As India looks at the rare opportunity to attract global value chains (GVCs) in manufacturing, it faces formidable challenges. While the constraints like labour issues, cost of capital, difficulty of doing business, and infrastructure bottle-necks are well know, there are a few other equally important factors. I blogged earlier about the entrepreneurship deficit.
This post will cover the deficiency of a distinguishing feature of large scale manufacturing - the need for an eco-system to support such manufacturing facilities. This demands a cluster-focused approach in certain sectors.
A feature of modern manufacturing is the disaggregation of production stages into a multiplicity of activities and tasks and their outsourcing. This puts the large factory which churns out the finished product at the apex of a massive chain of suppliers, some of which cluster around the factory and others are dispersed globally. For example, Volkswagen has around 5,000 first-tier suppliers, each with an average of 250 second-tier suppliers, so it could end up with as many as 1.25 million suppliers.
In other words, an essential requirement for scale manufacturing is the presence of a large component manufacturing industry. Take the example of footwear industry. Unfortunately, like with other sectors, components are imported from China. This is not just the case with soles and uppers. Even islets, insoles, and laces are imported from China. It is stunning that even buckles in belts are largely imported from China.
I blogged here about the strength of China. Over the years, the country has built up an unmatched manufacturing eco-system. Sample this,
Its industrial base has unparalleled depth and has only grown more competitive. In 2005, 26% of the value of China’s exports was added abroad; by 2016 that was down to 17%, according to the OECD. In other words, more of the bits and bobs that end up in Chinese gadgets are themselves made in China.
In contrast, India's manufacturing ecosystem in any product line is limited. Even the large non-leather contract manufacturers like Apache and Lotus import uppers and soles from China, Indonesia and Vietnam and only stitch them together in India. In the case of iPhone manufacturing in India, while Wistron and Foxconn assemble phones using imported components, the local suppliers merely make packaging materials, chargers, and batteries.
Large manufacturers are therefore unlikely to relocate to India without being able to replicate an eco-system of suppliers near their locations. This, in turn, calls for a cluster-based approach to manufacturing. It requires public policy to focus not just on the big manufacturing firm but also to support the emergence of an eco-system of ancillaries and suppliers. Such suppliers may be co-located or located elsewhere in the country, in which case it is necessary to facilitate integration of the supply-chains by removing bottlenecks on inter-state logistics and taxation issues.
Catalysing and nurturing component manufacturing is not easy. They aggregate, grow and become more productive under the umbrella of the large manufacturers. This means that some of the larger branded manufacturers will have to be encouraged to take the lead in this regard. While they could provide the market assurance, the government may have to offer some fiscal incentives and/or interest subvention subsidy also for the suppliers. In simple terms, the government efforts have to go beyond the current policy of focusing only on courting the large manufacturers like Foxconn or Feng Tay or Pou Chen or Toray and ignoring their suppliers.
The fundamental point is that if India has to succeed in attracting GVCs, it has to adopt a policy that is centred on creating manufacturing eco-systems (or clusters) than just assembly-line factories. This demands primarily the government playing an important and very active co-ordination role. Large manufacturers will need the support of the government in co-ordinating both set-up and operations to attract suppliers and ancillaries.
Once the enabling policies and regulations are in place, this would involve actively supporting and facilitating both the big manufacturers and their suppliers with activities like acquiring land, different starting permissions and clearances, and hassle-free transactions with government during their operations. In short, it requires a different culture of operations, especially one which needs to pay as much attention to the eco-system of suppliers as much as the large companies themselves.
Once the enabling policies and regulations are in place, this would involve actively supporting and facilitating both the big manufacturers and their suppliers with activities like acquiring land, different starting permissions and clearances, and hassle-free transactions with government during their operations. In short, it requires a different culture of operations, especially one which needs to pay as much attention to the eco-system of suppliers as much as the large companies themselves.
Apart from the ecosystem constraints, there are the limitations of the Indian market which prevents leveraging economies of scale. For example, in 2010, while Apple sold 30 million iPhones in China, its Indian market was just 2 million. Apple therefore pays 60% more per unit for Wistron to assemble iPhones in India. A takeaway is perhaps that instead of chasing big names like Apple, it may be prudent to court the likes of Oppo and Xiaomi, who are more likely to find a large enough local demand and also therefore have the incentives to invest in volumes and create eco-systems. They are also likely to support their smaller component manufacturers compared to the likes of Foxconn.
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