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TATA STRATEGIC MANAGEMENT GROUP Achieving Global Competitiveness Excel, Enhance, Expand
Foreword With the Indian manufacturers looking forward to the Global Manufacturing Summit 2016, TATA Strategic Management Group, in association with The Machinist, is pleased to present this knowledge paper on the Achieving Global Competitiveness Excel, Enhance, and Expand. By virtue of closely working with leading manufacturing companies on various strategic and operations assignments, we have had the advantage of industry insights in writing this paper. This knowledge paper attempts to provide an overview of global manufacturing, current scenario of the Indian manufacturing sector and highlights several challenges faced by the industry. The paper outlays a three prong strategy for achieving global competitiveness Excel in quality, Enhance technology edge and Expand to new geographies. Finally, it lays down the imperatives for all the stakeholders, which will enable Indian manufacturing, compete on a global scale. We are very grateful to The Machinist for giving us an opportunity to partner with them in the preparation of this knowledge paper. It was an exciting and enriching experience for the TATA Strategic team. We sincerely hope this report will be of help to the industry and will set a direction for the Indian manufacturing sector to gear up for rapid growth.
Summary Global manufacturing is witnessing strong influence from several developed and emerging economies. The key trends observed are - shift from low value add manufacturing to high tech manufacturing, focus on innovation and investments in R&D and adoption of advanced manufacturing technologies (autonomous robots, 3D printing etc.). India has an ambitious target to improve contribution from manufacturing output to GDP from 16% to 25% by 2025. Major challenges faced by the Indian manufacturers are perception of poor quality, inability in adopting advanced manufacturing technologies and inadequate presence in the global markets. To achieve global competitiveness, Indian manufacturers need to excel in product and service quality, enhance innovation levels and technological capabilities and also expand geographical footprint. Apart from the industry, other stake holders such as industry bodies and government also have an important role to play in enabling Indian manufacturers achieve global competitiveness. 1. Global manufacturing Manufacturing is a key sector contributing to the global economy and employment. China and US are the dominant players in global manufacturing, contributing more than ~45% (2015) of the total manufacturing value added (Refer Table 1). The recent trends suggest that China and US would continue to remain dominant players in manufacturing. With rising labor costs, China has been shifting away from being a low cost manufacturing destination to sophisticated technology driven manufacturing through investments in R&D and infrastructure. Increasing labor costs in China has helped US regain its competitiveness. US continues to foster the culture of innovation thereby securing its contribution in high tech manufacturing. A recent CII study highlights that the countries like UK, Mexico, Vietnam, South Korea etc. have rapidly improved their manufacturing output over last 3-5 years. Though BREXIT posted threat to UK s free access to the European market; lowest corporate taxes, highly skilled workforce and strong industry-academia collaboration has fueled manufacturing activity in the country. South Korea has invested more than 4.3% of GDP in R&D, one of the highest among the developed countries. The South Korean government had been focusing on increasing productivity through rapid technology adoption such as advanced manufacturing technologies such as IIoT, autonomous robots, 3D printing etc.
Vietnam is also following the trend of increasing high tech manufacturing, electronics contributing which now contributes to more than 30% of its exports (as compared less than 20% 1 in 2012). Mexico due to its closeness to large US market and cheap labor has been able to improve its manufacturing output at the cost of China and other emerging economies It is important to note that the improvement in manufacturing activities and output in the above mentioned emerging manufacturing superstars as highlighted in the CII manufacturing report is due to the factors ranging from geographical advantage to favorable regulatory changes, government focus on R&D and high-tech manufacturing, availability of skilled labor and strong industry-academia collaboration. These economies have ingeniously leveraged factors most relevant to them to rejuvenate manufacturing. 2. Current Indian Manufacturing Industry Indian manufacturing value added is estimated to be US$333bn 3 in 2015. Though India has improved drastically over the last decade, it still lags behind its peers. India accounts for only 2.6% of the global manufacturing value added (Refer to Table 1). The contribution of Indian manufacturing to GDP has been stagnated 16% to 17% over the last 5 years (Refer to Figure 1). Figure 1: Contribution of Indian manufacturing to GDP (%) 2
Rank Country 1 manufacturing value % of world added in 2014 1 China 26.9 2 USA 17.9 3 Japan 7.3 4 Germany 6.8 5 South Korea 3.4 6 India 2.6 7 Italy 2.6 8 France 2.4 9 UK 2.4 Table 1: % manufacturing value addition (Country wise) 3 The same trend is visible in exports. India s overall share in exports has been declining in the last couple of years compared to its peers. China has been steadily increasing its contribution to reach ~14% of global exports in 2015. Though Bangladesh and Vietnam have a lower growth rate compared to India, there has been a steady growth in the share of exports in global market (Refer to Figure 2) Figure 2: % Growth in share of exports 4 However, under the new manufacturing policy (NMP), the Government of India has set an ambitious target of increasing the contribution of manufacturing output to 25 per cent of GDP by 2025. Additionally, newly unveiled, the National Capital Goods Policy envisages increasing production of capital goods from `2.3 lakh crores (US$ 34.5 bn) in FY15 to `7.5 lakh crore (US$ 112.5 bn) in FY25 and increase in exports from the current 27% to 40%. The government has set
ball rolling by addressing key issues or challenges that had plagued the industry for a long time. E.g. Taxation which was a major hurdle in India is expected to be eased out with the implementation of GST from April 2017. With the government s focus on improving ease of doing business 5, India has improved its standing from 116 out of 155 in 2006 to 130 out of 190 in 2016 However, the improvement in regulatory environment is yet to translate into industry growth. The IIP index, an indicator of growth of various key industries such as mining, electricity and manufacturing, has shown a stagnated growth of 2.3% and 2% in FY 15 and FY 16 respectively. The performance is majorly affected by capital goods which have posted a negative growth in FY16. Key factors responsible for lower performance of India at domestic and global platform have been highlighted (Refer to Figure 3) Perception as low cost manufacturer Indian manufacturers traditionally prided themselves in developing low cost products which has invariably given rise to poor quality perception Even Indian customers are prepared to pay a premium for German or Japanese products due to the perception of higher quality and superior technology as compared to their domestic counterparts Lack of innovaiton and adoption of technology With few large companies embracing advanced manufacturing technologies, several medium and small scale enterprises are struggling to understand and adopt the same. India spent less than 1% of GDP on research and development and contributed only 3.3% of the total global R&D spending in 2014. Inadequate presence in global markets India is still a largely raw material exporting country. It has made little progress in diversifying its exports or moving up the value chain. Figure 3: Key factors for low performance of India
3. Three prong strategy for Indian Manufacturing Industry Tata Strategic study indicates that a three prong strategy needs to be adopted by the Indian manufacturing sector to achieve global competitiveness (Refer to Figure 4) Figure 4 : Achieving global competitiveness 3.1. Excel in product and service quality To excel in product quality, Indian manufacturers need to elevate to world class quality standards. Several Indian companies have already initiated their journey in this direction. E.g. Boeing Company, an American plane maker, and Tata Advanced Systems Ltd (TASL), a fully owned subsidiary of Tata Sons, have entered into a joint venture to set up a new facility in Hyderabad to manufacture Boeing AH-64 Apache helicopter fuselages for export. TASL has focused on collaborating with world class aircraft manufacturer to get technology know-how, developed capabilities to meet stringent quality norms by adopting benchmarked processes, deployed skilled labor and demonstrated consistency in product quality to attract global opportunities. Apart from product, overall service quality is essential to compete in the global markets. Indian companies have been focusing on after sales service. However there needs to be a paradigm shift where companies need to focus on improving overall customer experience throughout pre-sales, sales and after sales service. E.g. Delivery time is one of the important measures of service quality especially in case of engineered to order goods. Several projects have project delivery date as a critical measure and hence concerned about delivery against commitment for each of their orders. Medium and Small Enterprises need to focus on planning by integrating concepts of project management in manufacturing to ensure committed delivery date is met.
Indian manufacturers need to work on four major areas to excel in product and service quality (Refer to Figure 5) Figure 5: Excel in product and service quality Collaboration with global players Indian companies need to identify and tie up with global players for technology know-how. This would lead to technology transfers and adoption of best practices from the global players. Benchmark manufacturing processes Continuous improvements need to be fostered through periodic benchmarking with the world class companies. This will not only allow companies to imitate global best practices but also build on it to improve further. Up-skilling of workforce Capability of workforce is the one of the most critical factor. Companies can adopt various interventions ranging from orientation seminars to technology demonstration and training for the same. E-learning platforms should be leveraged to ensure interactive and effective learning with minimal cost.
Integrated planning Companies need to align functions to work towards a single objective of fulfilling customer requirements. Departmental plans and key result areas (KRAs) need to be aligned to customer requirement. Companies also need to adopt technology to ensure visibility of status of the product at all time. Integrated planning from raw material vendor to customer s site would provide better visibility and control over the delivery. 3.2. Enhance innovation levels and technological capabilities Innovation and new product development play a pivotal role in the sustained success of companies. Multiple studies have indicated that innovative solutions not only add value to the customers but also strengthen the competitive position of the companies. Successful companies set up structure & processes for development of new products & to foster innovation. The global R&D spend 6 was $1947 billion in 2016 with US, China, Japan and Germany contributing more than 60% of the totals R&D spend. China, a conventional low cost manufacturing hub is also slowly shading its low cost manufacturer image with more focus on R&D to consistently develop newer and technologically advanced products. However India is far behind its peers on this front. Global Innovation Index (GII) is a measure of innovation capabilities and results which profiled 128 economies in 2016. The global innovation index ranks India lowly 66 th as compared to China (25). Even countries like Malaysia and Vietnam are leading India on the innovation index (Refer to Table 2) Table 2: Global Innovation Index (2016) 7 Similar trend can be observed in the adoption of new technologies. India has been lagging behind in adoption of advanced manufacturing technologies compared to its peers. E.g. the density of
industrial robots in India in 2014 is 8 per 10,000 employees which is 1/4 th of the density of robots in China and 1/8 th of the world average (Refer to Figure 6) Figure 6: Robot density per 10,000 employees (2014) 8 This is further validated in a first of its kind survey conducted by Tata Strategic on advanced manufacturing 9. It was observed that only 10% of respondents have adopted advanced manufacturing today. 45-55% of medium and small scale companies in India (less than `1000 Cr) have very low understanding of the relevance of these technologies to their business. Indian manufacturers need to work on three major areas to enhance innovation levels and technological capabilities (Refer to Figure 7) Figure 7: Enhance innovation levels and technological capabilities
Foster culture of innovation Innovation is not only top-down and hence companies should foster a mind-set for idea generation and innovation. They need to establishing processes for innovation within the organization and have regular monitoring to ensure adherence. The top management needs champion adoption of newer technologies. Reverse mentoring can be adopted where younger smart minds can be made responsible to understand the relevance of these technologies in their businesses and educate the top management. The mid-management should be encouraged to experiment with new age technologies to innovate and overhaul existing manufacturing processes. Learn from leaders across industries Global leaders are demonstrating success and quantifying benefits achieved from adopting advanced manufacturing technologies. Indian manufacturers need to collaborate with these players to understand relevance of these technologies in their businesses and replicate implementation to reap benefits. This will reduce the time for implementation and costs associated with adoption of these technologies. Identify areas with maximum potential for ROI It is not necessary for a company to adopt a technology across functions across factories. Indian manufacturers need to identify business imperative or top of the mind concern, identify the technologies and functions where implementation is essential and quantify the likely impact of adoption of each of the advanced manufacturing trends on their business by creating a robust business case. 3.3. Expand geographical footprint With more sophistication, global manufacturing is increasingly adopting strategies to re-organize their value chain in terms of scope of work and location for manufacturing. This has resulted in manufacturing becoming more fragmented. The products are created in several stages, with value added from different parts of the world. This means the raw materials could be sourced from a location with advantage on commodity prices, component manufacturing is done at locations with high skill levels and final assemblies could be done at home locations/ export hubs and hence
export to destination countries. For example, aircraft manufacturers such as Boeing and Airbus outsource 50% of the value of the aircraft to low cost countries. India currently exports US$ 264bn 10 worth of products and services as compared to US$ 2282bn 10 by China. Top 15 countries account for 60% of the total export for India with UK and UAE accounting for ~26% of total exports (Refer to Table 3) Table 3: India's top export destination (2015) 10 Chinese export to the specific country as a multiple of Indian export to that country. It can be clearly seen that the Chinese export is ~8-10 times that of Indian export to most countries. This highlights a huge export potential for India (Refer to Figure 8) Figure 8: China's export as a multiple of Indian export (2015) 10 Indian manufacturers have two broad ways to increase export and expand their presence
3.3.1. Increase exports to traditional markets China has been improving its competitiveness through shift from low cost goods manufacturing to high-tech manufacturing. China has high-tech manufacturing contributing to ~40% of its exports in the period FY07-11, while ~50% of Indian export is dominated by low cost manufactured goods. (Refer to Figure 9). India needs to increase the contribution from high-tech manufacturing to achieve greater prominence in value chain and secure exports in traditional markets. Figure 9: Technological intensity in manufacturing exports (2007-2011) 11 3.3.2. Increase geographic diversification Nearly 80% of the exports in the last decade from South Asia (including India) had been from the sale of same products and same destinations. India s export to fast growing economies such as Africa, Latin America and other Asian countries has been less than 2% 12 in 2015. These newer geographies present an attractive opportunity for Indian manufacturers. Indian manufacturers need to work on two major areas to expand its global footprint Excel and enhance capabilities As discussed in the earlier sections, Indian manufacturers need to elevate product and service quality and enhance technological capabilities to move from low cost goods manufacturing to hightech manufacturing. Quality and technology driven products could be pillars for the future expansion of Indian manufacturing.
Develop specific strategy for expansion Companies need to develop an expansion strategy to identify and prioritize attractive export geographies and most suitable products / service. Companies also need to formulate market specific strategies to prioritized options in terms of choosing independent representatives, establishing foreign sales subsidiary, establishing foreign production (own facility or acquired) considering labor cost, labor laws, skill level of employees, FDI policies in destination country, infrastructure etc. As export is inherently riskier due to involvement of multiple parties, influence of external uncontrollable factors etc., companies also need to work identifying potential risks and develop mitigation plans. 4. Imperatives for other stakeholders Though industry will play a large part in improving competitiveness of the Indian manufacturing and making India a truly global manufacturing hub, it needs to be ably supported by multiple other stakeholders. 4.1. Industry bodies Industry bodies should facilitate flow of knowledge through conferences and seminars with case studies from the Indian context thereby increasing awareness on recent trends such as process innovation through advanced manufacturing technologies especially among small and medium enterprises. These sessions would also provide a platform for brainstorming and understanding future potential for Indian manufacturing. Industry bodies could also serve as a bridge between academic institutions and industry. They need to push for industry-academia collaboration in order to channelize the knowledge from academia to applied research with practical industrial value. Industry bodies also need to act as representatives to the government in making policy recommendations, lobbying and working with the state & central governments. This would help improving pre-requisites for achieving global competitiveness such as access to R&D funds and infrastructure.
4.2. Government Government is an important stakeholder in this entire process. It has ensured progress on various fronts and needs to ensure effective implementation. E.g. GST roll out target of April 2017 need to be met. Ease of doing business in India needs further improvement such as simplification of procedures, expediting regulatory and other clearances at all levels etc. Other initiatives like the Make in India campaign need more specificity in their goals. To foster innovation, government needs to make provision of fiscal incentives such as refining the tax laws related to R&D expenses by companies and provision of tax benefits for use of new emerging technologies in the industry. The government should encourage development of new technology through indigenous sources and provide fiscal and non-fiscal incentives. Investments in improving inland roads/railway lines to ports, enhancing warehousing, improving port/airport capacity to handle export consignments is critical to increase exports and the country s manufacturing competitiveness. 5. Conclusion Indian manufacturing sector is at a favorable position with large workforce, stable central government, industry focused government policies and reforms with special focus on manufacturing. Global companies continue to show interest in setting up manufacturing facilities in India. Thus current Indian manufacturing is at a crucial juncture. By following 3E s Excel, Enhance and Expand, Indian manufacturing can achieve global competitiveness in years to come. 6. Bibliography 1. Vietnam General Statistics Office 2. Central Statistics Office 3. The World Bank database 4. World Trade Organization and CRISIL Research 5. Doing business 2016 and Doing business 2006 report by The World Bank 6. 2016 Global R&D Funding Forecast by Industrial Research Institute 7. The Global Innovation Index 2016: Winning with Global Innovation 8. International Federation for Robotics 9. Survey on Advanced Manufacturing in India A Tata Strategic survey report on advanced manufacturing technologies in India
10. World's top exports referred for country wise split of export for different source countries 11. Make in India: Which Exports Can Drive the Next Wave of Growth? an IMF Working Paper referred for technological intensity of manufacturing exports from different countries 12. Emerging trends in global manufacturing industries by UNIDO United Nations Industrial Development Organization in 2013 along with University of Cambridge and IFM Management technology policy 13. Redefining Brand India: Value through Innovation and New Product Development a Tata Strategic report on innovation and new product development for FICCI 14. Indian Manufacturing Vision 2020 a knowledge paper by Tata Strategic for Machinist Manufacturing Excellence Summit 2016
About Tata Strategic Tata Strategic Management Group is the largest Indian owned management consulting firm. Set up in 1991, Tata Strategic has completed over 1,000 engagements with more than 300 clients across countries and industry sectors, addressing the business concerns of the top management. We enhance client value through end to end solutions from strategy to tangible results and benefits. Our Offerings: Authors Shripad Ranade is the Practice Head for Automotive, Engineering & Infrastructure at Tata Strategic. He has over 15 years of industry & consulting experience in strategy formulation, business planning, operational excellence & sales & marketing strategy. (Email: shripad.ranade@tsmg.com; Mobile: +91 98203 05663) Abhishek Bagwe is an Engagement Manager for Engineering at Tata Strategic. He has extensive experience in strategy formulation, operational excellence, and market assessment of more than 7 years in Engineering, Infrastructure & EPC sector. (Email: abhishek.bagwe@tsmg.com; Mobile: 98197 67783) Rajesh P is a Consultant for Automotive & Engineering at Tata Strategic. He has experience in growth strategy formulation, sales effectiveness and business due diligence of more than 5 years in Automotive & Engineering sector (Email: rajesh.pattabiraman@tsmg.com)