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Made in India: The next big manufacturing export story

Apparel, auto components, speciality chemicals and electrical and electronics products could contribute a major share. A DNA Special

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Ramesh Mangaleswaran McKinsey & Co

In the past, India did not tap into its manufacturing exports potential to the fullest.

Going forward, however, ‘Made in India’ could become the next big manufacturing exports story. The global trend to manufacture and source products in low-cost countries (LCCs) is likely to gather strength over the next 10 years, particularly in the skill-intensive industries where India has a significant competitive advantage. If India were to take advantage of this trend, manufacturing exports from India could increase to approximately $300 billion by 2015, leading to a share of approximately 3.5% in world manufacturing trade.

Achieving this acceleration in manufacturing exports will require that Indian players adopt a global mindset, carefully select product segments and rapidly build cost excellence and marketing capability; that MNCs proactively develop India as one of their top three sourcing hubs; and that the government implement key enabling reforms in taxation, infrastructure development, clusters (SEZs), labour and skill development to help unlock India’s manufacturing potential.

Manufacturing offshoring to LCCs will increase with skill-intensive industries driving the second wave. Manufacturing offshoring to LCCs is a well-established trend. Labour-intensive industries (toys, apparel and footwear) and select skill-intensive industries (computer hardware and consumer electronics) constituted the first wave of this offshoring.  Going forward, the offshoring wave will encompass skill-intensive industries such as apparel, auto components, speciality chemicals and industrial electronics. As a result, offshoring to LCCs is expected to increase from the current $1,300-$1,400 billion to $4,000-$4,500 billion by 2015.

The skill-intensive industries will drive most of this increase. In the US, for example, the share of skill-intensive industries could rise from 55% to 70% of total offshoring to LCCs.

Four factors will drive this growth: continued margin pressure on players in home markets; the emergence of a strong supplier base in LCCs; explosive demand growth in LCCs; and the dismantling of regulatory barriers by the World Trade Organisation (WTO).

India has the potential to capture approximately US $ 300 billion in manufacturing exports by 2015. The aspiration, though ambitious, is attainable. India has several advantages in skill-intensive industries, such as auto components and pharmaceuticals, where the next set of offshoring opportunities will arise. Apart from low wage rates, these advantages include engineering skills (process, product and capital engineering), established raw material bases, a mature supply base and a growing domestic demand. In-depth assessment shows that out of this approximately US $ 300 billion of total manufacturing exports, US $ 70–90 billion could be captured from just four sectors — apparel, auto components, speciality chemicals and electrical and electronic products.

More Indian companies need to and can play on the global stage. In order to be successful, Indian companies will need to adopt a global mindset to build scale and achieve cost excellence; acquire market access rapidly, including using inorganic routes such as acquisitions, where required; strengthen design and innovation skills; build a global or regional operating footprint; and master the ability to manage a world-class talent pool and organisation. These actions will form the foundation for ambitious global growth and will need to be supported by a judicious choice of market segments and business models.

Apparel: In apparel, for example, the dismantling of quotas has created a unique opportunity for India because MNC buyers want to build an alternative large-scale sourcing base to China. India has the potential to become the second-largest exporter among LCCs. To achieve this, apparel companies need to choose between ‘operational excellence’ and ‘design and innovation’. Operational excellence-led companies will compete on the basis of lower costs and will be distinctive in their economies of scale (4,000- to 5,000-machine factories), sourcing of fabric and labour productivity. Best practices in operations and quality enhancement measures will ensure their success. Players competing through design and innovation will be characterised by innovative fabric R&D, close relationships with supplier mills, relationships with retailers’ design departments, a good understanding of fashion trends, and an ability to offer a range of readymade designs to customers.

Auto components: In auto components, leading Indian companies are already seeing a significant acceleration in demand. More Indian companies can capture this opportunity if they specialise in components where they can build world-class competitiveness (e.g., components that require skilled manpower in the process design, equipment design and production stages); rapidly build sales and marketing capability in developed markets; and create an environment of relentless, continuous improvement in India.

Electrical and electronic products: In this sphere, Indian companies can choose to focus on: (a) manufacturing only; (b) design and manufacturing; (c) design, manufacturing, and branding. Given the trend towards outsourcing of design and India’s strengths in both design and manufacturing, it is suggested that Indian companies focus on the second model — design and manufacturing. Success for Indian companies in this sector will require an aggressive mindset focused on establishing cost- or capabilities-based leadership; selecting the right product segment based on its attractiveness and fit with India’s strengths and the company’s access to relevant technology; and locking in customers and technology through innovative approaches.

Specialty chemicals: In this segment, winning Indian companies can adopt one of two business models: ‘low-cost producers’ (offering products at the lowest cost and to exact specifications driven by scale, process and capital-engineering skills, privileged access to feedstock and chemical knowledge) or ‘application developers’ (providing products customised for specific end-use applications). In this segment only those companies that continuously climb the experience curve through process innovation, capital engineering and selected backward integration in advantaged feedstock are expected to win the game eventually. A few Indian companies have already started ascending this curve.

MNCs can develop India as a sourcing and manufacturing hub for skill-intensive industries. Historically, MNCs have not treated India as a global sourcing and manufacturing hub. Yet, there are several recent examples of MNCs beginning to see signs of success (e.g., Siemens and ABB in electrical and electronic products, Toyota and Cummins in auto components and engineering). For MNCs, India could become either a dominant sourcing and manufacturing base in its own right (in auto components, custom-based and non-electronic products), or an alternative sourcing hub to China to avoid the risks inherent in single-country sourcing (e.g., in apparel).

For early-mover MNCs, this is the opportunity to shape sourcing from India. The current constraints in infrastructure, policy and domestic demand leave India at a disadvantage compared to other LCCs like China. This implies that such MNCs will have to make an additional effort to overcome these constraints, develop suppliers and institute internal processes. But this effort is also likely to give them first-mover benefits in terms of proprietary relationships with the best suppliers, access to the best talent and support from the government because of their position as lighthouse investors. Consequently, they will reap the benefits of sourcing from India, i.e., cost savings, access to an enormous skill-base (of engineers, chemists, etc.) and innovation. Further, as government reforms unfold and the domestic market expands, MNCs will have the opportunity to participate in creating a market in what promises to emerge as one of the largest economies in the world.

The government must accelerate reforms to support export growth: A few important measures include lowering indirect taxes which will lower price points, boost domestic demand and, therefore, provide scale for export competitiveness; creating enabling infrastructure e.g. the recently announced sector specific manufacturing investment regions, accelerating power and port reforms etc; and supporting skill development e.g. public private partnerships to boost skilled manpower availabilities.

Ramesh Mangaleswaran is a partner based in McKinsey & Company’s Mumbai office

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