Global Economics

India Moves Beyond the Back Office


Boston Consulting's Sirkin and Bhattacharya say India has all the ingredients to emerge as a 21st Century manufacturing hub

In today's global economy, the division of labor between China and India couldn't be clearer: China makes things; India does things.

Beneath the surface, however, this has started to change. Driven by its vast domestic market and an abundance of relatively low-cost workers with advanced technical skills, India is becoming an important and potentially world-class manufacturing hub, according to a recent report by the Boston Consulting Group and Knowledge@Wharton.

It has several hurdles to overcome first, the most significant of which is the country's notoriously substandard infrastructure: shabby airports, potholed roads, clogged ports, and insufficient electric power.

Plagued by Power Shortages

This latter problem is especially acute. According to the Ministry of Power, peak demand during the fiscal year ended Mar. 31, 2006 exceeded supply by approximately 11.6%. Ravi Aron, a senior fellow at the Mack Center for Technological Innovation at the University of Pennsylvania's Wharton School, notes that overpriced and unreliable energy supplies have forced many Indian businesses to invest in their own generators. About three-fifths of all Indian manufacturing depends on such power, compared to less than a fourth in China. "This is an additional capital investment that shows up on the balance sheet," Aron notes. "Insulating yourself from India in India is an expensive business."

Acknowledging the problem, Indian Finance Minister P. Chidambaram told us last fall, during Boston Consulting Group's first-ever global partners meeting in that country, that India will have to spend an estimated $150 billion over the next seven to eight years to bring infrastructure up to par. The importance of this can't be overstated. If the efforts are successful, India should be able to boost its annual gross domestic product growth rate from the current 8% to 9% per year to a sustainable 9% to 10% per annum.

More and more multinationals are aware of India's vast potential and have been setting up operations in the country. Ford (F), Hyundai, and Suzuki all export significant numbers of cars manufactured in India. LG, Motorola (MOT), and Nokia (NOK) either manufacture handsets in India or have plans to start, with a sizable share of production being exported. ABB, Schneider Electric (SU), Honeywell (HON), and Siemens (SI) have Indian plants that manufacture electrical products for both the domestic and export markets.

Less Dependence on Home Economy

A number of globally competitive Indian companies also are making their mark. Over the past five or six years, many Indian firms have restructured their manufacturing operations and have implemented world-class practices. Moser Baer has established itself as a global manufacturer of CDs, DVDs, and other data-storage media. Indian pharmaceutical companies, many of which already meet demanding U.S. Food & Drug Administration manufacturing standards, are entering the global market in increasing numbers. And Indian auto parts manufacturers are becoming prominent institutions in the global supply chain.

As Wharton Management Professor Saikat Chaudhuri points out, until recently, global manufacturing in India has been driven strictly by domestic demand. But the dependence of the manufacturing sector on the domestic economy, the Wharton expert notes, is starting to fade. Toyota (TM), for example, is building transmissions for its global manufacturing operations in a factory near Bangalore. Hyundai Automotive Group has designated its Indian manufacturing plant as the only Hyundai facility worldwide that will make small cars, marking a major shift in manufacturing operations from South Korea to India.

While the services sector has been red-hot for some time, India's manufacturing competitiveness is a recent phenomenon—and rests on its ability to do technologically advanced, high-end manufacturing at comparatively low cost. This is possible when you graduate an estimated 400,000 engineers per year, second only to China.

A Simple Business Equation

Consider the rapidly growing auto parts industry, which has emerged as a major supplier to many leading multinationals.

Bharat Forge—the largest chassis manufacturer in the world—is the dominant figure here, but by no means the only player. More than a dozen Indian automotive parts manufacturers already have been awarded the prestigious Deming Prize, the Japanese quality award presented by the Union of Japanese Scientists & Engineers. Prize winners include Sona Koyo Steering Systems, brake manufacturer Sundaram-Clayton, and TVS Motor. (The latter two are both part of the TVS group.)

For many multinationals, the business equation is really quite simple. As Sachin Nandgaonkar, a colleague of ours in BCG's New Delhi office, puts it: "If I can have Japanese quality at a much lower cost, then why not?"

Service Sector as Model

Besides auto parts, telecom equipment, and pharmaceuticals, India has the potential to be competitive in a variety of other skill-intensive industries, such as fabricated metal products, high-end chemicals, consumer electronics, and computer hardware.

Between 1990 and 2005, manufacturing's contribution to the Indian economy remained more or less stagnant, rising marginally from 25% to 27% of gross domestic product.

Over the same period, the service sector's share of GDP rose from 37% to 52%. In 2005, manufacturing exports, according to BCG estimates, were just 6% of GDP, compared to China's 35%. The point is: There's much room for growth. But the more important point, perhaps, is that the service sector provides the model.

Leveraging Brainpower

Indian manufacturing, if it is to prosper in the global marketplace, will be knowledge-based. India's service providers have been moving up the value chain for some time now. Gone are the days when Indian companies were merely an extension of the back office. Today, Indian companies are providing customers with "knowledge process" outsourcing (KPO), services requiring specialized expertise, judgment, and discretion.

That's the road less traveled that Indian manufacturers would be wise to take as well: leveraging their technical skills and brainpower to seek competitive advantage. All that stands in the way is the road well traveled: an inadequate and antiquated infrastructure that can't sustain a modern manufacturing powerhouse.

Sirkin is a senior vice-president and director of Boston Consulting Group, based in the firm's Chicago office. Bhattacharaya is a BCG vice-president and director in the company's New Delhi office. For more on this topic, see the recently published BCG/Knowledge@Wharton report, "What's Next for India: Beyond the Back Office," available at www.bcg.com under "Publications."


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