Column: Cracking the code for industry hubs

Written by Arindam Bhattacharya | Updated: Jun 11 2011, 07:51am hrs
The hype around the investment in a new plant announced by Maruti in Gujrat tells its own story. Industrial hubs have become the new silver bullet for our policymakers to develop the manufacturing sector. All state governments want to build industrial hubs in their states and compete with each other to provide attractive incentives to attract new investments. Gujarat, better known for its petrochemical industry, hopes to now build a strong automotive hub in the state on back of investments by Maruti and Tata Motors.

There is no doubt that well-developed industrial hub or cluster is an important policy lever to drive the growth of the manufacturing industry. These can lead to significant cost savings as well as improved productivity from (i) increased supply chain responsiveness because of manufacturing consolidation near suppliers, (ii) decreased time-to-market as companies can more effectively leverage the capabilities available with vendors in the cluster, (iii) better and cost-effective availability of labour and also reduced talent recruiting efforts because of the power of clusters in drawing labour, and (iv) lower logistics costs due to proximity of customers and/or suppliers etc. Economic analysis shows that these benefits can convert into 5% to 8% cost advantage for plants in the hubs compared to stand-alone plants.

However, building successful hubs is much more than providing land and other incentives to attract new investments as demonstrated by so many industrial estatesthe earlier avatar of these industrial hubslying abandoned, full of sheds from closed factories. These industrial estates had developed the land and had offered many other incentives but firms that set up plants in them could not sustain their operations for long because of variety of reasons. This raises a critical question: What are the ingredients for industrial hubs which build and sustain competitiveness over a long period of time

A successful industrial hub cannot be built independent of the challenges inherent in the current industrial structures of the country or in a state. Indias manufacturing growth has been the second fastest in the world in the last decade, but it has also been quite uneven in its geographic coverage. Some pockets have really grown fast and many others have struggled for survival. Seven statesTamil Nadu, Maharashtra, Andhra Pradesh, Gujarat, Uttar Pradesh, Punjab and Karnatakaaccount for roughly 70% of all factories, employment and capital invested in manufacturing. Building an industrial hub in one of the under-penetrated states would call for a more comprehensive effort and set of policies to provide the hard enabling environment for success. For example, while labour may be available at a new hub being planned, supply of the right set of skills and also manufacturing managers can become a constraint. These have to be addressed right at the planning stage and not left to be addressed at a later stage.

Successful industrial hubs have most of the value chain for an industry located in them. An automotive cluster will have two to four tiers of suppliers servicing one or more vehicle plants. So, creating a supply park along with the vehicle manufacturer is a must, something that is now recognised. So, the state governments wanting to build an auto hub offer land not just for the final assembler like Maruti but also for its suppliers to set up plants in close proximity. While this can work in building an auto cluster, as a big player like Maruti will work with its suppliers to build a strong supply chain, this has been an area of difficulty in other industries. Many of these tier 2 and 3 suppliers are SMEs. They lack the infrastructure and funding to support product development and technology upgradation. They also find it difficult to attract high quality talentbeing unable to match the wage rate, job security and career development opportunities available in larger organisations. Government initiatives to support SME growth and technology upgradation have seen limited success, suffering from low awareness and ineffective adoption and utilisation. Building a successful industrial hub will require not just policy interventions to develop these SMEs, but actively support integration between these SMEs and the large firms they supply. This can lead to emergence of new cooperative structures with smaller enterprises connected to large enterprises rather than merely selling at market prices, development of shared services and training centres so that these value chains get benefit of both scale advantage of large enterprises and scope advantage from many small members with different capabilities.

The final ingredient of success of an industrial hub, and in many ways the most critical for long-term competitiveness, is the development of its knowledge centre and the innovation eco-system. Products, technologies and skills become obsolete with time. New competitors emerge with new business models. The biggest manufacturing hubs in the US mid-west became equally famous as the largest rust belt in the country when they were unable to meet such dramatic shifts and evolve. On the other hand, Silicon Valley has remained the most well known technology hub for decades as it has continuously evolved its role and business model over the years. The key to building such knowledge centres is location of (or close linkage to) one or more universities and research centres within the hub. The emergence of Bangalore as the Silicon Valley of India has been driven by the location of prestigious institutions like the Indian Institute of Science and the large number of central research and technology organisations in the city.

Policymakers have set an aspirational growth target of over 12% for the manufacturing sector and increasing its share of GDP from 16% to 25%. Industrial hubs will have to necessarily play a key role in making this happen. Providing land and other incentives is necessary but not sufficient. Setting up successful hubs call for much more in terms of enabling infrastructure, supply chain integration and, perhaps most importantly, building a knowledge centre, and capabilities to evolve with changing times.

The author is managing director, Boston Consulting Group, India. These are his personal views