Blasé Capital VALUE vs VOLUME

As India aims to become the third-largest economy in the future, India Inc has reached a point where it needs to actively participate in the value versus volume debate. For decades since the economic reforms, we have focused on volumes. For example, the potential of the Indian middle class is offered as bait for foreign investors, and Indian businesses. The domestic volumes are enough to woo large scale private investments. Similarly, we have vied to create export hubs for cumulative exports. We may not have succeeded but the focus was to sell in volumes at cheap prices. This was even true of services exports, especially IT, where the strategy was to use cheaper manpower to become the world’s back-office. Either send the manpower abroad, or urge the foreign businesses to outsource operations to the even-cheaper Indian campuses.

There were notable successes. As mentioned, Indian IT is the largest in the world, and Indians hog the annual H-1Bs granted by the US. According to a media report, India is the third-largest pharma producer in the world by volume. The story is getting better when we talk of the exports of cars and two-wheelers. Even, many of the foreign firms, which salivated on Indian demand, have made this country the hub for exports, even to the developed world. Apple imports millions of iPhones from India, although the critical components are still made in China. Like China, India emerged as a low-cost volume supplier to the world across a few categories. In effect, India aped and pursued the China strategy, which intensified after the pandemic, as foreign businesses opted for China+1 strategy.

However, the downside was evident, which today feels like several self-goals. In the pursuit of volumes via cheap costs, like China, India forgot the virtues of value. For example, despite being one of the largest volume players in pharma, we rank 14 in terms of value. This implies that despite capturing a fifth of the global generics market, and exports of more than USD 30 billion a year, India accounts for three per cent of the global trade value. We sell a lot, but we sell them cheap because we make off-patent generics. The real value, money, and profits lie in branded drugs, which need trillions of dollars in R&D to develop, and make new medicines. This value hierarchy is captured by the US, and Europe. Today, China is making a mark, and quickly climbing up the value chain.

So, what went wrong, and what can go right? According to a media article, one of the issues in pharma is fragile supply chains. “More than 60 per cent of key raw materials, and active pharma ingredients are imported, primarily from China. This dependence creates vulnerabilities in pricing, supply continuity, and strategic autonomy, especially in an era of weaponised trade and geopolitical uncertainty,” the article stated. In addition, the businesses were not interested in going up the value chain, which required years and money. Instead, given their reverse-engineering, and reverse-chemistry skills, Indians were keen to capture the low-hanging generic fruits, which were decently profitable if one was the first entrant. Thus, dozens of Indian

drugmakers were able to make their name in generics, and even sell the medicines in developed markets like the US and Europe. The world was in their hands, and mouths.

In the case of IT and software, Indian firms were keen to set up systems, and processes that could scale up the outsourcing businesses. Hence, they focused on costs, and cheaper manpower, including outsourcing work to Indian campuses. There were enough opportunities for the cash-rich firms to buy up foreign consultancy and IT giants in the 2000s and 2010s. But most let them go, and opted for tactical low-cost purchases that plugged the gaps in their

outsourcing services. Despite the talks about climbing up the value chain, most did not, or could not. Hence, global consultancies captured the value, with high profits, and left the volumes to the

Indians. It turned out to be a case of leaving millions of crumbs for the Indians, and walking away with the exotic and more-tasty dishes. Indian appetite, thus, remained limited.

For India to capture global value, apart from volumes, needs a change in mindset of the businesses, and push from the Government. There needs to be a shift to R&D to discover new molecules, and make new drugs. Official incentives need to change from volumes, or production, to research, or discoveries. Like China, India needs to decide that the future lies in value. Volume-led businesses are the first ones to be hit by disruptions related to trade, supply chains, and technology. Value-based ones incorporate these elements in their strategies, and are more distanced from risks. The world’s largest drug discoverers, and makers have survived, though they have merged with others, or acquired by others. Similarly, the world’s largest consultancies have survived, though they too have witnessed an era of M&As. India is lucky that it has the generics-makers, and IT firms that have survived for decades. Hence, it may be easier for them to make the value jump, and continue with volumes.