The digital transformation of global manufacturing in the 21st century need not be a threat to India
In a recent article (Make in India 2.0, FE, June 28), we made a case for incorporating new strategies in the landmark Make-in-India initiative as implementation of digital technologies, collectively called Industry 4.0, are transforming the manufacturing paradigm of last two decades of 20th century, which saw China become the ‘factory to the world’ on the back of foreign investment and low-cost manufacturing driven export-led strategy. We are already starting to see a shift to the 21st century paradigm—as evidenced by the recent announcement by Adidas for shifting production from China to Germany as advances in robotics made it cost-effective to do so. This trend will only pick up as the price of industrial robots is projected to drop by 20% over the next decade, while their performance will improve by 5% annually. The biggest beneficiary of this foreign investment cum low labour cost manufacturing paradigm, namely China, is rushing to transform its manufacturing sector for the new century and has become the biggest buyer of robots.
In this new manufacturing paradigm, the future of manufacturing growth and creation of new jobs in India has to go beyond the industrial parks with large-scale labour-intensive plants of the 20th century. The new paradigm will be driven by three key shifts, (i) robotics enabled small-scale, localised manufacturing, (ii) growth of global digital services servicing manufactured products, (iii) and greater share of platform enabled exchange of products transforming supply chains. We need a Make-in-India 2.0 policy framework that will not only allow India to leapfrog into the digital 21st century and build relevant capabilities and competitiveness, but ensure that we are creating jobs for the 12 million youths who join the job market every year.
To achieve this, India needs a multi-pronged approach which should have four pillars. First, and foremost is to create jobs. There is no alternative but to make some very specific policy choices. For instance, investing to scale up labour-intensive sectors which are further back on the automation intensity, where global shifts are taking place and/or where India can build a natural competitive advantage. This strategy is obvious, but, the unfortunate fact is that between 2008 and 2013, 80% of production growth and 40% of export growth has been in non-labour intensive sectors like metals, chemicals and plastics.
Take, as an example, textiles and apparel—the second largest employment generator in the country. China is rapidly losing its share of the global textile exports as wages increase. The government, recently, brought out an innovative policy with many firsts (allowing fixed-term employment) and while there is more to be done (tying up market access with FTA with EU), the need of the hour is speedy implementation. Another sector which has similar growth and job creation potential and needs similar focused policy thrust is agribusiness. We are primed for a second green revolution, but can we become the ‘kitchen for the world’? A similar policy thrust to build scale in agricultural production, supply chain efficiency and transforming food, beverage and tobacco processing is needed by de-bottlenecking credit, modernising labour laws, and providing incentives for private investment.
However, what is less obvious is that to sustain competitiveness of these traditional labour intensive sectors in this new manufacturing age, the new investments in these sectors should build ‘future-ready’ facilities which combine labour-cost advantage with new age digital technologies like robotics, and not be copies of plants which served China well in the 20th century.
Second, it is absolutely critical to put renewed focus on SMEs as the new manufacturing paradigm will see the growth of smaller plants to meet local demand driven by shifting economies of scale. The challenge in India is further accentuated by the recent RBI study that shows companies with annualised sales of over R1,000 crore were growing, while SMEs were not. In fact, credit to SMEs, as a share of total lending, is shrinking. We have to re-think our SME strategy, but with a 21st century mindset. For instance, Singapore announced an industry transformation package of SG$4.5 billion to help companies, especially SMEs, become future ready by building their technology capabilities, developing scale and making them internationalise.
The third, less-obvious strategy of Make in India 2.0 should be to grow digital services. Globally, trade in digital enabled services is growing faster than trade in goods and traditional services. Advances like cheap sensors enabling the IoT and 3D printing allowing for remote manufacture of spare parts are shifting potential life-cycle value from equipment manufacturers to service providers. Large software companies are well-placed to provide these services across a range of industries. However, the digital ecosystem will need to be built and investments in newer technologies like sensors, 3D printing, cloud networks, etc, will need to be made.
Nasscom had recently announced that India is looking to capture 20% of the IoT market, which is projected to be $300 billion by 2020. This is just a starting point. As the value and ambit of digital services grows, we need to leverage the advantage we have built in ITeS globally. However, estimates suggest India is facing a critical talent shortfall in areas like cyber security and big data analytics. Further, new job roles will get created, e.g, drone coordinator, 3D printing technician, professional triber—who puts together freelance tech teams, etc,—for which we do not, currently, have capabilities. Re-orienting our skilling initiatives towards building the requisite skill-set to win a share of the global digital services pie will be critical.
Finally, large scale sectors like automotive which are further along the automation curve will need a different strategy. They will continue to have key manual processes. Here, a labour advantage over China’s rising wages can be gained by large-scale investments in technology and building capabilities to manage “robot workers”. As the skills performed by humans will become increasingly more complex, the capacity of workers to master these new skills and the availability of programming talent will become drivers of competitiveness.
The digital transformation of global manufacturing in the 21st century need not be a threat. By recognising the opportunities (and challenges), Make-in-India will not only position the country’s manufacturing sector to compete in this new century, it can also help address the challenges of job-less growth we saw towards the end of the previous one.
This is the concluding article of a two-part series(Co-authored with Aparna Bijapurkar, consultant, BCG Henderson Institute) The author is senior partner,BCG India, and director, BCG Henderson Institute.Views are personal