1. Why Make-in-India must re-tool manufacturing

Why Make-in-India must re-tool manufacturing

The strategy of low-cost manufacturing and merchandise exports will not be enough

By: | Updated: June 28, 2016 8:09 AM
Industry 4.0, a collection of nine cyber-physical and data technologies, is the fourth manufacturing revolution since the first one was launched by the development of steam engine and later electricity in the second half of 19th century which transformed the economies in Europe and later the US.

Industry 4.0, a collection of nine cyber-physical and data technologies, is the fourth manufacturing revolution since the first one was launched by the development of steam engine and later electricity in the second half of 19th century which transformed the economies in Europe and later the US.

I recently met the CEO of a leading global durables player who has been exploring investment in a manufacturing plant in India. We ended up discussing the competitiveness of India as a manufacturing location within their global supply-chain, in the context of the shifts in the model of globalisation triggered by the slowdown of the global economy on the one hand and the adoption of digital technologies, collectively called Industry 4.0, on the other. During the discussion, the CEO said, “The low cost labour arbitrage model of manufacturing and global supply-chains is dead.”

He added that new plants will not be built on the basis of low-cost-labour advantage in emerging markets as the trade-off between automation/robotics and labour is shifting dramatically. He illustrated this with the example of their plant in Poland which combined the cost advantage of Poland with the latest digital technologies and has proved to be a cash-cow for them, implying that if they were to invest in a manufacturing plant in India, it would be along the same model. We discussed how the new digital technologies allow higher customisation and lower industry scale production systems to become viable. It is not inconceivable that the future global manufacturing network will consist of a collection of small-scale, reconfigurable, highly-automated plants closer to the market, supported by highly skilled teams of coders in another country. Such a shift will have dramatic impact on industries, companies and countries.

Industry 4.0, a collection of nine cyber-physical and data technologies, is the fourth manufacturing revolution since the first one was launched by the development of steam engine and later electricity in the second half of 19th century which transformed the economies in Europe and later the US. The early 20th century saw the second manufacturing revolution from rapid application of mass production, which, although developed post World War I, was really scaled up during the World War II years and transformed civilian industries post-War in the Western countries. The third manufacturing wave was launched in the 1970s and 1980s with the growth of internet which allowed the de-construction of value chains and outsourcing of manufacturing and services to low-cost countries leading to the emergence of China as the factory for the world (and led to the growth of India’s ITeS industry).

The challenge for India is made more daunting as, unlike the previous waves of new manufacturing technologies, the new digitisation of manufacturing is coming at a time when the global economy is not just sluggish, it is not showing any robust signs of revival. Perhaps, more important for export-oriented manufacturing strategies is that the global merchandise trade, as a percentage of global GDP, has been stagnant at 24% since 2010—the first time such a prolonged stagnation has been seen since robust trade data started becoming available in the 1960s.

A fundamental structural shift underlies this data, driven by the growth in value of services in the product life-cycle which, by definition, are ‘borderless’ and are driven by availability of skilled manpower—not low-cost labour. A gas turbine or aero-engine with lots of embedded sensors need not be serviced only in the country it is sold, except for change of physical parts. The embedded sensors, generating huge amount of data, allow a remote team of data analysts and engineers to monitor performance,or can even be outsourced to specialist service-provider sitting in a third country. This value migration will drive a growth in services trade while merchandise trade will continue to remain stagnant. This raises the question whether export-oriented manufacturing strategies (e.g., large coastal zones for exports proposed in the draft electronic manufacturing policy by the NITI Aayog) which fueled the growth of China, and is one of the underlying strategies of Make-in-India, will be effective in meeting the long-term objectives.

Make-in-India was launched by the government as a flagship programme, with the objective to increase the share of manufacturing in the GDP and create millions of new manufacturing jobs. The focus of the initiative, and rightly so, was on improving the ease of doing business, building industrial corridors, improving infrastructure and significantly increasing FDI into the country. Without these fundamental building blocks we are not even in the game to be a globally-competitive manufacturing nation. But the conversation with a leader of a global manufacturing company is a timely reminder that if India is to achieve its long-term objectives for Make-in-India, the current strategy based on the late-20th century paradigm, of low-cost manufacturing and merchandise exports, will not be enough.

We need a Make-in-India 2.0 that will re-tool India’s manufacturing for the digital 21st century and not for the previous one. India has time to get it right; every new manufacturing technology in the past took about two decades to mature and become the default model for global value-chains and there is no reason why in the case of digital technologies this migration should not take as much or longer due to its capital intensity and regulation by countries fearing job-losses. India missed the bus when low-cost manufacturing took off in 1990. Hopefully, we will not do so as the digital revolution takes off 25 years later.

This is the first column of a two-part series Co-authored with Aparna Bijapurkar, consultant, BCG Henderson Institute Bhattacharya is senior partner, BCG India, and director, BCG Henderson Institute. Views are personal

  1. V
    Valar
    Jun 28, 2016 at 2:45 pm
    Superb article.One of very few that talk of what we should be doing.
    Reply

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