Economic Survey 2022: Exports to shoot up in ..
Jan 31 - 2022
Fulfilling the promise of India’s manufacturing sector.
India's manufacturers have a golden chance to
emerge from the shadow of the country’s services sector and seize more of the
global market. McKinsey analysis finds that rising demand in India, together
with the multinationals’ desire to diversify their production to include low-cost
plants in countries other than China, could together help India’s manufacturing
sector to grow sixfold by 2025, to $1 trillion, while creating up to 90 million
domestic jobs.
Capturing this opportunity will require India’s
manufacturers to improve their productivity dramatically—in some cases, by up
to five times current levels. The country’s central and state governments
can help by dismantling barriers in markets for land, labor, infrastructure,
and some products (see sidebar, “Four imperatives for India’s government”). But
the lion’s share of the improvement must come from India’s manufacturers
themselves.
Recognizing this, a few leading ones are upgrading their
competitiveness by bolstering their operations to improve the productivity of
labor and capital while launching targeted programs to train the plant
operators, managers, maintenance engineers, and other professionals the country
needs to reach its manufacturing potential. A closer look at the experiences of
these companies offers lessons for other Indian manufacturers and for global
product makers considering opportunities in India.
Made in India?
India’s manufacturers have long performed below their
potential. Although the country’s manufacturing exports are growing
(particularly in skill-intensive sectors such as auto components, engineered
goods, generic pharmaceuticals, and small cars) its manufacturing sector
generates just 16 percent of India’s GDP—much less than the 55 percent from
services. Moreover, a majority of India’s largest manufacturers don’t
return their cost of capital (Exhibit 1), a factor that dampens investment in
the sector and makes it less attractive than its counterparts in competing
economies, such as China and Thailand. Indeed, China’s manufacturers captured
nearly 45 percent of the global growth in manufacturing exports from low-cost
countries between 2001 and 2010, whereas India accounted for a paltry 5
percent.
Exhibit 1
More than half of India’s manufacturing
companies do not return their cost of capital.
Nonetheless, India’s rapidly expanding economy, which has
grown by 7 percent a year over the past decade, gives the country’s
manufacturers a huge opportunity to reverse the tide. History shows that as
incomes rise, the demand for consumer goods skyrockets. And many of India’s
consumption sectors—including food and beverages, textiles and apparel, and
electrical equipment and machinery—have reached this inflection point. In fact,
our research suggests that these sectors will grow from 12 to 20 percent
annually over the next 15 years (Exhibit 2).
Exhibit 2
Many sectors in India will experience strong
domestic market growth driven by increased consumption.
To be sure, global economic growth is poised to create
opportunities for low-cost manufacturers everywhere: by 2015 the market for
manufactured goods from low-cost countries will more than double, to nearly $8
trillion a year. China will probably capture much of the growth. Still, we
estimate that up to $5 trillion a year will be up for grabs as global companies
seek to diversify production and sources of supply beyond China, both to
address rising factor costs there and to chase domestic demand in other
countries.
India has a massive workforce, an emerging supply base, and
access to natural resources needed in production—notably, iron ore and aluminum
for engineered goods, cotton for textiles, and coal for power generation. The
country could become a viable manufacturing alternative to China in industries
ranging from apparel to auto components and might even dominate some
skill-intensive manufacturing sectors (Exhibit 3).
Exhibit 3
India could be competitive in a number of
industries.
If India’s manufacturing sector realized its full potential,
it could generate 25 to 30 percent of GDP by 2025, thus propelling the country
into the manufacturing big leagues, along with China, Germany, Japan, and the
United States. Along the way, we estimate that India could create 60 million to
90 million new manufacturing jobs and become an attractive investment
destination for its own entrepreneurs and multinational companies.
India’s product makers must embrace global best practices in
operations—while tailoring them to India’s unique environment—to improve the
efficiency and effectiveness of the country’s manufacturing investments
dramatically. A look at how some Indian companies are making inroads in these
areas suggests a path that others can follow.
Bolster operations
India’s legacy of industrial protectionism has left many of
the country’s manufacturers uncompetitive. To seize the opportunities now
available to them, they must dramatically increase the productivity of their
labor and capital. The rewards could be significant: a McKinsey benchmarking
study of 75 Indian manufacturers found that for an average company, the
potential productivity improvements represented about seven percentage points
in additional returns on sales.
Improve labor productivity
Indian manufacturers lag behind their global peers in
production planning, supply chain management, quality, and maintenance—areas
that contribute to their lower productivity (Exhibit 4). Consequently, workers
in India’s manufacturing sector are almost four and five times less productive,
on average, than their counterparts in Thailand and China, respectively.
Exhibit 4
Indian manufacturers lag behind their global
peers in key operational areas.
Nonetheless, some Indian companies are making strides. Tata
Steel, for instance, improved its output per worker by a factor of eight
between 1998 and 2011, largely by adapting its operational and management
practices to India’s unique conditions. The company dramatically improved the
output of its blast furnaces, for example, by learning to adjust them
continually to account for the large variations in the ash content of Indian
coal from shipment to shipment. In this way, the steelmaker can burn coal with
high ash content more efficiently than would otherwise be possible.
The company has also made significant organizational changes
to support new ways of working. To make employees more accountable, for
example, Tata Steel reduced the number of managerial layers to 5, from 13. It
also began investing heavily in building analytical and interpersonal skills
among frontline managers and staff to ensure access to scarce competencies.
Today, the company’s Shavak Nanavati Technical Institute trains more than 2,000
employees a year in both “hard” skills as well as “soft” ones, such as conflict
resolution. Together, these moves strengthened the company’s focus on
continuous improvement—Tata Steel won the coveted Deming Prize in 2008 for
advances in process excellence and quality improvements—and helped it become
one of the world’s lowest-cost steel producers.
Improve capital productivity
India’s manufacturers must also improve the productivity of
their capital, in some cases by 50 percent or more. While such
improvements are challenging, they are possible if companies set bold targets
and adopt an “owner–entrepreneur” mind-set when tackling large capital projects
or making other big investments.
For example, a global mining and metals company that was
setting up aluminum smelter operations in India set a capital cost target 50
percent lower than the industry’s global average. The company then empowered
its project teams to reach the goal—for example, by giving them greater freedom
to make decisions about capital specifications and which low-cost equipment
suppliers to use. (A technical and commercial audit team of senior managers
ensured that the new approach didn’t compromise the quality of capital
equipment or backfire in the form of graft.)
Moreover, the company did not give the contract out on an
EPC basis. Instead, it brought together a mix of Chinese and European
companies to finalize the design and to supply the equipment needed, and the
integration and commissioning work was done in-house, thus saving much of the
margin that would otherwise have been given away. Together, these moves helped
the company to launch its Indian smelter operations at a capital cost 50
percent below industry averages (and 20 percent less than other players in the
same market spent).
Many Indian companies are also assessing the technical
design of their capital equipment to make trade-offs between capital
expenditures and life cycle expectations for reliability—essentially
“Indianizing” the specifications. Tata Power, for example, has lowered its
capital expenditures in a drive to identify relatively inexpensive designs and
specifications for big projects. During the planning stages of a new
4,000-megawatt facility, for instance, the company brought together customers,
suppliers, and Tata engineers to make a number of Indianized design decisions.
These included using cheaper welded tubes instead of seamless ones in feedwater
heaters and redesigning the layout of the turbine-generator building to make it
more compact. Together, such trade-offs saved the company more than $100
million in capital outlays while preserving the plant’s core capabilities and
meeting standards for safety and reliability.
Meanwhile, some Indian companies are working to raise the
productivity of their existing assets—for example, by focusing
on the reliability of equipment. In our experience, throughput improvements
from 40 to 100 percent are possible when Indian companies apply
traditional lean-management techniques to keep machines running longer and to
reduce time wasted during retooling and production line changeovers. Tata
Steel, for instance, focused on standardized tasks throughout its mills and
trained workers to uncover the root causes of equipment problems. One of the
company’s melting shops we studied raised its production dramatically over two
years by standardizing jobs and empowering its operations and maintenance
employees to identify potential problems of key machines that had previously
been prone to creating production bottlenecks.
Targeted skill development
India’s manufacturers could learn a lot from the IT sector’s
experience in promoting the large-scale development of skills. India’s IT
services and business-process-outsourcing sectors together hire nearly a
million new recruits a year and bring them up to speed in just months. A key
factor in this success was the early recognition among Indian IT companies,
back in the 1990s, that the number of engineering graduates in computer
sciences wouldn’t meet the needs of the country’s burgeoning IT sector. In
response, Infosys, Wipro, and other companies began hiring graduates from all
engineering disciplines and using in-house curricula and faculties to build
skills among new hires. That approach ultimately led to the formation of a
successful network of independent, privately owned computer-training
institutes, such as Aptech and NIIT.
India’s manufacturers should follow a similar path by
establishing in-house training centers to promote vital manufacturing roles,
including those of fitters, machinists, maintenance engineers, and welders.
Some Indian companies are already taking matters into their own hands. For
example, to impart vocational skills, India’s largest automaker, Maruti Suzuki,
has adopted six technical institutes across the country, some in regions with
little manufacturing presence. By using the company’s own managers as faculty
for some classes, Maruti Suzuki inculcates trainees with a strong feel for its
culture as well. The automaker is now expanding its training programs to
include employees of key suppliers.
Although training programs make good business sense, they
are also increasingly necessary to get local populations to accept the establishment
of a manufacturing footprint in India. Tata Motors’ partnership with the
Gujarat state government to improve the skills of local workers, for example,
helped the company to ameliorate concerns about the displacement of residents
by the construction of a Tata Nano car factory while giving the company access
to new workers. Today, nearly 1,000 people who live within a 10-kilometer
radius of this Sanand factory make Nanos. Similarly, Tata Steel has agreed with
the Orissa state government to train and improve the skills of workers living
near a planned steel plant in Kalinganagar. The company has pledged to give
local villagers jobs in the project’s execution and operations.
Frontline workers aren’t the only ones whose skills need
upgrading; India’s manufacturers must also improve those of managers. Consider
the experience of the cement maker Holcim, where executives set—and
achieved—such goals as significantly improving the reliability and energy
efficiency of the production process, as well as other important operating
metrics at the company’s Indian subsidiaries.
At the heart of this initiative is an academy the company
set up in its Indian plant to help future leaders bolster their skills through
a “field and forum” approach that intersperses classwork with hands-on
fieldwork in the form of operational-improvement projects. Similarly, Holcim
trains its managers to focus on performance dialogues with frontline employees
on the importance of identifying the root causes of problems and of finding
potential solutions through cross-functional teams. The company uses
operational “war rooms” in its Indian plants to serve as a clearinghouse for
the best ideas and to uncover the best contributions. In parallel, Holcim
created an ambitious leadership program to support the personal development of
up-and-coming manufacturing leaders.
Source: https://www.mckinsey.com/business-functions/operations/our-insights/fulfilling-the-promise-of-indias-manufacturing-sector#
