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A. V. Ram Mohan

Some years ago, there was expectation that the Indian manufacturing sector would be the world's source of components. But its impact on the international manufacturing base has been nowhere near that of Korea, Taiwan or China. And policy hurdles are largely to blame.

THERE was a time in the late 1960s when the British policy establishment was quite worried about the decline of the industrial and manufacturing sector. Britain's manufacturing companies, which played a pivotal role in the Industrial Revolution in an earlier age, were taking a beating in the modern market place.

The Finniston Committee looked into the reasons for the decline and made several points, one of which related to the managerial and policy attitude towards engineering.

The report said that the top establishment viewed manufacturing as a mere factor of production, and not production itself. Hence, it was not making the long-term investments needed for manufacturing excellence, skill-building and design competence.

While sympathetic noises were made about the Finniston Committee report, British manufacturing continued its decline to its insignificant position today.

About 20 years ago, there was widespread expectation that the Indian manufacturing sector would be the world's source of components. A low cost base, liberalisation of imported raw materials and capital equipment and a considerably devalued rupee would do the trick, it was thought.

Where is the country on that score today? It is safe to say that the Indian manufacturing sector has not made an impact on the international manufacturing base — at least, certainly nowhere near what Korea, Taiwan or China have.

More important, many manufacturing companies in India are turning towards China for component sourcing, turning the earlier theory on its head.

What is the point of these two instances? Is there a parallel between the circumstances identified by the Finniston panel in Britain and what has been happening in India over a 30-year span? Where is the manufacturing industry headed today? Can we spot some trends that are happening in this sector, visibly and subtly, which point the direction manufacturing is taking?

The most important trend is one of internationalisation of ownership and brands at the top end of every market — of automobiles, consumer durables, office equipment, mobile phones, entertainment electronics, even items of daily usage like pens and so on.

The top end of each of these markets is dominated by MNC brands, mostly manufactured by companies majority owned by foreign parents; there may be notable exceptions in commercial vehicles or pharmaceuticals, which may be due to historical investment reasons or restrictive government policies on drug pricing.

If you consider a ten-year horizon, there is a good chance that products which require world class design and manufacturing skills, large investments and countrywide distribution networks for sales and service will be in the MNC sector. It means pretty much every manufactured product.

At the lower end of these products, there is a likelihood of indigenous manufacturing wresting market leadership, mainly on cost considerations; therefore, in practically all product categories is a parallel manufacturing sector, which has an entirely different focus on costs, quality, methods of manufacture and design.

The so-called push towards the rural markets will be spearheaded by such companies, and selectively by MNCs at the higher end.

Extensive subcontracting and contract manufacturing will be the order of the day; traditionally averse to increasing the numbers in the main plants, MNC-owned companies will push ancillarisation to its limit. Wherever production can be by contract workmen, even inside the main manufacturing plants, it will be done by such an arrangement.

As a result one will see a lop-sided employment pattern in manufacturing entities, with only a core number employed by the main plants and a larger percentage in the ancillary and contract sector. While this may be good news from a cost stand point, it can severely limit the process of building skills in this sector and attracting the right talent to it.

`Manufactured by X and marketed by Y' which has been a silent tradition in the MNC-owned FMCG sector for several years now, will become the order of the day.

In the next wave of capital liberalisation, ownership of the branded parts in the ancillary sector will also shift to the MNC fold; there may not be widespread anguish or dismay as it happens, as many ancillary companies are family owned and subsequent generations do not always want to be in the manufacturing business.

Mostly subcontracting entities, contract manufacturing service providers, small parts and fabrication manufacturers will be left in the indigenous sector.

Import of manufactured items, which are small in size or bulk in volume, indicating small freight element, will be very common.

What is happening in pens, locks and chemicals like silicon carbide will repeat in many similar items; the WTO pressures, burgeoning surpluses in foreign exchange, clumsiness of domestic alternatives (examples: ball point pens, cell phones) will ensure a large presence of Chinese and Korean products in India.

Again, over a ten-year horizon, there will not be any manufacturing of these items left in the country, in any material way.

Is it such a bad thing if all of these events unfold as they are described here? When small cars are exported for the first time in large numbers to Europe it vindicates two basic propositions that underline these trends.

One, dominance in technology of design and manufacturing dictates the ownership of manufacturing as a sector. That is why when the leadership in technology moved away from Britain, the ownership of these businesses moved to the leader, in this case the Japanese.

And, two, international ownership of the manufacturing sector helps to utilise the comparative advantage offered by the country, in this case skills and abundance of trainable labour force for export of cars out of India. If Ford, Hyundai and Maruti can export cars in large numbers to advanced markets, can the component and ancillary sectors be far behind in exports, if they too are owned by international leaders in their fields of operations?

How to internationalise Indian manufacturing in a way which exploits our human potential while protecting national interests in the main challenge. Get it right, learn the lessons of the recent past and we can still become the leaders in engineering supplies to the world. If you are a friend of Indian engineering talent, you should be rooting for ambitious internationalisation and removal of the policy hurdles blocking its way.

(The author is an executive with Ramco Systems. The views expressed here are his own and not of the company he works for. He can be contacted at rammohan@rsi.ramco.com)

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