Understanding the Rise of Manufacturing in India

When many executives think about manufacturing, China is the first country that comes to mind. But there are other players grabbing a bit of that spotlight — like India. Despite the conventional wisdom that says India’s place in the global economy revolves around digital bits and services rather than material atoms, the country is starting to attract more attention for its manufacturing potential for a number of reasons: India is the third-largest economy in purchasing power parity after the U.S. and China, it has a large population of engineers and factory workers, its intellectual property is widely respected, and it is easy to find English-speaking managers there. While Narendra Modi’s “Make In India ” initiative to promote manufacturing in India was mocked by some, North American executives are increasingly looking to expand their manufacturing supply chains beyond China. To decide if India is a good candidate for your operations, it’s important to understand the opportunities of doing business in the country — as well as the challenges. American success stories in India While American companies are only starting to explore India’s potential for manufacturing, we’re already seeing a few examples of how these efforts can be successful. For example, Chicago-based Abbott, which operates in 150 countries and owns top brands such as Similac infant formula, recently built a manufacturing facility in Jhagadia, Gujarat, in order to compete in India’s large growing nutrition market. In 2014, its 14,000 employees in India generated $1.09 billion in sales. This is largely because it manufactures products that reflect the local environment (to deal with spicy Indian food, it sells the antacid Digene), and are widely used there (to manage aches and pains, most Indians are prescribed Abbott’s Brufen when they want ibuprofen). It also adapts some its products to meet local expectations — for example, the plant caters to Indian mothers by manufacturing a version of the popular kids’ nutritional supplement PediaSure that is flavored with saffron and almonds. India was one of the first expansion markets for Abbott, after Canada and the U.K, and today it’s the company’s third largest market globally — all six of the company’s business units have a presence in the country. “Last year, we signaled that India is a key manufacturing destination for us with a $75 million investment,” Abbott Vice President Bhasker Iyer told us. “It is one of the fastest growing markets globally — with a young population, strong macroeconomic indicators, a huge consumption story, and a politically stable government working to accelerate reforms. For a healthcare company, the reasons to be part of this vibrant country are even more compelling — it’s an opportunity to serve the unmet healthcare needs of a 1.2 billion population.” While Abbott does not currently export its products from India, the U.S. company Cummins does manufacture its engines, generators, and turbochargers there to export across the globe. India is hugely important to the company’s revenue stream, and Cummins India is only one of eight operations they have in the country. According to its latest investor presentation, Cummins India exports grew at 14% annually over the last five years and now constitute 40% of sales. The company has 20 manufacturing plants in India, compared to Abbott’s three, and one-sixth of Cummins’ 54,000 worldwide employees currently work there. Another company planning to boost exports by manufacturing in India is GE. Among the 10 factories it has in the country, its new factory in the city of Pune serves as a global supply source for a number of its diverse businesses, from aviation and turbo machinery to wind turbines and diesel locomotives. “In the future, manufacturing will be far more decentralized. But decentralization poses a challenge to the concept of economies of scale,” said Banmali Agrawala, President for GE South Asia. The Pune factory helps solve this challenge. The company plans to send half of the output to GE’s global factories and the other half to the domestic market in India. And it was recently announced that CEO Jeff Immelt is headed to India again this month, in part to assert support for manufacturing in the country. While our success stories have focused on large companies, opportunities for manufacturing in India are open to smaller entities, even ambitious startups. Former Texas Instruments engineer Lou Hutter, now CEO of the startup Cricket Semiconductor, is raising $1B dollars (largely from investors of Indian origin) to build India’s first analog chip fabrication (“fab”) facility. Hutter and his partners hope to be located in the middle-sized city of Indore in Madhya Pradesh, where the Chief Minister has offered free land and a stable supply of water and electricity. Most fabs produce digital microchips that power modern electronics. But these digital devices must also interface with the analog real world in useful ways. The analog fab is much more aligned with India’s strength in automotive and industrial sectors, according to Hutter. Overcoming challenges While these companies show the potential of manufacturing in India, they can also illustrate the challenges western companies face when doing business in India. For example, Cummins’ biggest obstacle was navigating a difficult land acquisition process and complex government regulations. Land ownership is often opaque, and re-zoning from agricultural to industrial use has been fraught with peril and delays. The first step to overcoming these challenges is to understand India as a collection of states, rather than one monolithic entity. It’s the states that are working to help companies establish their manufacturing facilities, and four have made significant recent advances. For example, the state of Madhya Pradesh has implemented a single online registration for business licenses to replace the complicated system businesses previously had to go through: 61 different registers operating under 13 separate federal labor laws. The state has also systematized the inspection process. Before, a barrage of inspectors would show up at companies without notice and slow down production; now the state has implemented process where inspectors come once every five years, and have to give advance notice. Meeting these challenges also requires a ground-up evaluation of your company’s needs in order to match them to India’s opportunities and current capabilities. If you don’t have in-house knowledge or resources, you may wish to consult state-based officials or engage a third party advisor. Another challenge is that historically, India has regulated companies’ ability to fire factory workers, making it especially difficult for larger companies. While this was aimed at protecting jobs, one unintended consequence was that many factories stayed small to avoid increased regulatory burden and many others try to show their workers as contract labor. Western companies also don’t have to build their own manufacturing facilities; they can rely on Indian factories. While advising American corporate clients, one of us (Bagla) found that Indian suppliers can be globally competitive in manufacturing items as diverse as manhole covers, automotive components, and even personal care cosmetics, which shows how India’s manufacturing sector is advancing beyond bits. The takeaway Just two decades ago, most Western executives thought of Ireland or Central America as the place to outsource software and business processes; today, we believe that India’s knowledge worker base rivals those two destinations combined. We don’t expect Indian manufacturing to go head to head with factories in China, Japan, the United States, or Germany any time soon. But top executives who wish to diversify their supply chains should no longer only consider India as a supplier of software and call center services. Manufacturing is the next frontier in India, and companies such as Abbott, Cummins, and GE have already proven that the countries resources hold tremendous potential. We believe that western CEOs should follow Jeff Immelt’s lead and begin including India as part of their global supply chain. While there is no single formulaic answer to manufacturing success in India, patience and a trusted local partner or advisor to guide western executives’ efforts are necessary — as well as an understanding of the challenges. And from India’s perspective, manufacturing is probably the only way to lift half a billion more of its population out of poverty. If Prime Minister Modi is able to inspire those around him to unlock India’s land and labor for manufacturing, domestic and global corporations will accelerate this transformation. Source- hbr.org
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Why India Is Such a Huge Opportunity for Western Investors

India has been the talk of the investment community for a number of years now. But no matter how much the opportunity is explained and analyzed, Western foreign investors still seem unsure. Why the reticence to embrace such a huge opportunity, especially in the tech sector? The first stumbling block for investors to overcome is their own perception of the Indian economy. A decade ago, they would have been right to be cautious. But now? Macro-economic stability in India has been vastly improved by the greater credibility of the Central Bank. But more than this, the new government administration, led by Prime Minister Modi, has generated a great deal of positive market confidence. This confidence comes from the government's very strong mandate and the fact that this administration has managed to inspire even opposition politicians; getting them on their side and gaining their co-operation. There's no shortage of demand either. India's urban population is projected to reach 500 million by 2017 and the potential aggregate demand in India is massive. Currently the majority of people's incomes in India are, on a global scale, relatively low or very low. But that's changing fast. It's estimated that in India there are already 350m middle-class people - more than the entire population of America. And this is set to grow exponentially. So there can be no dispute that there is a huge untapped market in India. So far most of the Indian investment discussions have been dominated by the potential offered by the e-commerce industry; I call the phenomenon 'Flipkartisation', named after the hyper-successful Indian online shopping site, Flipkart. According to IAMAI and IMRB International, in 2014 the e-commerce industry in India was worth $13.5bn; a long way behind America. But the internet penetration level is projected to rise to only 19 per cent in India in 2015, versus 84 per cent in the USA. So you can see the investment attraction, which is why a number of high-profile investors have already secured substantial returns on their stakes. But rising rates of connectivity offer Western investors other potentially high-yield opportunities. In particular, the hot Indian investment right now is in the financial technology sector. Here's the investment case: India has millions of unbanked people, so there is significant room for growth. According to the Bank of India, more than 40 per cent of the Indian population does not have access to any banking facilities at the moment, rising to 61 per cent in rural areas. In addition, only 11 per cent of the Indian adult population has access to a loan facility. Unlike in the West where people are loyal to their bank, Indian consumers aren't tied into traditional banks, so there is huge potential to leapfrog Western models and go directly to newer financial models: mobile app-based banking, mobile wallets, and peer-to-peer loans. Unlike other areas of the app industry which are largely dependent on advertising, this is also very easy to commercialize through fees. In addition there is strong consumer demand for micro-payment technology due to the large number of micro- and small businesses in India. However, because of a number of recent high-profile failures, there will still be reticence on the part of Western investors. But there are clear reasons for many of these failures. As a successful investor in India myself, I can see at least some of the fundamental mistakes they made: many foreign investors try to manage their investments from the US or UK, leaving the Indian companies to get on with it alone or micro-managing from a distance with little knowledge or understanding of the culture and systems. They try to impose Western solutions onto Asian culture. Frankly, they try to paint their house through their letterbox. This strategy is utterly wrong. In my experience, investing in India can just never be about short-term financial gain. This is why New Call Telecom is now raising more than $100m to scale up operations in India and roll out digital services across the country. Venture capital and private equity firms need to partner with companies who have experience on-the-ground managing and scaling Indian and Asian investments. To be successful you need to be a close, working partner with the company in which you invest. You need their local knowledge and you need to be in-country as much as possible. It's those Western investors who commit themselves to really getting involved with the local companies and trusting the in-country teams that will ultimately be successful in India.

Source- huffingtonpost.co.uk

India Ranked Best for Investment

In the profitability index, the country is way ahead of China, U.S. In the 2014 index, India was at the sixth position. A ranking of destinations for attractiveness to foreign investors has placed India at the top among 110 countries. China has secured the 65th position and the U.S. is at the 50th. In the 2014 index, India was at the sixth position and Hong Kong was number one. The ranking is based on an index for baseline profitability that assumes that three factors affect the ultimate success of a foreign investment: how much the value of an asset grows; the preservation of that value while the asset is owned; and the ease of repatriation of proceeds from selling the asset. The index combines measures for each of these factors into a summary statistic that conveys a country’s basic attractiveness for investment. Investment guidance “Where exactly should they [investors] put their money? The Baseline Profitability Index (BPI) is back for its third year with some answers, and Narendra Modi’s India is the place to start,” wrote Daniel Altman, creator of the index and an Adjunct Professor at New York University’s Stern School of Business, in the Foreign Policy magazine. “Economic growth alone doesn’t determine the returns to investing abroad; you have to worry about things like financial stability, physical security, corruption, expropriation by government, exploitation by local partners, capital controls, and exchange rates as well. Putting all of these factors together gives a better idea of how big the return will be when it finally reaches your pocket,” he wrote. The big story in the BPI in 2015 is “India coming out on top, with growth forecasts up, perceptions of corruption down, and investors better protected following the election of a government led by Prime Minister Narendra Modi.” High returns A high ranking indicates high returns and improving economic institutions. The index, thus, compares how local policies and conditions affect the same investment in different countries. Or how the value of the principal and the return will change depending only on where the investment is made. Local factors can erode profits. These include payment of bribes and kickbacks, the risk of which is compared across countries using the Transparency International’s Corruption Perceptions Index, a measure for the perceived levels of public-sector corruption worldwide. In 2014, the country was at the 85th position out of 175 countries as compared to its ranking of 94 out of 177 in 2013. World Bank index BPI calculation also uses an index of investor protection compiled by the World Bank. In 2014, the average BPI score across all countries was 0.99; this year it is 1.03 — meaning the expected returns over the next five years are about three-quarters of a per cent higher a year. The calculation of the BPI is an imperfect exercise fraught with assumptions, Mr. Altman says. “For example, how does a survey about perceptions of corruption translate into likelihoods of having to pay bribes, and how big might those bribes be?” he wrote when he first introduced the index. Lower rank in Corruption Index helped India India came first in the Baseline Profitability Index helped by its improved ranking in the Transparency International’s Corruption Perception Index — in 2014, the country was at the 85th position out of 175 countries as compared to its ranking of 94 out of 177 countries in 2013. The calculation of the BPI is an imperfect exercise fraught with assumptions, Daniel Altman, its creator, says. “For example, how does a survey about perceptions of corruption translate into likelihoods of having to pay bribes, and how big might those bribes be?” he wrote when he first introduced the index. In 2014, the average BPI score across all countries was 0.99; this year it is 1.03 — meaning the expected returns over the next five years are about three-quarters of a per cent higher a year.

Source: the Hindu