Success beyond software and services
India dominates the world market in motorcycles. What will it take to replicate this success in other industries?
Examples abound in software and services of how Indians can work systematically to solve challenges, build teams, institutional structures, and scale. But what of other areas? This is a take on aspects of manufacturing, and consideration of a change in approach.
Consider the example of a software unicorn such as Postman, a Bangalore-based Application Programming Interface platform that eases interoperability for apps. The founders are engineer managers with experience at Yahoo and other MNCS. Started in 2009, in six years it was valued at $2 billion. This is a highvalue Software-as-a-service enterprise. It is an area where India has deep skills, there is limited need for capital, and ready access to local and offshore markets in verticals such as banking and finance, and oil and gas.
The team has thought through the customer-centric product rationally and deeply to design and deliver solutions, blessed with good timing, marketing with sound strategy, and executing with skill.
By contrast, manufacturing enterprises face many more problems. These include large capital requirements, an extended payback period, high costs for capital, infrastructure, and inputs, and a bias for softcollar jobs. Inadequate logistics cause delays and high inventories, increasing costs. Small, fragmented suppliers do not have adequate scale to function efficiently, although they have access to natural resources such as iron ore, bauxite, cotton, and abundant sunshine, together with low-cost labour. There is potential to exploit these in skill-intensive value chains such as pharmaceuticals, capital goods and automotive components, because of large, proximate domestic markets. To realise this potential, these manufacturing value chains need considerable effort and investment to become global champions. An assessment of their status follows, with some possible ways forward, and instances of success despite the constraints.
Present state of manufacturing
A Mckinsey publication in October 2020 on manufacturing in India observed that while companies elsewhere had begun to reconfigure sourcing and manufacturing for better reliability after Covid, India was not moving to exploit these opportunities1. The report cites that manufacturing sector GDP from 2006 to 2012 grew by 9.5 per cent, but declined over the next six years to 7.4 per cent. Also, nearly 700 of the top 1,000 manufacturers showed returns below their cost of capital in 2018, whereas sectors with better returns showed increased investment from 2016 to 2020. The authors suggest India has the potential to become a manufacturing powerhouse if it can develop globally competitive manufacturing hubs. They outline the steps required in 11 sectors with strong potential, premised on India’s strengths in raw materials, manufacturing skills, and entrepreneurship, by obtaining and applying the requisite know-how and technology, increasing productivity, and attracting capital. They estimate that appropriate changes in industrial policy together with responsive manufacturers could more than double the value chains in seven years, with significantly increased employment.
Manufacturing value chains
The report classifies India’s high-potential manufacturing value chains into “mature”, “established but underweight”, and “emerging” categories (see chart).
The mature value chains comprise sectors such as pharmaceuticals, automotive components and vehicles, and chemicals, that are ready to scale up for domestic markets and exports. Sectors in the second category have specific shortcomings that need rectification to compete in export markets. For instance, food processing companies are too small and need higher productivity to be competitive in quality and cost abroad. Another example cited here is inadequate technological sophistication in aerospace and defence. In the third category of emerging value chains, sectors such as semiconductors and solar technology trail Asian countries, but could be developed through investment and technology inputs. Potential target markets are low-carbon technologies, such as energy storage, hydrogen equipment, carbon capture and sequestration, electric two-wheelers, drones, and lithium-ion batteries.
Now consider contrary examples of manufacturing success against all odds. There is indeed an industry where Indian manufacturers excel, and that is in motorcycles. An interesting account by a veteran describes how Bajaj Auto painstakingly built its R&D team 20 years ago, and went on to design and build products to hold its own2. TVS Motors did the same. When Chinese motorcycles launched in India and undercut the market in 2005, the apprehension was of the imminent demise of India’s motorcycle manufacturing. Within six months however, Chinese manufacturers failed because of poor quality and high tariffs, bowing out. Bajaj then addressed markets in Africa, where their better quality and prices lower than premium Japanese motorcycles prevailed. Now, Bajaj and TVS have the top slots in Africa, and there are reportedly no Chinese products. This was repeated in South America. In Europe, KTM is the market leader and Bajaj owns 48 per cent. Three Indian companies now dominate world markets: Hero, Bajaj and TVS. The author ends with the question: ‘‘Why was this not done in TVS, computers, mobile phones, pharmaceuticals, and other industries? It’s the same country, same labour laws, same infrastructure, but not the same entrepreneurs.” Possibly, together with all the constraints and impediments, because of factors such as limited vision and/or ambition, and absence of government support?
Developing the value chains
Returning to the development of value chains, six of the 11 account for about 80 per cent of the estimated gains: chemicals and petrochemicals, agriculture and food processing, electronics and semiconductors, capital goods and machine tools, iron ore and steel, and automotive components and vehicles. The report emphasises the importance of government support, and for manufacturers to dare to invest in organisation and scale to increase productivity per worker. An indicative agenda for the agricultural and food value chain is available here .
Two aspects3are highlighted overall: (a) the need for higher productivity (for instance, Indonesia is double India’s, and China and Korea, four times); (b) the availability of capital being the single biggest obstacle. This is where government, business, political and citizen energies have to be convergent to achieve good outcomes.
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1: Mckinsey - Rajat Dhawan & Suvojoy Sengupta, October 2020: “A new growth formula for manufacturing in India”: https://www.mckinsey.com; 2: Srinivas Kantheti, 15 June, 2020: https://www.cnbctv18.com/views/how-one-indianindustry-beat-china-at-manufacturing-and-created-aglobal-footprint-6135001.htm ; 3: Mckinsey, Ibid, Page 7: “Catalyzing growth in the agricultural and food value chain”.