Opinion

‘Scale in India’ a must for Make in India

Sridhar Seshadri Piyush Kumar | Updated on January 24, 2018 Published on July 16, 2015

More the merrier: Once their scales go up, Indian firms can exit the imitation game - Photo: Vijay Soneji   -  THE HINDU

Indian firms lack the bandwidth to deliver world-class manufacturing. The government must help them scale up

The push for ‘Make in India’ is consistent with the prevailing belief that the global competition for dominance in manufacturing is not over.

China has grown at a blistering pace not only because of its abundant supply of labour but also because of highly-conducive government policies and a robust management style that has helped Chinese manufacturers scale up and cost-down rapidly.

The net result has been an unparalleled reconfiguration of the worldwide manufacturing system.

The modern manufacturing system has evolved from its traditional form where a firm transformed raw material from its suppliers to create finished products for its customers.

Instead, today we talk about global manufacturing ecosystems and complex, multi-entity supply chains. For instance, the Apple sources from 748 listed suppliers across the globe. More than 600 of these are located in Asia, of whom 331 are in China.

With such a large-scale inter-continental movement of parts, assemblies and sub-products, manufacturing cannot be viewed as a standalone entity that is focused on specific sectors, or on specific processes.

Instead, it has to be viewed in terms of a network of flows across interconnected entities. Such closely intertwined global networks resemble holistic ecosystems where focusing on or strengthening just one or few arms of the network creates only a limited impact and the real winners are those who help resolve more comprehensive problems.

Evidently, manufacturing strategy has gradually moved from being a firm-level problem to becoming a national imperative for many countries. For example, even though wage rates in China were initially quite low, they have increased with the increase in productivity.

As a result, even Chinese firms that participate in global networks now have to make a choice between retaining components of manufacturing within the country and transferring them to lower cost countries.

Indian scenario

Let’s think again about Apple’s global supply chain; none of its suppliers is from India! This illustrates the sad fact that India has not been a major beneficiary of the global supply chain revolution.

This may partly because of the glaring disparity in the productivity of manufacturing firms in India and the west. India employs about 52 million people in manufacturing, or about four times the corresponding figure in the US.

Also, the average product of Indian firms is only one-tenth of that of US firms. This means that an average Indian employee in manufacturing is 40 times less productive than his or her US counterpart.

How are such low levels of productivity sustainable? The answer lies in the size distribution of firms in India. There are many small firms and several large firms but mid-sized firms are missing.

This distribution is one-of-its-kind in the world. Under normal circumstances, the small suppliers would grow in tandem with the firms to whom they supply. However, unlike in many other nations, this has not happened in India.

Supplier development activities have been limited to a few sectors that are dominated by big firms. In the remaining sectors, small supplier firms have been left out — they are disconnected from continuously-changing global supply chains.

And once disconnected, firms cannot be plugged back into the larger flows without a disruptive modification that would allow them to scale up and grow. ‘Make in India’ can happen if the connection can be re-established.

Many ways to make it

While it is heartening to find some examples of Indian firms rising to the global manufacturing challenge, a nationwide improvement in manufacturing requires a dedicated and multidimensional approach.

The challenges include creating a favourable business landscape, closing administrative loopholes, upgrading the infrastructure, improving the availability of land, facilitating raising capital and minimising state-wise variations in adoption and execution of policies.

Individual firms need to take corrective actions as well. They must adopt a professional approach to craft a business strategy that allows them to move beyond early-stage entrepreneurship to scaled-up businesses, they need to partner globally for design, technology, and manufacturing practices.

They have to invest in skill development to create a world class workforce capable of leveraging the ever-changing technological landscape.

Most important, it is imperative for firms to move the participation in the global manufacturing ecosystem to the top of their strategic agenda.

A central agency

India also needs a concerted policy directed towards scale-development and a central body to continuously address and resolve the problem of scale in Indian manufacturing.

Such a body, which could potentially be a public-private partnership, would promote a network-centric perspective on manufacturing and advance an agenda of embedding firms into global supply chain flows.

It would also examine employment implications of progress in manufacturing and help formulate policy objectives in this regard.

At the grassroots level, it would create the infrastructure for the adoption of world class manufacturing practices. And, it would invest in building a body of knowledge, and help develop a cadre of leaders capable of connecting Indian firms to global supply chains.

The path to world-class manufacturing is long. Indian firms are far removed from the frontier in many industries. A large part of the problem remains the small scale of Indian firms. Therefore, ‘Scale in India’ seems to be the path to a sustainable ‘Make in India’.

A successful scaling up of a wide swath of Indian enterprises is a necessary condition for quality enhancements, cost reductions, global partnerships, professional management, and market development.

And, once the scale of Indian manufacturing rises to global levels, it can ultimately shed the process of imitation and leapfrog to participate in the next revolution in world-class, large-scale manufacturing.

Seshadri is a professor at the Indian School of Business. Kumar is a visiting faculty at ISB

Published on July 16, 2015
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