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India's mills get
busy
By Kunal Kumar Kundu
MUMBAI - Any long-term analysis of the
Indian economy presents a bizarre scenario of an
economic development process that moved straight
from an agrarian economy to a services-led
economy, with the industrial phase completely
bypassing it. But going by the trend of the last
financial year, all that may be changing.
India's economy is estimated to grow by
6.9% during the current financial year (2004-05).
This is on back of the 8.5% increase registered in
2003-04. According to the "advance estimates" of
the national income, released by the Central
Statistical Organization (CSO), the 6.91% growth
in the country's gross domestic product (GDP)
during 2004-05 will be propelled mainly by
industry and services. While industry is estimated
to grow by 7.8% (against 6.6% in 2003-04), the
growth rate for services is projected to slack off
a little (8.9% versus 9.1%).
An impressive
performance by the electricity and manufacturing
sectors in fact pushed up the industrial growth to
10.8% in May, up from 6.8% recorded in the
previous year. On a cumulative basis, the Index of
Industrial Production (IIP) for the first two
months of this fiscal year grew by 9.6% as
compared to 7.9% a year ago, according to figures
released Thursday. Manufacturing, which carries
the highest weight in the IIP basket, grew by
11.5% in May, substantially higher than the 7.5%
growth last May. During April-May this year,
manufacturing sector grew by 10.5% as compared to
8.1% during 2004-05.
This is a welcome
development given India's susceptibility to late
monsoons. Every time the monsoon plays truant,
India's GDP growth flags. Only once in the past
has it so happened that the economy registered a
growth rate of over 5% when agriculture performed
poorly - in 1995-96, during the short-lived
investment boom of the mid-nineties.
Source: Center for Monitoring Indian
Economy (CMIE)
The above graph,
which traces the growth rate of GDP along with the
three sectors is clear proof of the vise-like grip
of the agricultural sector on the country's
economy. The statistical correlation between the
GDP growth rate and that of the agricultural
sector from 1995-96 to the present is as high as
0.78, which is more than double the corresponding
correlations for the manufacturing and service
sectors. For a change this year, although the
agricultural sector is expected to show a major
drop in growth rate (a mere 1.1%), India's GDP
growth is expected to be buoyant - mainly
shouldered by the manufacturing sector, which is
expected to grow at a faster pace this year
compared to the previous year.
During the
first nine months of the 2004-05 financial year
(April-December), while the agricultural growth
rate was a mere 0.3% (after having grown by 9.3%
during 2003-04 from a lower base in the previous
year), industrial growth jumped from 6.2% in
2003-04 to close at 8% in 2004-05. The service
sector growth rate over the period contracted from
9.5% to 8.8%.
For the full year, the Index
of Industrial Production is estimated to have
grown by as high as 8.1% in 2004. What also
indicates a turnaround in Indian manufacturing is
the increase in domestic capital goods index by
12.62% during in 2004-2005. Imports of capital
goods also rose by a substantial 16.84% during the
same period.
So, after a very long time,
the Indian manufacturing sector does seem to have
played a role it never did in the past. And the
indications are that this sector will be an
important growth driver in the future. Even the
efficiency of capital usage in India has improved
during the reform period, though there is room for
further improvement. According to the Reserve Bank
of India (RBI), the country's central bank, the
Incremental Capital Output Ratio (ICOR) decreased
from 4.6 in 1990-96 to 4.3 in 1997-2004. It is
further estimated to decrease to 4.1 in 2005-2008.
In contrast, the Chinese economic growth - being
purely investment driven - was accompanied by a
decreasing efficiency of capital. According to the
director of the China Economic Analysis project of
the Prospect Foundation, China's ICOR increased
from 3.4 during 1991-1995, to 4.5 during
1996-2000, and 5.1 during 2001-2004.
The
increasing efficiency is also reflected in the
corporate performance over the years:
Measures of Indian
corporate performance (%)
|
97-98 |
98-99 |
99-00 |
00-01 |
01-02 |
02-03 |
03-04 |
|
Operating profit/capital
employed |
8.9 |
8.3 |
8.9 |
8.6 |
9.8 |
12.2 |
13.5 |
|
Profit after tax/capital
employed |
2.6 |
1.8 |
2.7 |
3.1 |
3.2 |
5.1 |
7.4 |
|
Value of
products/capital employed |
1.15 |
1.15 |
1.23 |
1.36 |
1.24 |
1.38 |
1.47 |
|
Earnings
reinvested/capital employed |
10.7 |
5.9 |
12.4 |
6.9 |
-4.0 |
15.5 |
34.1 |
Source: CMIE
Superior
corporate performance explains much of India's
recent success. According to JP Morgan, listed
Indian firms deliver higher returns on equity
(RoE) than comparable companies in Hong Kong,
Singapore, Korea, Taiwan, Japan and Malaysia or
Hong Kong-listed Chinese firms. Remarkably, Indian
firms combine high RoEs with Asia's lowest
debt-to-equity ratios. Large equity bases enhance
stability but depress RoE, making Indian
profitability all the more impressive.
Indeed, defying the notion that China is
good for manufacturing and India for services, the
manufacturing sector in India has been moving up
the value chain. Be it in automobiles or
technology, an increasing number of multinational
corporations (MNCs) have begun to see India as a
viable manufacturing base. While Hyundai is
planning to set up a second car plant in the
country, Ford is reinvesting in its factory in
Tamil Nadu. The world's largest auto parts' maker,
Delphi Corp, has relocated several product lines
to India. So has Bosch, another auto parts giant.
Hyundai is using India as a manufacturing and
export base for its compacts to Europe. Toyota has
just started exporting 150,000 transmissions to
other Toyota plants in Southeast Asia from India.
Indian forging and castings companies such as
Bharat Forge Ltd are exporting 40% of production
to clients such as DaimlerChrysler and Cummins
Engine Co.
This trend of increasing
manufacturing activity is well reflected in the
recent survey carried out by the Council of the
Confederation of Indian Industry (CII). According
to the survey, between April and December 2004,
nearly 30 out of 134 segments recorded a growth
rate of more than 20%. The report said that
manufacturing and services sectors witnessed a
10%-plus growth in turnover and operating profits
during the period under consideration as compared
to the same period in the previous year. For the
544 manufacturing firms surveyed, operating
margins increased from 14.8% in 2002-03 to 17.4%
in 2004-05 whereas post-tax margins jumped 4
percentage points to 8.7%.
According to
the Boston Consulting Group, India's edge lies in
its ability to turn out low-volume, high-variety
parts, in which the engineering content is high,
from vertically integrated manufacturing units -
despite the fact that the size of India's
factories are much smaller than those in China,
United States and emerging economies. According to
CII, manufactured product outsourcing from India
could be as big as $10 billion by 2007 and $50
billion by 2015. In the last few years,
manufacturing outsourcing from India has been
growing at around $1 billion a year. Already, an
estimated $5 billion worth of engineering goods,
auto components, pharmaceutical and textile
products have been outsourced from India over the
past four years. This is not surprising because
high-skill jobs can be done in India at a fraction
of the cost that would be incurred in the
developed world.
Countrywide median salary
in engineering design (US$ per
annum)
|
Country |
Median
salary |
|
India |
7,638 |
|
US |
57,500 |
|
UK |
41,171 |
|
Germany |
59,417 |
Source: Pay Scale Inc, USA
India occupied the top position in the AT
Kearney 2004 Offshore Location Attractiveness
Index by a comfortable margin because of its
strong mix of low-cost and significant depth in
human resources. China secured the second place
due to its vast labor pool and low costs, though
it lags behind India in terms of experience and
other key factors such as IT and management
education, language skills, concern about
intellectual property and overall country risk.
India has an existing advantage in
custom-based manufacturing and assembly products
like transformers and industrial equipment
actuators. For transformers, critical components
like electric-grade steel, insulation paper and
copper coils are all developed or manufactured
locally. In India's 6 million-plus color
television market, which is dominated by Samsung
and LG, Japanese majors Sony and National and
European major Philips, most components are
locally made.
Even for a sophisticated
product like an X-ray system, the films, monitors,
X-ray tubes and tables are made in India. The
Indian engineering ecosystem has helped homegrown
Indian companies make a mark on the global stage.
For instance, Delhi-based optical disc-maker Moser
Baer grew from a US$22 million to a $335 million
company in just six years from 1998. Moser Baer is
now the lowest-cost manufacturer and supplies to
11 of the 12 global corporate brands. It has
attracted and retained global strategic investors,
including the International Finance Corporation
(IFC), Warburg Pincus Singapore LLC and Electra
Partners; and its products conform to standards
specified by both the American National Standards
Institution (ANSI) and the European Manufacturers'
Association (ECMA).
Moser Baer is not an
exception. A McKinsey study on leading Fortune 100
players states that the Indian operations of these
firms are already reaching, if not exceeding,
global cost and productivity benchmarks. "Many
products have been found to be 30-40% cheaper in
India than in the US and Europe," says the study,
which assesses India's manufacturing
competitiveness. This cost and quality advantage
is helping India emerge as a preferred sourcing
hub for multinationals across the world.
Swedish giant ABB makes circuit breakers at
its Indian plant. This plant was, in fact, the
first to manufacture certain outdoor circuit
breakers - all with local Indian talent
Tata Honeywell redesigns multiple automation
products for India and sells them in similar
markets worldwide. These include automation
controllers for air conditioning of cell sites
(where a wireless antenna and network
communications equipment are placed for the use of
mobile phones) customized for the Indian climate
Tecumseh, the world's leading manufacturer of
compressors, manufactures and exports compressors
out of India. It exported $20 million worth of
compressors in 2003 and is the third-largest
branded player in the domestic market. The Indian
manufacturing facilities of Tecumseh in Delhi (1.5
million units a year) and Hyderabad (600,000 units
per year) are the only ones in Asia
Siemens sources many power transmission and
distribution equipment components (mainly castings
and forgings) from India. These have typically
resulted in 25-30% savings over European and US
costs
Another area that has been
witnessing a lot of action is electronics
manufacturing services (EMS). The EMS market in
India is estimated to reach around $4.57 billion
by 2010. No wonder then that most big names want a
piece of the action. LG Electronics has decided to
close down its microwave plant in England and
shift its complete manufacturing base to a plant
in Ranjangaon near Pune. From this plant, the
company plans to make about 120,000 microwave
ovens this year. It is targeting 65% of its
turnover in 2010 from mobile phones, IT products
and peripherals. Currently, these contribute 15%
of LG's turnover in India. LG is looking at a
turnover of $10 billion from India by the end of
the decade.
Flextronics, the world's
biggest contract manufacturer, has a plant in
Bangalore. So does Solectron Centum, a part of the
leading US-based EMS maker Solectron. Jabil
Circuit, the NYSE-listed electronic service
provider, has also expanded its presence in India
by announcing a manufacturing facility near Pune,
its second in the country. Nokia, the world's
largest cell phone maker, now plans to set up a
plant in India with an investment of $100-150
million, while Sony Ericsson has asked its vendors
to evaluate opportunities for making phones in
India. Elcoteq Network Corporation, the largest
European EMS provider, is also expanding its base
in the country.
India's attractiveness as
a destination for manufacturing-related investment
is definitely growing. AT Kearney's FDI confidence
level index for 2004 put India at number 3. In the
manufacturing investment index, India stood at the
second position, displacing the US to the third
place. The story of Intimate Fashions is a case in
point. Its factory, based in Tamil Nadu,
manufactures lingerie for the popular brand,
Victoria's Secret. With 2,200 workers, the firm
produces 6.5 million pieces a year.
But
with the business climate improving in the
country, it is not just the foreign companies that
are flocking to India. A number of Indian
companies manufacturing elsewhere have begun to
understand the economics of moving here and are
relocating their plants and entire assembly lines
to India. This trend could well work toward making
a China of India. Essar Power, ACC and Jindal
Steel in the infrastructure sector, Bharat Forge
and the Anand Group in the auto sector, Arvind
Mills in the textile sector and durables giant
Tecumseh have bought used, working-condition
plants in foreign countries that they plan to
subsequently dismantle, ship and reassemble in
India.
Essar Power is in the process of
dismantling and relocating a 1,200 MW power plant
from Scotland to Vadinar in Gujarat at a cost of
about $617.3 million. Cement major ACC's
Delhi-based subsidiary, Everest Industries Ltd, is
also midway through the relocation of a compressed
board plant from Denmark to Nashik in the western
state of Maharashtra at a cost of $6.85 million,
while denim company Arvind Mills is shifting its
manufacturing plant from Mauritius to India at an
estimated cost of $2.74 million. Clearly, India is
riding the manufacturing wave it missed earlier.
Kunal Kumar Kundu is a senior
economist with a leading bilateral chamber of
commerce in India. He has a Masters in Economics
from the University of Calcutta.
(Copyright 2005 Asia Times Online Ltd. All
rights reserved. Please contact us for information
on sales, syndication and republishing.)
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