The current public discussion focuses again on automotive manufacturing, and as a few times before it is the apparent disconnect between management and blue collar workers that is making the headlines. Be it at Toyota Motors, Maruti Suzuki or Bajaj, significant disturbance is created either over topics of compensation or of employment of temporary workers.

Traditionally, the automotive industry has been a global example of a virtuous cycle, paying higher wages than in other industries to its blue collar workers who in turn buy cars themselves as a function of time and increase the addressable market. Comparing Indian automotive wages with those in other industries, it is obvious, that the same dynamics can potentially play out in India as well.

However, due to the intense competitive pressures and due to the tremendous value-for-money orientation of Indian consumers, wage increases must be at least compensated by productivity improvements. Especially in economically challenging times, pressures on companies’ bottom lines are enormous and all employees, blue and white collar, need to work together to ensure continued market and financial success of the enterprise.

‘Glocal’trends

Positive collaboration is happening. Maruti recently announced that they generated about Rs 360 crore savings via employee suggestions and by optimizing the work on the shopfloor in the same way they do globally (lean manufacturing, MOST, Kanban, etc.). Similar approaches are adopted by automotive companies in India to protect bottom lines.

Nevertheless, blue collar unrest and organised agitation is an area where the new government needs to step in to revise labour laws. The framework for labour in India needs to protect relevant claims of blue collar employees (clean and safe work environments, fair wages, etc.) but needs to also provide the necessary flexibility to adjust permanent headcount according to market demands. Government needs to create an environment in which a constructive, non-political balancing of labour and management interests is possible.

Take Germany and France as examples. Between 2000 and 2010 Germany increased productivity by 20 per cent and was able to limit shrinkage of manufacturing jobs in the automotive industry to 3 per cent. France, on the other hand, lost 5 per cent in terms of productivity in the same time frame and 28 per cent of all jobs at OEMs. Workers agitation and government backing created an environment in which companies basic health was undermined. The same is true for the US with the spectacular collapse of both GM and Chrysler under the burden of high retirement and health care obligations.

Clearly, not all productivity improvements in Germany were limited to labour optimization. German OEMs also improved productivity by extensively employing ‘Design to Manufacture’ techniques. Similar approaches are employed by Indian players, e.g., to bring down the number of strokes in press shop operations. Additional potential leveraging of modern manufacturing techniques seems to exist.

Competitive edge

Global OEMs invest where they find the best economic eco-system, demonstrated for example by Renault’s recent investment in a full-fledged 340,000 unit, 90 per cent European export oriented factory in Morocco. While India’s large market is something that no OEM can ignore, India will only leverage her full manufacturing potential, e.g., for exports, by driving corresponding change.

As a consequence, the new government needs to take action on a number of areas. Infrastructure needs to be consistently improved to drive down the cost disadvantage of Indian companies vs foreign competition due to logistics, expensive and unreliable energy, etc. Some estimates show that logistics disadvantages alone add up to 2-3 per cent cost disadvantages for Indian players vs competition. In today’s globally competitive world, this can make or break a company.

An industry policy must be formulated that is diligently executed. While announcements in the past have gone in the right direction, our track record of execution has been below expectations. Take highway construction as an example. Compared to the announced 20 km per day only a fraction has been achieved on the ground.

The global environment is not getting easier. With ‘Industry 4.0’, i.e., the integration of production assets via the internet and smart algorithms, American and European companies and governments alike aspire to 30 per cent productivity increases in their respective manufacturing industries. Assuming a cost advantage of, e.g., Indian suppliers versus their US counterparts of 30-40 per cent after the recent dramatic devaluation of the INR, this clearly indicates that simple off-shoring of manufacturing may not be a viable option going forward. In other words, it will be more difficult for India to copy the Chinese model and to simply benefit from rising Chinese labour rates.

The world is currently rediscovering the virtues of a functioning and strong manufacturing industry and the benefits it brings for services related to and centered around products. It is time for us to join the band wagon.

(The writer is Managing Partner, Roland Berger Strategy Consultants Pvt. Ltd.)

comment COMMENT NOW