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India's other outsourcing success

WHAT IS common among Toyota, Cummins, Tecumseh, Emerson, Hyundai, Maruti, Tyco, Kennametal and Renault. They are all global engineering giants and all of them have chosen India to be a part of their global supply chain. The list of names mentioned is by no means complete. Nor is the purchase from India limited to low value rough castings and forgings. In many cases it is fully machined components, sub-assemblies and even full assemblies. Toyota, for example, is setting up a plant near Bangalore to make complete transmissions for its new platform.

And what has already happened in the automotive field is now being replicated in other engineering sectors such as electrical products, compressors, pumps and valves and toolings. Indian manufacturing is finally becoming a force in the international arena.

But it was not always like this. Back in the late Fifties and early Sixties, when the U.S. and Japanese industrial giants, faced with a surge in demand triggered by a post-War economic boom, were looking to outsource offshore, their eyes did fall on India as the then industrially most advanced nation in the Asian continent. But India was then steeped in new-found nationalism, paranoid about letting in a new East India Company and had adopted an inward-looking and so-called `self-reliant' approach to industrial development which was inimical to foreign technology, foreign investment and foreign goods.

Towards this end, a host of tariff and non-tariff barriers on imports as well as a plethora of controls on permissible product lines, capacities, pricing, distribution and had been erected. The older generation of industrialists will recall, no doubt with a shudder, those days when they had to battle with the DGTD to import a machine or take up a technical collaboration foreign. The long delays in obtaining import licences necessitated maintaining a huge inventory of imported spares. Combined with rigid labour legislation that prohibited any rationalisation, these constraints were sufficient to scare away most foreign buyers and investors.

This creation of a Fortress India rendered Indian industry obsolete and non-competitive by insulating it from global trends in technology, process and management. The net effect of all this was that India lost a golden opportunity to be the hub of manufacturing in Asia. It was bypassed as a vendor country by global big business who then proceeded to wean the fishing and farming communities of what is now the ASEAN grouping into becoming topnotch industrial countries. This effort succeeded thanks to the far-sightedness of the then political leaders in those countries who, though autocratic, were pragmatic enough to latch on to the coat tails of global industrial giants to achieve accelerated development for their countries.

Indian industry had to wait till the advent of the Nineties to realise its true potential, when the Narasimh Rao-Manmohan Singh combine, with the prodding of the Bretton Woods twins, launched its economic liberalisation package. The consequent removal of constraints enabled the more nimble and farsighted Indian engineering companies to update technologies and processes (such as replacing general purpose machine tools by CNC machines), establish global scale capacities (Bharat Forge, for example, has in Pune the world's largest single location forging facility), deploy the most stringent quality and cost control systems such as Total Productive Maintenance and Six Sigma and rightsize the workforce.

Today India can boast of several engineering companies which are not just globally competitive but can even match the best in the advanced countries. Sundram Fasteners, for example, has several times won the global best supplier award from General Motors for radiator caps. Coupled with the relatively low wage rates in India, this translates into India being one of the most cost-competitive vendor countries in the world.

Everyone talks about the formidable capability of China in the manufacturing field. But there have been occasions recently when India has been preferred to China as a supply hub. Tecumseh, the world's largest producer of refrigerator compressors, decided to relocate its AC compressor component plants from the U.S. to India instead of China. Its reason - the higher skill set available in India. Even the Chinese themselves have realised the benefits of outsourcing to India. Bharat Forge has bagged long-term contracts from Chinese companies to supply crankshafts and forged engine components. Ford India is supplying auto components to China. Toyota chose India over China for locating the transmissions manufacturing facility for its new platform. A decided advantage that India can offer over China is value addition in the form of engineering design services.

While the going is good at present for the Indian engineering industry, there are some wrinkles that have to be ironed out if it is to become a big player in the global arena. Unfortunately, most of these are not in the hands of the engineering companies themselves.

For example, global buyers nowadays are keen on just-in-time supplies of components and sub-assemblies. Unfortunately, Indian transport infrastructure and the facilities and operational facilities of Indian ports are not yet of a standard which enable Indian vendors to meet such demands. A new worry for the foreign buyer is the frequent breakdown of law and order due to the increasing incidence of terrorist bombings, bandhs, strikes, riots, and dharnas, which can cause severe disruption of supplies from India. Indian competitors — like China, Mexico and Brazil — do not suffer from such frequent breakdown of civic order discipline.

The margins in this game are often wafer thin and there is constant pressure on the vendors from the buyers to reduce prices. It is, therefore, crucial that the Indian manufacturers are enabled to access basic raw materials such as metals, fuel and chemicals at international prices. Another problem that has cropped up is, ironically, on the manpower front. Due to the substantial differential in emoluments and workplace environment between the IT and engineering sectors, manufacturing companies often lose to the IT sector those engineers who have just crossed the training threshold and have started adding value to the company.

India has already become a favoured supplier of automotive components to the world, with exports expected to cross $1 billion this year, from less than $300 million three years ago. Provided some of the problems pointed out above do not bog down the industry, it will not be a surprise if, five years from now, the value of engineering goods exported from the country overtakes the earnings from the much-vaunted computer software exports.

N. N. Sachitanand
in Bangalore

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