skills to collaborate across the value chain to remain competitive in their industry sectors, Batra says.

Improving Vocational SkillsGupta and Batra agree that

the diverse skill levels and talent in India’s large population paint an interesting picture of India’s labor pool. Companies will find that engi-neering and managerial-level talent are exceptionally strong, Gupta says. However, the vocational skills needed for manufacturing are not as strong. That’s because after India’s indepen-dence, the country’s leaders built a strong higher-education system but did not focus on vocational skills, Gupta explains. The weakness has not gone unnoticed, and is a pillar of Modi’s campaign.

The government launched a National Multi-Skills Mission, focused on vocational skills training to meet the needs of manufacturing employers. It’s estimated that 2.3 per-cent of India’s workforce has formal skills training, compared to 52 per-cent in the United States and 96 per-cent in South Korea. But, Gupta says companies also will need to provide vocational training as part of their investment in the country.

Examining the current and future state of three industry sectors offer business and supply management executives a taste of where the

country is headed in its quest for man-ufacturing expansion.

Opening Doors to Defense“India is one of the largest

importers of defense armaments in the world because it lives in a very troubled neighborhood,” Gupta says. Defense manufacturing was a state-owned enterprise in India, but the gov-ernment recently opened the industry to the private sector. “Modi’s govern-ment is telling foreign defense compa-nies that it wants them to manufacture in India, not just sell to the country.”

Gupta believes the defense industry will become an important manufacturing segment in India as companies look to set up joint ven-tures with Indian companies. The Make in India website notes that opening up the defense sector to private industry also will “help build domestic capabilities, which will bol-ster exports in the long term.”

By encouraging defense manufac-turers to open up shop in India, Gupta says a supporting base of suppliers will begin evolving to serve the sector. “The suppliers are not going to set up manufacturing operations without the big defense companies to sell to,” he says. But as large defense firms estab-lish joint ventures and manufacturing operations, the suppliers will follow.

Supplying a Growing MarketThe consumer electronics sector,

and specifically the smart phone seg-ment, is expected to grow as compa-nies continue to tap into India’s large marketplace. India is the third-largest smart phone market and is expected to become the second largest by 2017. “Once again, the government is saying that smart phones should not be imported from China, but should be manufactured in India,” Gupta says.

Foxconn’s plans demonstrate that major manufacturers are listening.

Gupta says India is not yet a large manufacturer of semiconductor chips, and most components for manufac-turing operations will be imported at first. “But as scale builds up, suppliers will have the incentive to manufacture onsite,” he says. “If you are a compo-nent manufacturer in South Korea or Taiwan and you know that Foxconn already has operations in India, you are not worried about demand so your risk is dramatically reduced.”

Gupta expects India to follow a path similar to China, which started out as a site for assembly operations, followed by local value-add oper-ations to meet the needs of large manufacturers.

Building on Strength

ISM-India’s Batra recalls when he left India 25 years ago, there was one automobile manufacturer and one style of car. Today, it’s the sev-enth-largest producer in the world and the fourth-largest automotive market by volume. The Make in India initia-tive hopes to build on the strength of India’s strong automotive sector. Its website notes that global car manufacturers have been ramping up investments in India to cater to growing domestic demand, and that the manufacturers plan to leverage India’s competitive advantage to set up export-oriented production hubs.

Gupta points out that compared to China, India has a more attractive business climate in the automotive sector. “The Chinese government restricts the equity stake of foreign car companies to a maximum of 50 percent,” he explains. “On the other hand, India has no such restriction.”

Another key factor to the growth of the automotive industry, which could translate to other industry sec-tors, is India’s strong engineering and technology ecosystem, Batra says. “Many companies have established

ISM November | December 201520

R&D centers here because of the strong technical talent and lower labor costs for that talent,” he says. “Innovation in manufacturing is and will remain crucial to India.”

IP, Contracting Issues

India ranks 142nd out of 189 coun-tries in the World Bank Group’s Doing Business rankings, which measures the ease of doing business around the world. However, Gupta and Batra agree there are many advantages India offers, especially compared to China, in IP protection and contract issues. They say India has a well-es-tablished legal, judicial and admin-istrative system to handle IP issues and has committed to a wide range of international treaties and conventions relating to intellectual property rights.

In terms of IP, CEOs view India as a better place than China to do busi-ness, Gupta believes. “They invest in China because the economy and the market are so large, but they invest despite concerns about protecting IP.” The same is true when it comes to con-tracting. “If you have a contract issue with the government of China, you are basically powerless,” Gupta says. But CEOs are generally more comfortable in handling contracting issues in India, with its Western-style democracy and national government. “If the Indian market were small, none of these issues would matter,” he says. “But because it is large and growing fast, such issues take on added importance.”

Supply Management GoalsAs India attempts to entice mul-

tinational companies to establish manufacturing operations in the country, Batra says supply manage-ment practitioners will need a plan to help their companies meet their goals. “Business leaders worldwide expect their supply chains to help capture a competitive advantage, and the same

will be expected once manufacturing sites are moved to India.”

He says initially the supply chain goals will be to: • Provide a competitive advantage• Increase cost efficiency• Deliver a high-level of service• Improve quality.

Zeroing in on those goals will force supply management practi-tioners to focus on the entire value chain. Batra says he expects that com-panies setting up operations in India will use established suppliers, even if it means importing components at first. “To save on logistics and inven-tory costs, however, supply manage-ment’s role will be to identify local supply sources. He says the evolu-tion will shift the supply management agenda, requiring a greater focus on: • Collaborating with internal business

partners and across the value chain• Implementing a “pull” replenish-

ment system, a key principle of lean manufacturing

• Driving technology and automation choices

• Improving speed-to-market across the supply chain.

“There will be changes throu-ghout the supply chain as companies first work to gain market entry and then look to establish an export hub in India,” Batra says. “And the evolution will depend on the industry sector and its maturity level.”

The question over whether India’s manufacturing sector will grow to meet the needs of its large domestic market or has the strength to become an export hub is one many experts are weighing. The World Bank’s April 2015 report says that the potential for rapid export growth remains constrained by both supply and demand.

“On the supply side, India mer-chandise exports have not been

able to keep pace with the growth in world exports,” the report notes. “On the demand side, the global export market seems to have peaked.” It adds that “India will need to increase its manufacturing competitiveness significantly to carve a space for itself among the world’s large exporters.”

Gupta says he expects that man-ufacturing growth in India over the next five years will be targeted toward domestic consumption, which is OK because the market is large, labor costs are low, and infrastructure will take time to improve. It’s a sce-nario common in emerging market growth. China is an export pow-erhouse, but when manufacturing first began growing in the country, about 75 percent to 80 percent was for the domestic market, he says. “Businesses will eventually find that they can’t be competitive in India by importing parts from China.”

The Make in India campaign is visible proof of the government’s com-mitment to attract manufacturing com-panies in its effort to create jobs and increase economic growth, although the jury is still out on whether global companies will answer the call. Batra is confident India has much to offer com-panies and believes at the heart of the campaign is the goal of making India a financially viable country.

He says the campaign isn’t simply about making India a marketplace for cheap labor or to increase GDP. “The manufacturing strategy should lead to growth in jobs and opportunities for better livelihoods,” he says. “The policies for growth must be based on core supply chain strategies to drive effective supply networks. India has great capabilities and the potential to propel it into a manufacturing hub in the years to come.” ISM

Mary Siegfried is a senior writer for Inside

Supply Management®.

INDIA ROLLS OUT THE RED CARPET

© Institute for Supply Management®. All rights reserved. Reprinted with permission from the publisher, the Institute for Supply Management®.