Global Economics

How India Clusters Growth


By applying new management tools to traditional hubs of manufacturing—such as Tamil Nadu's leather trade—local firms boost competitiveness and quality

In a neat industrial area on the outskirts of Chennai is the factory of export house Farida Group. Inside the spacious workplace are rows of women in uniform blue jackets and men in blue-gray polo shirts who quietly operate moulding and pressing machines. At the beginning of the rows are marked-up productivity and quality charts. The floors have markings in paint for the exact position of the tables and machines.

It has the look and feel of an efficient, modern auto parts operation, but Farida is in fact a leather factory that makes shoes for export to top brands like Timberland (TBL). About 80% of the workforce is composed of women who sit behind the tables, hand-cleaning and finishing the shoes, lacing them up expertly and then putting them into boxes, ready for the shipping container.

This factory is one of four that Farida has in the state of Tamil Nadu. Farida has three similar facilities in the town of Ambur, about 100 miles from the city. In Ambur, the company employs 4,000 people working two shifts to produce shoes for export to Britain, Germany, and the U.S. Every day, busloads of young women and men travel to Ambur from as far as 25 miles away. Their earnings start at $100 a month, a coveted, stable income in the poor rural area they come from, and enabling a measure of precious financial independence for the women. Apart from boosting the manufacturing of leather shoes, the Farida factories contribute to "rural development, women's [empowerment], and vocational training in a part of the region that had been virtually forgotten," says Farida's owner, Rafeeque Ahmad.

Tapping Natural Talent

These facilities are part of a slew of new manufacturing hubs, or "clusters," developing across India, from Chennai in the south to the hosiery and knitwear capital of Ludhiana in the north. These clusters take advantage of the traditional skills of a community, transforming local groups of workshops and small factories into a modern industry. For instance, the Ambur area has been home to leather workers for over a century, and the state of Tamil Nadu is India's leather capital: Of the $3 billion in annual leather exports from India, 40% to 45% comes from Tamil Nadu, and a total of $750 million comes from the Ambur area alone. The cluster strategy is one reason that India is in the middle of a manufacturing boom. (BusinessWeek, 10/04/07)

Farida is a 50-year-old family business founded by Ahmad's grandfather. At the time, the Muslim community ran the leather tanning and curing business, as Hindus considered the cow sacred. However the lowest-caste Hindus did work with leather. They, along with the Muslims, lived in and around Ambur, and their combined skills built the leather business in the area. As Farida grew from a tanning business into a sophisticated shoe design and manufacturing exporter, it found ready skills in the area and developed them, with some help from, of all sectors, Chennai's auto parts industry.

Farida's inspiration came from V. Narasimhan, the former president of Sundaram Clayton, one of India's top auto parts exporters and winner of the prestigious Deming Prize for quality in manufacturing. Narasimhan is the spiritual leader of the clusters program, an initiative between the public and private sectors. On behalf of the Automobile Components Manufacturing Assn. and the Confederation of Indian Industry, the modest man from Chennai travels once a month to different parts of the country, preaching his gospel to makers of autos and auto parts. He has helped upgrade the quality and productivity of 150 auto parts companies in India alone.

Striking a Chord

Two years ago, Ahmad and two of his U.S.-educated sons went to a conference in Chennai about quality management in manufacturing. Ahmad recalls Narasimhan talking about what the concept of clusters had done for the auto parts industry, how it had improved quality, reduced costs, and speeded up delivery so much that local companies were able to become full-fledged exporters to the West. "We thought it was fantastic. It struck a chord with us, so we asked Narasimhan's help," Ahmad remembers.

He and his sons took the auto executive to their shoe factories in Chennai and Ambur, and when Narasimhan saw the number of women working there, he could hardly contain his excitement at finding such a suitable place to put his ideas into practice. He gave Ahmad and his sons lessons on everything from manufacturing methodology and quality benchmarks to staff dress codes. (Factory hands, he insisted, had to wear uniforms to ensure discipline and professionalism.) They quickly put his ideas from the auto parts industry into practice, dividing their factory staff into subclusters of workers, implementing good manufacturing principles to begin continuous improvement management.

All these subclusters report to a group leader, who enforces the quality measures and productivity improvements, pretty much the same way the auto parts industry does it. The strongest group, says Ahmad, is only as good as its weakest member; so group members help those who lag behind, so they can meet productivity targets. Farida is six months into the three-year program, and there is already marked improvement in both quality and productivity.

New Economy Adopting Quality Clusters

The idea of clusters has caught on in other industries, too. The National Manufacturing Competitiveness Council is encouraging it, seeing it as a way to modernize manufacturing in India. The Confederation of Indian Industry first introduced the idea in India in 1997 after a visit to India by Japanese Professor Yoshikazu Tsuda from Akio University. During a conference on improving quality in New Delhi, Tsuda suggested that India's auto parts business form clusters of companies with similar size and range in order to share their experiences and improve quality. CII spread the word to auto industries in Delhi, then Chennai. A year later, under the guidance of Tsuda and Professor Y. Washio of the Japanese Union of Scientists & Engineers, Sundaram-Clayton (which makes brakes systems and aluminum parts and which Narasimhan headed) won the coveted Deming Prize for quality, a first for India.

Now India has 118 clusters whose quality control and productivity programs have improved the operations and profits of almost 1,000 small enterprises, says CII's deputy director general for manufacturing services, Sarita Nagpal. "There has to be a major expansion of the effort," she says. "We have learned from the Japanese that it's all about efficiency. Productivity increases 10% with more efficiency."

The New Economy is getting into the clusters act too. When Bill Gates visited India in 2005, a meeting with Indian Prime Minister Manmohan Singh about enhancing the productivity of manufacturing got Gates thinking. Immediately after, he met V. Krishnamurthy, chairman of India's National Manufacturing Competitiveness Council, who convinced him of the validity of the clusters concept, and their desperate need for modern technology. So Microsoft (MSFT) jumped in. The company has a Web site, Vikas, built specially for small firms with investments of $6,250 to $50 million that participate in manufacturing clusters for the export market. Most of these firms had a little bit of tech in their lives—an accounting software, CAD-CAM for design, e-mail—but nothing integrated or meaningfully connected to suppliers or buyers to make a difference to their business.

Back to the Future with Guilds

Vikas is a one-stop, open-source portal customized for the particular industry, and integrates the usual programs plus the unusual—a vendor-manager program where the supplier can punch in his order completion form, or download a changed order form in real time, for instance. For now, the program is free, but soon the exporters will have to pay a fee. The program has been so successful that in Tirupur, India's largest textile center near Chennai, export delivery schedules have improved by 50%, according to Anil Verghese, Microsoft's executive in charge of clusters. Says Saktivel, the chairman of the Tirupur Exporters Assn.: "We want to increase our productivity, marketing production and cost controls, and this system will help us." The exporters' association has invested about $1.4 million in the cluster project.

Narasimhan expects the clusters program to increase in number, and the companies to become mainstream. "They will now be able to globally compete, and achieve their real potential," he says.

Indeed, Subir Gokarn, chief economist, Asia-Pacific, for Standard & Poor's—like BusinessWeek, part of the McGraw-Hill Companies (MHP), expects that these clusters will be the base of India's manufacturing revolution, and more important, represent a way to restore the vitality of India's guild system. India has many castes, most of which are divided into professions—weavers, cobblers, metal workers, iron smiths, agriculturalists. But over the years the guild system became rigid: A weaver's son could never aspire to be a cloth merchant in Mumbai's bazaars, for instance.

Still, the skills have been passed down over the centuries, though many communities have atrophied and entire communities turned into landless laborers. Now, with India's exploding growth, there is a shortage of skills, and those communities of skilled workers and artisans are in a position to benefit. For instance, the reason for the auto industry's take off in Tamil Nadu was due in large part to the presence of castes of ironsmiths and blacksmiths in the state, all clustered around each other. "It's good to see that our best practices are being passed on to different parties," says Gokarn.


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