When Global Giants Relocate- Will India be The Destination?
What Indians Must Do To Become The Next Global Manufacturing Hub
The process of de-globalization started a few years ago when Chinese manufacturing sites started facing closure on account of pollution. While the world welcomed cheaper imports from China, little did they realize that it was at the cost of environment. Chinese Government set-up a robust infrastructure for manufacturing and exports over the past several years to attract global giants to set-up their manufacturing operations in China. China became the global manufacturing hub for the leading giants. China’s share of exports in total exports of all countries rose to impressive 13%, with USA being second at around 8% sharing this place with Germany, and India at 1.7% I the year 2019.
While problems relating to industry closures on account of pollution problems in China over the past few years pushed the global industry to think of alternate destinations for creating a more reliable supply chain, the current Corona pandemic has only accelerated this process. Investigations with most global giants who have relied on Chinese suppliers for a long time over the past decade reveals that most of them made huge efforts over the past five years to develop a second source in other countries for their demand and many of them succeeded. Few did not mind accepting a bit higher price for their requirements coming from other countries like India. They did manage to infuse reliability in their operations by creating a non-Chinese option as a second option for their supplies. India may have been a small beneficiary in terms of incremental exports, but Indians were still not price competitive against China. Main suppliers continued to be Chinese with Indians being a second source for a much smaller share. In terms of investments too, India did not gained much.
A very important question that we must ask therefore is, ”Did India succeed in attracting the global giants to set-up a manufacturing site in India over the past few years when they were facing enormous difficulties in China to get their supplies on time due to pollution problems?” The answer is “No”. It is a fact that FDI in India’s manufacturing sector has been decreasing in the past few years and it was the lowest in the year 2018-19 at USD 7 billion; most of this was in the Telecommunications sector (USD 4.8 billion) followed by the services sector (USD 2.8 billion). Most FDI has been in sectors where the foreign players wanted to increase their global market share by selling to Indian consumers.
On account of the current Covid pandemic, once again there is a growing sentiment to move manufacturing out of China. Recently Japan, USA and S Korea have openly expressed their desire for this geo-economic shift. With variables like youngest pool of skilled and Englishspeaking manpower at its disposal, India should be able to attract FDI in the manufacturing sector now provided other variables are favorable. While the anti-China sentiment exists right now; it is not a guarantee that it will stay forever. The time window for this opportunity for India is limited. Indians will have to accelerate the reforms to create a highly appealing and conducive environment for attracting global investment in manufacturing. Foreign investors are looking for comparable costs of production. Indians; both government and industry, will have to ensure that we create a comparatively advantageous environment for producing competitively. Indian products will have to compete with China; both in terms of costs and quality. Countries like Vietnam have already done better recently in attracting FDI in manufacturing than India. Indians will have to speed up their confidence building efforts to attract foreign investors. In order to do this India needs to immediately correct the structural design faults that have traditionally been in the way of promoting FDI in India’s manufacturing sector.
Let us take a closer look at the variables that drive away FDI in manufacturing. First and foremost is the cost of finance. When the world is moving towards low or negative interest rates today, India still has the highest rates. The gap is over 6% even today and has been higher in the past. Combined with this is 3-4% devaluation of our currency that further diminishes attractiveness of any project’s profitability unless it is designed to cater to the world market and earn foreign exchange. This has not happened so far. Even giants like Samsung have invested in India more for their Indian domestic sales while they have invested in Vietnam for catering to global markets. Their turnover in India was approximately one third of the turnover in Vietnam in 2019. Their turnover is higher in Vietnam because of exports. Why India is not considered favorable for setting up manufacturing for exports? It is time to pause and analyze.
When companies design operations for “Made in India but Made for the World”, instead of just “Make in India” then the export earnings from the project will augment their profitability making it more attractive to invest. Soft financing with interest moratoriums and longer payback must be considered as a policy by the government other than the current incentives to attract FDI in India. India must incentivize the global industry not just for “Make in India” campaign but the business environment should be made so conducive that foreign companies are also compelled to “Make it for the World”. This can be done only if the government and industry come together and overcome a few challenges first that create manufacturing competitiveness that generates ease of doing business, clarity on policies, competitive cost of manufacturing, quality and highly efficient logistics that compare with the best in the world.
Next major hurdle before India can become an attractive destination for global investment in manufacturing is the productivity of our labor force and our labor laws. Rigid laws on downsizing labour and cumbersome compliances currently force companies either to remain small, employ fewer workers or use capital-intensive methods of production. Industrial relations bill allowing companies to hire workers on fixed-term contracts of any duration is yet to be passed in parliament. The bill in its current form still does not permit companies to hire and fire at will but allows the government to relax conditions through a special executive order. This may not be enough in current times where investors may look for greater flexibility and ease of downsizing. Besides, India ranks 103 out of 141 countries on the competitiveness of its labour market, according to the World Economic Forum.
Even though government agrees that labour reforms are necessary to provide employment to the nearly 1 million job-seekers entering the market each month, the fears of a trade union backlash and partisan politics have been a deterrent to major labour reforms in the past. This process of reforms needs to be accelerated now. India has no option but to succeed in becoming a global manufacturing hub as otherwise the vast Indian manpower resource looking for employment will soon be a source of future social problems.
China has been working with robust strategy over the years. They have been able to deliver world class quality consistently. Chinese have created an ecosystem with very effective industryacademia collaborations that encourage innovations. The number of patents filed by Chinese have grown over the years giving power to the Chinese industry to develop their own technologies after assimilation of imported technologies. This is what the Japanese did after world war two and emerged as one of the global leaders in new technologies and products development. India needs to replicate this model.
India will have to bring in long pending reforms in its education system that promote innovative and application-oriented thinking amongst students. Indian education system is designed to test memorized knowledge and not its application. This needs to be changed immediately. Indian technical institutions need higher budgets, better facilities and competent educators for carrying out fundamental research. Salaries and perks for the educators need to be such that the best talent gets attracted by our leading universities. Industry-academia collaborations for R & D need to increase. Government needs to incentivize R & D in manufacturing and create an ecosystem that encourages research and development for developing new products at par or better than the rest of the world. Indians have proved to the world that they are good at technology assimilation, but they are yet to prove that they can be good at fundamental research for development of new products.
India needs to develop comparable infrastructure for manufacturing, storage and transport at par with China and this needs to be done quickly now. Environment clearances need to be accelerated too with single window for time bound clearances to encourage FDI in manufacturing. Sectoral experts need to be empowered in the government departments for giving speedy clearances after ensuring that all environmental concerns are addressed. Finally, just the way India is looking at FDI in manufacturing, every other country is looking for FDI too in order to create jobs. With tariff barriers increasing to promote indigenous manufacturing and job creation, Indian industry will have to accept challenge for setting up oversees manufacturing in different trade blocks to augment their revenue and profits in future. This is a definite future trend which will promote free movement of capital, technology and skilled manpower instead of free movement of goods. Indian government will have to incentivize oversees investments and Industry will have to accept this challenge too. Free movement of goods will happen only within the trade blocks and therefore country to country trade agreements will gain higher importance in future.
To conclude therefore, Indian government and industry have tough tasks on hand, but they will have to move in unison and act speedily to repair the structural faults as cited above. The world will not wait, and investments will go to the best destinations that create competitively priced highquality products for the global players along with all the other ease of business-related comfort levels for investments in any country. Indians will have to augment their effort levels and accelerate their reforms to enhance attractiveness for FDI in manufacturing else the young English-speaking skilled manpower which is their strength could soon become a troublesome social concern.
