Even as the government aims to increase the manufacturing sector’s contribution to 25% of GDP by 2025 from the existing 17%, the progress in the last two years has belied expectations. The manufacturing sector’s contribution has remained in the 16% range in recent years, near its lowest in the last decade. This is despite the government’s focus on Make in India, Digital India and other policy initiatives. An analysis by McKinsey India shows that India ranks lowest in wage to productivity comparison among its Asian peers. With lowest average daily wage of $5.90 against $34 for China and $37 for Malaysia, the average daily wage to output is around 4.1 compared with 9.0 for Philippines, 7.1 for China and 6.1 for Malaysia.
The management consulting firm, however, believes that not all is lost yet. It suggests that seven sunrise sectors — defence, aviation, railways, auto & auto components, electronics, pharmaceuticals and textiles — together have a potential to contribute around $80-100 billion to India’s GDP every year till 2025, provided India adopts Industry 4.0, a combination of advanced analytics, internet of things (IoT), robotics & automation and process digitisation across the business value chain.
Industry 4.0, also termed the fourth industrial revolution, has four dominant themes cutting across the value chain. First, it looks at increasing productivity through advanced analytics that enables a shift from detection to prediction and then prevention of faults. Second, it focuses on increasing connectivity for both machine-to-machine and machine-to-products through IoT. Third, it focuses on increasing capacity within organisations through robotics and automation, like virtual & augmented reality and industrial automation. Fourth, it focuses on increasing capability and customer/employee experience by digitising the various business processes.
At less than 10% of the planned capex, companies in India can enhance their operating profits by 40% if they apply the industry 4.0 model to their business assets and processes. There can be transformational change in the way companies work, provided the applications are used at manufacturing, procurement, supply chain and various other levels in the company.
Navtez Singh Bal, senior partner with McKinsey India, told FE that for steel plants of 10 million tonnes per annum capacity, with an Ebitda (earnings before interest, taxes, depreciation and amortisation) of $1 billion, application of advanced analytics, IoT, robotics & automation and process digitisation can unlock an additional Ebitda of 40% or approximately $400 million (Rs 2,600 crore to Rs 3,000 crore) for the plant at a cheapest capex of around $50 million (Rs 300 crore.) “This is the best payback on any investment, and far cheaper compared with an investment on additional capacity of 4 million tonnes,” Bal said.
“I would in fact argue that India should not have a capital expenditure for the next three to five years, rather companies should focus on improving the existing assets; that can drastically improve the operating profits with small amount of operating expenses rather than capex,” Bal said. In the manufacturing sector, the major impact has been on yield, energy throughput, quality, predictive maintenance and labour productivity improvements. This has also helped companies tighten their supply chains by cutting lead times, through better connectivity across the chain, Bal said.
He believes India has no option but to focus on adopting Industry 4.0, as well as reskilling its workforce. About 10 crore young people will join the labour market over the next 10 years, and Industry 4.0 is critical for creating opportunities to employ many of them.
However, a major bottleneck for adoption could be the lack of skilled workforce and capabilities in the country. “Organisations will need a big shift in capabilities and mindsets to train in Industry 4.0, to make use of advanced analytics and build a data backbone. Operations teams will need to learn and adapt these skills. Skill training mechanisms will need to be upgraded across the board, along with changes in the education system,” Kunwar Singh, another partner at McKinsey India, said.