India is on its way to becoming a world-class manufacturer thanks to a rapidly changing business environment, according to a new study by a noted US business school and a firm of consultants.
Poor infrastructure, bureaucratic red tape and restrictive labour laws have kept India's manufacturing sector at the back, while its services have turned red hot, say The Boston Consulting Group and Knowledge@Wharton.
But beneath the surface, things are changing rapidly, and India could become a manufacturing powerhouse within five to 10 years, says their report released in Boston on Thursday.
Founded in 1963, The Boston Consulting Group with 61 offices in 36 countries claims to help companies in all industries and markets achieve competitive advantage. Knowledge@Wharton is an online resource on knowledge generated at The Wharton School of the University of Pennsylvania.
Driven by the emergence of a vast domestic market and relatively low-cost workers with advanced technical skills, more and more multinationals are setting up manufacturing operations in India, notes the report, entitled "What's Next for India: Beyond the Back Office."
Ford, Hyundai and Suzuki all export cars from India in significant numbers. LG, Motorola and Nokia all either make handsets in India or have plans to start, with a sizeable share of production being exported. ABB, Schneider, Honeywell and Siemens have set up plants to manufacture electrical and electronic products for domestic and export markets.
"Over the past five or six years, many firms have restructured their manufacturing operations and implemented world-class practices," says Arindam Bhattacharya, a partner in BCG's New Delhi office.
"Slowly but surely, they have started building a globally competitive manufacturing base in industries like pharmaceuticals, auto components, cars and motorcycles." Also optimistic is Wharton professor of management Saikat Chaudhuri.
"Every major campany has India on its radar screen," he says in the report. "It's just a matter of timing."
As the success of firms such as auto parts maker Bharat Forge shows, India's competitiveness lies in relatively high-end manufacturing. "Indian universities graduate 400,000 engineers a year, second only to China," notes Harold L Sirkin, a senior partner in BCG's Chicago office and leader of the firm's global operations practice.
"It's only a matter of time until India converts its engineering prowess into manufacturing capabilities."
• India's infrastructure agenda — India is in the midst of the most ambitious infrastructure upgrade in its history. Better roads, ports, power and airports could easily nudge the nation's annual GDP growth rate up to a sustainable 8 per cent.
• A tale of two sectors — The failure of power sector reforms and the success of telecom underscore the importance of foreign investment and competition in India's infrastructure upgrade.
• Beyond the back office — India's outsourcing providers are moving up the value chain toward knowledge process outsourcing (KPO) services, where specialised expertise, judgment and discretion are the tools.
• Emerging stars — The story of Bharat Forge's remarkable rise illustrates the hurdles that Indian industry must overcome. Today, the company dominates India's $615 million market for auto parts.