As global supply chains continue to shift in the post-pandemic world, how can India defend its leadership in sectors it is strong in, capture leadership position in new sectors, and learn from the pitfalls of other countries? A discussion by eminent panellists: Mr Soumyadeep Ganguly, Partner, McKinsey, Mr Rahul Mammen Mappillai, MD, MRF Ltd, Mr Sriram Viji, MD, Brakes India.
Soumyadeep Ganguly: I will cover my opening remarks in three parts: a) The India growth story; b) The India advantage; and c) Winning in India.
For the past ten years, we aspired for manufacturing to be 25% of the GDP. But it’s still hovering somewhere between 16 to 18. We are trying to be a $5 trillion economy. While something is going right, we need to get something right. Digital economy is going to be a core element across the globe. India is at the forefront—whether it is UPI, ONDC, FASTag and so on.
In manufacturing backed by supply chain shift, there are two elements. There is the China+1 story. Some leaders have said, ‘Let’s make it India+1 story.’ While there is an opportunity, we have to be competitive. The next aspect is that we are a talent factory. A large part of the global STEM graduates is going to come from India. The urban population is going to increase and we will become a global export talent. So, India is transforming rapidly. We are growing at 7% for the last three years consecutively, but of late, our growth trajectory is tapering a bit.
McKinsey Global Institute did a study on how much our export will look like as we go to 2030. There is an opportunity to double it from 450 to 1000 billion dollars. Apart from traditional manufacturing, a lot of advanced manufacturing is also coming into place—like going up the value chain in electronics, making very specific auto components and machineries, etc. The US, EU, and probably CIS countries are going to be major hubs where we can potentially export.
Four Archetypes
There are four types of architecture which the global organizations are looking for in India:
- Manufacturing from India: Apple has plans to make 30% of their phones exported from India. We must go up the value chain and start manufacturing the components here instead of merely assembling.
- Sourcing from India: Many international companies have established their IPOs (International Procurement Office) in India. Now we are less than 1% to 4% or 5% of the total internal procurements. There is a potential to capture 8 to 10% of the global sourcing from India, which not only includes components but services like R&D, digital, engineering, etc.
- Leveraging talent for innovation: Companies like Mondelez have set up their first lighthouse factory, as they call it, in India and showed the global market that you can make profit by selling a Cadbury pack at five rupees, which is 50 cents. The US market was never ready for that and that factory is now a model factory for the globe. However, such examples are not seen everywhere but in pockets. We need to be consistent to realise the huge potential.
- Build for the future: Companies want to build in India and then replicate the India model across the globe.
The India Advantage:
We have four distinct advantages:
- Market access: We are going to be a third largest economy
- Infrastructure—both physical and digital.
- Manufacturing advantage
- Government enablement to improve ease of doing business
We believe that there are 140 million households who will cross the $10,000 yearly income. For the global luxury brands, it’s a mind-boggling number. We see our logistics costs, as a percentage of GDP, coming down from a 13% or 14% by 1% or 1.5%. China’s cost is 4 to 6%. So, we have a long way to go, though we are in the right track. If we want to be the manufacturing hub of the world, we have to go utilize our IT infrastructure and make a real impact on the KPIs which matter.
With STEM graduates, consistency of talent is one of our big problems. Their rating varies from almost one to eight on a scale of 10. This is not good news. But the good news is, we have the numbers; many competing countries like Indonesia, Thailand or Vietnam are not able to compete with us.
India still doesn’t have many large enterprises. Almost 87% do less than 2 million business. Our ease of doing business is improving. Our labour laws have been simplified significantly, but there are still many more nuances which people need to figure out. Our R&D investment is low, though on the higher side. Taking care of these will help us to balance, so that we can be on the right trajectory.
What is the recipe for winning in India—for both global and Indian manufacturers?
a) Get the fundamentals right. Limit dependence on government and exposure to legacy players.
b) Maintain a long-term commitment for succeeding from India
c) Enable local leadership.
d) Have countermeasures in place to deal with chaos like disruption in logistics carriers, when there is unrest.
e) Make in India for the world: It’s not only India for India but India for Global story. This story applies irrespective of whether India becomes a sourcing hub or manufacturing hub.
Sriram Viji: We work in the automotive components space and have been exposed to how global companies think of India as a sourcing base. Seven or eight years ago, other countries, including China, were more expensive than India, but we were not getting the business. It is a combination of factors that enables India to realize its potential. There is a level of quality, scale and trust that we have to meet. That is changing very quickly. India’s economy has grown tremendously in the last seven to eight years and it has a lot more potential, with 20 million two wheelers, 4.5 million passenger cars and utility vehicles and almost half a million trucks and buses being manufactured in India today. We are at a scale where we should be competitive.
With respect to the trust factor, international purchase organizations are starting to get comfortable with the culture of India and operating in India. That’s a huge difference. US has been wedded to China for over two decades now. This didn’t happen overnight. They’ve had people there. There have been Americans who visited China multiple times in the 80s and 90s to build that trust. India started the journey much later. We are still on that trust building journey.
Also, the risk-reward relationship changes over time. The risk was very low between 2010 and 2020, post the financial meltdown. This gave an opportunity for global scale to be built and global trade to really accelerate. Post-covid, with a lot of geopolitical tensions, people have realised that there are ridges and valleys and the world is not as flat as it was thought to be. In the act of rebalancing, we really have some opportunity to garner, where India can be on the global scale. At TVS, we are trying to build on a global scale and provide global quality, but we will do it with an arbitrage of the Indian talent base a lower cost advantage that we have.
Rahul Mammen Mappillai: R&D is a big opportunity for India. But for Indian companies to make use of the opportunity, there has to be a change in mindset. Historically, given a benchmark of a multinational product, we have been matching that. Now we have to set benchmarks of our own. That’s easier said than done. I’ll tell you the way we are approaching it. If you have to create new benchmarks, it’s very clear that our engineers have to be allowed to experiment and fail, without which you can’t create new benchmarks. We’ve put money and built a factory meant only for R&D engineers to make tests and try crazy stuff. If one out of 10 works, that in itself allows for the experimentation. So, the first step is that as companies, we have to believe that our local talent can create something new and innovative; and support them with investment.
The advantage a global OEM has in operating abroad is that all the suppliers have world-class infra, which they can use to co-develop. We are building a test track in Trichy and it should be ready in four months’ time. A global OEM will now feel comfortable coming to India because they know that the tyre company can also test in a world-class track. We must co-develop a world-class infra to make the global OEMs comfortable in coming to India.
Soumyadeep Ganguly: Are we able to take the advantage of our talent and infrastructure?
Sriram Viji: We have the talent pipeline and India has the demographic dividend. Definitely, we have access to people both on the shop floor as well as in engineering or white-collar jobs. But there’s still a huge disparity and skill gap. Over the last decade, we see companies hiring from certain institutions and our BTech is not the same across the country. There’s a lot of work we must do here.
But I would say that the demographic dividend is starting to pan out much more realistically. We acquired a small company in Europe. They were struggling with manpower on the shop floor and to get a CNC operator there, it took them a month and a half. They could not get a maintenance person who could handle robotics and automation and reprogram a robot. So, they had to outsource the resource at two times the price. But if I have to replace a resource within India, I would have a pool of people to choose from, who are not just skilled and motivated but will work much harder than anyone in Europe. Our population is increasingly getting skilled, and it is really hungry to do well.
India has had a pretty poor infrastructure in the past, and we have struggled with logistics across the country. But in the last six or seven years, we’ve had GST and UPI, which enables payment even for smaller values and all the roadblocks have gone away. But most importantly, there are a lot of investments in roadways and railways and our infra is improving, though we still have a long way to go.
Rahul Mammen Mappillai: In two- and three-wheelers, we are by far the leader in the world, and being a supplier to them, it’s an automatic extension for us to be a component supplier leader. But in passenger cars, Tesla is creating new benchmarks. In India, Mahindra is an example of a company that has set unbelievable benchmarks in EV technology. As component suppliers for companies like Mahindra, who are benchmarking Tesla, we are producing tyres, which have similar features to the tyres which are supplied to Tesla globally. That in itself, enables us to target the EV market globally.
Sriram Viji: We have to put in efforts at different levels. There has to be an alignment of policies right from the international level to the national level to the state level and to the company level. We must have a very strong and robust MSME ecosystem, which can build the base for most of India.
Rahul Mammen Mappillai: The thing which is not spoken about enough is consistency. How can I ensure that every product I produce, irrespective of which plant or line it is manufactured, gives you the same performance? That is a key to be a global manufacturer. In our grandfathers’ time, companies didn’t have access to technology, finance and machines. Now we have access to all these. We must get our culture right and quality should be part of that culture.
I believe that we, as managers or leaders, are the biggest causes for variation. For instance, 20 or 25 raw materials go into making a tyre. Now, I have two options. One, I ensure that every plant gets the same source of raw material for one full year, or I have a situation where the raw materials keep changing, from different suppliers every week. Obviously, option one will cause less variation than option two. But the supply chain guys will refuse that and opt for the need of flexibility and cost advantage. Yet there are ways of handling it. You can allocate one supplier to one plant and another supplier to another plant. Now that we have access to all the fancy machinery, I find many times we are like kids in a candy store. If somebody comes and says, ‘My new machine will reduce cost by 40%,’ we jump at it. But remember, different machines at different plants, will give you slight variations in quality. I think India is now at a juncture where we’ve experienced everything. We know what technology is available. We have to be clear about what is right for us, stick to it and focus on it. If we can get consistency right, I see no reason why India cannot become the world’s manufacturing hub for any product in the world.
