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India’s Promises & Drawbacks

Is India fulfilling its potential in the high-tech industry? That's a question government officials, businesses, and academics inside and outside the country are pondering as the nation comes to a crossroads. It must decide whether to keep focusing on software and services or examine opportunities in hardware manufacturing.

Such a review has become even more necessary for the country as companies worldwide weigh the inherent dangers that China's dominant position in global manufacturing poses to their supply chains. Many companies are evaluating their alternates and seeing limits to the advantages offered by places once considered safer bets, including Eastern Europe, Ireland, Vietnam, the Philippines, Mexico, Indonesia, Malaysia, and Thailand.

Over the last couple of decades, some of these places have attained a moderate level of success by attracting key segments of the electronics supply chain. Thailand is a major supplier of hard disk drives. Mexico's maquiladora belt has become vital for companies that want final assembly or production close to the huge US market.

Yet India continues to pop up in discussions about the future of global manufacturing, especially among high-tech companies. It has something the alternate centers mentioned above lack: hundreds of millions of potential workers, which China also has in abundance. In fact, India is the only nation that can go punch-for-punch with China in offering the huge workforce global manufacturers need. An extra advantage: Many of its people speak English, the language of global commerce. With an estimated population of 1.2 billion, a literacy rate of about 61 percent, and English as the language for “national, political, and commercial communication,” according to the CIA World Fact Book, India should be the obvious choice for companies seeking an alternative to China.

However, it is not. The country's basic infrastructure and road networks aren't quite as developed. Its laws and regulations are often difficult to navigate. Transnational issues continue to plague its local politics and hinder its ability to play a bigger role in the international community. Also, the economic liberalization policies begun in the 1980s have positioned the country to play a leading role only in the services and software sectors. The manufacturing economy hasn't been quite as successful.

That may be about to change. A recent report from {complink 7473|McKinsey & Co.} hints at rapid changes occurring in India's manufacturing sector and says the country may expand production “sixfold by 2025, to $1 trillion, while creating up to 90 million domestic jobs.” The report, “Fulfilling the promise of India’s manufacturing sector,” bases its conclusion on the “multinationals' desire to diversify their production to include low-cost plants in countries other than China.”

Making India competitive against China will require more than just efforts on the part of the government. The private sector will have to intensify its efforts to get operations qualified to meet the high requirements of foreign manufacturers and supply products to the local economy. The opportunities are immense. More than half of India's workforce is still involved in the agro-economy — a dismal fact that is changing rapidly as more people move from the hinterland to the big cities.

McKinsey said India could become competitive in many industries, including several of interest to the high-tech community: computer hardware, consumer electronics, domestic appliances, engines and turbines, fabricated metal products, industrial and medical electronics equipment, miscellaneous electric equipment, motor vehicle assembly, specialty chemicals, storage media, and telecom equipment.

From a supply chain perspective, India would seem capable of quickly overcoming the key challenge many in the electronics industry have pointed out about the country: the absence of a vibrant procurement, logistics, and local materials support system. Again, opaque regulations and concerns about being ready for the big league could hold it back. But McKinsey sees it differently:

If India’s manufacturing sector realized its full potential, it could generate 25 to 30 percent of GDP by 2025, thus propelling the country into the manufacturing big leagues, along with China, Germany, Japan, and the United States.

I juxtaposed my range of concerns about India with the promises identified by McKinsey. My conclusion is that perhaps it's time for the electronics industry to take a second look at India and help the manufacturing sector achieve its potential. It's most likely to result in a win-win for a country that wants to play a bigger role in technology and an industry scared stiff about China's role in manufacturing.

11 comments on “India’s Promises & Drawbacks

  1. Himanshugupta
    March 20, 2012

    I remember about 10 years ago when the whole race of “manufacturing hub” was on peak then India had advantage over China both in terms of spoken language and skilled labour. But somehow the Indian political will did not muster strength to provide the much needed infrastructure. The situation has not improved much except that private investors are not forcing government harder to implement the much needed reforms. 

    On one hand India has failed miserably to attract manufacturing companies but on other hand the service industry has flourished. Especially in the electronic sector, now service provider companies are feeling the pinch of not having manufacturing closer. Hopefully, this lead to some incentives to start small scale manufacturing in India itself.

  2. Barbara Jorgensen
    March 20, 2012

    India's tech star has risen and fallen several times for various reasons. Now, the region is “hot” again in terms of technolgoy companies expanding there. What seems to be differnt this time around?

  3. _hm
    March 20, 2012

    May be very difficult!

     

  4. Himanshugupta
    March 21, 2012

    @Barbara, there seems to be a push from the government to have some kind of technology manufacturing with the country mainly due to the safety reasons. Now what will all this hype deliver is to see.

  5. Daniel
    March 21, 2012

    “In fact, India is the only nation that can go punch-for-punch with China in offering the huge workforce global manufacturers need”

    Right Bolaji. The high educational/literacy rate and a large pool of skilled manpower can drive the nation to a manufacturing hub. The only thing is government has to create necessary infrastructure and a direct FDI single window system. I feels that if government is taking initiatives, most of the companies may be willing for investment in manufacturing sector.

  6. bolaji ojo
    March 21, 2012

    Himanshugupta, If India was able to build a virile service sector, what are the drawbacks on the manufacturing side? What's holding the country back here?

  7. Himanshugupta
    March 21, 2012

    Bolaji, from what i read and hear; the problem lies in the system. The goverment needs a large scale reform for manufacturing to flourish. Apart from that the strict labor rules (for blue collar jobs) and lack of good infrastructure are the major problems. 

  8. Barbara Jorgensen
    March 21, 2012

    @Himan: I've read in several reports that tariffs and/or taxes create a problem for foreign investments, but I'm not sure on the particulars. Any major development effort such as high-tech usually looks for the local government's support. Look at how China suceeded and how much the government there contributed.

  9. prabhakar_deosthali
    March 22, 2012

    One thing that the Indian technology sector is lacking compared to China is a killer instinct. To have confidence to kill the competition and surge ahead.

    The main reason why the software industry has flourished is that in the software industry though you have to put in more hours every day you have the flexibility about which time of the day you will put those hours. The software engineers are used to have their own work schedules, facility for work from home and all those kind of flexibilities. So this is an asynchromous activity

    high tech manufacturing on the other hand requires you to follow strict day-to-day time schedules- for supplies-for production for deliveries. There is not a momemnt to relax. It has to be a well orchestrated operation on the shop floor with all the particpants present at the same time working in a synchronous manner.

    So for high tech manufacturing to succeed in India everything from the infrastructure to people's work habits have to have a sea change.

    The automobile manufactruing in India has got a moderate success  and I am sure with a little government push similar success can be replicated in Electronics manufactruing.

  10. Mr. Roques
    March 23, 2012

    For an entire industry to shift to India, does it need companies to agree among themselves? Or are those decisions made by companies, without agreeing with others?

  11. Kris
    April 3, 2012

    Mr. Roques, the companies within an industry will not agree collectively in any competitive, large and fragmented industry.  Multinationals will come to India individually but the trickle will become a flood when they see other multinationals succeeding.  Let me use our electronics industry as an example.  

    We have been manufacturing Printed Circuit Boards (SCLpcb.com) in India for over 20 years. We are seeing less reliance on government driven telecom orders and more on private sector driven automotive electronics, cell phones, consumer electronics, LED lighting etc. Huge potential for growth already so we are adding CNC machines from Switzerland. Indian Aviation and defence electronics add to the potential.  As our scale and technology improve, our exports increase.  Foreign manufacturers hoping to also take advantage of the large growing Indian market and hoping to diversify supply chains also come to India.  This virtuous cycle is what the McKinsey article was highlighting. 

    As others have pointed out the damper on this is poor infrastructure (roads, customs and especially power), expensive loans (17%), antiquated labor and laws, etc. The service sector relies less on this.  Workarounds like diesel generators are what we are all forced to do. I am from the US so believe me when I say that it takes a lot of work to overcome the myriad of obstacles. But it is doable and the opportunities are enormous.

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