This is one of those long form articles that you’d regret having started reading. This is your last chance. Go away.
Like all stories it starts somewhere. Turns out before 2010, USA used to be the world’s manufacturing hub. China toppled them to the top spot.
It wasn’t done in a day. China began transforming itself to be the outsource hub manufacturing all kinds of things for the world beginning from the 1980s.
In 2018, China produced nearly 30% of the world’s manufacturing output.
Because of Covid-19 a lot of people are thinking that India can topple over China. However, I don’t think it’s going to happen any time soon without the infrastructure in place.
There’s both red tapism and logistical nightmares that stand in the way. The coronavirus may have altered how the world over sees China from now on but finding a new place for the world’s factory might be a problem.
To fan the myth, news reports that point to nations and companies spearheading talks with India to manufacture electronics, medical devices and everything else is doing the rounds. True, there’s opportunity but there are also other nations with a more established manufacturing interface like South Korea and Taiwan.
China’s success rang true owing to a number of factors. There was a manufacturing infrastructure in place with logistics supply and policy support and also the assurance of low labor.
All in one, the country was primed to act as a hub for sellers and buyers and that catapulted its position to a world manufacturing hub of repute.
Covid-19 is transitory in nature. But that doesn’t entirely mean that the opportunity is lost. There are tariffs in place on China from the US which are not going away any time soon. That means there’s plenty of space for new entrants to fill the gap.
So where are the opportunities?
There are dime a dozen opportunities in multiple spaces.
IT-enabled manufacturing for one has created a niche space for 3d printing, for automobile for data analysis and others. India is already an IT hub which means there’s demand and space for newer technologies such as this.
With much fanfare PM Modi launched Make in India in 2014. The problems? It treated all industries as the same. The thing is there are a number of industries with which we have some level of strategic advantage.
Due to a direct result of Make in india the share of manufacturing with respect to GDP fell from the earlier 15 percent to 14 percent in 2019.
The biggest problem with the government isn’t policy paralysis that crippled earlier governments. It’s the fact that the policies that are brought forward with so much gusto aren’t followed through. There’s no execution and that’s due to the policies failing at the grass root level.
The core reason behind this may be the fact that the PMO is a one man team, flanked by a few yes men.
It was with the same gusto that he imagined himself emerging victorious after his 21 day battle against covid-19.
That was not to be.
What this did was suck the air out of already stagnating growth and deflate the balloon that once was Indian economy. Much before the government was failing the economy was backtracking its steps.
Some of the industrial strength is seen in the fact that the number of cellphone and accessories manufacturing units skyrocketed from 2 to 260 by 2019.
We are the second largest makers of phones. 95% of the components are assembled in India itself.
Just like phones there are several industries that if given a policy boost can use the intrinsic advantages available in India and drive growth.
The 2019-20 economic survey recommended that India learn its lessons from China regarding export performance.
We cannot replace China until we learn from China.
Deepak Sood of ASSOCHAM said that a clear strategy that looks into plugging leaks is the call of the hour. I felt like it was 2006 and that I was in the middle of the guy who won the silver at Olympics. Politicians were singing them. The state of sports was going to change in the country.
Guess what happened? Nothing.
Chinese exporters are going to stabilize their losses son.
Also CHina has its arms deep inside India, to the tune of $5.6 billion dollar investment into Indian startups.
China is also supplying raw materials, intermediate goods and others for a lot of industries. Even though we manufacture phones 75% of the raw material, the chips come from China.
So a supply chain disruption also cut our veins and doesn’t get us printed boards, modules and chips we need
The shocks in CHina don’t really kickstart our Indian manufacturing.
There are at least 1050 critical items we need other forms of supply from. The commerce department however shows that we don’t have enough to feed our pharmaceutical industry, phones or even plastics.
India’s manufacturing doesn’t have industrial clusters to compete with CHina.
Manufacturing isn’t a simple one tier process where you can source all components from a single supplier. It’s a complicated multi tiered array that has first-tier suppliers, second tier suppliers and third tier suppliers.
Volkswagen has 5000 first tier suppliers. Each of these suppliers source components from 250 suppliers each and then there are more at the third level, meaning close to 1 million suppliers working at different stages.
So we need a supplier’s network to replicate something even remote.
The second is the question of skill levels. Chinese education system is tuned to preparing industry ready workers for factory job.
Quite recently Apple had plan of starting a factory in India. They didn’t carry through
Lack of assembly line readiness. Lack of engineers and skilled mechanics to get the factory working and on its feet.
There’s a sheer lack of skilled and semi skilled workers in India. The problem is going to stay until education is fixed.
Another core problem depending on China is that businesses are running low of inventory. That means manufacturers need to rethink how sorely they are dependent on China.
Even before China caught COVID-19, Donald Trump’s tariff-hikes on Chinese products had made multinational companies nervous. A survey of American companies with operations in China showed than 7 percent of them were thinking of relocating to other countries. Some of them were probably toying with the idea even earlier as China’s wages had started rising over the past few years. The coronavirus outbreak would have made them even more determined to exit the country.
Being a replacement for China means having the technical and infrastructural prowess that China has been developing since the past 4 decades.
So there’s really no physical infrastructure present in India to compete with that.
India’s domestic demand for consumer goods isn’t keeping up. What was there before will falter owing to income loss and debt issues owing to Covid-19 and even otherwise.
Foreign investors should get land and tax exemptions.
We may not really gain. The past is to learn from. Over the last two years since Trump came to power and there have been retaliatory tariffs on China exactly how many companies moved their factories here?
Only 5 percent and I’m being generous. 50% went to Vietnam. More went to Taiwan and Thailand.
WHat China and what we can learn from as well is that they improved the ease with which a foreign investor can get up and running. They cut red tape to a minimum. CHina has been wooing them to set up factories.
And it isn’t just vanilla promises.
There’s the biggest expressway network in the world, the biggest high speed railways and 7 of the world’s biggest cargo ports. There’s also technical expertise in telecommunications. And ample power.
This is the physical infrastructure that’s in place. The factories and suppliers aren’t clubbed together and if we were to rely on road or rail its a logistical nightmare.
By placing suppliers and factories together China cut time and transportation costs associated with it. That means electronics and heavy machines that comply with US and EU certification are there.
Power supply is a big goner. Raw material and equipment both need to be imported.
Since we started around mobile manufacturing here’s something that shows you advanced that is and why we import components from China.
Phones need lcd panels. There are no panel manufacturers in the country. They have to be imported.
Again we need to import quality plastic that can support the wear and tear by phones
There’s no R and D going on India. And that means there’s very few chances of something groundbreaking hitting us.
Chinese manufacturing be it ecommerce or phones there’s a lot of tech on the ground.Most phone companies have their patents.
There are import taxes for everything assembled in India of 30%. They just call themselves manufacturers but assembling and making are two different things.
A company requires thousands of components to manufacture one phone. It can’t manufacture everything alone. We need components manufacturers first rather than the phone companies.
China has better paid workers though. That means there are more outlays with setting up manufacturing in China.
And while that’s twice than what Indians get paid, there’s also the fact they are better trained and spend the surplus back in their own country. These range of skills can help and make for better bargaining.
China isn’t a democracy and red tapism and legal hurdles are less than likely to play spoilsport once they have decided to green flag a project.
No decisions can be unilateral in India.
While our government’s solution has been to pump cash to the economy through direct cash transfers. The chinese govt. Isn’t losing sleep over that. They are all about restarting production.
That again means that we cannot turn ourselves into manufacturing hub.
The full package unveiled is around 10 percent of the GDP that is around 20 lakh crore.
The lockdown that was supposed to end many moons ago was extended multiple times and even now many states are blocking access to June 30th. We can’t really afford to do that.
The market expecting more of a stimulus package means they need to borrow more.
The focus this time is around for farmers, daily wage laborers and smes
The consumption of local goods is the call of the hour to support the domestic economy.
THe economy should open and we should make covid-19 a part of our lives rather than fear it. The industrial production growth in March subsided down to -16.7%.
From 4.5 percent before. The slowest growth since 1972 is going to do more harm than good. It was negative inflation in March.
It isn’t really a golden opportunity while the govt. Brakes every opportunity to restart the economy.
At the outset it seems hard to argue the claims brought forth in a Forbes article that says that the British left India richer than they found the country. According to Shashi Tharoor the industrial capacity of a nation that along China was responsible for 75% of the world’s manufactured output was left to shambles after the Raj.
So what’s really going on here?
The truth is britishers did destroy India’s economy.
There was the first industrial revolution that raised the standard of living.
This came about people learning specialized trades and driving growth on the back of what they learnt.
This improves trade as there’s rising demand for new kinds of products.
There’s also the fact that industrial revolution harnessed fossil fuels and that meant horse power didn’t need horses or other animals. Machinery automated human effort raising it by a big quotient. This led to a rise in GDP per capita.
In the 1870s the numbers were $552 for India as GDP. In the same period countries like Japan too had between $400 to $600 as GDP. It was the same for France Switzerland and England.
Adjusted by these, we can look at the living standards of the people and are close to the $2 mark for living wages.
The independent India pegs GDP at $618
The change isn’t much. We can say at best the living standards went down a bit or worse maintained the same levels of poverty.
There are more people though. In 1947 India’s population stood at 355 million. Now its aroud 1.4 billion which is nearly 4 times as much.
The same living standard for a people that have swelled thrice in population is poor.
India’s economy grew but they also stopped India’s from participating in the industrial revolution. They were not allowed to manufacture textiles and by cutting that off Industries stagnated.
The state of FMCG
Let’s look at a current worrying situation.
The FMCG segment, or the fast moving consumer goods segment makes things that people need regularly. Stuff like biscuits or paste.
That means they have a perennial flow of sales that isn’t supposed to stop. Except they did. The results are not encouraging.
Sales are falling. HUL is one of the largest FMCG companies in India. It has been doing business for over 84 years or more. The soaps and bars you use and several tea brands and jams and juices as well as beauty creams like Lakme are under the umbrella of HUL. Its sales fell by 1.2 percent.
For dabur that markets ayurvedic products the results are even more disenchanting with sales dropping by 6.5 percent between October and December.
Marico the company behind Parachute saw its sales decline 7.5 percent.
These sales are falling because corporate India gets the air it lives from rural India. Rural India is where 70 percent of 1.4 billion live and even the offshoots that work as drivers and retail salesmen hail from these villages.
From cereals to vegetables the production center is from rural areas where transactions are inn cash. Demonetisation sucked the cash out of the system. 86% of currency notes disappeared immediately.
That had a direct impact on consumption. What’s more harvested crops were dumped because farmers couldn’t transport them to local markets. No one could pay because there was no cash to pay with.
Truck rental rates dropped. The capacity utilization of plants that produce electricity went to 10 year lows. Because industries are sizing up to serve the muted demand.