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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$333bn3 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

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 exports4

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

Rank Country1% of world

manufacturing value added in 2014

1 China 26.92 USA 17.93 Japan 7.34 Germany 6.85 South Korea 3.46 India 2.67 Italy 2.68 France 2.49 UK 2.4

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 business5, 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)

Figure 3: Key factors for low performance of India

•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

Perception as low cost manufacturer

•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.

Lack of innovaiton and adoption of technology

•India is still a largely raw material exporting country. It has made little progress in diversifying its exports or moving up the value chain.

Inadequate presence in global markets

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 spend6 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 66th 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 1/4th of the density of robots

in China and 1/8th 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

manufacturing9. 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$ 264bn10 worth of products and services as compared to US$ 2282bn10

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 high-

tech 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.

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Authors

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)

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)