indian manufacturing

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MANUFACTURING MANAGEMENT

INDIAN MANUFACTURING

TO, MR. SUBRAMANIYAM

FROM-DEEPAK CHAUHAN

ROLL NUMBER- 3180

CLASS-TY-D



I. INTRODUCTION

India has had a turbulent past and a large period of economic isolation but in the past

twenty years it has experienced mass liberalization, making it a stronger player in the global

market. Today, India is on a path of growth that will make one of the top economies in the world

in thirty to forty years. Despite the great strides made by the Indian people, there remain some

serious economic problems that will prevent steady and sustainable growth in the country. In a

2007 paper by Hendricks and Kulkarni, the dualism of India is analyzed, with special focus on

the Lewis Structural Adjustment Model. This model predicts that development in a country will

create greater movement from agriculture to manufacturing among the population, and

eventually movement to the service sector. However as the paper points out, India has not

followed this development model. As the services and IT industry sector grows and the

agriculture industry loses labor output, more and more citizens find themselves unemployed and

unable to be a part of effective labor input. The paper calls for the re-industrialization of India, in

order to employ the millions of semi-literate and illiterate Indians who cannot be a part of the

existing dualistic economy.



Creating a strong industrial base is necessary in India for a variety reasons. First and

foremost, manufacturing is an essential sector of all economies, especially for a developing

country. Without a base in industry strong and sustainable growth is not possible in India.

Second, improving the manufacturing sector is the first step in increasing exports from the

country. Through increased share in world exports, India can improve it¶s standing in the global

market, and integrate its economy with the economies of other nations. Another rationale for

developing more manufactured goods in India is the increase on self-sufficiency and reliance

from domestic firms, making the national economy stronger. These are not the only arguments

for the re-industrialization of India, but they do relate to certain key issues plaguing the Indian

economy today.

This paper attempts to address the lack of industrialization in India brought up in by

Hendricks and Kulkarni (2007). Through a series of policy recommendations for the Indian

government, it is hoped that a useful industrial sector can be realized in India. Doing so will not

only improve the Indian economy, employ millions of Indians, and create infrastructure but will

also allow India to start a path of sustainable growth. In the first section I offer a review of

pertinent literature with special focus on four key areas: infrastructure, FDI, efficiency of firms,

and environmental regulation. This is followed by a section that lists relevant policy

recommendations for each area, with a conclusion of the argument following after.

Manufacturing



India has emerged as one of the world's top ten countries in industrial production as per UNIDO's newreport titled 'Yearbook of Industrial Statistics 2010'. India surpassed Canada, Brazil and Mexico in 2009to reach the 9th position from the 12th position it held in 2008.

The Index of Industrial Production (IIP) quick estimates data for October 2010 shows a growth of 11.3 per cent in the manufacturing sector as compared to October 2009. The cumulative growth during April-

October 2009-10 over the corresponding period of 2008-09 is 11 per cent, according to data by theMinistry of Statistics and Programme Implementation.

Growth Trends India is ranked second in terms of manufacturing competence, according to report '2010 GlobalManufacturing Competitiveness Index', by Deloitte Touche Tohmatsu and the US Council onCompetitiveness. The report states that the country's talent pool of scientists, researchers, and engineers,together with its English-speaking workforce and democratic regime make it an attractive destination for

manufacturers.

As per the Industrial Outlook Survey conducted by the Reserve Bank of India (RBI) for October-December 2010 quarter the Indian manufacturing sector showed positive overall business sentiment in thequarter. The business expectation index (BEI), which acts as a barometer of the overall health of themanufacturing sector, has gone up to 126.5 for the assessment quarter, its highest reading since the April-

June 2007 quarter.

The HSBC Markit Purchasing Managers' Index (PMI), based on a survey of 500 companies, posted 58.4in November 2010, increasing from 57.2 in October 2010. Incoming new business received bymanufacturers in India increased substantially during the month. Further, the latest expansion in neworder volumes was the strongest in four months. Panellists also indicated a marked rise in new export business during November 2010.

Around 50 segments in the manufacturing sector grew by 39 per cent, entering the 'excellent growth'category, during April-December 2010-11, according to a survey by the Confederation of Indian Industry(CII) and ASCON. Segments in the excellent category included air conditioners, natural gas, tractors,nitrogen fertilisers, ball bearings, electrical and cable wires, auto components, construction equipment,electric fans and tyre industry.

Further, 22 segments made it to the 'high growth' category, registering a growth of 17.3 per cent duringthe first nine months of the current fiscal. Industries such as utility vehicles, crude oil, power transformers, energy meters, alcoholic beverages and textile machinery have registered around 10-20 per cent growth.



Exports from special economic zones (SEZs) grew by over 68 per cent to US$ 12.55 billion as compared

to the corresponding period of 2009-10. [June 30]

Buoyed by India's response to its super-machines, iconic American superbike maker Harley Davidson issetting up an assembly unit at Bawal, Haryana. This will be its second plant outside the US, after Brazil

FieldFresh, the 50:50 joint venture of Bharti Enterprises and Filipino firm Del Monte Pacific Ltd formedin 2007-end, has inaugurated its R&D and manufacturing unit at Hosur, Tamil Nadu, set up with an

investment of US$ 26.14 million.

Doosan Heavy Industries and Construction Co Ltd of South Korea had expressed interest in setting up a

power equipment manufacturing facility in Haryana, to be fully owned by the foreign company.

Pipavav Shipyard has signed a memorendum of understanding (MoU) with SAAB Dynamics AB, part of Sweden's Wallenberg Group, for developing products in the defence and aerospace sectors.

Rieter Nittoku Automotive Sound Proof Products India Pvt Ltd, a joint venture between Rieter group of

Switzerland (51 per cent holding) and Nihon Tokushu Toryo Co Ltd of Japan (49 per cent holding), hasinvested US$ 15 million in a new facility at Oragadam, near Chennai.

India is at the cusp of a growth phase that is likely to surpass most current projections. The

growth, it is commonly agreed, would be fuelled by internal demand, as well as an increase indemand from an increasingly capital-starved West.

The key point is that much of the next phase of growth is gong to centre around value-addedmanufacturing.

CHANGING SCENARIO

The West is in catatonic shock in the face of the recent economic catastrophe. Capital andcredit are scarce, while the savings rate of the once profligate populations is rising.Manufacturing capacity exceeds annual demand in many instances to the tune of 40-45 per cent; even at 5 per cent growth rates, capacity utilisation will take five to seven years to peak,provided, of course, obsolescence does not overwhelm it.

Besides, markets are growing in the East and not in the West, as a result of which goodsproduced in expensive and aging factories in the West become costly on arrival in the East.Hence, manufacturing has to shift out of the developed world on a much larger scale than hashappened so far.

The West, given its obsession with clean energy and the environment, is happy moving thedirty, dangerous and difficult manufacturing processes, or DDD, out. These countries do notwish to make large-scale investments in capital or fund customers, as they were wont to dothrough the early part of the 20 {+t} {+h} century.

Even as these industries move out, Western companies will take time to shut them, given thecurrent economic and unemployment difficulties. They would tend to find partners, as they did inSouth East Asia for electronics manufacturing or for many verticals in manufacturing, at least tilleconomies of scale and capital availability justify investments in the emerging economies.



Therefore, contract manufacturing will tend to be the preferred norm for economic and socialreasons.

Investment in manufacturing will move towards countries with low costs, a good internaldemand and lower competitive pressures. The BRIC nations have often been referred to as abloc that will ride the next wave.

INDIA'S PROSPECTS

Brazil is uncomfortable with forex inflows, given its manufacturing base. Its reluctance wasevident in the imposition of a 2 per cent transaction tax on capital flows.

Russia is a basket case and unless oil recovers to stunning heights, internal demand is unlikelyto resurface any time soon; hence, it has very little potential to attract firms to set up shop.China is not a trusted partner; investors have learnt that China makes it easy to get in butdifficult to operate. The lack of protection of hard-earned IPR is a major issue in China.

Foreign investors would have to contend with competition from low-cost, mass-based products,riding on the back of pilfered IPR. Restrictions on borrowing from local banks for working capitalcan also work as a disadvantage.

In contrast, India has both a large internal market as well as the sophistication and expertise todeal with DDD industries. Competition is organised and restricted to a few players in mostindustries. Funds are freely available. Hence, profitable growth looks possible for any foreigninvestor.

FUTURE TRENDS

From an Indian industry perspective, the emerging situation may drive three trends.

Within the next year or two, India should witness growth in demand and hence capacity inmanufacturing. The driver will be higher internal demand and, in a short while, the needs of customers overseas.

In three or five years, India will have to develop contract manufacturing skills. A supplier mustbe able to make the components he or she is good at, source components and parts, assembleand test to deliver directly to the manufacturer. This cannot happen in China as the reliability of

many firms, except those that have moved with their partners form Singapore or Malaysia, issuspect.

In the long term, Indian manufacturers will have to develop and build, design and developmentpartnerships. In Detroit, most of a vehicle is developed by sub-contractors to the big three, andthis has been so for over two decades now. Indian manufacturing firms will have to develop newskill sets and experience to enter this domain.



India will grow in this direction, inadequate infrastructure notwithstanding. Many entrepreneursare considering investments in small power plants to beat the lack of electricity.

Roads and goods movement can only head north, given the stated intent of the CentralGovernment. And demand is picking up.

India has what it takes to grow on the back of its manufacturing competence. If only India canlearn and make it easy to enter and start and run a business, all would be well.

The National Manufacturing Competitiveness Council (NMCC) has been set up by the Government to

provide a continuing forum for policy dialogue to energise and sustain the growth of manufacturing

industries in India. The NMCC is expected to suggest various ways and means for enhancing the

competitiveness of manufacturing sector including identification of manufacturing sectors which have

potential for global competitiveness; current strengths and constraints of identified sectors, and

recommend National level industry/sector specific policy imitatives as may be required for augmentingthe growth of manufacturing sector. Dr. V. Krishnamurthy was appointed as Chairman of the NMCC in

the rank of Cabinet Minister to the Government of India. The Government also nominated Members of

the Council who are from various fields of industry. Shri V. Govindarajan has been appointed as

Member Secretary of the NMCC

The National Common Minimum Programme had identified the need to have a continuing forum

consisting of representatives from Government, the Industry and the Academicia for policy dialogue to

energize and sustain the growth of the manufacturing industry. Food processing, Textiles and



Garments, Engineering, Consumer goods, Pharmaceuticals, Capital goods, Leather and IT hardware

are among the priority items specifically mentioned in the Common Minimum Programme.

Since 1991, the Indian economy is being progressively liberalized and its integration to the global

economy is deepening. On one hand the liberalization and globalization have provided unprecedented

opportunity for the growth and expansion of the industry in general and the manufacturing in

particular. On the other hand the Indian industry has to not only faced stiff competition from freeimports but also continue its efforts to grow its export capability through competitiveness. There is a

continuous need to benchmark the Indian manufacturing sector against the best in the world and

enhance competitiveness of the manufacturing sector.

The Rise Of Indian Manufacturing

If U.S. manufacturers are going to be competitive in the foreseeable future, they'll need to access thegrowing market in India. With a middle class population estimated at between 215 million and 300million and expected to reach 583 million by 2025 (according to the McKinsey Global Institute),opportunities for global-minded manufacturers are abundant, not only in servicing the needs of thismarket but in creating products adhering to new business models that ultimately will ensure future globalmarkets.

According to Anil K. Gupta, professor of strategy and organization at the University of Maryland's SmithSchool of Business, manufacturers must view the market in India as three distinct segments: a top tier which will be immediately profitable, a middle tier which is where long-term growth is situated, and a

bottom tier where a company won't see a profit but could break even while pushing the envelope on theinnovation front.

"Designing new products, services and even entire business models to cater to these unique needs canyield innovations that can serve as cutting-edge sources of competitive advantage, not just in other emerging economies but also back home in other developed economies," says Gupta. The unique needs of the middle and lower tiers are low buying power, energy and raw material scarcity, environmentaldegradation and large populations.

U.S. manufacturers need to be aware of the three distinctmarket segments in India, and plan their growth strategiesaccordingly, says the University of Maryland's Anil Gupta. the United States. Seeking to serve the

growing industrial market in India, the Timken Co., a manufacturer of friction management and power transmission products based in Canton, Ohio, announced in April the opening of its second manufacturing plant in Chennai, India. This plant will be located in a special economic zone at Mahindra World City.The new $25 million plant joins a plant located at Jamshedpur and a global technology center inBangalore.

Timken CEO James W. Griffith cited the new plant as a "major step forward in our strategy of drivinggrowth in global industrial markets," in a statement at the plant opening. "We will continue to makeinvestments, both organic and inorganic, to take advantage of strong global demand in our targeted



industrial growth markets." Nearly 80% of the production of this plant will be exported to the company'soperations in the U.S. and the remaining will be sold in India. The Chennai facility will manufacturetapered roller bearings for customers in the global industrial markets.

Globalizing Indian Manufacturing

1

The pace of change has been blistering. Both the perceptions

and the reality of manufacturing in India have shifted radically,

even in the last several months.

Less than two years ago, most international observers were

still on the fence when discussing the potential of Indian

manufacturing. Did India really have what it takes to become

a powerhouse in global manufacturing? Opinion on Indian

manufacturing is dramatically different today. Recently,

the chairman of Toyota Motor Corporation said ³«Indian

companies are fast catching up. My fear is that Japan will soon

be overcome.´

2

The Summit on Indian Manufacturing Competitiveness set out

to map the challenges and opportunities of manufacturing in

India and other emerging markets.

3



The summit was co-hosted

by the Center for Global Logistics and Manufacturing Strategies of the Indian School of Business,

Deloitte Research, the

Global Business Institute of the Stern School of Business at

New York University, the National Science Foundation, and

the Krannert School of Management at Purdue University. The

Summit provides a forum for industry experts, business executives and academic researchers from around

the world to share

experiences, ideas and research focused on the manufacturing

sector. A dominant theme at the Summit was India¶s ability

to continue to develop its manufacturing sector to the point

where it might revolutionize global industry.

This is no small question. Without a doubt, manufacturing is

the backbone of the economy in most countries, especially so

in fast-growing emerging markets. It is clear that for the Indian

economy to successfully distribute wealth across its population,

manufacturing has to grow from its current 17 percent share

of GDP to a number closer to 30 percent (which is the standard

for most developed economies). This growth will require

several signi¿ cant changes:

signi¿ cant increase in productivity and quality at the plant

levels

pursuit of worldwide competitive manufacturing strategies

and operations

successful integration into the global supply chains

While there are signi¿ cant challenges for Indian manufacturing

entering the global arena²whether through the expansion of



domestic enterprises or investments by global manufacturers

from abroad²the opportunities are arguably more than worth

the effort. Global competitiveness in manufacturing fosters

growth, productivity and employment, and strengthens the

agriculture and service sectors. Rapid advances in worldwide

distribution systems and information technology, combined

with a lowering of trade barriers, have led to the growth

of global manufacturing and service networks that take

advantage of low-cost wages and reach local markets. By

scaling business through innovative investments and practices,

Indian manufacturing is slated to become a hallmark of

manufacturing prowess in the future.

Peering into the future

Indias prospects for revolutionizing global industry hinge on

the answers to many crucial questions. Among these:

Can the industry sustain its current growth rate for some

years into the future?

Can it develop the jobs, investments and demand needed to

propel the Indian economy?

Does India need to follow the same development path as

Japan, South Korea and China? Or is there another way?

One that is more innovative, more ef cient, less polluting,

more productive and more sustainable? One that is tai lored

to the unique characteristics of Indian culture and polity?

A second set of questions looks from the outside in and

addresses the role that Indian manufacturing will play in global



industries and the global economy:

How will Indian manufacturers t into global value chains?

How will Indian manufacturers affect the relative advantage

and disadvantage of different countries as locations for

industrial activity?

From a sourcing, production, distribution and sales

perspective, how will foreign multinationals engage with

Indian manufacturers?

What are the critical areas where innovation in Indian

manufacturing industries (for example, operations

management, process innovation, design or distribution) is

starting to lead rather than lag behind innovation by global

manufacturers?

In which areas will innovation in Indian manufacturing

change the structure and performance of manufacturing

industries around the world?

Contribution of Manufacturing Sector in India



Though India banks heavily on its services sector for growth, the manufacturing sector too plays a

significant role in the Indian economy, contributing nearly 16 per cent to the GDP (in 2006-07).

Encouraged by an increasing presence of multinationals, scaling up of operations by domestic companiesand an ever expanding domestic market, the Indian manufacturing sector has been averaging a 9 per cent

growth in the last four years (2004-08), with a record 12.3 per cent in 2006-07.

India is fast emerging as a global manufacturing hub. Be it automobiles or computer hardware, consumer

durables or engineering products, all are being manufactured by multinationals in India.

Moreover, according to a report by the Federation of Indian Chambers of Commerce and Industry (FICCI) and YesBank, India is poised to become the global manufacturing hub for luxury brands over the next five years with

manufacturing of luxury items becoming a US$ 500 million industry during this period.

India has all the requisite skills in product, process and capital engineering, thanks to its long manufacturinghistory and higher education system. India's cheap, skilled manpower is attracting a number of companies,

spanning diverse industries, making India a global manufacturing powerhouse.

According to a survey of the manufacturing industry, carried out by FICCI among 25 core sectors, 21 capital goods,15 intermediate goods, 26 consumers durables, and 13 consumer non-durable sectors, the country's

manufacturing sector is expected to grow by 9.5 per cent in 2008-09, up from 8.8 per cent last fiscal.

y LG is looking at making India its global manufacturing hub for its mobile handsets. The company will soonbe exporting mobile phones to Europe and the Commonwealth of Independent States (CIS) from India.

y Luxury brands like Louis Vuitton and Frette are looking at India as a manufacturing base for theirproducts.

y Skoda Auto, a part of the international Volkswagen Group based in the Czech Republic, plans to make

India its regional manufacturing hub. It will start producing cars in India by 2010 with a manufacturingtarget of 50,000 units. Besides the domestic market, these will also be exported to neighbouring countries

like Nepal, Sri Lanka, Burma and Bangladesh.

y Aircraft manufacturer Airbus is considering India as one of the key centers for design and development of its long haul A 350 plane.

y Cummins is making India its manufacturing hub for newly developed line of generator sets.

y Samsung plans to invest US $ 100 million over a period of four years in its manufacturing plant nearChennai and make it its global hub.



y Ford is making India its manufacturing hub for engine manufacturing.

y Hyundai has made India the manufacturing and export hub for its small Cars. The i10 is beingmanufactured only in India and exported to the world. India is Hyundai's largest base outside Korea.

y Suzuki too is making India its manufacturing hub for small cars. The A-Star is being manufactured solely

in India and exported to Europe.

y Nokia is investing an additional US $ 75 million in its Sriperumbudur plant taking the total investment toUS$ 285 million. Nearly 50 per cent of its production at Sriperumbudur is exported to countries across the

Middle East and Africa, Asia, Australia and New Zealand.

India Advantage

India's vast domestic market and availability of low-cost workers with advanced technical skills has been

instrumental in attracting an ever expanding number of multinationals who are setting up their manufacturing basein the country.

The sheer size of the Indian market has obvious appeal. The rapid growth of the Indian economy is likely to make

India the fifth largest consumer market in the world by 2025 from twelfth in 2005, according to a study byMcKinsey Global Institute.

Aggregate Indian consumer spending is likewise estimated to more than quadruple to approximately US $ 1.5trillion by 2025, on the back of a ten-fold increase in middle class population and a three-fold jump in household

income.

Along with this, India offers abundant engineering and technical manpower, producing annually about 400,000graduate engineers.

Moreover, according to a study by ASSOCHAM, India will emerge as the fourth strongest economy among the G-20

countries after China, Russia and South Korea from the global crisis, given its robust forex reserves, high GDPgrowth rate and various fiscal and monetary measures taken to tackle the downturn.

Petroleum and Natural Gas in India

y First successful oil well was dug in India in 1889 at Digboi, Assam.

y At present a number of regions having oil reserves have been identified and oil is being extractedin these regions.

y For exploration purpose, Oil and Natural Gas Commission (ONGC) was established in 1956 at

Dehradun, Uttarakhand.



y The total oil reserves in India have been estimated to be about 13 crore tonnes. Domestic production of oil in India is much less to meet the domestic demand.

India currently produces just over 32 million tonnes of crude oil against its annual demand of 105

million tonnes meeting only 30.5 percent of demand from domestic resources.

Oil Refineries in India

y At present there are 19 refineries operating in the country (17 in Public Sector and 2 in PrivateSector). Mangalore Refinery and Petro chemicals Limited (MRPL), which was a joint sector

company, became a PSU subsequent on acquisition of its majority shares by ONGC.

y Out of 17 Public Sector Refineries 7 are owned by IOC Ltd., two each by Chennai PetroleumCorporation Ltd. (a subsidiary of IOCL), Hindustan Petroleum Corporation Ltd. and ONGC, oneeach by BPCL, Kochi Refineries Ltd. (a subsidiary of BPCL), Numaligarh Refinery Ltd. (asubsidiary of BPCL) and Bongaigaon Refineries and Petrochemicals (a subsidiary of IOCL). The private Sector Refineries belong to Reliance Industries Ltd. and Essar Industries.

Marketing and Distribution of Petroleum Products

1. Indian Oil Corporation IOC : Established in 1964 by amalgamating Indian Refineries Ltd. andIndian Oil Company Ltd.

2. Bharat Petroleum Corporation Ltd BPCL : By acquisition of Burmah Shell in 1976.

3. Hindustan Petroleum Corporation Ltd (HPCL): Established in 1974 by acquiring the assets of USCompany ESSO Eastern. In 1976, Government acquired Caltex Oil Refining Ltd. and merged it

with HPCL.

4. Gas Authority of India Ltd GAIL : Established in 1984, for handling post-exploration activitiesrelating to natural gas. The company was assigned the priority task of setting up the cross country

HBJ (Hazira, Bijapur and Jagdishpur) pipeline. Presently GAIL is the largest company in Indiafor marketing of natural gas.

Oil India Ltd



Oil India Limited (OIL), under the administrative set-up of the Ministry of Petroleum and Natural Gas, isa National Oil Company engaged in the exploration, production and transportation of crude oil andnatural gas in the country. OIL was incorporated in 1959 as a company with two-third share of BurmahOIL Company and one-third share of Government of India. In 1961, OIL became a joint venture companywith equal share of Government of India and Burmah OIL Company. On October 14, 1981, OIL became

a Government of India Enterprise, a wholly-owned Public Sector Undertaking.

indian manufacturing

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