labels: industry - general, economy - general, restructuring
Capital flight?news
01 January 1900
These are strange foreboding moments for India's manufacturing sector at the millennial turnaround. As the nation's triumphant rise on the horizons of global information economy continues to win accolades from all and sundry, its manufacturing industry, once ranked among the eighth largest in the world, is creaking to a painful slowdown. A new breed of soothsayers has already been prophesying the virtual demise of the Indian manufacturing industry.

But is it really the end of the road for Indian manufacturing sector? Or, is it the beginnings of a new era in industrial manufacturing? Or faced with the challenges of fierce global competition and tectonic shifts in technology, is Indian manufacturing actually groping for a new strategic framework?

For long battered by the whimsical policies of India's socialistic legacy, and now blithely forsaken by the torchbearers of the new economy, the Indian manufacturing sector is finding itself "flogged to death" twice as were. At once forced to rise from the slumber of decades of protectionism and license raj and overnight face up to the challenges international competition both at home and abroad, the Indian industry is unmistakably, caught up in the throes of an unprecedented crisis situation.

Its phobic response to imports from China, persistent investment slowdown in the key manufacturing sectors, alarming slump in profitability and closure of several industrial units – seem to signify erosion of business confidence and lack of clear-cut strategic direction.

As the renewed clamour for a "level playing field" once again begins to gain political crescendo, few seem to be in a mood to take the bull by its horns. The mood of palpable diffidence, instead, is seeking succor in hyped up arguments about a definitive value migration from industrial manufacturing to information technology (IT) driven services segment. Though, belatedly there is realisation that "click-n-mouse" businesses have to find their moorings in the " brick-n-mortar" economy, the debate about re-building a vibrant competitive manufacturing industry in India has already got obfuscated into a tangled web of confusion, compounded by discouraging macro-level trends.

Capital flight?

Ajanta, the world's largest clock manufacturer based in India, has recently decided to shift its operations 'lock-stock-barrel' to China, even as domestic manufacturers of batteries, two-wheelers, and other consumer goods are crying hoarse about cheap Chinese imports. This move raises fears of a virtual capital flight out of several sectors of domestic manufacturing. Interestingly, as more of domestic businesses prepare to either close shop or move out of the country, there has been several foreign manufacturing firms, both in consumer and capital goods segments, making a beeline to India to tap its unexplored domestic market.

Already, the likes of Sony, Samsung, Panasonic, LG, Daewoo, Aiwa, Sharp have, over the past ten years, virtually wiped off the local television manufacturers from the market. The only exception may be Videocon and BPL, which are putting up a brave front trying to build its scale and size in its business.

More recently, the French cement major – Lafarge has been in the news with its overtures to taking over many of India's sick and tired cement plants. Fearing the French cement major's predatory onslaught, some of the cement companies have even rushed to the government pleading for some form of protection.

However, yesteryear's habitual reflexes are likely to prove less helpful or perhaps even counterproductive in facing up to challenges of competitive manufacturing in the post-globalised dispensation. With the manufacturing paradigm itself having undergone a metamorphosis the world over, the real challenge before the Indian manufacturing sector is to clearly to look beyond itself and come to terms with what needs to be done. As Percy Barnevik of ABB recently put it: India must now learn to benchmark its achievements with what other countries have achieved rather than compare itself with itself.

Indeed, fifty years of industrial achievement in many key sectors have been impressive enough, but they pale into insignificance when compared to what some smaller and recent entrants into the global market have accomplished in much shorter time frames.

Though a semblance of demand-led growth had been witnessed in the past, the trend has failed to sustain itself and move up in the industry value chain. Mostly confined to capital goods and other bulk export product segments like ready-made garments, polished diamonds, leather goods, the initial growth impetus has failed to deliver long-term competitive advantages. This failure is exasperated by radical shifts in technology and market landscape in the wake of globalisation. In the consumer goods manufacturing sector, for instance, which accounts for much of industrial growth elsewhere in the world, the situation is particularly grim, with the past macro-level industry policy having been nearly oblivious to its growth.

Past imperfect

The litany of the past economic excesses is one long painful episode but ignoring its lessons can only push us to the brink of yet another disaster. In the post-independence period, India's industrial development strategy has been almost singularly guided by government's overriding political priorities in allocating investment resources in public sector undertakings. Constrained by poor capital formation in a number of key areas, the government's industry policy had then focussed on creating core sector industries, which required huge investment resources and were considered part of the overall developmental priorities in terms of needs of national security and social well being.

In its aftermath, the state became the biggest risk-bearer in the role of incubator for a developing industrial economy. The strategic mind-set that underlay the Nehru-Mahalobnis model of development, distrustful of private sector, made the state the chief instrument of development. The strategy did pay off well by accounting for much of India's initial industrial growth in core segments like power, steel, oil refining, civil aviation, machine tools, heavy engineering, public works and other infrastructure services, where none existed before. The state also engineered the growth of modern service sector institutions such as banking, insurance, institutional credit, scientific and technology research and development and technical education.

However, despite its fairly well-articulated strategic intent, not without its historical merits and achievements, the Nehru-Mahalobnis model soon regressed into what is aptly called the 'license-permit-quota raj". A virtual nexus of disparate politicians of all hues, career bureaucrats and willy-nilly businessmen that emerged subsequently proved to be the lynchpin of Indian economy. Socialistic over-indulgence not only bred its brand of dust-raising populist politics, bereft of sound institutional foundations, but also created a buccaneer business class that took advantage of every possible loophole in the policies of the government to corner production capacities, import licenses, export subsidies and quotas.

Ten years down through the post reform era, the inertial pull of this hoary past still continues to exert considerable influence on the onward surge of the Indian industry struggling to find its place in today's globalised context. A long-term strategic direction for the Indian industry, increasing its quality and cost competitiveness, enhancing its ability to absorb technological advances and adopt innovative management practices and build industry's overall capability to face the pressures of open global market competition still remain among key issues that need to be clinched. Surfeit of developments in the wake of fast-track economic reforms initiated in 1991 have further reinforced the need to deepen the reform process at the enterprise level itself.

Future tense

Inevitably, there is clearly a sense of paradox about the current situation in the Indian manufacturing sector and economy at large. While there are ample signs of resurgence in several segments, especially those in sync with global market dynamics, the macro-level statistics on industrial performance still paint a mood of diffidence. While IT, pharmaceutical, automobiles, and fast moving consumer goods (FMCG) sectors have shown unprecedented growth in the past five years, conventional sectors like engineering goods, chemicals and small scale manufacturing, that had strong presence in Indian economy, have been on decline, bearing the brunt of new global competitive pressures. In particular, the chasm in the manufacturing sector, between those companies coming forward to accept challenges of restructuring and those unable to wriggle out of the past inertia, point towards a deeper revamp process underway in the Indian industry.

Major post-reform transitional trends in Indian industry could be summed up as under:

  • M&A phenomenon with its inbuilt challenges of restructuring of equity, debt and management controls is now cutting across the entire spectrum of industry and is acting as a curtain raiser on more concrete processes of business process restructuring.
  • Global quality standards have made improvements in productivity and rebuilding cost-inefficient systems of manufacturing sine quo non of survival and growth for the Indian industry, faced with severe import competition in all most all segments.
  • Strategic value drivers in the industry are now entrenched in the logistics and supply chain pipeline, with focus on just-in time inventories, shorter production turnaround time and smart outsourcing strategies that can cut down distribution and procurement costs.
  • Adapting to information technology as key competitive tool in managing the business processes, both within and outside the enterprise, effectively redefining the manufacturing systems and supplier and customer-led business processes.

Leading management thinker Prof.C.K.Prahalad sums it up thus: "the only way open to Indian manufacturing businesses to emerge successful is to innovate continuously and find the new strategic space". The new strategic space here implies that businesses will have to now create their own paradigm competitiveness, factoring in global market forces and cast away legacy-driven diseconomies of scale and size and other ill-structured information flows that underlie demand-supply mismatches. Whatever seemed to work in a closed and protected business environment, with handful of players calling shots in the market, will have to now give way to a new strategic mind-set, where enterprises could draw upon latest manufacturing technologies and adopt appropriate downsizing and outsourcing initiatives on a cost-effective basis.

The challenge is to actually redraw the competitive landscape using global benchmarks in product quality and end-customers as the basic driver of industry practices. The new game clearly will have its winners and losers. Tensions are already evident in the current spate of mergers and acquisitions rocking the Indian industry and other businesses at large. Many Indian business houses have already been seen to be shifting their gears from manufacturing and have been more than willing to offload their stakes in joint ventures to their overseas partners. Several overseas firms too have been aggressively acquiring or setting up manufacturing businesses in India.

Among major private sector groups, the RPG group has drastically scaled down its investments in manufacturing business, taken aback by its dismal performances in manufacturing businesses. The Thapar-controlled Crompton Greaves has recently exited from two JVs in the power equipment sector, giving away their stakes to overseas partners. And this is just the beginning!

Given the pace, at which the equity restructuring has been going in manufacturing businesses, it may be legitimate to ask if future of manufacturing in India would at all continue to remain in Indian hands? But whether manufacturing continues to be Indian or not - the role of a competitive manufacturing sector per se in future development of the economy is certainly going to be a far more important than what has been conceded so far.


 search domain-b
  go
 
Capital flight?