ABB's Uppal: Building global factories in India

India a manufacturing powerhouse in another 10 years? At the moment, it sounds like just what it is: a flight of fancy of some management consultants. With manufactured exports of just $40 billion (Rs 1,76,000 crore), India has a measly 0.8 per cent share of world trade. China, the 800-pound gorilla of world trade, has a lion's share in a range of export items. Toys, footwear and jewellery are some industries where the Asian dragon made use of its low labour costs and huge manufacturing capacities to emerge as the preferred sourcing base in Round I of offshoring. More importantly, infrastructure such as power and transportation is woefully inadequate in India. Add a corrupt bureaucracy, and the cost of doing business in India is too high to be globally competitive.

That said, the CII-McKinsey blue sky visioning might not be all that fantastic. For one, as the Firm makes it clear in its 84-page report, the $300-billion (Rs 13,20,000-crore) manufactured export figure is not a projection. Rather, it's an estimate of the potential, which will be realised provided a number of things fall into place. Neither is it betting on the existing crop of exporters in labour-intensive industries like toys and footwear catching up with China. Instead, its hopes are pinned on growth accelerating in a crop of skill-intensive industries such as auto components, electrical and electronic products, and speciality chemicals. Interestingly enough, the consulting firm does think that the dismantling of export quotas in apparel and textiles (which are relatively less skill-intensive than the other three) will help India's case.

What will turn the tide in India's favour? McKinsey points to a variety of factors. One, buyers around the world are looking for an alternative to China, not just to derisk sourcing, but also to drive bargains harder. Two, since the 90s, large Indian manufacturers have spent a considerable amount of money and time getting their act together. Three, foreign manufacturers have steadily scaled up production in the country, and in the process have brought in their own best practices that have spread across their local vendors. Finally, and perhaps most importantly, price pressures on manufacturers in developed markets continue to grow. Therefore, they have no choice but to offshore production to the most cost effective locations. Says Shirish Sankhe, Partner, McKinsey: "Where it offshoring was in the late 80s and early 90s, manufacturing offshoring is now."

Perhaps, but the industries aren't comparable. It does not have a complex supply chain like manufacturing does, and hence is relatively unaffected by infrastructure bottlenecks. Therefore, if the inflexion has to happen in manufactured exports, the government must first address the hurdles in the way. For example, the report points out, the government must remove trade barriers, lower indirect taxes, upgrade ports, accelerate power reforms, encourage the creation of manufacturing clusters and accelerate skill development. And a good time to start doing that would be now. Says Jamshyd Godrej, Chairman of Godrej & Boyce and CII's Competitiveness Council: "If the real demand from overseas does come, then the problem will be the absence of scale."

Gokaldas Exports' Hinduja: Gearing up to meet additional demand in a quota-free world

Apparel Manufacturing

CURRENT EXPORTS (BILLION $6.1 POTENTIAL EXPORTS* (BILLION) $25-30 GLOBAL SHARE* 8-10% STRENGTHS Vertical integration, skilled labour and design skills WEAKNESSES Lack of scale and operational expertise *By 2015

Happily for India, though, a handful of companies-Indian and foreign-has taken the lead to leverage India's strengths and address its weaknesses. Here's a detailed look at how things are shaping up in the four sectors (electricals and electronics, auto components, speciality chemicals, and apparel) identified by McKinsey as the drivers of the next wave of manufactured exports.

Auto Components: Potent Mix of Low Cost and Skills

With exports of $1.1 billion (Rs 4,840 crore), the Indian auto components industry today is a virtual non-entity globally. Yet, there are indications that things could soon change dramatically. Lured by engineering and continuous improvement of skills, and not just low costs, component manufacturing is moving to India. That's happening via two routes. One, big Indian tier-I suppliers are acquiring beachheads in key markets. Bharat Forge, Sundram Fasteners and Sona Koyo Steering are some of the vendors who've adopted that route. Two, global vehicle manufacturers and vendors are developing their India operations as a supply base for plants and customers elsewhere in the world. Toyota, Ford's Visteon and General Motors' Delphi count among those.

No matter what the strategy, the fact is cars around the world will sport an increasing number of made-in-India parts. Chennai-based Fasteners' acquisition of the precision forgings business of Dana Spicer Europe in the UK gives it access to big customers like man and Scania, while its newly set up plant in China for high tensile fasteners puts the Rs 689-crore company smack in the middle of a fast growing market. Says Sampathkumar Moorthy, the company's President: "The idea is to either acquire or move back-end manufacturing to India and expand customer base."

Similar logic is at work at Bharat Forge, the world's second-largest forgings company, and the Sona Group, which late last year acquired a 21 per cent stake in Fuji Autotech of France and will supply steering parts to it. Another Chennai-based vendor, Rane TRW Steering Systems, has adopted a slightly different tack. Apart from supplying to international customers, it contract manufactures in collaboration with other higher tier suppliers. For example, Rane supplies some sub-systems of the steering system to TRW, which later assembles them for supply to Chrysler. Says L. Ganesh, Vice Chairman, Rane Group: "Indian companies could look to setting up dedicated production lines for their collaborators."

Toyota Kirloskar's Toyoshima: Happy that Indian vendors have measured up to others in Asia

Auto Components

CURRENT EXPORTS (BILLION $1.1 POTENTIAL EXPORTS* (BILLION) $20-25 GLOBAL SHARE* 2-2.5% STRENGTHS Engineering and continuous improvement of skills WEAKNESSES Fragmented industry and poor OEM linkages *By 2015

But the biggest compliment to India's competitive advantage in auto components comes from Toyota Motors. In a majority-owned joint venture (90:10) with the Kirloskars, it has set up a 100 per cent export-oriented unit (EOU) to make transmission-arguably the most complicated part that goes into a vehicle. The Rs 500-crore venture will produce 1.6 lakh units and export to more than 100 countries. Says Atsushi Toyoshima, Managing Director, Toyota Kirloskar Motors: "Our vendors have achieved quality, cost and delivery targets, and are now comparable with their Asian counterparts."

Apparel: Integrated Play

Think apparel, and China is what comes to mind. Understandably so. It lords over a fifth of the $200-billion (Rs 8,80,000-crore) world trade in apparel. India, in contrast, has a 3 per cent share with revenues of $3 billion (Rs 13,200 crore). Now, with the quota regime getting dismantled starting this year, India is likely to emerge as a major beneficiary. To seize the opportunity, the McKinsey report says, Indian exporters will have to choose between operational excellence, and design and innovation. Alternatively, some players may choose to become aggregators or buying agents, while small players could remain contract manufacturers.

Irrespective of the strategy, leading exporters are expanding capacities and focussing on design development. For instance, Gokaldas Exports, which supplies to Nike, gap and Tommy Hilfiger, among others, plans to spend Rs 90 crore in expanding capacities either on its own or by acquiring smaller manufacturers that have a well-settled apparel line.

Ditto Welspun, which is doubling its terry towel capacity to 23,200 metric tonnes per annum (MTPA) and increasing its (bed) sheeting capacity to 100,000 metres per day at a cost of Rs 575 crore. Says Dinesh Hinduja, Executive Director of Gokaldas, India's largest apparel exporter: "We are gearing up to cater to a surge in demand following the dismantling of quotas." Adds B.K. Goenka, Vice Chairman and Managing Director, Welspun: "The entry of more players, reduction in export incentives and a strong rupee make (exports) challenging."

Jubilant Organosys' Bhartia: Cashing in on R&D and low-cost play

Speciality Chemicals

CURRENT EXPORTS (BILLION $1.6 POTENTIAL EXPORTS* (BILLION) $12-15 GLOBAL SHARE* In the top two among the low-cost producers STRENGTHS Low-cost manpower and process innovation skills WEAKNESSES Application R&D and marketing *By 2015

Electrical and Electronic Products: Engineering Edge

As the McKinsey report points out, it is popularly believed that with just $1.2 billion (Rs 5,280 crore) in electrical and electronic exports, India is a poor also-ran to Taiwan and China, which boast of exports in excess of $50 billion (Rs 2,20,000 crore) each. "This need not be so," says the report. "Despite a late start, India can leverage its advantages in custom-made and non-electronic segments to capture $15-18 billion (Rs 66,000-79,200 crore) a year in exports by 2015." How? By making the most of its low-cost labour, highly developed engineering capabilities and high quality vendors.

Already, several MNCs are increasingly manufacturing and sourcing from India. Swedish power and automation giant ABB has designated two plants in India as its global factories. The one in Vadodara makes high voltage circuit breakers and the other in Nashik, medium range outdoor circuit breakers. ABB refers to operations like India not as low-cost, but as high-productivity countries. For good reason. ABB's India facility was the first to manufacture outdoor circuit breakers with local talent, and cut costs and delivery period by half in the process. Says Ravi Uppal, head of ABB India: "India's intrinsic strengths and competitiveness include a high level of technical competence and domain expertise."

Tecumseh, a global compressor giant, Moser Baer (a home-grown optical media powerhouse with 18 per cent share globally) and Celetronix are some others who have beat the odds to become world-class producers out of India. What worked for these companies? As the report points out, smart choice of segments. They operate in custom-based and non-electronic segments. Celetronix, for example, designs and manufactures power assemblies for leading computer hardware brands, including Apple. Explains Sandeep Tandon, Director, Celetronix, which logged Rs 850 crore in exports last year: "As a group, we have focussed on products that are on the leading edge of technology, but require substantial human interaction for design and manufacture."

"Where IT offshoring was in the late 80s and early 90s, manufacturing offshoring is now" Shirish Sankhe Partner/McKinsey

Speciality Chemicals: Superlative Process Skills

So far, big manufacturers and buyers of chemicals have resisted offshoring-at least in any significant way-to low cost countries like India. But with profits coming under pressure, the trend has started. Rohm & Haas set up a $300-million (Rs 1,320-crore) plant in China in 2002, and a much smaller $20 million (Rs 88-crore) facility in Taloja (Maharashtra) for adhesives and coatings. It is a sourcing hub for Asia. Germany's third-largest chemicals manufacturer, Degussa, has plants in India for fumed silica and construction chemicals.

If the country has to make further inroads into a market dominated by China, the report says, it needs to become either a low-cost producer or applications developer. Surprisingly, a few companies have already made significant progress as applications developers. A prominent case: Micro Inks, one of the lowest-cost producers in Asia and the 11th largest ink marketer in the us, grew to Rs 930 crore in revenues at last count by investing in research and development. With the result, it has developed proprietary products and integrated backwards into most raw materials. Says Anjum Bilakhia, the company's CEO: "Ink constitutes just 5 to 7 per cent of a total printer's cost, hence it is quality and not cost that drives the procurement decision."

The ability to manufacture at 20 to 30 per cent lower costs while adhering to exact specifications is what sets low-cost producers apart. Ask Jubilant Organosys. By developing low-cost, non-patent-infringing processes and manufacturing its own raw materials, Jubilant has become the world's #2 manufacturer of chemical pyridine (used in medical drugs) and its derivatives, with a capacity of 24,000 tpa (by May this year). In the next two to three years, Jubilant hopes to become the #1 manufacturer. Says Shyam Bhartia, the Rs 947-crore company's Chairman & Managing Director: "R&D has been one of our key enablers. Last year, for example, we filed for 16 new patents."

Will India touch the magical figure of $300 billion by 2015? Highly unlikely. The hurdles that stand in the way of an export take-off are many and severe. Even if the government started addressing them starting now, it will be several years before its impact is felt on exports. But getting started is important. Let's hope the promise of $300 billion in earnings is incentive enough.

-additional reporting by E. Kumar Sharma in Hyderabad, Rahul Sachitanand in Bangalore
and Kushan Mitra in Delhi