An industry leader referring to recent media reports on the wage rates going up rapidly in China (??China has reached a turning point in manufacturing??, The Economist, July 2010) said to me that this is good news for his company and the Indian industry. I was somewhat taken aback at this simplistic interpretation. Wage rates are only one of the measures of competitiveness. An equally important measure is labour productivity. And in the battle of productivity, unfortunately, India is losing.
There is no doubt that India?s manufacturing competitiveness has improved in the last two decades. India?s manufacturing labour productivity, as measured by output per unit of labour cost, has grown by around 5% per annum (in real terms) over the past decade, a commendable achievement by any standards.
But is that enough? Any manufacturing sector benchmark cannot ignore the fact that India?s biggest competitor is China, which no doubt led to the comment on wage rates. The competitiveness of the Chinese manufacturers is being driven home, pun intended, by their rapidly growing dominance not just in the international markets, but also increasingly in our home market. There is little doubt, as many Indian firms claim, that the Chinese players have an advantage from overt and covert government support (e.g., lower cost of capital, power and land, export subsidies, weak yen, etc). But equally important driver of their competitiveness is their high labour productivity. The fact is that during the same decade when India?s labour productivity grew by 65-70%, Chinese manufacturing labour productivity grew annually at 12-13% to add up to a whopping 180% (based on EIU figures). So, despite increasing wage rates, they continue to be more competitive.
It is interesting to note that India started losing the productivity race to China just over 10 years ago. In 1996, India?s average productivity for organised labour, as productivity of unorganised labour is difficult to measure, was higher than for China (EIU figures). In 1998, China drew level. Since then, China has increased its labour productivity at 2 to 3 times that of India. Of course, as with many of these comparisons, we have to be cautious about the figures, but the growing gap between the two countries seems pretty clear. What did China and other developing countries with similar performance do, and what lessons can we draw?
An obvious lever is improving the manufacturing management practices. On this dimension, anecdotal evidence suggests that in peer to peer comparisons, India is at least at par with China and other developing countries, if not better. There are three other key levers that drive productivity improvement: (i) higher level of capital that allows moving up the value chain and using higher skilled workforce, (ii) higher scale of operations possible due to superior infrastructure (that allows large scale plants to serve more distant markets) and government- or market-induced industry consolidation and (iii) strong clusters that provide a variety of productivity benefits and overcome impact of wage increase.
Manufacturing industries have seen several quality and productivity improvement programmes?Toyota Production System, Six Sigma, Total Quality Management, flexible automation, lean manufacturing, etc. The Indian industry has embraced many of these techniques in its ?1st wave of productivity improvement programmes?. This has reaped dividends as Indian industry improved its competitiveness and emerged as the second-fastest growing manufacturing economy in a world of low inflation and high growth. But after the recent economic crisis, as tightening labour markets and growing inflationary pressures led to rising wage rates in developing countries, the next battle for competitiveness has begun with productivity emerging as the trump card.
The challenge of improving productivity in India is compounded by the nature and composition of our labour force. In the next 15 years, as per different estimates, India needs to generate over 100 million manufacturing jobs, many of which will be low-skilled, migrating workers from rural to urban centres. Improving productivity levels of a stable workforce is so much easier than that of a rapidly growing one with low level of skills. At the same time, with rising education and awareness levels, workers today are more conscious of aspirations, rights and options. They are not willing to be treated simply as ?hands and legs? and ?settle? for management-driven decisions and want more say in the management of their firms.
No doubt clusters will have to play a critical role in meeting India?s productivity challenge. Clusters allow consolidation and co-location of suppliers, shortens production cycles and allows just-in-time inventory, delivers lower logistics cost and creates higher skilled workforce. They have been a key force in improving productivity and capability in every manufacturing economy. But, given India?s context, the twin levers of using capital to go up the value chain or building larger scale plants can be deployed only selectively.
India will have to add new fourth and fifth ?people levers? to the three levers of clusters, capital and scale and implement its own unique approach to meet this challenge. The fourth lever will be to bridge the massive skills gap. The Prime Minister?s National Council on Skills Development has set the target of skilling 500 million Indians by 2022 as a core national agenda. This has to be linked to the productivity imperative and include appropriate curriculum design and continuous education, and not done in isolation to improve basic employability. The fifth and final lever, perhaps the most complex in many ways, is adopting a ?people-centric? approach to manage our workforce. Engaging all the employees to ?own? their organisation?s productivity improvement programme and not treat it as just a top management?s initiative. Aligning the country?s and the firm?s productivity challenge with the individual worker?s aspiration for greater participation. There are many fine examples of Indian companies that have done this successfully. India Inc has to build these individual successes into countrywide ?second wave? of productivity improvement. Ensuring its success will determine whether we win or lose the battle of productivity.
?The author is managing director, Boston Consulting Group, India. These are his personal views