More than just making in India

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Updated: April 9, 2015 3:31:44 AM

Make-in-India has to focus on improving the quality and flexibility of our labour force, enhancing technology and value-addition

After coming to power, the NDA government launched its ambitious initiative called the Make-in-India to revitalise the country’s manufacturing sector, and make India as an attractive destination for global manufacturing companies. The key message in the pitch to global manufacturing companies is that today India offers the most attractive combination of a large and fast growing market and a large, low-cost and fast-growing labour pool—something that is unmatched among large manufacturing economies. Potentially a stage set for the next “revolution” in global manufacturing.

The last revolution in the global manufacturing industry started about 25 years ago when China made its big push to become the “factory to the world”, on the back of huge supply of cheap labour and world-class infrastructure in its manufacturing zones and ports. This revolution seems to have finally played itself out, driven by rapidly growing wages in China which has outpaced productivity growth. Therefore, Make-in-India seems to be timed perfectly to position the country as the next big manufacturing destination for the world. To make this pitch “believable”, the government has rightly focused on getting the basic building blocks right—infrastructure (roads, ports), power availability and its quality, land (though the Bill is facing opposition in Parliament as this article is being written), huge focus on improving the ease of doing business index and rationalising tax structures (GST, inverted duty structure, transfer pricing, etc)—and has taken some steps on the labour front, where some states have taken the lead.

Post the high-profile “launch” of this programme by the Prime Minister, I was in a conversation with the CEO of an MNC on the India opportunity for his company. He made an interesting observation that the “the era of lower labour cost arbitrage driving global manufacturing strategy is over”, which at that moment seemed rather surprising to me. Close on the heels of this conversation, the Boston Consulting Group brought out two reports on the manufacturing sector. The first report, based on an extensive study of manufacturing competitiveness of the top 25 countries making up over 90% of world’s manufacturing production, concluded that the last decade saw a fundamental shift in a country’s competitiveness, with many countries seen as manufacturing powers losing competitiveness and others gaining substantially. The case of China’s loss of low-wage-driven competitiveness is well known. More interesting are the gains in competitiveness of high-cost countries such as the UK, which is becoming among the most competitive in Europe and has fuelled the resurgence of manufacturing in the US.

The second report, titled Why Advanced Manufacturing Will Boost Productivity, noted that the adoption of advanced technology is driving manufacturing costs down by as much as 20% to 40%. The report estimated that, by 2025, over 25% of manufacturing tasks will be automated, driving large savings in global labour costs of manufacturing. While this report explains the basis for the above-mentioned MNC CEO’s claim that manufacturing investment decisions are no longer being driven by lower labour costs, it presents only part of the picture behind the resurgence of manufacturing in the US and the UK, and also why China continues to be an attractive investment destination. The other part of the picture behind the growth in productivity is the high level of flexibility in these countries, the combination of which, with advanced manufacturing technology, saw the US improving its competitiveness the most among the top 25 manufacturing countries.

The government is absolutely right in first focusing on these building blocks which, if we don’t fix, will mean that we will not even be in the “game”, i.e. consideration set of high priority countries for manufacturing investments by global companies. However, drawing lessons from the swings in manufacturing competitiveness in the last decade clearly shows the limitation of a manufacturing strategy (and the Make-in-India campaign) that is driven by the availability of a large pool of low-cost labour, good infrastructure and large home market demand. China is today building “manufacturing depth” through technology and higher value-addition with an aggressive policy for increasing innovation, technology absorption and development, massive university-industry collaboration, developing its own technical standards, etc, to add to its scale advantage. Similarly, the US has shown the way how a high wage cost country can compete through advanced manufacturing systems backed by highly skilled and flexible labour force. On the other hand, a strong negative lesson can be drawn from the experience of Brazil, a country which had such huge promise for investors just a decade ago. During the last ten years, Brazil seems to have got into a “productivity trap”, and from a competitive low-cost country has today become one of the costliest one, driven primarily by its poor labour productivity and inflexibility and constraints of its labour market.

So, what does all this mean for the success of the Make-in-India programme? There is no doubt that the initiative has been timed perfectly to attract manufacturing investment as global companies restructure their manufacturing value-chains. The first battle has been won as the high decibel global campaign has started to reposition India in the minds of global manufacturing companies as an attractive destination. But the war of making India a top manufacturing nation has just begun, and to win this war, the Make-in-India has to necessarily evolve beyond making in India by improving the building blocks of infrastructure and the ease of doing business, and incorporate two other critical themes—(1) to fundamentally improve the quality and flexibility of our labour force; and (2) give a big focus on increasing technology depth and value-addition of our manufacturing sector. Only this combination can sustain manufacturing productivity—fundamental to global competitiveness—in the long run and earn India its rightful place among the top manufacturing nations of the world.

The author is managing director, the Boston Consulting Group, India. Views are personal

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